809 P.2d 1278 (N.M. 1991), 18651, New Mexico Life Ins. Guar. Ass'n v. Quinn & Co., Inc.

Docket Nº:18651, 18680.
Citation:809 P.2d 1278, 111 N.M. 750, 1991 -NMSC- 036
Opinion Judge:[10] Ransom
Party Name:NEW MEXICO LIFE INSURANCE GUARANTY ASSOCIATION, et al., Plaintiffs-Appellees, and Cross-Appellants, v. QUINN & COMPANY, INC., et al., Defendants-Appellants and Cross-Appellees.
Attorney:W.T. Martin, Jr. Carlsbad, for defendants-appellants and cross-appellees., Pongetti, Myers & Wilson, Floyd D. Wilson, Kevin Sweazea, Albuquerque, Victor R. Marshall & Associates, Victor R. Marshall, Joel K. Jacobsen, Albuquerque, for plaintiffs-appellees and cross-appellants. [7] W. T. Martin, J...
Judge Panel:MONTGOMERY and FRANCHINI, JJ., concur.
Case Date:April 10, 1991
Court:Supreme Court of New Mexico
 
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Page 1278

809 P.2d 1278 (N.M. 1991)

111 N.M. 750, 1991 -NMSC- 036

NEW MEXICO LIFE INSURANCE GUARANTY ASSOCIATION, et al.,

Plaintiffs-Appellees, and Cross-Appellants,

v.

QUINN & COMPANY, INC., et al., Defendants-Appellants and

Cross-Appellees.

Nos. 18651, 18680.

Supreme Court of New Mexico.

April 10, 1991

Page 1279

[Copyrighted Material Omitted]

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[111 N.M. 752] W.T. Martin, Jr. Carlsbad, for defendants-appellants and cross-appellees.

Pongetti, Myers & Wilson, Floyd D. Wilson, Kevin Sweazea, Albuquerque, Victor R. Marshall & Associates, Victor R. Marshall, Joel K. Jacobsen, Albuquerque, for plaintiffs-appellees and cross-appellants.

OPINION

RANSOM, Justice.

This matter is before the Court on interlocutory appeal and cross-appeal from the district court's order denying in part and granting in part defendants' motion to dismiss an action brought by the New Mexico Life Insurance Guaranty Association, a creature of the New Mexico Life and Health Insurance Guaranty Law, NMSA 1978, Sections 59A-42-1 to -16 (Repl.Pamp.1988). 1 Quinn & Company had marketed and sold in New Mexico certain Single Premium Deferred Annuity Life Insurance Policies for National Equity Life Insurance Company. National Equity became insolvent and eventually failed. The Association reimbursed the policyholders for the premiums they paid for the policies and brought suit against Quinn, its officers and directors, and its selling agents, alleging

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[111 N.M. 753] violations of the Securities Act of New Mexico, NMSA 1978, Sections 58-13-1 to -47 (Repl.Pamp.1984), the New Mexico Unfair Practices Act, commonly known as the New Mexico Unfair Trade Practices Act, NMSA 1978, Sections 57-12-1 to -16 (Orig.Pamp.1978), and the Insurance Code's unfair trade practices provisions, NMSA 1978, Sections 59A-16-1 to -30 (Orig.Pamp.1984). Additionally, the Association alleged several common law causes of action sounding both in tort and contract. 2

The defendants raise the following issues on appeal:

  1. On the question of whether the policies are securities under the New Mexico Securities Act, did the district court properly rule this to be a disputed issue of fact and, if not, were the policies insurance contracts or securities?

  2. Is the Association a proper party to the action and, if so, can the Association sue for more than it paid the policyholders?

  3. If the policies are deemed insurance securities, are the anti-fraud provisions of the New Mexico Securities Act applicable?

    The Association, in turn, raises the following issues on cross-appeal:

  4. With respect to Section 59A-42-13(E) of the Guaranty Law, which prohibits mention of the protections of the Guaranty Law in the sale of insurance, did the district court properly rule this section violates the first amendment to the United States Constitution?

  5. Is the New Mexico Unfair Trade Practices Act applicable to transactions subject to the New Mexico Unfair Insurance Practices Act?

    After careful review of the district court's order, the briefs, and the record below, we affirm in part and reverse in part.

    Standard of review. A motion to dismiss tests the legal sufficiency of the complaint. In considering a motion to dismiss for failure to state a claim upon which relief can be granted, we must accept as true all well-pleaded facts and question only whether the plaintiff might prevail under any state of facts provable under the claim. Groendyke Transp., Inc. v. New Mexico State Corp. Comm'n, 85 N.M. 718, 721, 516 P.2d 689, 692 (1973).

