Cetel v. Kirwan Financial Group, Inc.

Opinions of the United
2006 Decisions States Court of Appeals
for the Third Circuit
8-28-2006
Cetel v. Kirwan Fin Grp Inc
Precedential or Non-Precedential: Precedential
Docket No. 04-3408
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PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
___________
Nos. 04-3408, 05-1329, 05-1503, 05-1504
___________
Case No. 04-3408
KAREN CETEL; MORTON SCHNEIDER;
MARVIN CETEL; MARVIN CETEL, M.D., P.A.;
BARBARA SCHNEIDER;
BARBARA SCHNEIDER, M.D., F.A.C.S., P.A.
v.
KIRWAN FINANCIAL GROUP, INC.; BARRY COHEN;
MICHAEL KIRWAN; NEIL PRUPIS; LAMPF, LIPKIND,
PRUPIS, PETIGROW & LaBUE;
RAYMOND G. ANKNER;
CJA ASSOCIATES; BEAVEN COMPANIES, INC.;
MEDICAL SOCIETY OF NEW JERSEY;
INTER-AMERICAN INSURANCE CO. OF ILLINOIS;
COMMONWEALTH LIFE INSURANCE CO.;
PEOPLES SECURITY LIFE INSURANCE CO.;
MONUMENTAL LIFE INSURANCE CO.;
CAPITAL HOLDING COMPANY;
AEGON INSURANCE GROUP;
INDIANAPOLIS LIFE INSURANCE CO.
(District of New Jersey Civil No. 00-cv-5799)
VIJAY SANKHLA, M.D., on behalf of himself and
others similarly situated
v.
COMMONWEALTH LIFE INSURANCE COMPANY;
PEOPLES SECURITY LIFE INSURANCE COMPANY;
PROVIDIAN LIFE INSURANCE COMPANY; AEGON
USA INC.; MONUMENTAL LIFE INSURANCE
COMPANY; INDIANAPOLIS LIFE INSURANCE CO.;
RAYMOND G. ANKNER; BEAVEN COMPANIES, INC.;
CJA AND ASSOCIATES; KIRWAN FINANCIAL GROUP,
INC.; KIRWAN FINANCIAL ADVISORY, INC.; BARRY
COHEN; MICHAEL KIRWAN; PACIFIC EXECUTIVE
SERVICES; STEPHEN R. ROSS; DONALD S. MURPHY;
SEA NINE ASSOCIATE ; DSM, INC.; NEW JERSEY
MEDICAL PROFESSION ASSOCIATION;
SOUTHERN CALIFORNIA MEDICAL PROFESSION
ASSOCIATION; THE MEDICAL SOCIETY OF NEW
JERSEY; NEIL PRUPIS
District of New Jersey Civil No. 01-cv-04781)
Vijay Sankhla, M.D., *Yale Shulman, M.D.,
*Yale Shulman, M.D., P.A., *Boris Pearlman, M.D.
*Denville Radiology, P.A., Marvin Cetel, M.D.,
Karen Cetel, Marvin Cetel, M.D., P.A.,
Barbara Schneider, M.D., Morton Schneider,
Barbara Schneider, M.D. P.A.,
Appellants
*(Pursuant to Rule 12(a), F.R.A.P.)
2
__________
Case No: 05-1329
KAREN CETEL; MORTON SCHNEIDER;
MARVIN CETEL; MARVIN CETEL, M.D., P.A.;
BARBARA SCHNEIDER;
BARBARA SCHNEIDER, M.D., F.A.C.S., P.A.
v.
KIRWAN FINANCIAL GROUP, INC.; BARRY COHEN;
MICHAEL KIRWAN; NEIL PRUPIS; LAMPF, LIPKIND,
PRUPIS, PETIGROW & LaBUE; RAYMOND G. ANKNER;
CJA ASSOCIATES; BEAVEN COMPANIES, INC.;
MEDICAL SOCIETY OF NEW JERSEY;
INTER-AMERICAN INSURANCE CO. OF ILLINOIS;
COMMONWEALTH LIFE INSURANCE CO.;
PEOPLES SECURITY LIFE INSURANCE CO.;
MONUMENTAL LIFE INSURANCE CO.;
CAPITAL HOLDING COMPANY; AEGON INSURANCE
GROUP; INDIANAPOLIS LIFE INSURANCE CO.
(District of New Jersey Civil No. 00-cv-5799)
VIJAY SANKHLA, M.D., on behalf of himself and
others similarly situated
v.
COMMONWEALTH LIFE INSURANCE COMPANY;
3
PEOPLES SECURITY LIFE INSURANCE COMPANY;
PROVIDIAN LIFE INSURANCE COMPANY; AEGON
USA INC.; MONUMENTAL LIFE INSURANCE
COMPANY; INDIANAPOLIS LIFE INSURANCE CO.;
RAYMOND G. ANKNER; BEAVEN COMPANIES, INC.;
CJA AND ASSOCIATES; KIRWAN FINANCIAL GROUP,
INC.; KIRWAN FINANCIAL ADVISORY, INC.; BARRY
COHEN; MICHAEL KIRWAN; PACIFIC EXECUTIVE
SERVICES; STEPHEN R. ROSS; DONALD S. MURPHY;
SEA NINE ASSOCIATE ; DSM, INC.;
NEW JERSEY MEDICAL PROFESSION ASSOCIATION;
SOUTHERN CALIFORNIA MEDICAL PROFESSION
ASSOCIATION; THE MEDICAL SOCIETY OF NEW
JERSEY; NEIL PRUPIS
(District of New Jersey Civil No. 01-cv-04781)
Marvin Cetel, M.D., Karen Cetel,
Marvin Cetel, M.D., P.A., Barbara Schneider, M.D.,
Morton Schneider, Barbara Schneider, M.D. P.A.,
Appellants
__________
Case No: 05-1503
KAREN CETEL; MORTON SCHNEIDER; MARVIN
CETEL; MARVIN CETEL, M.D., P.A.;
BARBARA SCHNEIDER;
BARBARA SCHNEIDER, M.D., F.A.C.S., P.A.
4
v.
KIRWAN FINANCIAL GROUP, INC.; BARRY COHEN;
MICHAEL KIRWAN; NEIL PRUPIS; LAMPF, LIPKIND,
PRUPIS, PETIGROW & LaBUE; RAYMOND G. ANKNER;
CJA ASSOCIATES; BEAVEN COMPANIES, INC.;
MEDICAL SOCIETY OF NEW JERSEY;
INTER-AMERICAN INSURANCE CO. OF ILLINOIS;
COMMONWEALTH LIFE INSURANCE CO.;
PEOPLES SECURITY LIFE INSURANCE CO.;
MONUMENTAL LIFE INSURANCE CO.;
CAPITAL HOLDING COMPANY; AEGON INSURANCE
GROUP; INDIANAPOLIS LIFE INSURANCE CO.
(District of New Jersey Civil No. 00-cv-5799)
VIJAY SANKHLA, M.D., on behalf of himself and
others similarly situated
v.
COMMONWEALTH LIFE INSURANCE COMPANY;
PEOPLES SECURITY LIFE INSURANCE COMPANY;
PROVIDIAN LIFE INSURANCE COMPANY; AEGON
USA INC.; MONUMENTAL LIFE INSURANCE
COMPANY; INDIANAPOLIS LIFE INSURANCE CO.;
RAYMOND G. ANKNER; BEAVEN COMPANIES, INC.;
CJA AND ASSOCIATES; KIRWAN FINANCIAL GROUP,
INC.; KIRWAN FINANCIAL ADVISORY, INC.; BARRY
COHEN; MICHAEL KIRWAN; PACIFIC EXECUTIVE
SERVICES; STEPHEN R. ROSS;
5
DONALD S. MURPHY; SEA NINE ASSOCIATE ; DSM,
INC.; NEW JERSEY MEDICAL PROFESSION
ASSOCIATION; SOUTHERN CALIFORNIA MEDICAL
PROFESSION ASSOCIATION; THE MEDICAL SOCIETY
OF NEW JERSEY; NEIL PRUPIS
(District of New Jersey Civil No. 01-cv-04781)
Donald S. Murphy, Pacific Executive Services, DSM, Inc.,
Appellants
__________
Case No: 05-1504
KAREN CETEL; MORTON SCHNEIDER; MARVIN
CETEL; MARVIN CETEL, M.D., P.A.;
BARBARA SCHNEIDER;
BARBARA SCHNEIDER, M.D., F.A.C.S., P.A.
v.
