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Wal-Mart's 'Dead Peasant' Insurance Suit Gets New Life

The Delaware Supreme Court has revived part of Wal-Mart Stores Inc.'s so-called "dead peasant" suit seeking $130 million from insurers that allegedly deceived the retail giant about getting large tax benefits by taking out small life insurance policies on its employees.

In a rare reversal of a state Chancery Court decision, the full high court said Wal-Mart's fraud charges were prematurely thrown out along with the other claims in the suit.

The Supreme Court found that Wal-Mart may be able to prove the insurers knew the policies had serious flaws that jeopardized the tax benefits.

However, the justices refused to resuscitate the company's other charges, including breach of contract, negligence and breach of fiduciary duty.

Press reports have dubbed the "corporate-owned life insurance" policies at issue "dead peasant" insurance because most of the policies were purchased by companies such as Wal-Mart that employ large numbers of workers at the low end of the wage scale.

Moreover, according to court records, most of the policy benefits went to the companies rather than to families of deceased employees.

Wal-Mart said it filed the Chancery Court suit in an attempt to recover $130 million lost when the government retroactively ended the "dead peasant" tax benefits in the mid-1990s and began to pursue Wal-Mart for back taxes.

The retailer said the defendant insurance companies knew of the tax risk when they sold the company $1.3 billion worth of small life insurance polices on rank-and-file employees.

Wal-Mart, the world's largest retailer, is headquartered in Bentonville, Ark., but is incorporated in Delaware, so its disputes involving corporate law are normally decided in the First State's courts.

Defendants AIG Life Insurance Co., Hartford Life Insurance Co., and other insurers and brokers argued that they had no duty to advise Wal-Mart about the risks of assuming it could get significant tax benefits on the policies.

Moreover, the defendant companies said, they could not have legally rendered that kind of advice even if they had wanted to.

The Chancery Court granted the defendants' motion for summary judgment, finding that Wal-Mart would never be able to prove fraud, negligence or breach of contract because it knew or should have known the risks of buying such policies.

Wal-Mart appealed.

"We conclude that the complaint adequately alleges a claim of fraud." Justice Carolyn Berger wrote for a unanimous en banc Supreme Court. "The complaint adequately pleads that appellees sold appellants a product that was an economic sham designed to create enormous tax deductions."

Although the high court reversed the Chancery Court's decision and ordered a trial on the fraud claim, it upheld the dismissal of Wal-Mart's breach-of-contract claim because the retailer never proved the insurers violated any provision of the insurance contract.

The Supreme Court also found no basis for a negligence charge against the brokers. It said the negligence charge was just a reworking of a breach-of-fiduciary-duty claim that was also rejected.

Justice Berger said that since only the fraud charge survived, there is now a jurisdiction question. Without the issue of fiduciary duty or the claim for non-monetary relief, the Chancery Court, which specializes in equity issues, may no longer be the appropriate forum for the case, she said.

The unanimous high court said the Chancery Court should decide whether it will retain jurisdiction or transfer the case to the state Superior Court, where cases that involve issues of law and damages are commonly heard.