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Cetel v. Kirwan Financial Group

August 28, 2006

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.)
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; 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.
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) 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.; 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) 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.

The opinion of the court was delivered by: Nygaard, Circuit Judge.

PRECEDENTIAL

ARGUED APRIL 24, 2006

BEFORE: SCIRICA, Chief Judge, and NYGAARD, Circuit Judge, and YOHN,*fn1 District Judge.

OPINION OF THE COURT

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 to the VEBAs.*fn2 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 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 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 policies*fn3 created 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")*fn4 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 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 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 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, 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. at 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 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 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 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.

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 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 ...


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