KIRWAN FINANCIAL GROUP, INC.; BARRY COHEN;
MICHAEL KIRWAN; NEIL PRUPIS; LAMPF, LIPKIND,
PRUPIS, PETIGROW & LaBUE; RAYMOND G. ANKNER;
CJA ASSOCIATES; BEAVEN COMPANIES, INC.;
MEDICAL SOCIETY OF NEW JERSEY;
INTER-AMERICAN INSURANCE CO. OF ILLINOIS;
COMMONWEALTH LIFE INSURANCE CO.;
PEOPLES SECURITY LIFE INSURANCE CO.;
6
MONUMENTAL LIFE INSURANCE CO.;
CAPITAL HOLDING COMPANY; AEGON INSURANCE
GROUP; INDIANAPOLIS LIFE INSURANCE CO.
(District of New Jersey Civil No. 00-cv-5799)
VIJAY SANKHLA, M.D., on behalf of himself and
others similarly situated
v.
COMMONWEALTH LIFE INSURANCE COMPANY;
PEOPLES SECURITY LIFE INSURANCE COMPANY;
PROVIDIAN LIFE INSURANCE COMPANY; AEGON
USA INC.; MONUMENTAL LIFE INSURANCE
COMPANY; INDIANAPOLIS LIFE INSURANCE CO.;
RAYMOND G. ANKNER; BEAVEN COMPANIES, INC.;
CJA AND ASSOCIATES; KIRWAN FINANCIAL GROUP,
INC.; KIRWAN FINANCIAL ADVISORY, INC.; BARRY
COHEN; MICHAEL KIRWAN; PACIFIC EXECUTIVE
SERVICES; STEPHEN R. ROSS; DONALD S. MURPHY;
SEA NINE ASSOCIATE ; DSM, INC.; NEW JERSEY
MEDICAL PROFESSION ASSOCIATION;
SOUTHERN CALIFORNIA MEDICAL PROFESSION
ASSOCIATION;
THE MEDICAL SOCIETY OF NEW JERSEY;
NEIL PRUPIS
(District of New Jersey Civil No. 01-cv-04781)
7
Monumental Life Insurance Company,
Commonwealth Life Insurance Company,
Capital Holding Corporation, and AEGON USA, Inc.,
Appellants
___________
On Appeal from the United States District Court
for the District of New Jersey
(D.C. Nos. 00-cv-5799, 01-cv-4781)
District Judge: The Honorable Anne E. Thompson
___________
ARGUED APRIL 24, 2006
BEFORE: SCIRICA, Chief Judge,
and NYGAARD, Circuit Judge,
and YOHN,* District Judge.
(Filed August 28, 2006)
___________
*Honorable William H. Yohn, Jr., Senior District Judge
for the United States District Court for the Eastern District of
Pennsylvania, sitting by designation.
8
Mark J. Oberstaedt, Esq. (Argued)
Stephen J. Fram, Esq.
Archer & Greiner
One Centennial Square
P. O. Box 3000
Haddonfield, NJ 08033
Counsel for Appellants/Cross Appellees
Kevin L. Smith, Esq. (Argued)
Hines Smith
3080 Bristol Street, Suite 540
Costa Mesa, CA 92626
Charles L. Becker, Esq.
Reed Smith
1650 Market Street
2500 One Liberty Place
Philadelphia, PA 19103-7301
Counsel for Appellee/Cross Appellant
Comm Life Ins. Co., et al.
Christopher P. Leise, Esq. (Argued)
White & Williams
457 Haddonfield Road
Suite 400 Liberty View
Cherry Hill, NJ 08034
9
Elizabeth A. Venditta, Esq.
Edward M. Koch, Esq.
White & Williams
One Liberty Place, Suite 1800
Philadelphia, PA 19103
Counsel for Appellee/Cross Appellant Pacific
Executive Serv., et al.
Walter F. Kawalec, III, Esq. (Argued)
Larry I. Zucker, Esq.
Marshall Dennehey Warner Coleman & Goggin
200 Lake Drive East
Woodland Falls Corporate Park, Suite 300
Cherry Hill, NJ 08002
Counsel for Appellee/Cross Appellant
Medical Society of NJ
Richard L. Hertzberg, Esq. (Argued)
Greenbaum Rowe Smith & Davis
P. O. Box 5600
Metro Corporate Campue One
Woodbridge, NJ 07095
Alain Leibman, Esq.
Stern & Kilcullen
75 Livingston Avenue
Roseland, NJ 07068
Counsel for Appellee/Cross Appellant
Raymond G. Ankner, et al.
10
William P. Marshall, Esq.
3101 Trewigton Road
P. O. Box 267
Colmar, PA 18915
Counsel for Appellee Barry Cohen
Michael Kirwan
1249 Knox Drive
Yardley, PA 19067
Pro Se
___________
OPINION OF THE COURT
___________
NYGAARD, Circuit Judge.
Appellants/Plaintiffs are physicians and their professional
corporations who purchased life insurance through Voluntary
Employee Beneficiary Associations (“VEBAs”) created,
marketed, operated, and endorsed by Appellees/Defendants, a
number of individuals, corporations, and associations connected
11
to the VEBAs.1 They claim that defendants misrepresented the
potential tax benefits of the VEBAs to induce them to purchase
the life insurance policies. After the Internal Revenue Service
decided that the VEBAs did not possess the tax benefits,
plaintiffs brought civil RICO, ERISA, and state law causes of
action against defendants. The District Court granted
defendants’ motions for summary judgment. We will affirm.
I. FACTS
This case involves a protracted disagreement over the
validity and legitimacy of VEBA plans that were developed and
marketed in the early 1990s, the history of which can be read in
Neonatology Assocs., v. Comm’r, 115 T.C. 43 (2000), aff’d 299
F.3d 221 (3d Cir. 2002). Sometime in the mid-1980s, Donald
Murphy and Stephen Ross formed a partnership called Pacific
1.
We refer herein to the parties simply as “plaintiffs” and
“defendants.”
12
Executive Services (“Murphy Defendants”) and sought to sell
life insurance policies through VEBAs specially designed to
take advantage of the Tax Reform Act of 1986, Pub.L. 99-514,
100 Stat. 2085. The Murphy Defendants believed that the Tax
Reform Act allowed them to market and sell life insurance
policies through the tax-exempt VEBAs, creating a scheme by
which they could sell more insurance policies by coupling them
with the tax benefits of the VEBAs. Specifically, the Murphy
Defendants conceived the scheme so as to require an employer
to purchase, at an inflated cost, group life insurance for its
employees. The annual contributions made by the employers
(purportedly for their employees) were to be tax-deductible and
the employees could later convert the group life insurance to
individual policies such that any premium overpayments would
convert to tax conversion credits. Under the Murphy
Defendants’ plan, purchasers could realize two distinct tax
13
benefits: (1) the professional corporations would be able to
deduct the life insurance premium payments; and (2) after
converting the group policies to individual policies, the
individual employees would obtain the insurance overpayments
as conversion credits.
To facilitate this plan, the Murphy Defendants engaged
Michael Kirwan and Kirwan Financial Group as well as Barry
Cohen (“Kirwan Defendants”), to act as “financial advisors,”
and to assist in the sales and marketing of the VEBAs to small
professional businesses. As noted earlier, the money-making
hook for the VEBAs was selling more life insurance policies.