    The facts. The Guaranty Law was enacted by our legislature to provide a mechanism to facilitate the continuation of coverage and to avoid financial loss to policyholders in the event of insurer insolvency. Section 59A-42-7(D). 3 The Guaranty Law establishes the Association as the principal mechanism to effectuate that purpose. Section 59A-42-2. All insurers licensed to sell insurance in New Mexico are directed to organize and remain members of the Association as a condition of their authority to transact business in New Mexico. Section 59A-42-5. The Association raises money through assessments against individual members and pays, within statutory limits, the claims of state residents against insolvent insurers that have transacted business in the state. Section 59A-42-8. The Association then has claims against the estates of the insolvent insurers. Section 59A-43-7. The New Mexico Superintendent of Insurance retains broad supervisory powers over the administration and functions of the Association. Section 59A-43-9.

    National Equity was licensed in 1982 by the New Mexico Department of Insurance to sell life, accident, and health insurance in New Mexico. During the years 1982 through 1985, National Equity marketed the policies in question through Quinn, a

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    [111 N.M. 754] licensed New Mexico securities brokerage firm. Quinn's brokers were licensed to sell both securities and insurance in New Mexico.

    Based on our review of an exemplar policy attached to the complaint, the policies worked as follows. The purchaser paid to National Equity a single premium. In return, National Equity guaranteed payment of interest at a specified rate for a period of time sufficient for the principal plus accrued interest to double the initial investment. Thereafter, National Equity guaranteed a minimum of four percent interest plus discretionary interest until the retirement date of the policy. At the retirement date, National Equity would make monthly annuity payments, "ten years certain." If the purchaser died before the payments commenced, National Equity paid the designated beneficiary an amount equal to the initial investment plus accrued interest. If the purchaser died after the payments began, the payments stopped, and the beneficiary was required to choose between certain settlement options. In either event, the entire value of the beneficiary's share was equal to the initial premium plus accrued interest. In addition, the purchaser could withdraw the cash value at any time. National Equity assessed a five percent withdrawal and surrender charge for withdrawals made during the initial doubling period. Withdrawals made thereafter were not penalized.

    The Association alleges that Quinn and its agents pitched the policies as a "true alternative to a certificate of deposit." In sales literature attached to the complaint, the policies were "guaranteed to double." Among the advertised features were: guaranteed principal, freedom from probate, guaranteed interest protection, annual compounding, flexible withdrawal features, no sales charge, and no current income tax on earnings. According to the complaint, Quinn and its agents represented to potential purchasers that the Association would "stand behind" the policies issued by National Equity.

    After National Equity was declared insolvent and placed in receivership, policyholders who had purchased the National Equity policies sought relief from the Association under the Guaranty Law. The Association, apparently uncertain whether the policies issued by National Equity were within the scope of the Guaranty Law, entered into a settlement agreement that was approved by the Superintendent. Pursuant to that agreement, the Association agreed to reimburse the policyholders, but for only a portion of the "contractual obligations" of National Equity. Each policyholder received the initial lump sum premium paid for the policy, and no more. In return for the payment, the Association required each policyholder to execute a Settlement, Assignment and Release Agreement. The assignment provided in part for the assignment to the Association of any claim the policyholder may have against National Equity and others arising out of the sale of the policies. In addition, the assignment provided the Association would be subrogated to all of the policyholder's rights against National Equity, Quinn, and any other person. The Association brought this action as both assignee and subrogee pursuant to the plenary assignments.

    In its complaint the Association asserted the policyholders were damaged in an amount equal to their premiums plus any interest due, and the Association sought the $3,412,519.15 it had paid to the policyholders, plus prejudgment interest that had accrued and would accrue on that amount, costs, attorney fees, and, significantly, other unspecified damages to be proved at trial.

    Whether the policy is a security cannot be decided in this case on a motion to dismiss. The defendants' motion to dismiss alleged that because the policies were not securities, the Association had failed to state a claim under Section 58-13-39, the anti-fraud provisions of the New Mexico Securities Act. In its order, the district court held that the question of whether the policies were securities for purposes of the

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    [111 N.M. 755] New Mexico Securities Act was a disputed question of fact. For the reasons set forth below, we agree with the district court's assessment of the question.

    At the outset we note, however, that the question of whether a particular arrangement is a security for purposes of the New Mexico Securities Act is a question of law ultimately to be determined by the court. 4 In this regard, we are in agreement with the unanimous body of federal and state law. Sheets v. Dziabis, 738 F.Supp. 307 (N.D.Ind.1990) (whether a particular arrangement is an investment contract under the federal definition is a question of law); Vairo v. Clayden, 153 Ariz. 13, 18, 734 P.2d 110, 115 (Ct.App.1987) (whether a particular instrument is a security under the state securities law is a question of law); Leyva v. Superior Court, 164 Cal.App.3d 462, 470, 210 Cal.Rptr. 545, 549 (1985) (same); Straub v. Mountain Trails Resort, Inc., 770 P.2d 1321, 1323 (Colo.Ct.App.1988)...

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