Freeman Invs., L.P. v. Pac. Life Ins. Co.

Citation704 F.3d 1110
Decision Date02 January 2013
Docket NumberNo. 09–55513.,09–55513.
PartiesFREEMAN INVESTMENTS, L.P.; Darrel Freeman Irrevocable Trust; Freeman Joint Irrevocable Trust, individually and on behalf of a class of others similarly situated; David Kemp, Trustee of the Darrel L. Freeman Irrevocable Trust, individually and on behalf of a class of others similarly situated; David Kemp, Trustee of the Freeman Irrevocable Trust, individually and on behalf of a class of others similarly situated, Plaintiffs–Appellants, v. PACIFIC LIFE INSURANCE COMPANY, Defendant–Appellee.
CourtUnited States Courts of Appeals. United States Court of Appeals (9th Circuit)

OPINION TEXT STARTS HERE

Lee A. Sherman, Callahan Thompson Sherman & Caudill LLP, Tustin, CA; Stephen R. Miller and John J. Schirger, Miller Schirger LLC, Kansas City, MO; and Patrick J. Stueve and Richard M. Paul III (argued), Stueve Siegel Hanson LLP, Kansas City, MO, for PlaintiffsAppellants.

James C. Martin (argued), Robert D. Phillips Jr., Thomas A. Evans and David J. Bird, Reed Smith LLP, San Francisco, CA, for DefendantAppellee.

Appeal from the United States District Court for the Central District of California, David O. Carter, District Judge, Presiding. D.C. No. 8:08–cv–01134–DOC–AN.

Before: ALEX KOZINSKI, Chief Judge, STEPHEN S. TROTT and SIDNEY R. THOMAS, Circuit Judges.

OPINION

KOZINSKI, Chief Judge:

The Securities Litigation Uniform Standards Act of 1998 (SLUSA) precludes state law class actions that allege misrepresentation or fraudulent omission in connection with the purchase or sale of covered securities. In this case we answer the question on everyone's lips: Does SLUSA displace class actions alleging breach of a variable universal life insurance contract?

I. BACKGROUND

Plaintiffs purchased variable universal life insurance policies from defendant Pacific Life Insurance Company. Variable universal insurance differs in important ways from term life insurance, which protects against risk of death for a finite period and provides no continuing benefit once that time expires. See American Council of Life Insurers, Life Insurance Fact Book 64 (2011). Variable universal insurance lasts for the duration of the policyholder's life and allows him to share in the gains (or losses) generated by the investment of premiums. A policyholder may borrow against the accumulated value of his variable universal policy, or cash out the accumulated value by surrendering the policy while he's alive.

Pacific guarantees its customers a minimum insurance benefit, and policyholders also allocate a portion of their premiums to a separate account whose value fluctuates over time.1 Policyholders choose from various investment options within the separate account, and Pacific invests the assets into corresponding portfolios of the Pacific Select Fund. The death benefit payable to survivors varies with the performance of the funds each customer selects. Because the policyholder bears the risk associated with the investments, our sister circuits have held that the variable universal policy qualifies as a security regulated by federal law. See Herndon v. Equitable Variable Life Ins. Co., 325 F.3d 1252, 1253 (11th Cir.2003) (per curiam); see also Lincoln Nat'l Life Ins. Co. v. Bezich, 610 F.3d 448, 451 (7th Cir.2010).2

Each month, Pacific assesses a “cost of insurance” charge, which it collects by redeeming units of the separate account. Plaintiffs accuse Pacific of levying excessive cost of insurance charges. They allege that “cost of insurance” is an industry term of art and that they understood the fee would be calculated according to industry standards. Second Am. Class Action Compl. ¶¶ 15–17. They brought a class action in federal district court alleging breach of contract, breach of the duty of good faith and fair dealing and unfair competition under California Business and Professions Code § 17200. Id. ¶¶ 33–45. They also claim that the statute of limitations should toll because Pacific concealed the magnitude of its charges in its quarterly statements. Id. ¶¶ 32, 43. Tolling would permit plaintiffs to seek restitution of charges assessed during the entire period they held the policy, some of which seems to go back beyond the limitations period.

Pacific moved to dismiss the complaint, arguing that the class action was precluded by SLUSA. The statute bars class actions brought under state law, whether styled in tort, contract or breach of fiduciary duty, that in essence claim misrepresentation or omission in connection with certain securities transactions. See15 U.S.C. § 78bb(f)(1); Segal v. Fifth Third Bank, N.A., 581 F.3d 305, 310 (6th Cir.2009). The district court granted the motion, but only after twice giving plaintiffs leave to amend. Plaintiffs scrubbed their complaint of many (but not all) references to systematic concealment and deceitful conduct, but the district court concluded that the substance remained the same: “Such allegations of excessive charges, hidden loads and concealment clearly amount, at the least, to an allegation that Defendant omitted facts in connection with the purchase of securities, if not allegations of outright misrepresentations made by Defendant.” We review de novo. Proctor v. Vishay Intertechnology Inc., 584 F.3d 1208, 1218 (9th Cir.2009).

II. DISCUSSION

SLUSA is part of a series of reforms targeted at costly securities litigation. Congress first passed the Private Securities Litigation Reform Act of 1995 (PSLRA) to deter the filing of so-called strike suits—frivolous securities class actions that put defendants to the unappealing choice of settling claims, however meritless, or risking extravagant discovery and trial costs. SeeH.R. Conf. Rep. 104–369 (1995), 1995 U.S.C.C.A.N. 730; Michael A. Perino, Fraud and Federalism: Preempting Private State Securities Fraud Causes of Action, 50 Stan. L. Rev. 273, 290–91 (1998). The statute imposed a number of procedural hurdles on federal securities class actions, including a heightened pleading requirement. See15 U.S.C. § 78u–4(b); Proctor, 584 F.3d at 1217. But inventive lawyers found detours around these obstacles. By bringing state law class actions in state courts, they avoided the procedural steeplechase erected by the PSLRA. See Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 81–82, 126 S.Ct. 1503, 164 L.Ed.2d 179 (2006).

