Forrest T. Jones and Co. v. Variable Annuity Life
| Decision Date | 01 August 2006 |
| Docket Number | No. 99-1140-CV-W-HFS.,99-1140-CV-W-HFS. |
| Citation | 447 F.Supp.2d 1035 |
| Parties | FORREST T. JONES AND COMPANY, INC., et al., Plaintiffs, v. The VARIABLE ANNUITY LIFE INSURANCE COMPANY, et al, Defendants. |
| Court | U.S. District Court — Western District of Missouri |
Joseph M. Rebein, Mark Christopher Tatum, Shook, Hardy & Bacon LLP, Kansas City, MO, for Plaintiffs.
David A. Jones, Erin Seki, Akin, Gump, Strauss, Hauer & Feld, LLP, San Antonio, TX, David M. Skeens, J. Michael Vaughan, R. Keith Johnston, Walters, Bender, Strohbehn & Vaughan, P.C., Kansas City, MO, for Defendants.
Before the court is the motion of defendants, the Variable Annuity Life Insurance Company and the Variable Annuity Marketing Company (collectively "Variable") to set aside the findings of the examiner, BKD.LLP ("BKD") (doc. 84). Plaintiffs Forrest T. Jones and Company Inc., and National Pension and Consultant Groups (collectively "FTJ") have filed a motion for leave to file a first amended complaint (doc. 89), and a motion for partial summary judgment (doc. 92). Variable then filed a motion for summary judgment (doc. 96); a motion to set aside the order denying its motion to compel the production of documents(doc. 122); and a motion for leave to file an expert's report (doc. 128).
The following facts are essentially uncontested, but where disputed, will be duly noted. This is an accounting action in which FTJ claims that Variable breached certain provisions of a Selling Agreement pertaining to the payment of fees.
FTJ is involved in insurance administration, and its affiliate, National Pension and Consultant Groups, serves as a broker/dealer. FTJ's primary work is the sale of insurance benefits to educators in the K through 12 educational market. Variable is a provider of annuity markets in the education market, while its subsidiary, Variable Annuity Marketing Company, operates as a broker/dealer for the distribution of securities.
In 1982, the parties entered into a Selling Agreement1 whereby FTJ agreed to provide customer leads to Variable from its educational base so that Variable could secure tax-deferred 403(b) annuity sales, and Variable agreed to compensate FTJ at a rate of .25% of all premiums received by Variable as a direct result of the FTJ provided leads. The parties engaged in a collective marketing effort by sending mailings to members of particular education-related trade or professional associations whose members may have been eligible to participate in 403(b) programs. Leads generated from FTJ mailings were forwarded to Variable for sales processing. The mailing included a "lead card," with a promise of a free gift if the recipient returned the card. The prospective party would then be contacted by Variable to arrange a visit by a Variable salesperson. If a sale was made based on this combined effort by FTJ and Variable, FTJ was then paid .25% on all premiums paid.
FTJ states that under this arrangement, it received less than $30,000 annually, and this amount did not increase proportionate to Variable's gains in the market. The last mailing occurred in approximately 1996, and in December of 2001, Variable terminated its Agreement with FTJ to be effective on March 14, 2002. In the interim, on October 28, 1999, FTJ instituted a suit in state court for an accounting. On November 29, 1999, Variable removed the action to this court. After the commencement of litigation, Variable determined and acknowledged that for a 19 month period during 1997 through 1999, FTJ was underpaid by $23,003.
On or about August 26, 2002, the parties entered into a Stipulated Settlement Plan ("SSP") for an accounting to be conducted. The parties selected BKD to be the Examiner. The parties agreed that a deviation between the actual annual payments made and BKD's determinations must be greater than 5% of the actual annual payments to FTJ under the Agreement, or they would be deemed immaterial and non-payable2. (SSP: pg. 5). Any deviation greater than the threshold amount would warrant payment for the entire amount of the difference. (Id). According to the SSP, BKD's determination would be final and could only be appealed, subject to an arbitrary and capricious standard, within thirty (30) days of final submission of the final report to the parties; any appeals not filed during this time frame were forever barred. (Id: pg. 4). The parties agreed that the total costs and fees of the accounting effort would not exceed $125,000, and that they would share equally expenses up to $60,000, with the loser paying all amounts above $60,0003. (Id: pg. 6). The SSP also provided, inter alia, that after the accounting was completed the parties could raise legal issues to determine whether any amounts determined to be owed must be paid. (Id: pg. 7-8). The parties agreed that these issues would include, but would not be limited to, statute of limitations, and fees for in force customers at the time the Agreement was terminated; any such issues were to be raised within sixty4 (60) days from submission of the final report. (Id: pg. 8).
