Cranley v. National Life Ins. Co. of Vermont

Decision Date15 May 2001
Docket NumberNo. 2:99-CV-323.,No. 2:99-CV-348.,2:99-CV-323.,2:99-CV-348.
Citation144 F.Supp.2d 291
CourtU.S. District Court — District of Vermont
PartiesJohn J. CRANLEY III and Julius Grad, on behalf of themselves and all other similarly situated policyholders of National Life of Vermont, Plaintiffs, v. NATIONAL LIFE INSURANCE COMPANY OF VERMONT, National Life Holding Company, NLV Financial Corporation, Patrick E. Welch, Thomas H. MacLeay, James A. Mallon, William A. Smith, Rodney A. Buck, Gregory H. Doremus, Charles C. Kittredge, Robert E. Boardman, David R. Coates, Benjamin F. Edwards III, Earle H. Harbison, Jr., Roger B. Porter, E. Miles Prentice III, Thomas P. Salmon, A. Gary Shilling, Thomas R. Williams, Patricia K. Woolf, and Elizabeth Costle, Defendants. Walter J. and Betty Birdsall, on behalf of themselves and all other similarly situated policyholders of National Life of Vermont, Plaintiffs, v. National Life Insurance Company of Vermont, National Life Holding Company, NLV Financial Corporation, Patrick E. Welch, Thomas H. MacLeay, James A. Mallon, William A. Smith, Rodney A. Buck, Gregory H. Doremus, Charles C. Kittredge, Robert E. Boardman, David R. Coates, Benjamin F. Edwards III, Earle H. Harbison, Jr., Roger B. Porter, E. Miles Prentice III, Thomas P. Salmon, A. Gary Shilling, Thomas R. Williams, Patricia K. Woolf, and Elizabeth Costle, Defendants.

Geoffrey W. Crawford, O'Neill, Crawford & Green, Burlington, VT, Stanley M. Chesley, Robert A. Steinberg, Terrence L. Goodman, Waite, Schneider, Bayless & Chesley Co., L.P.A., Cincinnati, OH, Richard S. Wayne, William K. Flynn, Steven F. Stuhlbarg, Strauss & Troy, Cincinnati, OH, Howard Specter, David Manogue, Joseph N. Kravec, Jr., Specter, Specter, Evans & Manogue, P.C., Pittsburgh, PA, Michael G. Lange, John P. Zavez, Patrick T. Egan, Berman, DeValerio & Pease, Boston, MA, Jody Edward Anderman, LeBlanc, Maples & Waddell, Baton Rouge, LA, for Plaintiffs.

Robert Stephen Burke, Montpelier, VT, Jeffrey B. Rudman, John G. Fabiano, Andrea J. Robinson, Peter A. Speath, Sharon C. Simpson, Anita K. Krug, Hale and Dorr, LLP, Boston, MA, for Defendants.

OPINION AND ORDER

SESSIONS, District Judge.

This class action lawsuit challenges the reorganization of National Life Insurance Company ("National Life") from a mutual insurance company to a mutual insurance holding company, pursuant to Section 3441 of Title 8 of Vermont Statutes Annotated. Vt.Stat.Ann. tit. 8, § 3441 (Supp.2000). The Plaintiffs, National Life policyholders, allege that the reorganization is designed to divest policyholders of their ownership interests in the company without providing compensation, and will confer stock ownership and other benefits upon the officers and directors of National Life to which they are not entitled. In particular, the Plaintiffs claim that the statute, both facially and as applied, violates the Contract Clause of the United States Constitution and the Due Process Clause of the Fourteenth Amendment to the United States Constitution, and constitutes an unlawful taking in violation of the Fourteenth Amendment to the United States Constitution. They also assert direct or derivative state law claims against the individual Defendants for breach of fiduciary duty, self-dealing, waste of corporate assets, dilution of voting rights of shareholders, fraudulent concealment or negligent omission, and conversion.

The Defendants have moved to dismiss the complaint in its entirety, arguing that this Court should abstain under the Burford and Pullman doctrines, that the Plaintiffs fail to state any claim upon which relief can be granted, and that the state law claims suffer from a variety of fatal defects, including failure to exhaust administrative remedies and failure to allege fraud or negligent omission with the requisite particularity. For the reasons stated below, the motions to dismiss (Docs. 27 and 28) are granted in part and denied in part as moot.

BACKGROUND

The following facts are matters of public record, or are taken as true for purposes of this motion to dismiss.