As such, the Murphy and Kirwan Defendants initially sold
Continuous Group (“C-Group”) life insurance policies2 created
2.
C-Group life insurance policies “masquerade as a policy that
provides only term life insurance benefits in order to make the
product marketable to targeted investors.” See Neonatology,
115 T.C. 53. However, the policy is actually a universal life
(continued...)
14
by Raymond Ankner and supplied by his non-party company
Inter-American Insurance Company. However, Inter-American
lost financial stability and, in 1991, Ankner convinced a number
of insurance sales companies (“Monumental Defendants”)3 to
supply the C-Group policies. Consequently, the Monumental
Defendants entered into a series of sales and marketing
agreements with the Murphy and Kirwan Defendants.
Additionally, in connection with the Murphy and Kirwan
Defendants’ attempts at marketing and promotion, the VEBAs
were also endorsed by the Medical Society of New Jersey, a
2.
(...continued)
policy comprised of two distinct but related policies. The first
— the accumulation phase — is a group term policy known as
the C-group term policy. The second — the payout phase — is
an individual universal policy known as the “C-group
conversion universalife” policy. Id.
3.
The Monumental Defendants include Commonwealth Life
Insurance Company, Monumental Life Insurance, People
Security Life, Capital Holding Company, Providence Life
Insurance, and AEGON USA, Inc.
15
professional organization composed of physicians, in exchange
for royalties generated by the sale of the VEBA plans to its
members.
With this framework in place, defendants began
marketing these plans to small businesses. Because they
promised significant tax avoidance, the plans were appealing,
and several businesses and employers purchased the VEBA
plans from defendants. One such company was Lakewood
Radiology, P.C., and its partners, plaintiffs Vijay Sankhla, Yale
Shulman, and Boris Pearlman (collectively, the “Sankhla
physicians”). After Cohen and Kirwan recommended that
Lakewood participate in the VEBA scheme, the professional
corporation agreed. Another corporation to be convinced by
Cohen and Kirwan was that of Cetel and Schenider (“Cetel
physicians”), who agreed to participate both individually and
through their professional corporation. Both of these
16
corporations, and the doctors, individually, began making
contributions to the VEBA plan in or around 1990. Moreover,
all of the plaintiffs had dealings, in some capacity with Kirwan
and Cohen, who became plaintiffs’ financial advisors, in all
relevant respects, for questions concerning the VEBA plans.
Additionally, plaintiffs also came to know Neil Prupis, who was
hired as an attorney by the Murphy Defendants.
However, the VEBA plans came to the attention of the
IRS which, on June 5, 1995, issued Notice 95-34. Notice 95-34
stated that the IRS did not consider the VEBAs’ tax-avoidance
mechanism to comply with the tax code. It asserted that such
deductions would be disallowed and that, if litigation were to
ensue, it would assert this position in court. Moreover, in 1994
and 1995 the IRS issued deficiency notices to a number of the
participants and also began audits of some businesses and
individuals who had participated in the VEBA plans. After the
17
IRS issued Notice 95-34, and after the IRS issued its audit
notices, Prupis was hired by the Murphy Defendants. He
drafted a letter to Cohen on July 12, 1995, which Cohen
circulated to the VEBA participants. This letter accompanied a
memorandum from Cohen and Kirwan to the VEBA
participants. Both communications sought to allay any concerns
the participants might have developed in light of the IRS
actions. To wit, the letters strongly conveyed the belief that the
IRS had taken an incorrect position, that the VEBA plans were
completely legitimate, and that no court had ever upheld the
IRS’ position concerning the validity of the VEBA plans.
Nonetheless, the IRS began sending deficiency notices to the
participants. Then, at the advice of Cohen and Kirwan, some of
the participants retained Prupis as their attorney to help them
deal with the IRS. Cohen and Prupis stood by their earlier
assurances and a letter dated August 7, 1996, to the participants,
18
encouraging them to continue participating in the plan. It also
outlined a proposal for attacking the IRS’ position in Tax Court.
As it turned out, in 2000 the Tax Court did indeed
determine that the VEBA plans marketed and sold by defendants
impermissibly circumvented the intent and provisions of the
Internal Revenue Code. See Neonatology, 115 T.C. 43.
Specifically, the court found that the VEBAs were merely
“vehicles which were designed and serve in operation to
distribute surplus cash surreptitiously (in the form of excess
contributions) from the corporations for the employee/owner’s
ultimate use and benefit.” Id. at 89. The Court also held that the
individuals who had contributed to the plans were liable for any
accuracy-related negligence penalties under I.R.C. § 6662(a).
This decision all but invalidated plaintiffs’ VEBA plans, and
plaintiffs’ professional medical corporations were denied
deductions they had taken for the contributions to the plan; as
19
well, the individual participants were levied a significant tax on
their dividend income.
The District Court found that the New Jersey Consumer
Fraud Act did not cover plaintiff’s allegations and also
dismissed certain ERISA claims for lack of standing. The
District Court granted summary judgment for all claims on
statute of limitations grounds. Because the District Court’s
order and our review hinge on a thorough grasp of the predicate
facts concerning plaintiffs’ knowledge at all relevant times, we
will review these facts as they relate to each individual plaintiff.
Dr. Sankhla
Vijay Sankhla practices radiology with Lakewood
Radiology, P.A. Upon becoming a partner with the Lakewood
group in 1995, Sankhla began participating in and made
contributions to the VEBA plan. He continued making
payments to the plan for five years, until 2000. He was never
20
audited by the IRS and claims he never saw their Notice 95-34.
However, his employer was audited for its contributions to the
VEBA plan, and he was subpoenaed in March 1995 in
connection with this audit. Additionally, Sankhla admitted that
he learned of the audits in mid-1995 and that he discussed the
audits with his radiology partners. Consequently, he contacted
Barry Cohen, the Lakewood Radiologists’ VEBA plan financial
advisor, and inquired about how the audits would affect him.
Cohen assured him that “his previous VEBA contributions were
entirely safe” but expressed a certain discomfort with one of the
VEBA plans. He additionally told Sankhla that “we are going
to win the [Neonatology] case,” apparently in an effort to assure
Sankhla of the safety of his investments. Moreover, he advised
Sankhla that the only way to guarantee the safety of his previous
VEBA plan investments would be to continue to make
contributions to it for another three years, to enable him to make
21
tax-free withdrawals. By 2000, however, Sankhla could not get
an adequate answer from Cohen concerning the propriety of
continued participation in the VEBA plan and so decided to
discontinue contributions to the plan.
Dr. Pearlman
Boris Pearlman, also a partner with Lakewood
Radiology. He participated in and made contributions to the
VEBA plan from 1991 until 1999. Like Sankhla, he terminated
his participation in 2000. Pearlman also contends that he never
saw the IRS Notice 95-34, although he did receive the July 1995
letter from Cohen and Kirwan. He also received a copy of the
letter from Prupis. In addition, Pearlman received notice of an
audit in June or July of 1995 and an IRS examination report.
However, Pearlman contends that he did not receive a
deficiency notice from the IRS until sometime after September
16, 1996.
22
After he received the IRS audit notice, Pearlman
contacted Cohen and Prupis with his concerns. In response
Cohen and Prupis both assured Pearlman that the “IRS had no
case” and that the VEBA plans were legitimate and would
continue to be so. Pearlman was apparently convinced by these
avowals and continued to invest in the VEBA plan. After the
Tax Court effectively invalidated the VEBA scheme in 2000,
Pearlman quit contributing to the plan.
