Waddell & Reed, Inc. v. UNITED INVEST. LIFE INS. CO.

• Decision Date: 03 July 2003
• Citation: 875 So.2d 1143
• Parties: WADDELL & REED, INC., et al. v. UNITED INVESTORS LIFE INSURANCE COMPANY.
• Court: Alabama Supreme Court

875 So.2d 1143

WADDELL & REED, INC., et al. v. UNITED INVESTORS LIFE INSURANCE COMPANY.

1012054.

Supreme Court of Alabama.

July 3, 2003.

As Modified on Denial of Rehearing September 5, 2003.

Caine J. O'Rear III and W. Alexander Moseley of Hand Arendall, L.L.C., Mobile; Roger L. Bates and E. Shane Black of Hand Arendall, L.L.C., Birmingham; and Orrin L. Harrison III of Vinson & Elkins, L.L.P., Dallas, Texas (brief in opposition to application for rehearing filed by Caine J. O'Rear III and W. Alexander Moseley of Hand Arendall, L.L.C., Mobile; Roger L. Bates and E. Shane Black of Hand Arendall, L.L.C., Birmingham; Orrin L. Harrison III of Akin Gump Strauss Hauer & Feld, LLP, Dallas, Texas; and Vinson & Elkins, L.L.P., Dallas, Texas), for appellants.

William J. Baxley and Joel E. Dillard of Baxley Dillard Dauphin & McKnight, Birmingham; Hobart A. McWhorter, Jr., James W. Gewin, Michael R. Pennington, and Matthew H. Lembke of Bradley Arant Rose & White, LLP, Birmingham; Peter Q. Bassett and Betsy P. Collins of Alston & Bird, LLP, Atlanta, Georgia; and William R. Sampson and Scott C. Nehrbass of Shook Hardy & Bacon, LLP, Overland Park, Kansas (brief in support of application for rehearing filed by William J. Baxley and Joel E. Dillard of Baxley Dillard Dauphin McKnight & Barclift, Birmingham; Hobart A. McWhorter, Jr., James W. Gewin, Michael R. Pennington, and Matthew H. Lembke of Bradley Arant Rose & White, LLP, Birmingham; Peter Q. Bassett and Betsy P. Collins of Alston & Bird, Atlanta, Georgia; and William R. Sampson and Scott C. Nehrbass of Shook Hardy & Bacon, LLP, Overland Park, Kansas), for appellee.

On Application for Rehearing

LYONS, Justice.

The opinion of April 18, 2003, is withdrawn, and the following is substituted therefor. Waddell & Reed, Inc.; Waddell & Reed Financial, Inc.; Waddell & Reed Financial Services, Inc.; W & R Insurance Agency, Inc.; and W & R Insurance Agency of Alabama, Inc. (hereinafter referred to collectively as "W & R"), appeal from a judgment entered on a jury verdict in favor of United Investors Life Insurance Company ("UILIC") and from the trial court's order denying W & R's postjudgment motions. We affirm in part, reverse in part, and remand.

I. Facts and Procedural History

As part of its services, UILIC issues various types of insurance policies, including variable-annuity insurance policies. A variable-annuity insurance policy is an investment vehicle that combines aspects of insurance and securities. All of the W & R defendants are financial services organizations. W & R sold and serviced the variable-annuity insurance policies issued by UILIC. At the outset of the relationship, UILIC and W & R were related corporations under the common ownership of a parent company, Torchmark Corporation. Torchmark had acquired UILIC and W & R in the early 1980s. As of May 1, 1990, UILIC and W & R entered into a principal underwriting agreement ("PUA"), which authorized W & R to sell and service UILIC variable-annuity insurance policies and also provided that W & R would receive a commission on each policy sold.

While the PUA expressly permitted W & R and UILIC to deal with other entities, during the time W & R and UILIC were subsidiary corporations of the same parent company, as a practical matter, neither party was free to deal with other entities with respect to the business of supplying their clients with variable-annuity insurance policies. In other words, while the companies were related, W & R was not free to recommend that a policyholder exchange his or her UILIC policy for that of another insurance company.

After a spin-off in 1998, W & R became an independent company; it began looking at variable-annuity products offered by other companies while continuing to work with UILIC on developing new products.¹ W & R contends that the UILIC variableannuity insurance policies it had sold over the years had become outdated. In the meantime, UILIC began negotiating with a new company to perform the functions being carried out by W & R. When UILIC learned that W & R was searching for companies offering new products, it entered into negotiations with W & R concerning their relationship. UILIC contends that before the negotiations began, W & R threatened mass replacement of the existing UILIC variable-annuity insurance policies W & R was servicing with those of another company. UILIC wanted some restriction on W & R's ability to offer replacement policies to UILIC policyholders.