Equal to the challenge, Congress persisted by adopting SLUSA, which seeks to prevent state class actions alleging fraud “from being used to frustrate the objectives” of the PSLRA. SeeH.R. Conf. Rep. 105–803 (1998). SLUSA bars private plaintiffs from bringing (1) a covered class action (2) based on state law claims (3) alleging that defendant made a misrepresentation or omission or employed any manipulative or deceptive device (4) in connection with the purchase or sale of (5) a covered security. See15 U.S.C. § 78bb(f)(1). Plaintiffs and Pacific agree that this case involves (1) a covered class action, (2) state law claims and (5) a coveredsecurity.3 They hotly dispute the two remaining elements: Do the state law claims, no matter how labeled, in substance allege (3) misrepresentation or omission (4) in connection with the purchase or sale of securities?

A. Misrepresentation or omission

In arguing that plaintiffs “allege numerous misrepresentations and omissions in furtherance of an inherently deceptive scheme,” Pacific quotes extensively from the initial complaint, which accuses the company of “systematic concealment” and “deceitful conduct” designed “to generate undeserved revenues.” As our sister circuits have recognized, the statute operates wherever deceptive statements or conduct form the gravamen or essence of the claim. See Rowinski v. Salomon Smith Barney Inc., 398 F.3d 294, 299–300 (3rd Cir.2005). Because we look to the substance of the allegations, plaintiffs cannot avoid preclusion “through artful pleading that removes the covered words ... but leaves in the covered concepts.” Segal, 581 F.3d at 311. Were it otherwise, “SLUSA enforcement would reduce to a formalistic search through the pages of the complaint for magic words—‘untrue statement,’ ‘material omission,’ ‘manipulative or deceptive device’—and nothing more.” Id. at 310.

Stripped to its essence, plaintiffs' latest complaint alleges that Pacific charged them too much for life insurance and, as a result, reduced the value of their investments. Specifically, they claim that “cost of insurance” is a term of art that refers to “the portion of premiums from each policyholder set aside to pay claims.” Second Am. Class Action Compl. ¶ 15 (internal quotation marks and emphasis omitted). They allege that they expected Pacific to calculate the cost of insurance charge “based on industry accepted actuarial determinations,” but the company deviated from industry norms and debited an amount “in excess of true mortality charges.” Id. ¶¶ 16–17. Plaintiffs thus raise a dispute about the meaning of a key contract term, and the success of their claim will turn on whether they can convince the court or jury that theirs is the accepted meaning in the industry.4SeeRestatement (Second) of Contracts § 202(3)(b); Cal. Civ.Code § 1645. This is just like the “what is chicken?” case with which every first-year law student is familiar. See Frigaliment Importing Co. v. B.N.S. Int'l Sales Corp., 190 F.Supp. 116, 117, 119 (S.D.N.Y.1960) (Friendly, J.).

To succeed on this claim, plaintiffs need not show that Pacific misrepresented the cost of insurance or omitted critical details. They need only persuade the court that theirs is the better reading of the contract term. See Yount v. Acuff Rose—Opryland, 103 F.3d 830, 836 (9th Cir.1996). [W]hile a contract dispute commonly involves a ‘disputed truth’ about the proper interpretation of the terms of a contract, that does not mean one party omitted a material fact by failing to anticipate, discover and disabuse the other of its contrary interpretation of a term in the contract.” Webster v. N.Y. Life Ins. and Annuity...

To continue reading

Request your trial
36 cases
  • Northstar Fin. Advisors Inc. v. Schwab Invs.
    • United States
    • U.S. Court of Appeals — Ninth Circuit
    • 9 Marzo 2015
    ...SLUSA operates “wherever deceptive statements or conduct form the gravamen or essence of the claim.” Freeman Invs., LP v. Pac. Life Ins. Co., 704 F.3d 1110, 1115 (9th Cir.2013). The district judge ruled that the “central theme” of the Second Amended Complaint was that the “defendants made m......
  • Zola v. TD Ameritrade, Inc.
    • United States
    • U.S. District Court — District of Nebraska
    • 23 Marzo 2016
    ...form the gravamen or essence of the claim.”' Lim, No. 15–CV–02074–RS, 2015 WL 7996475, at *5 (quoting Freeman Invs., L.P. v. Pacific Life Ins. Co. , 704 F.3d 1110, 1114 (9th Cir.2013) ). A security “covered” under SLUSA is “one traded nationally and listed on a national exchange.” Dabit , 5......
  • Fortunato v. Akebia Therapeutics, Inc.
    • United States
    • Massachusetts Superior Court
    • 21 Febrero 2017
    ... ... Sullivan, Inc. v. Utica Mut. Ins ... Co. , 439 Mass. 387, 401, 788 N.E.2d ... and trial costs." Freeman Investments, L.P. v ... Pacific Life Ins ... ...
  • Goldberg v. Bank of Am., N.A.
    • United States
    • U.S. Court of Appeals — Seventh Circuit
    • 23 Enero 2017
    ...claims as fraud claims by arguing that they ‘really’ involve deception or misrepresentation." Freeman Investments, L.P. v. Pacific Life Ins. Co. , 704 F.3d 1110, 1116 (9th Cir. 2013) (reversing dismissal of similar breach of contract case). That's why we should reverse the dismissal of this......
  • Request a trial to view additional results

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT