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Call v. Czaplicki, No. 09-6561 (RBK/AMD) - 2010 U.S. Dist. LEXIS 97268 (D.N.J. Sep. 16, 2010)

Rule:

The New Jersey Consumer Fraud Act provides in relevant part: The act, use or employment by any person of any unconscionable commercial practice, deception, fraud, false pretense, 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 misled, deceived or damaged thereby, is declared to be an unlawful practice.

Facts:

Plaintiff Gregory Call was the majority shareholder/owner of Mart, Inc., a Delaware corporation, Casie Protank, Inc., a New Jersey corporation, and Rezultz, Inc., another New Jersey corporation. He consulted with defendant Creative Financial Group (Creative) and its employee, Bernard Audette (Audette) regarding the purchase of life insurance policies and other financial products, which, among others, aimed for the establishment of a retirement plan that would allow the shareholders to avoid the payment of unnecessary taxes with their retirement savings and income. Audette and Creative advised Call that in order to take advantage of tax shelters, it was necessary to immediately form a Delaware limited liability partnership. Call then met with defendant Daniel Czaplicki, a lawyer, who then advised Call to prepare a shareholders' agreement and a partnership agreement to facilitate the formation and administration of the desired tax shelters. During this time, Czaplicki was also representing the other shareholders despite what Call alleged were actual adverse interests of the parties. Due to the alleged injury he suffered from Czaplicki’s faulty legal advice, including failing to prepare and perform with the requisite standard of care, failing to advise of the conflict of interest, and failing to advise that he was not licensed to practice in New Jersey, plaintiff filed the present complaint for legal malpractice against Czaplicki. Plaintiff further filled a complaint for violation of the New Jersey Consumer Fraud Act (NJCFA) against the remaining defendants. The defendants moved to dismiss the complaints, arguing that plaintiff failed to state a claim under NJCFA because the Act did not apply to the sale of securities, and a variable life insurance policy was a security.

Issue:

Could the New Jersey Consumer Fraud Act govern the sale of a variable life insurance policy?

Answer:

Yes.

Conclusion:

The Court noted that variable life insurance policies shared many of the same characteristics as variable annuity contracts. Both contracts contain an investment account that fluctuates in value based upon the performance of securities in an account portfolio, and the performance of an account manager. In light of the inherent similarities between variable annuity contracts and variable life insurance policies, it was plausible that a state may bifurcate the investment and insurance components of a variable life insurance policy and subject one to the NJCFA and the other to the state or federal securities laws. Therefore applying the framework adopted by the Supreme Court in previous jurisprudence, the Court held that the insurance component of plaintiff’s life insurance contract will be separated from its investment component for the purposes of applying the NJCFA.

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