Araujo v. John Hancock Life Ins. Co.

• Decision Date: 26 June 2002
• Docket Number: No. 01CV6622(ADS).,01CV6622(ADS).
• Parties: Daniel ARAUJO, on behalf of himself and all others similarly situated, Plaintiff, v. JOHN HANCOCK LIFE INSURANCE COMPANY, Defendant.
• Court: U.S. District Court — Eastern District of New York

206 F.Supp.2d 377

Daniel ARAUJO, on behalf of himself and all others similarly situated, Plaintiff, v. JOHN HANCOCK LIFE INSURANCE COMPANY, Defendant.

No. 01CV6622(ADS).

United States District Court, E.D. New York.

June 26, 2002.

Goodkind Labaton Rudoff & Sucharow LLP, Joel H. Bernstein, Esq. and Christopher J. Keller, Esq., Of Counsel, New York, NY, Zwerling Schachter & Zwerling, LLP, Robert S. Schachter, Esq., Of Counsel, Westbury, NY, for the Plaintiff.

Hale And Dorr LLP, Nicholas A. Marsh, Esq., Of Counsel, New York, NY, for the Defendant.

MEMORANDUM OF DECISION AND ORDER

SPATT, District Judge.

The plaintiff Daniel Araujo ("Araujo" or the "plaintiff"), on behalf of himself and all other similarly situated individuals, alleges that the defendant John Hancock Life Insurance Company ("John Hancock" or the "defendant") engaged in a scheme to charge its policyholders life insurance premiums for a period of time when no coverage existed. The plaintiff originally commenced this action in the Supreme Court of the State of New York, Suffolk County. The defendant later removed the action to this Court pursuant to the Securities Litigation Uniform Standards Act of 1998 ("SLUSA"), 15 U.S.C. § 77p, and 28 U.S.C. §§ 1331 and 1441(b). The defendant now moves to dismiss the complaint pursuant to the provisions of SLUSA, while the plaintiff cross-moves to file an amended complaint and to remand the action to state court for lack of subject matter jurisdiction.

I. BACKGROUND

The following facts are taken from the complaint. The plaintiff is the owner of a variable universal life insurance policy with the defendant. A variable universal life insurance policy permits a policyholder to invest premiums in a separate account containing mutual funds which grows or declines depending on the performance of the funds. See Joan E. Boros & W. Randolph Thompson, A Vocabulary of Variable Insurance Products, 813 PLI/Comm 11, 35-36 (2001). The policyholder receives an account value and a death benefit. See John Hancock, Medallion Variable Life Insurance, available at http://www. jhan-cock.com/products/insurance/medallio-info. htm (June 18, 2002). Before death, the policyholder can access her or his account by taking out a loan or making a withdrawal. See id. See also Boros & Thompson, supra, at 38-39 (explaining the various ways that a policyholder can access her or his account in a variable universal life insurance policy).

On January 27, 2001, the plaintiff completed an application for a variable universal life insurance policy with the defendant. In his application, the plaintiff selected a policy with a death benefit face value of $1,500,000. Also, the plaintiff elected to invest his premiums in a sub-account consisting of mutual funds which contain mid cap and large cap stocks. In addition, the plaintiff chose to pay a monthly premium of $3,000.

On March 15, 2001, the defendant issued a variable universal life insurance policy for the plaintiff. The plaintiff received the policy on March 28, 2001, thirteen days later. The plaintiff alleges that under the terms of the policy his insurance coverage did not go into effect until after he received the policy and paid the minimum initial premium payment. The plaintiff claims that he paid a first year annual insurance premium of $18,000 for a policy period beginning on March 15, 2001, the date the policy was issued. However, the plaintiff alleges that he did not receive the entire year's worth of coverage for which he paid. Instead, the plaintiff claims that the defendant received thirteen days worth of premiums for a "risk-free" period. Finally, the plaintiff alleges that this deceptive practice, namely charging premiums to policyholders when there is no coverage, was standard procedure for the defendant with regard to the life insurance policies that it sold.

On September 5, 2001, the plaintiff commenced a class action against the defendant in the Supreme Court of the State of New York, Suffolk County seeking to recover the value of the premiums collected by the defendant during the "risk-free" period. In the complaint, the plaintiff asserts claims under the New York common law for breach of contract, breach of implied covenant of good faith and fair dealing, unjust enrichment and the New York Consumer Protection from Deceptive Acts and Practices Act, N.Y. Gen. Bus. Law § 349 (McKinney 1988).

On October 5, 2001, the defendant removed the case to this Court pursuant to SLUSA and 28 U.S.C. §§ 1331 and 1441(b). The defendant now moves to dismiss the complaint under the provisions of SLUSA. The plaintiff cross-moves to file an amended complaint and to remand this action to state court for lack of subject matter jurisdiction.

