Opinion
CIVIL ACTION 03-1236, SECTION "T"(5)
October 20, 2003
ORDER AND REASONS
The defendant, Nationwide Life Insurance Company ("Nationwide"), filed a Motion to Dismiss pursuant to FRCP 12(b)(1), 12(b)(6), and the Securities Litigation Uniform Standards Act of 1998 ("SLUSA"). This matter was submitted for the Court's consideration with oral argument on September 24, 2003. The Court, having reviewed the arguments of counsel, the Court record, the law and applicable jurisprudence, is fully advised in the premises and ready to rule.
I. BACKGROUND:
Plaintiff purchased three Best of America Modified Single Premium Variable Annuities ("Annuities") from Defendant between May 1, 2001 and November 30, 2001.
On or around the time Plaintiff purchased the Annuities, he received a copy of the May 1, 2001 Prospectus ("Prospectus") issued in connection with the Annuities. Plaintiff alleges that the Prospectus specifically represented that the exchange and transfer rights granted to individual contract owners could not be unilaterally modified and that owners had a right to transfer variable assets among the various funds without a charge. Plaintiff concedes that the Prospectus lists mutual funds and accompanying management and other fees that mutual funds charge Nationwide, but there was no implication that customers would incur additional charges for trading in these funds. The Defendant contends that the Prospectus did provide that "mortality and expense" and "administrative" charges set forth in the Annuities would not increase over time, but these do not include fees imposed by the mutual funds, which will impose their own separate fees.
On January 25, 2002, the May 1, 2001 Prospectus was supplemented. The Supplemental Prospectus was filed with the SEC and Nationwide was required to promptly mail it to all holders of Annuities. The Supplemental Prospectus stated that certain mutual funds may assess fees on short-term trades.
The Prospectus was revised again on May 1, 2002, when Nationwide filed with the SEC the Revised Prospectus which advised all Annuity holders that certain mutual funds (not Nationwide) intended to assess or reserve the right to assess short-term trading fees, which were intended to address the negative impact created by market timing.
Sometime in May, 2002, Nationwide charged the Plaintiff a transaction fee for variable trades, which Plaintiff contends was a breach of contract and in violation of the representations made in the Prospectus. In June 2002, Plaintiff was billed for the transaction.
On May 1, 2003, Plaintiff filed a Complaint alleging that Nationwide violated sections 11 and 12(a)(2) of the 1933 Act, and breached the contracts that he purchased when they failed to disclose material information concerning short term trading fees that were imposed by some of the mutual funds after he purchased his Annuities.
II. ARGUMENTS OF NATIONWIDE IN SUPPORT OF MOTION TO DISMISS
A. Plaintiffs 1933 Act claims are barred by the applicable statues of limitation.
The Defendant contends that Plaintiffs sections 11 and 12(a)(2) claims must be dismissed because each is barred by the 1933 Act's one-year statute of limitations and Plaintiffs section 11 claims is additionally barred by the 1933 Act's three-year statute of repose.
According to Nationwide, Plaintiffs failure to plead facts that comply with the statute of limitations deprives this Court of Subject Matter Jurisdiction. Defendant submits that the only allegation that Miller makes relating to the one-year statute of limitations is that "less than one year has elapsed from the time that Plaintiff and the members of the class discovered, or reasonably could have discovered, the facts upon which the Complaint is based to the time the Complaint is filed," which Nationwide contends is insufficient to withstand a motion to dismiss. Similarly, Miller fails to allege when the Variable Annuity Account was bona fide offered to the public, so as to demonstrate compliance with the 1933 Act's three year statute of repose.
ln re Chaus Sees. Litig., 801 F. Supp. 1257, 1265 (S.D.N.Y. 1992).
1. One-year Statute of Limitations
Nationwide argues that Miller's section 11 and 12(a)(2) claims were filed more than one year after discovery or when they should have been discovered. Defendant submits that not only does the Plaintiff fail to allege facts showing his compliance with the statute of limitations, the facts in the record demonstrate he cannot do so. Section 77(m) of the 1933 Act provides that claims must be brought within one year of discovery of untrue statements or omissions or when discovery should have been made through exercise of reasonable diligence. Defendant argues that the Supplemental Prospectus filed with the SEC provides notice to investors when filed, regardless of whether it is actually obtained by Plaintiff. Accordingly, Plaintiff discovered or should have discovered the alleged misrepresentations and omissions when the Supplemental Prospectus was filed on January 25, 2002, at least fifteen months prior to the filing of his Complaint, The public disclosure provided constructive, if not actual, notice of the purported untrue statement or omission that Miller complains of and, as a result, his claims are barred by the one-year statute of limitations whether or not he actually read the Supplemental Prospectus.
