Opinion ID: 1998635
Heading Depth: 1
Heading Rank: 5

Heading: Count 3 Equitable Fraud

Text: Wal-Mart claims that all appellees knew or should have known, but failed to disclose, material information about the risk that the COLI plans would not achieve their intended tax benefits because of the structural flaws in those plans. Among other things, Wal-Mart alleges that: [C]ertain state insurance regulators had disapproved COLI plans, such as those sold to Wal-Mart . . . based on concerns relating to tax treatment, insurable interest, and deviations from acceptable accounting, actuarial, and operating principles in the life insurance industry. . . [T]he AIG Life and Hartford Life COLI plans were designed and administered in a fashion that deviated from acceptable accounting, actuarial, and operating principles in the life insurance industry, with respect to the simultaneous netting out of premium and interest payments by way of partial withdrawals from policy cash values ... loading charges to cover insurance company expenses ... payment of dividends... timing of dividend payments ... source of dividends ... manner in which loan interest rates were calculated [17] . . . These deviations from standard industry practice allegedly increased the risk that the COLI plans would fail, as they did, under the tax law in effect at the time Wal-Mart bought the policies. Wal-Mart claims that it sought assurances from appellees about the tax risks; that it reasonably relied on appellees to fully disclose all material information; and that had Wal-Mart known that the COLI plans were flawed in the manner alleged, it would not have purchased the policies. Finally, Wal-Mart alleges substantial damages as a result of the COLI plans' failure to produce tax benefits. To state a claim for common law fraud, a party must allege: 1) a false representation, usually one of fact. . .; 2) the defendant's knowledge or belief that the representation was false, or was made with reckless indifference to the truth; 3) an intent to induce the plaintiff to act or to refrain from acting; 4) the plaintiff's action or inaction taken in justifiable reliance upon the representation; and 5) damage to the plaintiff as a result of such reliance. [18] Equitable fraud differs from common law fraud in one respect  the defendant need not know that the representation is false. [19] Although an expression of opinion cannot form the basis of a fraud claim, the mere fact that a material statement is in the form of an opinion, or of an estimate, is not necessarily conclusive as to whether it must be treated as such . . . [20] Thus: Even though the language of a representation concerns only legal consequences and is in the form of an expression of opinion, it may, as in the case of any other statement of opinion, carry with it by implication the assertion that the facts known to the maker are not incompatible with his opinion or that he does know facts that justify him in forming it. . . . When the recipient does not know the facts, he may justifiably rely upon these implied assertions and recover on the basis of a misrepresentation of implied fact. [21] Similarly, a statement that is facially true... may constitute an actionable misrepresentation if it causes a false impression as to the true state of affairs, and the actor fails to provide qualifying information to cure the mistaken belief. [22] The Amended Complaint alleges that appellees misrepresented the viability of the COLI plans by failing to inform Wal-Mart that the plans deviated from industry standards, and that those deviations had prompted regulators to question or disapprove similar plans. These are misrepresentations of implied fact  implied in light of appellees' representations that the COLI plans were designed or intended to comply with the requirements of I.R.C. §§ 7702 and 264. In addition, a Broker allegedly advised Wal-Mart that its maximum exposure under a worst case scenario would be $283,000. That statement may be classified as an estimate or opinion, since no one can provide absolute assurance as to future events. Nonetheless, it is the type of opinion that suggests the reasonable belief that it was based on facts known to the maker. Thus, such a statement can form the basis for an equitable fraud claim as well. Appellees argue that this claim must be dismissed, if for no other reason, because Wal-Mart did not rely on their representations. They point to a Letter of Understanding (LOU) executed by Wal-Mart, which states: [Wal-Mart] has reviewed with its own legal and tax advisors all present and future implications of its ownership of the [COLI] Policies, including, but not limited to, the tax consequences of loans and/or withdrawals from the Policies and the deductibility thereof, and that it has not relied upon any representations of AIG Life or any employee, broker or agent of AIG Life in that regard. The trial court also questioned Wal-Mart's ability to seek relief in light of this provision. We do not view the LOU as dispositive. It is an agreement with AIG Life, not with all appellees. Moreover, this provision states only that Wal-Mart relied on its own tax advisors in analyzing the risks of using COLI policies as a tax shelter, and did not rely on AIG Life in that regard. It does not, by its terms, state that Wal-Mart was absolving AIG Life of liability for material misrepresentations as to the structural flaws in its product.