On August 24, 2004, BKD determined that for the period of 1982 through 2004, FTJ had been underpaid $695,761; at that time BKD's fees totaled $94,000. A second round of litigation then commenced.
Motion to Set Aside the Examiner's Findings
In its motion to set aside the findings of BKD, Variable asserts that the findings were arbitrary and capricious. The "arbitrary and capricious" standard examines whether BKD's decision was supported by substantial evidence, meaning more than a scintilla but less than a preponderance. Schatz v. Mutual of Omaha Ins. Co., 220 F.3d 944, 949 (8th Cir.2000). To make this finding, the court must consider whether the decision was based on a consideration of the relevant factors and whether there has been a clear error of judgment. South Dakota v. Ubbelohde, 330 F.3d 1014, 1031 (8th Cir.2003). This inquiry into the facts is to be careful and distinctly more than superficial, yet the ultimate standard of review is a very narrow one, and the court is not empowered to substitute its judgment for that of the decision-maker, in this case the designated Examiner. South Dakota, at 1031.5 In order for the examiner's decision to pass scrutiny, it must "articulate a rational connection between the facts found and the choice made." Id.; quoting, Bowman Trans p., Inc. v. Arkansas-Best Freight System, Inc., 419 U.S. 281, 288, 95 S.Ct. 438, 42 L.Ed.2d 447 (1974). If the decision is supported by a reasonable explanation, it should not be disturbed, even though a different reasonable interpretation could have been made. Schatz, at 949. In making this assessment, only the evidence that was before the examiner when its determination was made will be considered. Id.6
Variable contends that BKD's determination should have been based on the number of mailings, the number of responses received, and the number of responses that resulted in sales ("the conversion rate"). Instead, BKD rejected this actual data, and relied on an assumed conversion rate from a marketing association. Variable claims that this data was based on highly successful direct mail campaigns involving different financial products marketed to different target groups. Thus, BKD relied on incorrect data resulting in an inflated conversion rate. Variable also complains that BKD failed to explain why the conversion rate information provided by the parties was unreliable as compared to the "standard industry conversion rates."
Variable also complains that although BKD initially found conversion rate information provided by FTJ's expert, David Lee, to be unreliable, BKD subsequently reversed the decision and found the conversion rate information proffered by Mr. Lee for the period of 1986 to the present to be reliable. Variable contends that it was error for BKD to rely on these conversion rates because Mr. Lee based the rates on anonymous sources in the insurance industry and on his undocumented experience.
In what might be construed as its opposition7, by way of its motion for partial summary judgment FTJ claims that recovery of these fees "is a simple matter of enforcement of the parties' Settlement Plan." This argument is conclusory, and fails to provide sufficiently for a ruling on the merits. Consequently, Variable's motion will be denied temporarily, without prejudice to reconsideration when fully briefed, beginning with directly responsive briefing from FTJ.
FTJ seeks leave to amend its complaint in order to update the nature of its claims in light of the parties' agreement noted in the SSP and BKD's findings8. Specifically, FTJ seeks to add a claim for an accounting of what is referred to as paragraph 2 fees. According to FTJ, the Agreement provided that it receive payment from Variable pursuant to a compensation schedule under two separate systems. Paragraph 1 of the schedule related to fees earned from lead card generation, while paragraph 2 pertained to fees earned from Variable's school district penetration. According to FTJ, annuity products subject to the agreement were generally sold to district employees through payroll deduction systems, and Variable received district authorization to conduct payroll deductions attendant to the annuity sales and ongoing premiums. Thus, FTJ contends that the timing of payroll authorizations would largely establish the timing of Variable's school district penetration. FTJ complains that BKD addressed only fees due under paragraph 1, but failed to address those fees due under paragraph 2. FTJ also complains that BKD failed to consider any fees due from in-force customers; these are customers whose premiums were generating fees payable to FTJ at the time Variable terminated the Agreement i.e. December 21, 2001. FTJ contends that...
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