Eckstein v. Balcor Film Investors, 158 F.3d 1162, 1169 (7th Cir. 1995).
Dodds, 12 F.3d at 350-41.
2. Three years Statute of Repose
Nationwide further argues Miller's section 11 claim is also barred by the 1933 Act's three year statute of repose:
In no event shall any such action be brought to enforce a liability created under section 11 or section 12(a)(1) [ 15 U.S.C. § 77k or § 771(a)(1)] more than three years after the security was bona fide offered to the public.
Defendant cites authority, including a Minute Entry by Judge Heebe, in support of his argument that the three-year period specified begins to run when the security is "first offered" to the public. Because the Annuity was first offered to the public in October, 1997, Nationwide submits that Miller filed his Complaint more than three years after the security was "first offered" to the public, and as a result, his section 11 claim should be dismissed.
Dendinger v. First Nat'l Corp., 1989 WL 85070.
B. Plaintiffs breach of contract claim should be dismissed because documents in the record show Defendant did not impose any fees that breached the terms of the Annuity contracts.
The Complaint alleges that Nationwide imposed charges for the transfer of variable assets amongst the various funds, which were previously free to Plaintiff, and that he learned of them for the first time in the May 1, 2002 Revised Prospectus. Defendant contends that these allegations are contradicted by the Supplemental and Revised Prospectuses, which Defendant states make clear that the mutual funds, not Nationwide, were responsible for any short-term trading fees imposed. Therefore, Defendant argues that the Plaintiffs breach of contract claim cannot stand. Defendant also contends that the Revised Prospectus also advised Plaintiff that the purpose of the short-term trading fee was to compensate the underlying fund and contract owners with interest in the fund for the negative impact that may result from frequent, short-term trading strategies. Therefore, Defendant concludes that any argument by Plaintiff that the Variable Annuity Contract should be construed to prohibit the mutual funds from charging such fees would be against public policy, based on the fact that the courts, the SEC, and all commentators agree that the short-term market timing trades are against public policy because they are unfairly exploitative of other investors.
C, If the Court does not otherwise dismiss the Plaintiffs Complaint, it must nonetheless do so under SLUSA, which mandates the dismissal of any class action that raises state law misrepresentation and omission claims concerning a "covered security."
The Defendant contends that SLUSA mandates the dismissal of any class action that raises state law misrepresentation and omission claims concerning a "covered security." They submit that variable annuities, such as the one here, have been held by courts to be covered securities under SLUSA and that any class action alleging state law misrepresentations or omission claims relating to a variable annuity must be dismissed under SLUSA. They ask the Court to dismiss any remaining portions of the Complaint under SLUSA, specifically, Plaintiffs "breach of contract" claim, which is based on the allegation that Defendant allegedly made assurances to the Plaintiff that he could transfer assets in the Variable Annuity without charge, despite the fact that Defendant had allegedly met or was meeting with the SEC to impose such a charge. Plaintiffs breach of contract claim also includes allegations that the Defendant failed to disclose its attempts to impose a trading fee and made materially false statements concerning the Variable Annuity that it could not have believed were true.
15 U.S.C. § 77p(b), 78bb(f)(1); Lander v. Hartford Life Annuity Ins. Co., 251 F.3d 101 (2d. Cir. 2001).
Defendant contend that Plaintiff specifically excluded fraud based allegations in his Section 12(a)(2) claim but made no such disclaimer in his breach of contract claim, evidencing his intent to include fraud based misrepresentation allegations in his contract claim. To the extent the Court has not otherwise dismissed the Plaintiffs claims, Defendant contends that the maintenance of any remaining portions of the Complaint is preempted by SLUSA and must be dismissed.
III. ARGUMENTS OF MILLER IN OPPOSITION TO MOTION TO DISMISS
A. Plaintiffs Section 11 and 12(a)(2) claims were filed within one year after Defendant's misrepresentations were discovered or should have been discovered.