A critical point in the negotiations took place during early July 1999. On July 7, UILIC'S chief executive officer, Anthony McWhorter, and W & R's chief executive officer, Robert Hechler, spoke twice by telephone. During those conversations, according to both participants, UILIC agreed to increase W & R's annual compensation to 25 basis points on new business and to pay 20 basis points on existing business; in essence, UILIC agreed to pay again for policy sales for which it had previously compensated W & R.² UILIC says it agreed to do so to eliminate the risk of losing existing business by W & R's replacing policies. The new compensation arrangement was scheduled to take effect January 1, 2000. UILIC also agreed to develop a new variable-annuity insurance policy that W & R could promote instead of or in addition to the policy W & R claims was outdated.

The parties differ over what was said during the telephone conversations about restrictions on policy replacements. According to Hechler, he specifically refused the anti-replacement provisions. According to McWhorter, Hechler recognized the necessity for restrictions on replacements and did not object to such restrictions being imposed. McWhorter also says that Hechler agreed to amend the PUA to include anti-replacement language. In a letter from McWhorter to Hechler written on July 8, the day after the telephone conversations, the parties agreed that W & R would be compensated for both old and new business. The letter begins by describing its content as dealing with "some details of the agreement that we reached over the telephone" and ends by saying that it "fully describes the items that we discussed regarding compensation and product features." The letter was silent as to anti-replacement provisions. The letter was signed by both McWhorter and Hechler on behalf of their respective companies.

UILIC later requested a more formalized contract, and the parties exchanged drafts. UILIC proposed an outright ban on policy replacements, while W & R proposed language containing no restriction on replacements. For several months after July 1999, attorneys for UILIC and W & R exchanged drafts of amendments to the PUA. Some of those drafts included language written by W & R dealing with restrictions on replacements. UILIC offered evidence indicating that it was lulled into complacency while W & R "dragged its feet" and that during this time W & R had a hidden agenda of mass replacement of UILIC policies. When the parties failed to agree upon a new contract, W & R told UILIC that it would treat the July 8, 1999, letter as the parties' definitive agreement. UILIC insisted that it needed protection against widespread policy replacements.

On January 26, 2000, Keith Tucker, chairman of W & R's board of directors, wrote a letter addressed to C.B. Hudson, chairman of Torchmark's board of directors. Tucker stated: "I hope that you will accept our good faith promise not to replace your [UILIC's] policies issued to our clients in lieu of the agreement you have proposed [restricting W & R's ability to replace UILIC's variable-annuity insurance policies]." Tucker further stated that W & R had "no intention of replacing any policy issued by [UILIC], either now or in the future, unless circumstances require us to consider such a drastic measure." UILIC says that, in view of those assurances, it took no steps to educate its policyholders regarding potential policy-replacement efforts. At trial, Hechler said he never intended to agree to contract terms restricting W & R's capacity to replace UILIC policies.

W & R Target Funds, Inc. ("Target Funds"), was a mutual-fund company under the management of the officers of W & R. When policyholders paid premiums to UILIC, UILIC purchased mutual-fund shares in Target Funds pursuant to elections by the policyholders. UILIC held the shares in its name in trust for the policyholders. UILIC received 90 basis points of compensation per policyholder for administrative expenses; this type of compensation is known as mortality and expense charges ("M & E charges"). Each month, Target Funds redeemed enough mutual-fund shares purchased by UILIC on behalf of its policyholders to pay that month's M & E charges owed to UILIC. The proceeds from redeeming the shares were placed in Target Funds' bank account at United Missouri Bank ("UMB"), after which an amount of money equal to the month's M & E charges was wire-transferred from Target Funds' UMB account to a UILIC bank account. UILIC then paid W & R the compensation it was due.

Beginning in February 2000, officers of W & R, acting in their capacities as managers of Target Funds, began diverting money from the M & E charges owed to UILIC to pay the sums W & R claimed were due under the July 8, 1999, letter, retroactive to January 1, 2000. From January 2000 through April 2001, those officers caused more than $10,000,000 to be paid directly to W & R from the proceeds due UILIC for M & E charges.

UILIC sued the five W & R entities on May 3, 2000, requesting injunctive relief, a judgment declaring the parties' rights and liabilities under any contracts between the parties, and money damages for breach of contract, conversion, and tortious interference with business relations. UILIC later amended its complaint to charge fraudulent suppression, deceit, and misrepresentation. W & R filed a counterclaim against UILIC seeking a judgment declaring that the July 1999 letter was a binding contract that...