Dr. Shulman
A third partner at Lakewood Radiology, Yale Shulman
participated in the VEBA plan from 1993 until 1998. Shulman
was on the board of the Medical Society of New Jersey at the
time that the Medical Society approved Cohen and Kirwan’s
VEBA plan scheme. He also received a copy of Cohen and
Kirwan’s 1995 letter, and Prupis’ legal opinion concerning the
VEBA plan. Cohen and Kirwan then advised Shulman that he
23
should retain attorney Prupis to represent him in connection with
any impending IRS action. Shulman did so.
In late 1996, Shulman was audited by the IRS, which, in
1997, assessed penalties and taxes against Shulman for his
contributions to the VEBA plan. Evidently still believing the
plan to be legitimate, Shulman continued making contributions
until 1998.
Drs. Cetel and Schneider
Marvin Cetel and Barbara Schneider are the last two
physicians to participate in this particular VEBA scheme. They
began participating and contributing to the VEBA plan in 1990
and both received the IRS Notice 95-34 in May of 1995, the
IRS audit notices in June of 1995, and the Prupis and Cohen
letter of July 12, 1995. Schneider also received a notice of
deficiency from the IRS on October 31, 1995, after which she
hired Prupis as her attorney. Both physicians also received the
24
letter from Prupis dated August 7, 1996. Schneider made her
last contribution in 1998 and Cetel made his last contribution in
1997.
II. PROCEDURAL HISTORY
This appeal comprises actions that were initially filed as
two separate putative class actions (the Cetel action, filed on
July 20, 2000 and the Sankhla action, filed on September 6,
2001).4 Recognizing the importance of the Neonatology action
for the future of their investments in the VEBA plan, both the
Cetel physicians and the Sankhla physicians sought, and were
granted, leave to participate as amici curiae in the Neonatology
appeal to the Court of Appeals for the Third Circuit.
Neonatology Assocs. v. Comm’r., 293 F.3d 128 (3d Cir. 2002).
After the Tax Court’s decision was affirmed, 299 F.3d 221 (3d
Cir. 2002), plaintiffs sued defendants, alleging violations of
4.
Pearlman and Shulman joined the Sankhla suit in March 2002.
25
ERISA, RICO, and various state law claims, including the New
Jersey RICO statute and the New Jersey Consumer Fraud Act.
Although the actions were initially filed separately in New
Jersey state court, both were removed to the United States
District Court for the District of New Jersey on the basis of the
ERISA claims.
On July 8, 2002, the District Court dismissed the Sankhla
physicians’ state law claims as being preempted by section
514(a) of ERISA, 29 U.S .C. § 1144(a), and on November 25,
2002, consolidated the two cases.5 After completion of
discovery, defendants filed a motion for summary judgment,
seeking to dismiss plaintiffs’ remaining ERISA claims and their
civil RICO claims.
5.
Both suits named the same set of defendants: Barry Cohen,
Michael Kirwan and Kirwan Financial Group, the Medical
Society of New Jersey, Raymond Ankner and his companies,
Commonwealth Life Insurance Company and related entities,
and Neil Prupis, Esquire.
26
The District Court, in an order dated March 2, 2004, first
reversed itself on the issue of ERISA preemption, reinstating
plaintiffs’ state law claims but declining to finally resolve them,
and then granted defendants’ motion for summary judgment on
plaintiffs’ federal RICO claims and most of the ERISA claims.
The District Court held the RICO claims time-barred. Applying
the four-year statute of limitations period established by the
Supreme Court in Agency Holding Corp. v. Malley-Duff &
Assocs., 483 U.S. 143, 156, 107 S. Ct. 2759, 97 L. Ed. 2d 121
(1987) along with the “injury discovery rule” adopted by our
Court in Mathews v. Kidder Peabody & Co., 260 F.3d 239, 252
(3d Cir. 2001), the District Court determined that plaintiffs
should have been on notice of their injuries, at the latest, in 1995
after the IRS issued Notice 95-34 and began its audits of the
VEBA plan participants. With respect to plaintiffs’ ERISA
claims, the District Court held that the counts relating to §§ 409
27
and 502(a) of ERISA, 29 U.S.C. §§ 1109(a) and 1132(a)(2),
should be dismissed for lack of standing because plaintiffs
sought to recover benefits owed to them in their individual
capacities and not on behalf of their employer plans. The
District Court also dismissed both parties’ attempts to import the
findings of Neonatology to bind each other, employing its broad
discretion to determine that collateral estoppel should be denied
based on the complexity of the case. Finally, the District Court
granted summary judgment to defendants on plaintiffs’ “benefit-
of-the-bargain” theory of recovery. The District Court opined
that such damages would be highly speculative and would result
in the enforcement of an illegal tax-avoidance scheme.
In a third opinion dated July 16, 2004, the District Court
granted defendants’ motion for summary judgment on all of the
reinstated state law claims and the remaining ERISA and New
Jersey RICO claims and denied plaintiffs’ motion for
28
reconsideration of its March 2, 2004 opinion.6 The District
Court held the surviving ERISA claims under section 502(a)(3)
of ERISA, 29 U.S.C. § 1132(a)(3), for breach of fiduciary duty
to be time-barred. The Court concluded that plaintiffs had
actual knowledge of their fiduciary-breach allegations when, in
1995, the IRS sent out Notice 95-34 and began its audits of the
VEBA plan participants. The District Court, noting that the
federal RICO statute served as a model for the state corollary
and in the absence of any governing state law to the contrary,
concluded that a four-year statute of limitations, analogous to
that in the federal Act, controlled the New Jersey RICO claims.
It held that this statute of limitations began running by the
summer of 1995, when all of the plaintiffs had learned of the
IRS Notice 95-34 or had learned that the IRS had audited or was
6.
The District Court’s dismissal of plaintiffs’ breach of contract
and unjust enrichment claims are not appealed.
29
going to audit the personal accounts of the participants.
Moreover, the District Court held that plaintiffs failed to
undertake reasonable inquiries into the alleged fraud, vitiating
their reliance on New Jersey’s discovery rule as support for their
claim that the statute of limitations should be equitably tolled.
The District Court also rejected plaintiffs’ claim that the statute
of limitations did not begin to run until they suffered actual
damages, concluding that under New Jersey law, fraud claims
like those premised on the New Jersey RICO statute did not
require a knowledge of actual damages.7 Finally, the District
7.
The District Court applied the same reasoning to the Sankhla
Plaintiffs’ state law fraud-based claims, including fraud (Count
XII), breach of fiduciary duty (Count XIV), breach of good faith
and fair dealing (Count XVI), respondeat superior (Count
XVII), conspiracy and aiding and abetting fraudulent
misrepresentation (Count XVIII) and the physicians’ negligent
misrepresentation claim (Count XIII). The District Court held
that these claims had a six-year statue of limitations but, because
the Sankhla physicians filed their claims in September 2001 and
the date of accrual was, at the latest August 1995, these were
(continued...)
30
Court dismissed plaintiffs’ Consumer Fraud Act claim, opining
that, as a matter of law, the terms and scope of the CFA could
not apply to the sale and purchase of the VEBA plans because,
absent a clear indication by New Jersey courts otherwise, the
CFA did not intend to cover the sale and purchase of the
complex tax-avoidance schemes at issue here.
The disposition of this third opinion did leave certain
common law state claims intact, but plaintiffs entered into a
settlement agreement concerning these claims shortly thereafter
and the District Court entered a final Order of Dismissal.
Plaintiffs timely appeal from this Order and we have jurisdiction
pursuant to 28 U.S.C. § 1291. We review decisions granting
summary judgment de novo, applying the same legal standard
as the trial court to the same record. Omnipoint Comm’cns
7.
(...continued)
also time barred.
31
Enters., L.P. v. Newtown Twp., 219 F.3d 240, 242 (3d Cir.
2000). Summary judgment can only be granted “if the
pleadings, depositions, answers to interrogatories, and
admissions on file, together with the affidavits, if any, show that
there is no genuine issue as to any material fact and that the
moving party is entitled to judgment as a matter of law.” FED.