I. The Mutual Insurance Company

Mutual insurance companies are organized in a cooperative form, largely for the benefit of their policyholders. In exchange for paying premiums, the policyholders receive life insurance policies at cost and an ownership interest in the firm. By providing the funds for reserves to cover expected liabilities, policyholders provide the mutual company with "surplus," funds designed to cover unanticipated liabilities. The policyholders' ownership interest gives them, among other things, the right to elect a board of directors to manage the company, receive any dividends or reductions in premiums declared by the board, and receive any surplus if the company is dissolved.

Traditionally, a mutual insurance company that wished to change its structure to become a stock insurance company went through a "demutualization," in which each policyholder's equity in the company was calculated, and the policyholder permitted to acquire the equivalent in cash or stock in the new company. Several states, including Vermont, have recently enacted laws allowing a mutual company to convert to a stock insurance company without compensating policyholders for their equity by forming a mutual insurance holding company with a stock insurance company subsidiary. The policyholders' ownership interests in the mutual company are transformed into ownership interests in the holding company. The holding company retains a majority of the voting shares of the capital stock of the subsidiary stock insurance company. The stock company can then raise capital by selling its stock.

Following reorganization, the policyholders' interests are essentially split: their ownership rights are transferred to the mutual holding company and their contractual rights to benefits and dividends remain with the insurance company, which is now a stock company. The policyholders are thus no longer the sole recipients of future profits, which therefore may not be available to them in the form of dividends or reduced premiums.

II. The Statute and Regulations

Vermont law permits a domestic mutual insurance company, upon approval of the Commissioner of Banking, Insurance, Securities, and Health Care Administration ("the Commissioner" or "BISHCA"), to reorganize by forming a mutual insurance holding company, which will control a subsidiary stock insurance company. Vt.Stat. Ann. tit. 8, § 3441(a) (Supp.2000). In order to reorganize, the company must file an application with the Commissioner, which must include the plan of reorganization, the proposed charters, articles of association and bylaws for the mutual insurance holding company and any insurance company subsidiary, "and such other relevant information as the commissioner shall require." Id. That relevant information must include, among other things, the company's plan to obtain the approval of policyholders; information sufficient to demonstrate that the formation of a mutual insurance holding company will not cause financial impairment to the reorganizing insurer; that the resources of the mutual insurance company are sufficient to accomplish the plan or reorganization successfully; and that the reorganization is not contrary to the financial interests of or unfair to the policyholders. Regulation 97-5 § 5(A)(4-8).

The company's plan of reorganization must include, among other things, a plan to establish a "closed block," consisting of all participating policies in force on the adoption date, for purposes of paying policyholder dividends. Reg. 97-5 § 5(B)(5). The reorganizing insurer must allocate cash flow-producing assets to this closed block, in an amount sufficient to pay claims, expenses and taxes, "and the continuation of dividend scales in effect on the adoption date if the experience underlying such scales continues." Id.

In considering an application, the Commissioner may, in her discretion, hold a public hearing, for which the applicant must provide commissioner-approved notice to its policyholders. Tit. 8, § 3441(a); Reg. 97-5 § 6(B). The Commissioner will not approve a completed application for reorganization unless the reorganizing insurer's board of directors approves the plan by not less than a two-thirds majority. Reg. 97-5 § 6(C). Before approval the Commissioner must consider, among other factors, whether the proposed reorganization would be unfair to or contrary to the financial interests of policyholders, and whether the proposed reorganization promotes the general good of the state. Tit. 8, § 3441(a); Reg. 97-5 § 6(C)(5-7).

The reorganization of a domestic mutual insurance company must also be approved by its members or policyholders, at a meeting in which policyholders vote, in person or by proxy, upon the proposed plan of reorganization. Tit. 8, § 3441(c); Reg. 97-5 § 6(E). The reorganizing insurer must be able to certify to the Commissioner that the plan of reorganization was approved by no fewer than two-thirds of the policyholders voting. Reg. 97-5 § 6(E)(5). If five percent of the policyholders who voted against the reorganization petition the Commissioner, she will order a hearing, at which any policyholder may appear and be heard concerning the reorganization. Tit. 8, § 3441(c), Vt.Stat. Ann. tit. 8, § 3429 (1984). If the Commissioner is not satisfied that the interests of the policyholders are properly protected or if reasonable objection exists to the reorganization, she will revoke her approval of the plan. Id., § 3429.

The Commissioner retains continuing jurisdiction over a mutual insurance holding company and its subsidiaries after a reorganization has occurred "for the protection of policyholders as policyholders and the interests of policyholders as members of the mutual insurance holding company." Reg. 97-5 § 8(A). Thus, a stock offering by an entity created by a plan of reorganization may not occur without prior...

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