Tort Law

6th Cir. OKs Civil RICO Class Suit Against Edwards Wildman, Client Insurer re Tax-Shelter Marketing

Reversing a lower court’s dismissal of a civil racketeering class action against a law firm and a client insurer, a federal appeals court in Cincinnati on Wednesday gave the lawsuit a green light.

The suit was filed because of the defendants’ marketing of a tax shelter later determined by the Internal Revenue Service to be abusive. It alleges that Edwards Angell Palmer & Dodge, a law firm now known as Edwards Wildman Palmer following a merger, and its client, John Hancock Life Insurance Co., violated the federal Racketeer Influenced and Corrupt Organizations Act, reports Reuters.

Several state-law claims are also included in the suit, which contends that the plaintiffs, who own a family company, Stoney Creek Fisheries and Equipment Inc., in Michigan, relied on legal opinions from the law firm concerning the tax they would owe as a result of participating in the Benistar 419 Plan promoted by the defendants. It asserts a state-law negligent misrepresentation claim against all defendants and additional state-law claims against the insurer only.

While the plaintiffs have not yet proven their case, U.S. District Judge Janet Neff erred by granting a defense motion to dismiss in 2010 rather than allowing the plaintiffs a chance to obtain potential evidence in discovery, the 6th U.S. Circuit Court of Appeals said in a written opinion (PDF) on Wednesday.

The judge found that the plaintiffs had not adequately pleaded “conduct” and “enterprise” elements on the RICO claim. However, an amended complaint “delineates the specific roles and relationships of the Defendants, alleges the enterprise functioned at least five years, and alleges it functioned for the common purpose of promoting a fraudulent welfare benefit plan to generate commissions and related fees. That pattern of activity is sufficient to permit a jury to infer the existence of an enterprise,” the 6th Circuit writes.

Similarly, although the judge had agreed with the defendants that they were simply carrying out ordinary business and legal functions in marketing a third party’s tax shelter, the “conduct” element of the RICO claim was adequately pleaded by allegations that the defendants “carried out the directions” of the third party “by marketing the Plan directly to investors and providing allegedly incomplete and misleading legal opinions,” the appellate court states.

“Importantly, the [Plaintiffs] allege the Defendants carried out these directions, all the while knowing that contributions to the Plan were not likely to be allowed as deductions by the IRS. The district court held these allegations to be merely conclusory. The Amended Complaint reveals otherwise—it lists the specific IRS rulings and notices that should have put the Defendants on notice of the likelihood that the Benistar Plan was not compliant” with tax law, “but which were allegedly ignored in favor of older rulings and notices that were more favorable.”

While the plaintiffs have not proven their case, their allegations must be assumed to be true for the purpose of a motion to dismiss, the court notes, and enough was alleged to make it “plausible that the Defendants were aware of the falsity of the tax benefits that they represented as flowing from the Benistar Plans and that they promoted to the [Plaintiffs].”

A spokesman for Edwards Wildman told Reuters that it is looking forward “to the opportunity to show…that there is no basis for the plaintiffs’ claims against the firm.”

Representatives of John Hancock did not respond to the news agency’s requests for comment.

The suit seeks an unspecified amount of compensatory and punitive damages.

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