On September 3, 2002, the plaintiff below-appellant, Wal-Mart Corporation ("Wal-Mart"), brought an action in the Court of Chancery. In its amended complaint Wal-Mart asserted legal and equitable claims arising out of insurance policies that Wal-Mart had purchased between 1993 and 1995 from the defendants, who are certain insurance brokers and insurance providers. The Court of Chancery granted the defendants' motion to dismiss the amended complaint, determining as a matter of law that all of Wal-Mart's claims had accrued between 1993 and 1995, the period during which the policies were purchased. The Court further concluded that there was no basis to toll the running of the three-year statute of limitations. Because Wal-Mart's claims were found to be time-barred, the Court of Chancery granted the motion to dismiss.
Wal-Mart appealed to this Court, contending that: (1) none of its claims accrued before October 19, 1999, a date less than three years before this Chancery action was filed; (2) even if Wal-Mart's claims did accrue before October 19, 1999, the statute of limitations was tolled at least until then; and (3) in any event, the motion to dismiss should have been denied because the issues of when the causes of action accrued and whether the statute of limitations was tolled were fact-intensive and could not be decided on the face of the complaint.
We agree that the limitations defense poses issues that require a more developed record, for which reason this matter was improperly disposed of on a motion to dismiss. Accordingly, we reverse the judgment of the Court of Chancery and remand the case for further proceedings.
The pertinent facts, which for present purposes are assumed to be true, appear from the well-pleaded allegations of the complaint.
Facts Relating to the Dismissal Motion
Wal-Mart's claims arise out of its purchase from the insurer-defendants of some 350,000 corporate-owned life insurance ("COLI") policies, under which Wal-Mart was named as the beneficiary. Those COLI policies, which insured the lives of Wal-Mart's employees, were purchased as part of a plan whereby the insurers granted Wal-Mart loans that were used to pay the premiums on the policies. Wal-Mart would then deduct the interest payments on those loans from its income for purposes of reducing its federal income taxes.
In August 1993, Wal-Mart retained the broker-defendants to advise it about using COLI policies to obtain tax benefits. After proposals from several insurance companies were received, the broker-defendants recommended that Wal-Mart purchase COLI policies from AIG and Hartford. The broker-defendants also recommended that Wal-Mart create and use a Georgia "grantor trust" as the vehicle to purchase the policies, so that Georgia law would govern any "insurable interest" issues that might arise after the policies were purchased. The broker-defendants advised Wal-Mart that Georgia law would provide a favorable result if any employee(s) challenged whether Wal-Mart had a legally valid insurable interest in the lives of its workers.
Between 1993 and 1995, Wal-Mart purchased approximately 350,000 COLI policies from the insurer-defendants, and retained Marsh, Inc. to administer and service those policies. Wal-Mart sought — and obtained — assurances from both the insurer defendants and the broker defendants that: (i) the policies complied with the Internal Revenue Code, (ii) future changes to the tax law were unlikely to impact the policies adversely, and (iii) Wal-Mart had a valid insurable interest in the lives of its employees.
Through 1995, Wal-Mart claimed the federal tax deductions as contemplated under the COLI plan. In 1996, however, the legal landscape changed. As part of the Health Insurance Portability and Accountability Act ("HIPAA"), Congress prospectively disallowed interest deductions for loans used to fund COLI plans. HIPAA also provided for "transitional relief" that allowed taxpayer companies to take deductions in 1997 and 1998 for up to a maximum of 20,000 COLI policies. HIPAA did not, however, disallow any deductions that were taken before January 1, 1996. In response to the HIPAA legislation, Wal-Mart
Of importance to Wal-Mart's claims is that HIPAA eliminated the deductibility of interest payments for loans funding COLI policies prospectively, but did not disallow deductions taken before 1996; i.e., retrospectively. In 1997, nonetheless, the United States Internal Revenue Service ("IRS") brought several lawsuits in which it sought to disallow retrospectively COLI-related tax deductions that the defendants in those cases had taken before 1996. In those lawsuits the IRS characterized the COLI programs as "sham transactions." Wal-Mart was not included among the companies that were named as defendants in the IRS lawsuits.
The first of the IRS cases, Winn-Dixie Stores Inc. v. C.I.R.,
Separate and apart from the tax deductibility issue, beginning in 2001 Wal-Mart found itself confronted with lawsuits brought by the estates of deceased employees, wherein the estates claimed that Wal-Mart had no legally valid insurable interest in its employees' lives. In August 2002, in one of these lawsuits, Mayo v. Hartford Life Ins. Co., the Court held that Texas law, rather than Georgia law, governed the insurable interest question, and that under Texas law Wal-Mart had no valid insurable interest in the lives of its Texas employees.
Wal-Mart's Chancery complaint alleges several claims arising out of both the retrospective disallowance of the COLI-related tax deductions and the adverse "insurable interest" litigation. Specifically, Wal-Mart's complaint asserts claims against all defendants for: (i) unjust enrichment and restitution, (ii) breach of fiduciary duty, (iii) equitable fraud, (iv) breach of contract, (v) violation of the Delaware Consumer Fraud Act, and (vi) declaratory relief. Wal-Mart also asserts a separate claim against the broker defendants for negligence.
With one possible exception, the gravamen of those claims is that the defendants failed to disclose material facts and risks of the COLI plan at the time that Wal-Mart, in reliance upon the defendants' advice, purchased the COLI policies. Wal-Mart contends, however, that one of its claims — unjust enrichment — rests upon a different (non-disclosure) basis, viz, frustration of commercial purposes, a ground that is not attributable to any wrongful conduct of the defendants.