Plaintiff submits that, because the Agreement made representations that no fees would be imposed on transfers, he had no reason to believe that any fees were being imposed until they were imposed in May 2002 and he was billed in June of 2002. Plaintiff argues that because he was only placed on inquiry notice of the Defendant's conduct in May 2002 and he filed the case on May 1, 2003, the case was timely filed under the one year statute of limitations provisions for Section 11 and 12(a)(2) of the 1933 Act.
He contends that Defendant's argument that the January SEC filing triggered the statute of limitations is flawed in both law and fact. Plaintiff argues that Defendant tried to extend the holding that information contained in a supplemental prospectus filing is assimilated into the market and this reflection in price is attributed through constructive knowledge to all investors, and relate it to the imposition of trading charges by Nationwide in contravention of the Prospectus and Agreement. Further, in the instant case, the SEC filing did not immediately impact Plaintiffs trading fees, and without examining it, he could have no basis to believe it would conflict with representations made in the earlier Prospectus and Agreement. Plaintiff instead argues the rule that in order to rely on the receipt of a prospectus to impute constructive knowledge, plaintiffs first needed some modicum of actual knowledge to defendants' fraudulent statements or conduct.
Eckstein v. Balcor Film Investors, 58 F.3d 1162, 1169 (7th Cir. 1995).
Luhch v. Latham, 675 F. Supp. 1198, 1201 (N.D. Cal, 1987).
Further, Plaintiff argues that even if he had some actual knowledge of Nationwide's misrepresentations, this Court should follow the holding of the 9th Circuit and find that "the question of when a reasonably diligent investor should have discovered a claim as one appropriate for the factfinder to determine after trial" rather than one to be determined on a motion to dismiss.
Briskin v. Ernst Ernst, 589 F.2d 1363, 1367-68 (9th Cir. 1978).
Miller submits that Nationwide's argument, that he was placed on inquiry notice in January 2001, is not supported by the facts. First, Nationwide doesn't allege he actually received the Supplemental Prospectus, only that they were required to mail it. Second, while the Supplemental Prospectus indicated that mutual funds may assess trading fees, Nationwide fails to show where the Supplemental Prospectus indicates that Plaintiff will be charged for such transfers.
B. Plaintiffs cause of action is not barred by the three year statute of limitations because Plaintiff has purchased the Annuities within three years of their issue.
Plaintiff bought the Annuities based on an offer to purchase in Defendant's May 2001 Prospectus and filed the lawsuit on May 1, 2003, within the 33 Act's three-year statute of limitations. Because Nationwide first offered similar annuities governed by a separate registration statement in 1997, the Defendant's argument that the Plaintiffs claims were filed after the time period has no basis in law or logic. Plaintiff argues that the logical implication of Defendant's argument is that any issuer of securities who has previously issued securities more than three years prior to a new issuance can never be liable, meaning Sections 11 and 12(a)(2) would only apply to new users.
Plaintiff cites cases which treat the term "first offered to the public" as the same time of a plaintiffs purchase or alternatively, on the date trading of the security commenced. In the instant case, under either definition, Plaintiff argues that the annuities which he and the class purchased were offered no earlier than May 1, 2001, less than three years before Plaintiff filed the case.
In the alternative, using the "last offered" approach, under which the three year period would be ongoing so long as the Defendant continues to sell securities registered under the May 1, 2002 Prospectus, Plaintiffs claims would had been filed within three years of the time the annuities were first offered.
C. The fact that the mutual funds, and not the Defendant, originated the transfer charges has no bearing on Plaintiffs breach of contract claim.
Plaintiff contends that Nationwide promised unrestricted free transfer of annuity funds and that it would bear any administrative costs related to annuities. Thus, irrespective of whether Nationwide or the individual mutual funds imposed trading fees, the Plaintiff should not be made to bear their costs.
D. Defendant's public policy argument is impertinent, equitable and disingenuous.
The fact that the SEC has expressed concern about the possibility of harm wrought by excessive market time trading is irrelevant to Defendant's breach of its agreement with Plaintiff and the class. Plaintiff contends that the Defendant's touting the free trade features of its annuity, while actively campaigning with the SEC to restrict market timed features, is both inequitable and disingenuous.
9 First Lincoln Holdings, Inc. v. The Equitable Life Assurance Society of the U.S., 2002 WL 1990758 at *1 (2nd. Cir. 2002).
E. Since Plaintiffs breach of contract claims are not claims for "fraud in connection with the purchase of a security" they are not barred by SLUSA.