R. CIV. P. 56(c).
III. Discussion
A.
We will quickly dispose of a preliminary waiver issue.
Plaintiffs argue that when certain defendants filed their answers
to the complaint they failed to raise the issue of the statute of
limitations, instead taking the position that the claims asserted
were not ripe because the Tax Court litigation had yet to
conclude. In essence, plaintiffs make a waiver argument. The
District Court rejected it, applying the statute of limitations to
32
bar all pertinent claims against all defendants. We review the
District Court’s decision for abuse of discretion and we will
affirm on this point. Oddi v. Ford Motor Co., 234 F.3d 136, 146
(3d Cir.), cert. den. 532 U.S. 921 (2000). It is true that “parties
should generally assert affirmative defenses early in litigation,
so they may be ruled upon, prejudice may be avoided, and
judicial resources may be conserved.” Robinson v. Johnson,
313 F.3d 128, 134 (3d Cir. 2002). However, there is no hard
and fast rule limiting defendants’ ability to plead the statute of
limitations. Accordingly, affirmative defenses can be raised by
motion, at any time (even after trial), if plaintiffs suffer no
prejudice. Charpentier v. Godsil, 937 F.2d 859, 863–64 (3d Cir.
1991). Here, the District Court determined, and we agree, that
plaintiffs suffered no undue prejudice because they had notice
that the statute of limitations was an issue for the simple reason
that other defendants had pleaded in their answer that the claims
33
were time-barred. Because plaintiffs were on sufficient notice,
it did not inhibit their ability to gauge and respond to all the
possible defenses. The District Court was well within the
bounds of its discretion to allow defendants to plead the statute
of limitations even if they had not done so in their initial
answers.
B. Federal RICO Claims
Turning to the substance of plaintiffs’ appeal, the first
issue we address is whether the District Court erred when it
dismissed plaintiffs’ federal RICO claims as time-barred.
Plaintiffs do not contest that civil RICO actions are subject to a
four-year statute of limitations. See Forbes v. Eagleson, 228
F.3d 471 (3d Cir. 2000). Rather, they recognize that the
dispositive question concerning the federal RICO claims here is
whether plaintiffs were on “inquiry notice” of their injuries by
August 1995. In determining when a RICO claim accrues, we
34
apply an injury discovery rule “whereby a RICO claim accrues
when plaintiffs knew or should have known of their injury.”
Mathews v. Kidder Peabody & Co., 260 F.3d 239, 252 (3d Cir.
2001) (quoting Forbes, 228 F.3d at 484). As we noted in
Mathews, this rule has “both subjective and objective”
components and, with respect to the subjective, “a claim accrues
no later than when the plaintiffs themselves discover their
injuries.” Id. However, because the components are
disjunctive we first perform an objective inquiry to determine
when plaintiffs should have known of the basis of their claims,
which “depends on whether [and when] they had sufficient
information of possible wrongdoing to place them on ‘inquiry
notice’ or to excite ‘storm warnings’ of culpable activity.”
Benak ex rel. Alliance Premier Growth Fund v. Alliance Capital
Mgmt. L.P., 435 F.3d 396, 400 (3d Cir. 2006) (internal
quotations omitted). Moreover, plaintiffs have inquiry notice
35
“whenever circumstances exist that would lead a reasonable
investor of ordinary intelligence, through the exercise of due
diligence, to discovery of his or her injury.” Mathews, 260 F.3d
at 252.
In determining inquiry notice, our analysis proceeds in
two steps. First, the burden is on the defendant to show the
existence of “storm warnings.” Id. Storm warnings have not
been exhaustively catalogued, but they are essentially any
information or accumulation of data “that would alert a
reasonable person to the probability that misleading statements
or significant omissions had been made.” Id. This is an
objective inquiry and hinges not on a plaintiff’s actual
awareness of suspicious circumstances or even on the ability of
a plaintiff to understand their import. Instead, “[i]t is enough
that a reasonable investor of ordinary intelligence would have
discovered the information and recognized it as a storm
36
warning.” Id. This charge saddles the investor with
responsibilities like reading prospectuses, reports, and other
information related to the investments, Mathews, 260 F.3d at
252, and, additionally, assumes knowledge of “publicly
available news articles and analyst’s reports.” Benak, 435 F.3d
at 400 quoting Lui v. Credit Suise First Boston Corp. (In re
Initial Public Offering Sec. Litig.), 341 F. Supp. 2d 328, 345
(S.D.N.Y. 2004)). Once determined, the second step then shifts
the burden to plaintiffs to show that, heeding the storm
warnings, they exercised reasonable diligence but were unable
to find and avoid the storm. Mathews, 260 F.3d at 252; Benak,
435 F.3d at 400.
Here, we conclude that the District Court correctly
decided that sufficient storm warnings existed by August 1995
to satisfy the first prong of our inquiry notice analysis. By
August 1995, the IRS had circulated Notice 95-34, which
37
informed plaintiffs that the IRS had not approved the deduction
contributions to VEBA plans and, in fact, had actually
disallowed these deductions. The Notice made clear that the
VEBA plans were inconsistent with the tax code. Additionally,
in 1995 the Medical Society stopped endorsing the VEBA plans
and the IRS undertook audits of some of the plaintiffs, amassing
even more troubling storm clouds. All this information, taken
together, establishes with enough objective certainty that storm
warnings did exist concerning the lawfulness of the VEBA
plans, thus satisfying the first step.8
8.
We decline to treat Sankhla differently from any of the
other plaintiffs in determining that sufficient storm warnings
were sounding by August 1995. The fact that Sankhla may have
never seen the IRS’ Notice or heard of the audits does not save
him from attribution of inquiry notice because, as noted earlier,
his employer was audited and he was subpoenaed in connection
to this audit in March 1995. Moreover, he admitted that he had
learned of the audits of his other Lakewood Radiology partners
by mid-1995 and that he had discussed the audits and their
implications with his partners. Thus, the existence of storm
(continued...)
38
With respect to the second step, there is little doubt that
plaintiffs exercised scant, if any, diligence in attempting to
discover their injuries. The District Court appropriately
commented that:
[i]t seems incredible . . . to argue they relied
solely on the defendants’ assurances of a
“victory” over the IRS in the Tax Court . . . .
Asking the defendants whether the plans were
legal does not constitute reasonable due diligence
. . . . [A] reasonable person would not continue to
participate in a tax avoidance scheme after the
IRS issues a notice condemning such plans, and
that person was the subject of an IRS audit of his
participation in that plan.
By all accounts, plaintiffs’ only effort to discover their injuries
was to inquire about the validity of the plans with Cohen and
Prupis, both defendants in this dispute and also, at the time,
involved in the running and operation of the plan. Both Cohen
8.
(...continued)
warnings by August 1995 applies to all plaintiffs, including
Sankhla.
39
and Prupis continued to assure plaintiffs that the plans were
legitimate and “would be upheld in the courts.” In Mathews,
we addressed a similar degree of diligence and concluded that
it did not constitute the exercise of due diligence expected of
reasonable investors. There, plaintiffs sent a letter to defendants
inquiring into the state of their investment. Defendants
responded that they “remain[ed] confident in the underlying
value of the . . . assets and believe[d] this value will be realized
once the[] markets turnaround.” Mathews, 260 F.3d at 255.
Plaintiffs in Mathews argued that this inquiry constituted
reasonable diligence, but we rejected that argument, stating:
Reasonable due diligence does not require a
plaintiff to exhaust all possible avenues of
inquiry. Nor does it require the plaintiff to
actually discover his injury. At the very least,
however, due diligence does require plaintiffs to
do something more than send a single letter to the
defendant.
Id. at 255.
