O'Donnell v. Axa Equitable Life Insurance Co., 041018 FED2, 17-1085-cv

Docket Nº:17-1085-cv
Opinion Judge:Barrington D. Parker, Circuit Judge:
Party Name:RICHARD O'DONNELL, on behalf of himself and all others similarly situated, Plaintiff-Appellant, v. AXA EQUITABLE LIFE INSURANCE COMPANY, Defendant-Appellee.
Attorney:Joel C. Feffer and Daniella Quitt, Harwood Feffer LLP, New York, NY, for Plaintiff-Appellant. Jay B. Kasner and Kurt WM. Hemr, Skadden, Arps, Slate, Meagher & Flom LLP, New York, NY, for Defendant-Appellee.
Judge Panel:Before: JACOBS, SACK, AND PARKER, Circuit Judges.
Case Date:April 10, 2018
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit
 
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RICHARD O'DONNELL, on behalf of himself and all others similarly situated, Plaintiff-Appellant,

v.

AXA EQUITABLE LIFE INSURANCE COMPANY, Defendant-Appellee.

No. 17-1085-cv

United States Court of Appeals, Second Circuit

April 10, 2018

          Argued: October 25, 2017

          Appeal from the United States District Court for the Southern District of New York Vernon S. Broderick, District Judge, Presiding.

         A variable annuity policy holder brought a putative class action in state court alleging a breach of contract by an insurance company when it introduced a volatility management strategy to the policies without full compliance with state law. The insurance company, citing an alleged misrepresentation to a state regulator, removed the case to federal court where it sought dismissal. The United States District Court for the Southern District of New York, (Broderick, J.), granted dismissal, concluding that the Securities Litigation Uniform Standards Act (SLUSA) precluded the suit. The variable annuity holder appeals. We conclude that a holder's passive retention of a security following a misrepresentation of which the holder is unaware lacks the "in connection with" requirement for SLUSA preclusion. Accordingly, we REVERSE the judgment of the District Court and REMAND with instructions to remand the case to Connecticut state court.

          Joel C. Feffer and Daniella Quitt, Harwood Feffer LLP, New York, NY, for Plaintiff-Appellant.

          Jay B. Kasner and Kurt WM. Hemr, Skadden, Arps, Slate, Meagher & Flom LLP, New York, NY, for Defendant-Appellee.

          Before: JACOBS, SACK, AND PARKER, Circuit Judges.

          Barrington D. Parker, Circuit Judge:

         The Securities Litigation Uniform Standards Act of 1998 ("SLUSA") precludes plaintiffs from bringing certain class actions in state court that allege fraud in connection with the purchase or sale of nationally traded securities. 15 U.S.C. § 78bb(f)(1). In this putative class action, plaintiff-appellant Richard T. O'Donnell sues on behalf of himself and other variable annuity holders as customers of defendant-appellee AXA Equitable Life Insurance Co. ("AXA"). O'Donnell alleges that AXA implemented a volatility management strategy for its variable annuity policies in breach of its contractual duties to him and the other variable annuity holders.

         If SLUSA is applicable, then O'Donnell would be barred from maintaining this class action in state court and the action would be removable to federal court where it must be dismissed. 15 U.S.C. § 78bb(f)(1). In seeking state regulatory approval for the implementation of the volatility management strategy, AXA was charged with misleading the New York State Department of Financial Services ("DFS"), and eventually reached a settlement with that department. On this ground, the Appellee removed this action to federal court, arguing-solely for the purpose of SLUSA removal and dismissal-that O'Donnell's breach of contract action depends on a misrepresentation (AXA's alleged misrepresentation to the New York state regulator). In this vein, AXA argues, the alleged misrepresentation was made in connection with the purchase or sale of a SLUSA-covered security, and, thus, SLUSA preclusion applies. The action was eventually transferred to the United States District Court for the Southern District of New York (Broderick, J.) which dismissed it. See O'Donnell v. AXA Equitable Life Ins. Co., No. 15-CV-9488 (VSB), 2017 WL 1194479 (S.D.N.Y. Mar. 30, 2017).

         On this appeal, we are asked to determine whether a putative class action complaint is precluded by SLUSA where the alleged misrepresentation was made to a state regulator and unknown to the holders of the security. We conclude that a holder's passive retention of a security following a misrepresentation of which the holder is unaware fails the "in connection with" requirement for SLUSA preclusion. Accordingly, we reverse the judgment of the District Court and remand with instructions that this action be remanded to Connecticut state court.

         I. Background 1

         In November 2008 O'Donnell purchased a variable deferred annuity policy from AXA. Briefly, a variable annuity contract is an insurance contract that has an investment component under which an individual makes a single payment (or a series of payments) to an insurer who in return agrees to make periodic payments to the individual beginning either immediately or at some future date. See, e.g.,

Lander v. Hartford Life & Annuity Ins. Co., 251 F.3d 101, 104 (2d Cir. 2001). Variable annuities are "'hybrid products, ' possessing characteristics of both insurance products and investment securities." Id. at 105 (citation omitted). Unlike the beneficiary of a fixed annuity, the beneficiary of a variable annuity bears the investment risk of the underlying securities. Id. Moreover, because the level of benefits is not fixed, but will vary depending on the investment portfolio, many consumers use variable annuities as a tool for accumulating greater retirement funds by exposing themselves to greater market risk. Id. Variable annuities are sold primarily by insurance companies and must be offered through "separate accounts" that are registered with the Securities and Exchange Commission under the Investment Company Act of 1940.2Id.

         The policy that O'Donnell purchased allowed him to allocate his premiums among various investment options with different risk-reward characteristics. Specifically, O'Donnell invested value in AXA's "Separate Account No. ...

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