The relief that Wal-Mart seeks is an award of money damages equal to the "hard dollar losses" that Wal-Mart incurred by reason of the failure of the contemplated benefits of the COLI policies. Wal-Mart also seeks to recover all profits the defendants made in connection with the COLI transactions. In addition to and apart from damages, Wal-Mart seeks a declaratory judgment that the defendants are liable for any future losses Wal-Mart may incur that are associated with the failed policies, including the costs of future "insurable interest" litigation to which Wal-Mart may be subjected. Importantly, however, Wal-Mart does not seek to recover any COLI-related deductions that were prospectively disallowed under HIPAA. Rather, Wal-Mart seeks to recover only those tax benefits that were disallowed retrospectively as a result of the adverse federal court rulings, plus the costs it incurred as a result of the insurable interest litigation.
In December 2002, the defendants moved to dismiss Wal-Mart's complaint on the ground that all Wal-Mart's claims were time barred and (alternatively) that Wal-Mart's complaint failed to state a claim upon which relief could be granted. The Court of Chancery granted the motion on the first ground, concluding as a matter of law that all of Wal-Mart's claims were barred by 10 Del. C. § 8106, the applicable statute of limitations.
The Decision of the Court of Chancery
In reaching that result, the Court of Chancery determined that Wal-Mart's claims had accrued between 1993 and 1995, and that accordingly, the action was commenced after the three-year limitations period had expired. The Court also concluded that the running of the limitations period was not tolled because Wal-Mart had been on inquiry notice of its claims more than three years before its lawsuit was commenced.
In concluding that all of Wal-Mart's claims had accrued at the time Wal-Mart purchased the COLI policies — between
The Court of Chancery also determined as a matter of law that the statute of limitations had not been tolled because Wal-Mart's claims were not inherently unknowable.
Standard of Review
This Court reviews de novo, for errors of law, the dismissal of a complaint under Court of Chancery Rule 12(b)(6).
Accrual of Wal-Mart's Claims
A critical basis for the Court of Chancery's conclusion that Wal-Mart's claims were time-barred was its determination as a matter of law that all of Wal-Mart's claims had accrued at the time the COLI policies were purchased, i.e., between 1993 and 1995. The Court found that the gist of Wal-Mart's claims was the defendants' alleged failure to disclose to Wal-Mart, at the time the policies were purchased, the
The starting point of the Court of Chancery's analysis (with which all parties agree) is that the applicable statute of limitations is 10 Del. C. § 8106, which imposes a three-year period of limitations on Wal-Mart's tort, contract, and fiduciary duty claims; and that that three-year period applies by analogy to proceedings in equity.
This Court has repeatedly held that a cause of action "accrues" under Section 8106 at the time of the wrongful act, even if the plaintiff is ignorant of the cause of action.
Tolling of the Statute of Limitations
The trial court held as a matter of law that the statute of limitations period was not tolled as to Wal-Mart's claims. Even after a cause of action accrues, the "running" of the limitations period can be "tolled" in certain limited circumstances.
The Court of Chancery held as a matter of law that Wal-Mart was on inquiry notice of its claims more than three years
That conclusion was erroneous for three separate reasons. First, the trial court was not free to consider the TAMs and newspaper articles on this Rule 12(b)(6) motion, because these materials were neither attached to, nor incorporated by reference into, the complaint. Matters extrinsic to a complaint generally may not be considered in a ruling on a motion to dismiss.
Second, even if the articles and TAMs were properly before the Court, they do not conclusively demonstrate that Wal-Mart was on inquiry notice of its claims before September 3, 1999. The cited articles, all published between 1992 and 1995, discussed the existence of the COLI tax loophole and their use by many companies. The articles also discussed proposed legislation that could prospectively eliminate the loophole. But, the articles did not discuss retrospective disallowance of the deductions, which is the gravamen of Wal-Mart's tax-related claims. Moreover, on this record it is far from clear that the TAMs were sufficient to put Wal-Mart on inquiry notice of its tax-related claims against these defendants. TAMs are IRS rulings issued to private companies. As such, those rulings have questionable value either as binding or persuasive authority as to non-parties.
Third, and finally, neither the newspaper articles nor the TAMs contain any facts that would alert Wal-Mart to its claims relating to the insurable interest question. The newspaper articles and TAMs do not discuss the insurable interest-related issue, nor did the Court of Chancery make any specific determination of how Wal-Mart was placed on inquiry notice of its insurable interest-related claims.
What the complaint does allege is that Wal-Mart did not settle the retrospective tax deduction claims with the IRS until 2002, and that no court had retrospectively disallowed the pre-1996 tax deductions until the Tax Court's Winn-Dixie decision was handed down on October 19, 1999. The first case that challenged whether Wal-Mart had a legally valid insurable interest in its employees was not filed until 2001. Wal-Mart alleges that it relied on the advice of the broker-defendants in establishing the Georgia Grantor Trust, and that its injuries resulting from the insurable interest litigation were inherently unknowable until at least one court had determined that Georgia law did not govern the insurable interest issue. Those pleaded facts create a reasonable inference that Wal-Mart's tax-related injuries were inherently unknowable before October 1999, and that Wal-Mart's insurable interest-related injuries were inherently unknowable before 2002. Those same pleaded facts also create a reasonable inference that Wal-Mart was blamelessly ignorant of the "wrongful acts." To be sure, the pleaded facts also create reasonable inferences to the contrary. A Rule 12(b)(6) motion, however, is not a proper procedural vehicle to resolve conflicting inferences of fact.
Accordingly, the Court of Chancery legally erred in deciding, as a matter of law, that the statute of limitations was not tolled.
For the foregoing reasons, the judgment of the Chancery Court is reversed, and this case is remanded for further proceedings consistent with this Opinion.