Gallagher Seeks To Compel Arbitration with 831(b) Captive Owners

Editor's note: Earlier this month, Arthur J. Gallagher & Co. and other defendants made joint motions with the United States District Court for the District of Arizona—Phoenix Division in response to a suit filed in December 2018 by a group of 831(b) captive owner plaintiffs seeking class status against a group of defendants including Artex Risk Solutions, Inc.; Arthur J. Gallagher & Co.; TSA Holdings, LLC (formerly known as Tribeca Strategic Advisors, LLC); TBS LLC (doing business as PRS Insurance); Epsilon Actuarial Solutions, LLC; AmeRisk Consulting, LLC; Provincial Insurance, PCC; and various employees of the companies. The case is No. 2:18-cv-04514-GMS. Plaintiffs and Class are represented in the case by David R. Deary, Ralph Canada, and Jim Flegle of Loewinsohn Flegle Deary Simon LLP.

The suit alleges that Arthur J. Gallagher & Co.; its captive management unit, Artex Risk Solutions Inc.; and the other defendants supposedly conspired to design, promote, sell, implement, and manage illegal tax-advantaged captive insurance strategies.

In an earlier statement, Gallagher said, "We have been disappointed with the IRS's position on 831(b) captives. 831(b) captives are important insurance vehicles that have been provided for by Congress for decades. Gallagher and Artex have diligently and consistently striven to comply with 831(b) in forming and managing captive insurance companies."

The recent motion from the defendants said, "This piling up of parties, claims, and verbose allegations is a tactic [that] 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."

P. Bruce Wright and Saren Goldner provide a brief description of matter as it stands currently.

In Shivkov, et al. v. Artex Risk Solutions Incorporated, et al., Artex Risk Solutions, certain affiliates, various individuals who were employed by Artex, and certain entities unrelated to Artex who provided services in connection with the formation of certain captive insurance companies (which were organized in manner to qualify under section 831(b) of the Internal Revenue Code of 1986, as amended) were sued in connection with the formation of such captives. Damages, in general, were alleged to arise as a result of a denial of deductions by the Internal Revenue Service for amounts paid as premium to such captives. The case was filed seeking to certify a class as plaintiffs.

On March 8, 2019, the defendants made joint motions to compel individual arbitration. It was alleged by the defendants that each of the plaintiffs had entered into contracts with the defendants, which require arbitration of any disputes between the plaintiffs and defendants. Such arbitrations would have to be conducted separately, i.e., not as a class action, and would likely be conducted on a confidential basis. In the motions, the defendants also alleged that the contracts clearly indicated that the defendants were not providing tax advice, and, as such, should not be liable for any tax-related damages.

It is expected that there will be responsive documents and that, subsequently, the court will make a decision.