40
This analysis guides our conclusion here. Merely asking
defendants whether the plans were legal is inadequate to show
reasonable diligence. As we noted in Mathews and reiterate
here, plaintiffs who undertake no diligence beyond superficial
inquiry of defendants concerning the validity or propriety of
their investments cannot obtain the benefit that a finding of
reasonable diligence will confer. Accordingly, plaintiffs have
not met their portion of the burden-shifting requirement under
our inquiry-notice analysis and thus cannot defeat the finding
that they were on inquiry notice by August 1995 and, by
extension, that their claims accrued as of that date. See id.; In re
NAHC, Inc. Sec. Litig., 306 F.3d 1314, 1325 (3d Cir. 2002).
Plaintiffs submit, however, that even if their claims
accrued by August 1995, the District Court should have tolled
the statute of limitations because defendants fraudulently
concealed the VEBA scheme and therefore prevented plaintiffs
41
from discovering their injuries. It is true that “[f]raudulent
concealment is an equitable doctrine that is read into every
federal statute of limitations[,]” Mathews, 260 F.3d at 256
(quoting Davis v Grusemeyer, 996 F.2d 617, 624 (3d Cir. 1993),
and additionally, that it will toll the RICO limitation period
“where a pattern remains obscure in the face of a plaintiff’s
diligence in seeking to identify it.” Id. (quoting Rotella v.
Wood, 528 U.S. 549, 561, (2000). But, to benefit from the
equitable tolling doctrine, plaintiffs have the burden of proving
three necessary elements: (1) that the defendant actively misled
the plaintiff; (2) which prevented the plaintiff from recognizing
the validity of her claim within the limitations period; and (3)
where the plaintiff’s ignorance is not attributable to her lack of
reasonable due diligence in attempting to uncover the relevant
facts. Mathews, 260 F.3d at 256.
42
Plaintiffs’ claim fails on the third element. As discussed
above, plaintiffs did not exercise the due diligence expected of
a reasonable investor because they failed to undertake any
investigation into the meaning of the storm warnings beyond
asking defendants whether their plans were legitimate. As in
Mathews, a finding that plaintiffs did not exercise reasonable
diligence for the determination of when the claim accrues will
also likely foreclose the possibility of equitable tolling. Id. at
257 (“In order to avoid summary judgment, there must be a
genuine issue of material fact as to whether the Appellants
exercised reasonable due diligence in investigating their claim).9
9.
We, of course, do not suggest that in every case involving an
IRS audit of some form, the claim will begin to run on the date
of the audit. Nor do we suggest that assurances made by an
investment’s promoter or manager will never toll the statute of
limitations. Rather, these types of questions are necessarily fact
specific, based on the presence and exact type of storm warnings
and the extent of inquiry undertaken with respect to due
diligence. In this case, plaintiffs simply did not exercise enough
(continued...)
43
Finally, with respect to the federal RICO claims,
plaintiffs contend that under basic contract law, the accrual date
could only occur when a default in the contractual obligation
occurs. The District Court properly rejected this claim, holding
that “plaintiffs have failed to proffer sufficient evidence that
defendants breached any contractual obligation” and that
“plaintiffs have not pointed to any contractual provision or duty
that obligated Defendants to provide tax benefits.” Unlike in
the creditor-debtor context, where an injury may not accrue
unless and until the debtor defaults on some contractual
obligation, see Cruden v. Bank of New York, 957 F.2d 961, 967
(2d Cir. 1992), there simply is no contractual obligation upon
which one of the parties could have defaulted. In short, there is
9.
(...continued)
diligence to either prevent the claim from accruing or to allow
the statute of limitations to be tolled, as both “benefits” hinge on
the exercise of reasonable diligence.
44
no contractual claim, and plaintiffs’ attempt to reframe their
RICO claims in this vein appropriately must fail.
C. New Jersey RICO Claims
Plaintiffs next object to the District Court’s application
of a four-year statute of limitations to their New Jersey RICO
claims as opposed to a six-year limitations period. Although
they concede that some New Jersey courts have applied the
federal RICO statute of limitations of four years to New Jersey
RICO claims, see Matter of Integrity Ins. Co., 584 A.2d 286
(1990), they insist that due to some recent changes to the way
New Jersey courts approach state RICO claims, “it can no
longer be predicted that the New Jersey Supreme Court would
feel compelled to follow federal law in determining the
appropriate statute of limitations for NJRICO.” Thus, they
argue that the law is unsettled with respect to how long the
statute of limitations is for New Jersey RICO claims and suggest
45
that the appropriate statute of limitations should be six years.10
To support this claim, plaintiffs rely on State v. Ball, 661
A.2d 251 (N.J. 1995), in which, according to plaintiffs, the New
Jersey Supreme Court declined to interpret NJRICO
coextensively with federal interpretations of RICO, instead
opting to interpret NJRICO as governed by state law principles.
We disagree. A close reading of Ball suggests, contrary to
plaintiffs’ contention, that the New Jersey Supreme Court
believed the New Jersey RICO statute was and should be
consistent with the federal RICO statute. Ball, 661 A.2d at 258
(“[B]ecause the federal statute served as an initial model for [the
NJRICO statute], we heed federal legislative history and case
law in construing our statute.”). Moreover, subsequent New
Jersey cases belie plaintiffs’ contention that the New Jersey
10.
This is the general statute of limitations for New Jersey state
law claims. Mirra v. Holland Am. Line, 751 A.2d 138, 140 (N.J.
App. Div. 2002)
46
RICO is somehow divergent from the federal RICO statute.
See, e.g., Interchange State Bank v. Veglia, 668 A.2d 465, 472
(App. Div. 1995) (“There is no state decisional law on this
aspect of civil RICO law. Therefore, parallel federal case law
is an appropriate reference source to interpret the RICO
statute.”). In any event, nothing in Ball, or any other
case, stands for the proposition that claims under the New Jersey
RICO statute possess a six-year statute of limitations, as
opposed to the commonly applied four-year limitations period
for federal RICO claims. There is no evidence that the New
Jersey RICO statute possesses a different statute of limitations
from the federal RICO statute and we refuse to adopt such a
rule. Thus, for the reasons above, and because plaintiffs were
47
on notice of their claims, we will affirm the dismissal of the
NJRICO claim on the ground of statute of limitations.11
D. ERISA Claims
11.
Our decision that the District Court was correct in applying the
four-year statute of limitations to plaintiffs’ New Jersey RICO
claims is buttressed by the Supreme Court’s analysis in Agency
Holding Corp. v. Malley-Duff & Associates, Inc., 483 U.S. 143
(1987), which held that a universal four-year statute of
limitations would apply in federal civil RICO actions. After
deciding that a uniform federal statute of limitations was
necessary, the Court adopted the Clayton Act’s statute of
limitation. The Court found that the Clayton Act provided the
closest analogy to federal civil RICO claims because both
statutes “were designed to remedy economic injury by providing
for the recovery of treble damages, costs and attorney’s fees.
Both statutes also bring to bear the pressure of ‘private
attorneys’ general’ on a serious national problem for which
public prosecutorial resources are deemed inadequate.” 483
U.S. at 151. We anticipate the New Jersey Supreme Court will
apply this analysis to New Jersey law and adopt the New Jersey
Antitrust Act as the closest analogy to the New Jersey
Racketeering Act, thus, the Antitrust Act’s four-year statute of
limitations would apply. See Integrity Insurance, 584 A.2d at
287.