II. DISCUSSION

A. The Standard of Review

Rule 12(b)(1) of the Federal Rules of Civil Procedure provides the applicable standard of review for the motions to dismiss and remand because each concerns the subject matter jurisdiction of the Court. With regard to a motion under Rule 12(b)(1), the Court may consider affidavits and other material beyond the pleadings to resolve the jurisdictional question. Robinson v. Gov't of Malaysia, 269 F.3d 133, 141 n. 6 (2d Cir.2001); Antares Aircraft, L.P. v. Fed. Republic of Nigeria, 948 F.2d 90, 96 (2d Cir.1991), vacated on other grounds, 505 U.S. 1215, 112 S.Ct. 3020, 120 L.Ed.2d 892 (1992); Exch. Nat'l Bank of Chicago v. Touche Ross & Co., 544 F.2d 1126, 1130 (2d Cir. 1976). Further, under Rule 12(b)(1), the Court must accept as true all material factual allegations in the complaint, but will not draw inferences favorable to the party asserting jurisdiction. Shipping Fin. Servs. Corp. v. Drakos, 140 F.3d 129, 131 (2d Cir.1998); Atl. Mut. Ins. Co. v. Balfour Maclaine Int'l Ltd., 968 F.2d 196, 198 (2d Cir.1992). Hearsay statements contained in affidavits may not be considered. Kamen v. Am. Tel. & Tel. Co., 791 F.2d 1006, 1011 (2d Cir.1986). Each party may submit affidavits and other material in support of their respective positions. The Court will consider such material to the extent they are relevant to the issue of jurisdiction.

B. The Securities Litigation Uniform Standards Act of 1998

In 1998, Congress passed SLUSA to close a loophole in the Private Securities Litigation Reform Act of 1995 ("PSLRA"). Lander v. Hartford Life & Annuity Ins. Co., 251 F.3d 101, 107-08 (2d Cir.2001). PSLRA imposed, among other things, heightened pleading standards and a mandatory stay of discovery for class actions alleging fraud in the sale of securities. Id. at 107. The purpose of PSLRA was to prevent meritless class actions alleging securities fraud by creating uniform standards for such actions. Id.

According to House and Senate findings, Congress determined that class action plaintiffs were avoiding PSLRA's heightened requirements by filing class actions in state court under more lenient state statutory or common law theories. Id. at 107-08. To close this alternative, SLUSA mandates that federal courts be "the exclusive venue for class actions alleging fraud in the sale of certain covered securities ... [and that] such class actions be governed exclusively by federal law." Id. at 108.

SLUSA directs the removal and dismissal of class actions brought under state law alleging misrepresentation in connection with the purchase or sale of a covered security. In particular, SLUSA provides:

No covered class action based upon the statutory or common law of any State or subdivision thereof may be maintained in any State or Federal court by any private party alleging (1) an untrue statement or omission of a material fact in connection with the purchase or sale of a covered security; or (2) that the defendant used or employed any manipulative or deceptive device or contrivance in connection with the purchase or sale of a covered security.

15 U.S.C. § 77p(b). SLUSA also directs the removal of such actions from state court to federal court. 15 U.S.C. § 77p(c).

1. The Application of SLUSA to the Complaint

To dismiss an action under SLUSA, the defendant must show that: (1) the action is a "covered class action" under SLUSA; (2) the action purports to be based on state law; (3) the action involves a "covered security" under SLUSA; (4) the defendant misrepresented or omitted a material fact or employed a deceptive devise; (5) "in connection" with the purchase or sale of such security. See 15 U.S.C. § 77p(b). The Court will analyze each element separately.

a. A "Covered Class Action"

A "covered class action" includes a law-suit in which

[O]ne or more named parties seek to recover damages on a representative basis on behalf of themselves and other unnamed parties similarly situated, and questions of law or fact common to those persons or members of the prospective class predominate over any questions affecting only individual persons or members....

15 U.S.C. § 77p(f)(2)(A)(i)(II). The first element is met because the plaintiff seeks damages on behalf of himself and other similarly situated individuals and alleges that common questions of law and fact exist with respect to all members of the proposed class.

b. State Law

The complaint asserts claims under the New York common law for breach of contract, breach of implied covenant of good faith and fair dealing, unjust enrichment and the New York Consumer Protection from Deceptive Acts and Practices Act. As such, the second element is satisfied because the complaint purports to be based on state law.

c. A "Covered Security"

A "covered security" is defined as "a security that satisfies the standards for a covered security specified in paragraph (1) or (2) of section 77r(b) of this title, at the time during which it is alleged that the misrepresentation, omission, or manipulative or deceptive conduct occurred...." 15 U.S.C. § 77p(f)(3). Section 77r(b)(2) provides that a "security is a covered security if [it] is a security issued by an investment company that is registered, or that has...