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Bar-David v. Opinion Econ. Concepts, Inc.

United States District Court, D. New Jersey

September 22, 2014

DANI BAR-DAVID, MICHAL BAR-DAVID, and OCTAL CORPORATION, Plaintiff,
v.
OPINION ECONOMIC CONCEPTS, INC., KENNETH HARTSTEIN, NATI FINANCIAL, LLC, AMIR ABRAMOV, ARTHUR D. SHANKMAN & CO., ARTHUR D. SHANKMAN, PENSION STRATEGIES, LLC, and DAVID BURKE, Defendants

Order Filed: September 4, 2014

Page 760

For DANI BAR-DAVID, MICHAL BAR-DAVID, OCTAL CORPORATION, Plaintiffs: ARTHUR L. PORTER, JR., LEAD ATTORNEY, ALAN C. THOMAS, FISCHER, PORTER & THOMAS PC, ENGLEWOOD CLIFFS, NJ.

For ECONOMIC CONCEPTS, INC., KENNETH HARTSTEIN, Defendants: KENNETH R. ROTHSCHILD, LEAD ATTORNEY, GOLDEN ROTHSCHILD SPAGNOLA LUNDELL LEVITT & BOYLAN, BRIDGEWATER, NJ.

For AMIR ABRAMOV, Defendant: JOEL M. WERTMAN, LEAD ATTORNEY, MARSHALL, DENNEHEY, WARNER, COLEMAN & GOGGIN, PHILADELPHIA, PA.

For ARTHUR D. SHANKMAN & CO., ARTHUR D. SHANKMAN, Defendants: WILLIAM GAYNOR WINGET, LEAD ATTORNEY, WINGET SPADAFORA & SCHWARTZBERG, LLP, NEWARK, NJ; ERIC WILLIAM SWARTZ, WINGET, SPADAFORA & SCHWARTZBERG, LLP, New York, NY; GARRY THOMAS STEVENS, Winget, Spadafora & Schwartzberg LLP, Jersey City, NJ; HARRIS BRUCE KATZ, WINGET SPADAFORA & SCHWARTZBERG, LLP, NEWARK, NJ.

For PENSION STRATEGIES, LLC, Defendant: BENNET DANN ZUROFSKY, LEAD ATTORNEY, NEWARK, NJ.

OPINION

Page 761

KEVIN MCNULTY, United States District.

This matter comes before the court on the Report and Recommendation (" R& R" ) (ECF No. 57) of Hon. Madeline C. Arleo, United States Magistrate Judge, recommending that the Plaintiffs' motion to remand this action to State court (ECF No. 13-1) be granted. For the reasons set forth below, the R& R will be adopted, and the motion to remand will be granted.

I. BACKGROUND

Plaintiffs Dani Bar-David, Michal Bar-David, and Octal Corporation (collectively " Bar-David" ) allege that Defendants[1] fraudulently induced Bar-David to set up and continue to fund a defined benefit pension plan (" Plan" ) by misrepresenting and omitting material facts about the legal status of such a plan under 26 U.S.C. § 412(i). (Compl. at ¶ ¶ 1, 3-6, 10-13, ECF No. 1-Exhibit A). Bar-David alleges that, contrary to Defendants' misrepresentations, the Plan was an abusive tax shelter that was not was compliant with the Internal Revenue Code (IRC) and Internal Revenue Service (IRS) regulations and therefore did not qualify as a tax deductible and safe investment. ( Id. at ¶ 10). Bar-David further alleges that Defendants knew or should have known that the Plan did not comply with the IRC. Bar-David alleges that after an IRS audit revealed the Plan's non-compliance with the tax code, Bar-David was forced to pay back taxes, penalties, and interest. ( Id. at ¶ ¶ 54-58).

The Complaint alleges that Defendant Amir Abramov (" Abramov" ) gave Dani Bar-David insurance, retirement, and investment advice, and first suggested that Dani Bar-David meet with Arthur D. Shankman, an attorney and financial planning expert. ( Id. at ¶ 39). Shankman, holding himself out as an expert in 412(i)

Page 762

plans, became Dani Bar-David's financial adviser. ( Id. at ¶ 40). After a series of meetings, Abramov and Shankman allegedly induced Dani Bar-David to participate in the Plan. ( Id. at ¶ ¶ 40, 41).

During those meetings, Bar-David alleges, Shankman, individually and on behalf of Arthur D. Shankman & Co. (collectively " Shankman" ) and Abramov made, inter alia, the following misrepresentations to Bar-David:

o The Plan was a tax advantaged retirement investment that would provide benefits including a death benefit;
o The Plan would be paid for in five (5) years of contributions;
o The contributions to the Plan are 100% tax deductible;
o The Plan was a safe investment with no risk;
o The Plan was compliant with the Internal Revenue Code and IRS regulations and has been approved by the IRS;
o The investment in the Plan was guaranteed to grow at a minimum rate of return of 5%;
o The principal of Plaintiffs' contributions into their 412(i) Plan would always be safe and could never be lost;
o Plaintiffs' investment would grow at a minimum rate of return of 5%;
o A 412(i) plan was like a retirement plan and the contributions were considered by the IRS to be an ordinary and necessary business expense; and
o Plaintiffs could have access to their investment after ten (10) years at which time Plaintiffs could withdraw their money tax-free.

( R& R at 2-3, citing Compl. at ¶ ¶ 41, 63). Bar-David further alleges that Abramov and Shankman fraudulently omitted the following in their representations of the Plan:

o That a substantial percentage of the money invested by Plaintiffs was used to pay [Defendants'] exorbitant commissions and that virtually all of the money invested during the first year was immediately lost because of this;
o That the Plan would be funded with insurance policies that the IRS considered to be " springing cash value" policies that in turn would cause scrutiny of the Plan by the IRS;
o That the 412(i) Plan was a highly risky investment for the Plaintiffs;
o That the IRS perceived these type of plans as abusive tax shelters and not compliant with IRC 412(i) and that the IRS was not going to allow the deduction to the contribution into these types of plans;
o That the IRS viewed these types of plans as " listed transactions" ;
o The Plan did not comply with the Internal Revenue Code;
o The contributions to the plan were not tax deductible;
o The Plaintiffs will owe income tax on their contributions to the Plan;
o Contributions paid into a 412(i) plan would not be considered an ordinary and necessary business expense by the IRS;
o The IRS would in all reasonable probability assess substantial penalties and interest.

( R& R at 3, citing Compl. at ¶ ¶ 47, 53, 66).

Bar-David also alleges that Pension Strategies, LCC (" Pension Strategies" ), the third-party administrator of the Plan, knew or should have known material facts

Page 763

about the Plan that Pension Strategies failed to disclose. (Compl. at ...


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