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Gallagher seeks dismissal of microcaptive lawsuit

Arthur J. Gallagher

Arthur J. Gallagher & Co. asked a federal court in Arizona to dismiss a class action lawsuit alleging its captive management unit promoted the use of 831(b) captives that resulted in captive owners illegally reducing their taxes.

The lawsuit against Gallagher and its Artex Risk Solutions Inc. unit was filed in December in U.S. District Court in Phoenix on behalf of a group of Arizona-based businesses that allege they had to pay back taxes, penalties and interest to settle IRS investigations over their use of 831(b) captives, also known as microcaptives. The plaintiffs in Dimitri Shivkov v. Artex Risk Solutions Inc., which seeks class action status, allege violation of the Racketeer Influenced and Corrupt Organizations, or RICO, Act as well as breach of fiduciary duty, professional malpractice or negligence, and negligent misrepresentation or fraud, among other charges, and are seeking actual and punitive damages.

“Trimming away the many tangled branches of the Complaint reveals its root allegation: in order to earn fees and commissions, the Defendants helped the Plaintiffs set up and run captive insurance companies — insurance companies that are related to their insureds — to provide both insurance coverage and tax benefits,” Gallagher’s motion to dismiss stated. “Defendants supposedly tricked the Plaintiffs into believing that the captive insurance companies would provide certain tax benefits, but the IRS later proposed tax deficiencies against Plaintiffs, and Plaintiffs chose to settle with the IRS.”

The 138-page lawsuit tries to allege 13 causes of action spanning 13 years that 45 named plaintiffs assert on behalf of a putative class against 12 defendants, according to Gallagher’s motion to dismiss.

“This piling up of parties, claims, and verbose allegations is a tactic,” the motion stated. “It aims to overwhelm the reader into overlooking the simple, fatal flaws that require dismissal of the Complaint in the event Defendants’ motion to compel arbitration is not granted.”

The federal and Arizona RICO violation claims in the lawsuit are “thrice-defective” and should be dismissed because they ignore the 9th U.S. Circuit Court of Appeal’s holding that a defendant alleged only to have a “major” role is not liable, the plaintiffs violated the Supreme Court’s “basic principle” of alleging an enterprise distinct from the RICO persons directing it because the alleged enterprise and RICO persons in this case are the same, and because the plaintiffs rely on “RICO predicate acts of fraud but fail to plead fraud with particularity,” according to the motion.

Another reason to dismiss the lawsuit is that the contracts that governed each captive’s formation and operation specifically state that the defendants are not the plaintiffs’ advisers, and the plaintiffs alone are responsible for tax and legal matters, according to the motion.

“Defendants were not responsible for providing tax or legal advice to Plaintiffs,” the motion said.

The tort claims also violate the economic loss rule, which requires contracting parties to seek recovery pursuant to the terms of the contract itself for any economic injuries, according to the motion.

“Tellingly, Plaintiffs’ breach of contract and tort claims all assert the exact same economic injuries,” the motion said. “Plaintiffs may recover, if at all, only under the contracts. The tort claims should be dismissed.”

A spokesperson for Gallagher declined to comment.

Attorneys for both the plaintiffs and the defendants could not be immediately reached for comment.







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