48
We turn next to plaintiffs’ claim that the District Court
erred when it dismissed the ERISA §§ 409 and 502(a)(2) claims
for lack of standing. The District Court granted summary
judgment for defendants on these two counts because it found
that plaintiffs had only sought to recover damages in their
individual capacities and failed to name their employer plans as
plaintiffs. Because plaintiffs had not sued in a representative
capacity they could not meet the standing requirements under
either sections 409 or 502(a)(2). Plaintiffs present two
arguments on appeal. However, we need not address them
because irrespective of the vitality of their arguments, their
ERISA §§ 409 and 502(a)(2) claims and their ERISA §
502(a)(3) claim are barred by the statute of limitations. See
Curay-Cramer v. Ursuline Acad. of Wilmington, 450 F.3d 130,
133 (3d Cir. 2006) (citing Bernitsky v. United States, 620 F.2d
948, 950 (3d Cir. 1980)) (recognizing that “we can affirm on
49
any basis appearing in the record”). ERISA § 413, 29 U.S.C. §
1113 provides that all claims based on breach of fiduciary duty
must be brought within the earlier of:
(1) six years after (A) the date of the last action
which constituted a part of the breach or violation,
or (B) in the case of an omission the latest date on
which the fiduciary could have cured the breach
or violation, or
(2) three years after the earliest date on which the
plaintiff had actual knowledge of the breach or
violation;
except that in the case of fraud or concealment,
such action may be commenced not later than six
years after the date of discovery of such breach or
violation.
By its terms then, ERISA’s statute of limitations provision
offers a choice of periods, depending on “whether the plaintiff
has actual knowledge of the breach . . . .” Kurz v. Phila. Elec.
Co., 96 F.3d 1544, 1551 (3d Cir. 1996). In Gluck v. Unisys
Corp., we established that:
Actual knowledge of a breach or violation
requires that a plaintiff have actual knowledge of
50
all material facts necessary to understand that
some claim exists, which facts could include
necessary opinions of experts, knowledge of a
transactions’s harmful consequences, or even
actual harm.
960 F.2d 1168, 1178 (3d Cir. 1992) (internal citations omitted).
We have thus stated that for purposes of determining actual
knowledge, it must be shown that “plaintiffs actually knew not
only of the events that occurred which constitute the breach or
violation but also that those events supported a claim of breach
of fiduciary duty or violation.” Montrose Med. Group
Participating Savs. Plan v. Bulger, 243 F.3d 773, 787 (3d Cir.
2001) (citations omitted). In other words, where a claim is for
breach of fiduciary duty, to be charged with actual knowledge
“requires knowledge of all relevant facts at least sufficient to
give the plaintiff knowledge that a fiduciary duty has been
breached or ERISA provision violated.” Gluck, 960 F.2d at
1178.
51
Recognizing that the § 1113 statute of limitations sets a
“high standard for barring claims against fiduciaries prior to the
expiration of the six-year limitations” and the requirements must
be interpreted “stringently,” Montrose, 243 F.3d at 778, here,
we nonetheless agree with the District Court that by 1995,
plaintiffs had actual knowledge of the events and facts necessary
to understand that a claim or violation existed. The core of
plaintiffs’ breach of fiduciary duty claim is that defendants made
or ratified material misrepresentations to plaintiffs, or concealed
material information from them, concerning the legitimacy of
the VEBA plans. The record reveals the presence of IRS audits,
examination reports, deficiency notices, Notice 95-34, and the
possibility that plaintiffs would have to pay taxes, penalties, and
interest on money they were told would be tax-free, in addition
to their concerns that this information engendered. The totality
of this information unequivocally demonstrates that plaintiffs
52
were not only aware of all the material necessary to determine
that defendants had in fact misrepresented the tax benefits of the
VEBA plans, but also that defendants’ representations were
suspect.12
Plaintiffs’ claim that their knowledge of a possible breach
could not have arisen until the Tax Court invalidated the VEBA
plans in 2001 is unpersuasive in light of both the clear import of
the IRS’s statements and warnings that the plans were in
violation of the tax code and that any deductions stemming from
investments in the VEBA plans would be disallowed, and the
IRS’ actions in disallowing, at that time, the contributions made
to the VEBA plans. This information and corresponding official
12.
We decline to treat Sankhla differently here again because, as
noted earlier, despite the fact that he was never audited and
never received a deficiency notice, he was subpoenaed in
connection with his employer’s audit in March 1995, and
learned of and discussed the audits and their implications with
his partners who had been targeted by the IRS, thereby placing
him in possession of the same knowledge as the other plaintiffs.
53
action stand in direct contradiction to the representations made
by defendants and support a conclusion that, as a matter of law,
plaintiffs were aware of the facts establishing a breach of
fiduciary duty and thus in possession of actual knowledge
necessary to understand that some claim exists. See Romero v.
Allstate Corp., 404 F.3d 212, 226 (3d Cir. 2005) (“In order to
make out a breach of fiduciary duty claim . . . , a plaintiff must
establish each of the following elements (1) the defendant’s
status as an ERISA fiduciary acting as a fiduciary; (2) a
misrepresentation on the part of the defendant; (3) the
materiality of that misrepresentation; and (4) detrimental
reliance by the plaintiff on the misrepresentation.”) (quoting
Daniels v. Thomas & Betts Corp., 263 F.3d 66, 73 (3d Cir.
2001)); see also Ranke v. Sanofi-Synthelabo Inc., 436 F.3d 197,
202–03 (3d Cir. 2006).
54
Moreover, the record establishes that after the IRS
circulated Notice 95-34 and after it had audited and disallowed
certain of plaintiffs’ contributions, certain plaintiffs sought legal
advice concerning the validity of the VEBA plans and the
propriety of defendants’ claims concerning the plan’s validity.
This establishes sufficient evidence that they were aware of the
alleged breach and belying any claim to the contrary that they
could not have known or understood that some claim existed.13
See Connell v. Trustess of the Pension Fund of the Ironworkers
Dist. Council, 118 F.3d 154, 158 (3d Cir. 1997) (recognizing
that evidence of actual knowledge of an alleged breach can
include the fact that plaintiffs sought expert advice).
Consequently, we conclude that the evidence establishes that
13.
Of course, as noted earlier, the legal advice they sought came
from defendants’ own attorney, Prupis, but this is irrelevant for
a determination of whether plaintiffs had actual knowledge of
the alleged breach.
55
plaintiffs were in possession of the “material facts necessary to
understand that some claim exists,” Gluck, 960 F.2d at 1177,
and, therefore, that they had actual knowledge of the alleged
breach and are subject to the three year statute of limitations
period for the ERISA claims. Accordingly, we will affirm the
District Court’s order dismissing plaintiffs’ ERISA claims.
E. Plaintiffs’ State Law Claims
Plaintiffs also object to the District Court’s dismissal of
their myriad state common law claims as time-barred.14 Both
parties agree that these claims are governed by New Jersey state
law, which applies a six-year statute of limitations. N.J.S.A. §
2A:14-1; Mirra v. Holland America Line, 751 A.2d 138, 142
14.
As noted earlier, plaintiffs state law fraud claims include fraud
(Count XII), breach of fiduciary duty (Count XIV), breach of
good faith and fair dealing (Count XVI), respondeat superior
(Count XVII), conspiracy and aiding and abetting fraudulent
misrepresentation (Count XVIII) and negligent
misrepresentation (Count XIII).
56
(N.J. App. Div. 2002); The District Court determined that
plaintiffs’ state law claims accrued in August 1995, when the
IRS issued Notice 95-34 and some plaintiffs were audited. In
making this determination, the District Court was bound to
apply New Jersey’s discovery rule, which begins the statute of
limitations running when two conditions are met: (1) the
plaintiff has suffered actual injury; (2) the plaintiff knows that
the injury is due to the fault of another.15 Martinez v. Cooper
15.
Generally, a cause of action accrues when a plaintiff has
suffered an injury and is aware of a causal relationship between
the injury and the actor. See S. Cross Overseas Agency, Inc. v.
Wah Kwong Shipping Group, Ltd., 181 F.3d 410, 425 (3d Cir.
1999). However, where “a party is reasonably unaware either
that he has been injured, or that the injury is due to the fault or
neglect of an identifiable individual or entity,” the discovery
rule will “postpone the accrual of a cause of action” until such
time as a “reasonable person, exercising ordinary diligence,
[would know or should have known] that he or she was injured
due to the fault of another.” Caravaggio v. D’Agostini, 765
A.2d 182, 186–87 (N.J. 2001). Here, it is agreed that because
the plaintiffs’ common law state claims sound in fraud, the
discovery rule is applicable. S. Cross, 181 F.3d at 425 (“When
(continued...)