Under SLUSA, federal court is the exclusive venue for "fraud claims" in connection with the purchase or sale of a security. Contract law claims are not claims "in connection with the purchase or sale of a security." Plaintiff submits that while Defendants have argued that variable annuities are covered securities, they have not cited a single case holding that breach of contract claims relating to variable annuities are "fraud claims in connection with the purchase or sale or a covered security." Because only fraud claims, not breach of contract claims, are preempted by SLUSA, Defendant's arguments for dismissal under SLUSA must fail.
10Riley v. Merrill Lynch, Pierce Fenner Smith, Inc., 292 F.3d 1334, 1340 (11th Cir. 2002).
Falkowski v. Imation Corp., 309 F.3d 1123 (9th Cir. 2003).
III. LAW AND ANALYSIS
A. Law on Rule 12(b)(6) Dismissal
In considering a motion to dismiss for failure to state a claim pursuant to Rule 12(b)(6), courts have found that dismissal pursuant to this provision "is viewed with disfavor and is rarely granted." The complaint must be liberally construed in favor of the plaintiff, and all facts pleaded in the original complaint must be taken as true. A district court may not dismiss a complaint under FRCP 12(b)(6) "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief."
Lowery v. Texas A M University System, 117 F.3d 242, 247 (5th Cir. 1997); Kaiser Aluminum Chem. Sales v. Avondale Shipyards, 677 F.2d 1045, 1050 (5th Cir. 1982).
Oliver v. Scott, 276 F.3d 736, 740 (5th Cir. 2002); Campbell v. Wells Fargo Bank, 781 F.2d 440, 442 (5th Cir. 1980).
Ramming v. United States, 281 F.3d 158, 161 (5th Cir. 2001) (quoting Conley, supra), cert. denied, — U.S. — 122 S.Ct. 2665, 153 L.Ed.2d 838 (2002); Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-102, 2 L.Ed.2d 80 (1957); Blackburn v. Marshall, 42 F.3d 925, 931 (5th Cir. 1995).
B. Analysis
Section 77(m) of the 1933 Act provides that claims must be brought within one year of discovery of untrue statements or omissions or when discovery should have been made through exercise of reasonable diligence. The Supplemental Prospectus, filed with the SEC on January 25, 2002, provided notice to investors when filed and provided constructive notice, if not actual notice, of the purported untrue statement or omission of which Miller complains. The Court found no authority, nor does it believe any exists, to support Plaintiffs argument that annuities and securities should be treated differently for purposes of determining prescription. As a result, his claims are barred by the one-year statute of limitations, regardless of whether or not he actually read the Supplemental Prospectus.
Eckstein v. Balcor Film Investors, 58 F.3d 1162, 1169 (7th Cir. 1995).
In addition, this Court finds that the Annuity at issue was first offered to the public in October, 1997. Consistent with the holding in Dendinger, this Court holds that the three-year period begins to run when the security is "first-offered" to the public. Therefore, Plaintiff section 11 claim is also barred by the 1933 Act's three-year statute of repose.
Dendinger v. First Nat'l Corp., 1989 WL 85070.
Further, relying on the language of the Revised Prospectus, the Court finds that the plaintiffs' breach of contract claim fails. The Revised Prospectus expressly states that the mutual funds, not Nationwide, imposed the short-term trading fees, the Court determines that the documents in the public record evidence the fact that Nationwide was not responsible for imposing the fees in question.
Finally, the Court finds persuasive the defendants' argument that SLUSA mandates the dismissal of any class action that raises state law misrepresentation and omission claims concerning a covered security, and therefore mandates that this action be dismissed. While plaintiffs argue that the issue in question is a pure contract claim, therefore not preempted by SLUSA, the Court finds that the issue is not, in fact, a garden variety contract claim, but a claim based on misrepresentations and omissions. Therefore, SLUSA mandates that this action be dismissed.
For the above reasons, and in accordance with the law and applicable jurisprudence, this Court holds that the motion discussed above is appropriate under the circumstances. As such, this Court finds in favor of the defendants, dismissing the claims against them pursuant to FRCP 12(b)(1) (6).
Accordingly,
IT IS ORDERED that the Motion to Dismiss filed on behalf of the defendants, Nationwide Life Insurance Company, be and the same is hereby GRANTED. IT IS FURTHER ORDERED that all claims of the plaintiff against the defendant, Nationwide Life Insurance Company, be and the same are hereby DISMISSED WITH PREJUDICE. New Orleans, Louisiana,