57
Hosp./Univ. Med. Ctr., 747 A.2d 266, 272 (2000). This inquiry
boils down to “whether the facts presented would alert a
reasonable person, exercising ordinary diligence, that he or she
was injured due to the fault of another,” and requires an
objective analysis. Caravaggio v. D’Agostini, 765 A.2d 182,
186–87 (N.J. 2001).
As we have discussed earlier, despite plaintiffs’
assertions to the contrary, by August 1995 a reasonable person,
exercising ordinary diligence, would have known both that they
had been injured and that the injury was due to the fault of
defendants. The presence of Notice 95-34 and its attendant
consequences, combined with the audits and deficiency notices
constitute sufficient harm to satisfy the first prong of the
15.
(...continued)
the gist of the action is fraud concealed from the plaintiff, the
statute begins to run on discovery of the wrong or of facts that
reasonably should lead the plaintiff to inquire into the fraud.”).
58
discovery test. See Nappe v. Anscheleqitz, Barr, Ansell &
Bonell, 477 A.2d 1224 (N.J. 1984). And, additionally, despite
the clear signs that plaintiffs had been harmed, they failed to
make reasonable inquiries or investigations into the source of
that harm, thus vitiating any claim that they could not establish
some causation between their harm and another’s fault. See
Apgard v. Lederle Labs., 588 A.2d 380, 383 (N.J. 1991); see
also Savage v. Old Bridge-Sayreville Med. Group, P.A., 633
A.2d 514 (N.J. 1993). We thus have no trouble agreeing with
the District Court that, by August 1995, for purposes of
plaintiffs’ state law claims, the statute of limitations had begun
to run.16
16.
Additionally, plaintiffs’ insistence that the continuing tort
doctrine renders the District Court’s conclusion erroneous fails
because, although the doctrine might apply where the plaintiff
has no reason to believe he has been injured, it will not apply
where the plaintiff “discovered or should have discovered the
injury and its cause connection with the [negligence] before that
(continued...)
59
F. New Jersey Consumer Fraud Act
Plaintiffs next contend that the District Court erred by
holding that the New Jersey Consumer Fraud Act (CFA) does
not apply. Specifically, the District Court held that because the
VEBA plans “were extremely complicated tax avoidance
schemes involving tens, if not hundreds, of thousands of
dollars[,]” to apply the Consumer Fraud Act would “stretch the
admittedly broad application of the [] Act beyond the intent of
the New Jersey legislature.” Plaintiffs argue that the CFA must
16.
(...continued)
time.” Lopez v. Sawyer, 279 A.2d 116, 123 (N. J. App.Div.
1971). Here, plaintiffs should have discovered the cause of their
injury in August 1995 because this is when facts became
available that a reasonable person would have taken to suggest
the possibility of wrongdoing. Additionally, neither the
continuing tort doctrine nor the “last overt act” doctrine, which
defendants also press, applies to fraud claims. No New Jersey
courts have ever applied these doctrines to fraud claims and we
are unwilling, on these facts, to do so today. Republic of
Philippines v. Westinghouse Elec. Corp., 774 F. Supp 1438
(D.N.J. 1991).
60
be applied broadly, and to the VEBA plans at issue here, as
commanded by the New Jersey Supreme Court’s holding in
Lemelledo v. Beneficial Management Corp., 696 A.2d 546,
550–51 (N.J. 1997). We are unpersuaded.
The CFA “is intended to protect consumers by
eliminating sharp practices and dealings in the marketing of
merchandise and real estate.” Id. at 554 (internal quotations
omitted); see N.J. Stat. Ann. § 56:8-1 et seq.17 It is true that in
Lemelledo, the New Jersey Supreme Court held the Act to apply
17.
By its terms, the Act prohibits:
[t]he act, use or employment by any person of any
unconscionable commercial practice, deception,
fraud, false promise, misrepresentation, or the
knowing concealment, suppression, or omission
of any material fact with intent that others rely
upon such concealment, suppression or omission,
in connection with the sale or advertisement of
any merchandise or real estate, or with the
subsequent performance of such person as
aforesaid, whether or not any person has in fact
been mislead, deceived or damaged thereby . . . .
N.J. Stat. Ann. § 56:8-2.
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to the sale of insurance policies to consumers. 696 A.2d at 555
(“[O]ur reading of the CFA convinces us that the statute’s
language is ample enough to encompass the sale of insurance
policies as goods and services that are marketed to
consumers.”). However, as New Jersey courts have repeatedly
made clear, the CFA seeks to protect consumers who purchase
“goods or services generally sold to the public at large.”
Marascio v. Campanella, 689 A.2d 859 (App.Div. 1997).
Furthermore, “[t]he entire thrust of the Act is pointed to
products and services sold to consumers in the popular sense.”
Arc Networks, Inc. v. Gold Phone Card Co., 756 A.2d 636, 637
(N.J. Super. Ct. App. Div. 2000) (internal quotations omitted).
Thus, the CFA “is not intended to cover every transaction that
occurs in the marketplace[,]” but, rather, “[i]ts applicability is
limited to consumer transactions which are defined both by the
status of the parties and the nature of the transaction itself.” Id.
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These facts are insufficient to establish that the plans at
issue, and the transactions by which they were sold, qualify as
“products and services sold to consumers in the popular
sense[,]” such that they fall within the ambit of the CFA. Arc
Networks, 756 A.2d at 638. As opposed to the traditional sale
of insurance policies, which are undoubtedly subject to the
provisions of the CFA, see Lemelledo, 696 A.2d at 551, the
VEBA plans at issue here are instead rather complex
arrangements that do not reflect the kinds of “goods or services
generally sold to the public.” Arc Networks, 756 A.2d at 638.
As the District Court found, the VEBA plans were
complex tax-avoidance schemes designed primarily to allow an
investor to make tax-deductible contributions while allowing for
a permanent tax deferral upon withdrawal. Moreover, the plans
were not available to the general public and were never
marketed as such. Thus, the plans represent a highly specific
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scheme providing no real insurance products to plaintiffs,
necessarily marketed to a discrete and specific class of capable
investors — not the general public. Unlike the sale of credit to
the general public or the “sale of insurance policies . . . that are
marketed to consumers[,]” or even “anything offered[] directly
or indirectly to the public for sale,” Lemelledo, 696 A.2d at 551,
the sale of complex employee welfare benefit plans to a very
specific class of investor does not point to the remedial purpose
or intent of the CFA, “namely, to root out consumer fraud.” Id.
Consequently, because “the entire thrust of the [CFA] is pointed
to products and services sold to consumers in the popular
sense[,]” id., we cannot conclude that the District Court erred
when it dismissed plaintiffs’ claim under the CFA.18
18.
Two issues remain. Penultimately, plaintiffs claim the District
Court’s erred by denying their claim to recover “benefit-of-the-
bargain” damages for losses incurred as a result of the collapse
of the VEBA plans. Because we affirm the District Court’s
(continued...)
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IV. Conclusion
For the foregoing reasons, we will affirm the District
Court’s orders granting defendants’ motions for summary
judgment.
18.
(...continued)
dismissal of plaintiffs’ substantive claims in all respects,
including the dismissal of plaintiffs’ state law claims, the issue
as to whether plaintiffs could proceed under a benefit-of-the-
bargain theory of recovery is moot. Lastly, on cross-appeal,
defendants argue that plaintiffs’ state law claims are preempted
by ERISA. Because we have dismissed the state claims on other
grounds, we need not reach and do not address this issue.
Nugent v. Ashcroft, 367 F.3d 62, 168 (3d Cir. 2004).
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