Lander v. Hartford Life & Ann. Ins. Co.

• Citation: 251 F.3d 101
• Decision Date: 01 August 2000
• Docket Number: Docket No. 00-7849,DEFENDANTS-APPELLEES,PLAINTIFFS-APPELLANTS
• Parties: (2nd Cir. 2001) L. CLAIRE LANDER, CHARLES M. DROZ, JULIAN BLOCK, AND ZELDA BLOCK,, v. HARTFORD LIFE & ANNUITY INSURANCE COMPANY AND HARTFORD LIFE INSURANCE COMPANY,
• Court: U.S. Court of Appeals — Second Circuit

Page 101

251 F.3d 101 (2nd Cir. 2001)

L. CLAIRE LANDER, CHARLES M. DROZ, JULIAN BLOCK, AND ZELDA BLOCK, PLAINTIFFS-APPELLANTS, v. HARTFORD LIFE & ANNUITY INSURANCE COMPANY AND HARTFORD LIFE INSURANCE COMPANY, DEFENDANTS-APPELLEES.

Docket No. 00-7849

August Term, 2000

UNITED STATES COURT OF APPEALS

For the Second Circuit

Argued January 30, 2001

Decided May 25, 2001

Appeal from a judgment of the United States District Court for the District of Connecticut (Alfred V. Covello, Chief Judge) denying the plaintiffs' motion to remand to Connecticut Superior Court and dismissing the action for lack of jurisdiction pursuant to the Securities Litigation Uniform Standards Act of 1998 ("SLUSA"), Pub. L. No. 105-353, 112 Stat. 3227 (1998) (codified as amended in part at 15 U.S.C. §§ 77p & 78bb(f)). We hold that because the variable annuity contracts at issue here are "covered securities" as defined by SLUSA, and because the anti-preemption rule of the McCarran-Ferguson Act, ch. 20, 59 Stat. 33 (1945) (codified as amended at 15 U.S.C. § 1011 et seq.), does not preclude the application of SLUSA to variable annuities, the District Court's refusal to remand the case and subsequent dismissal were not in error.

Affirmed.

[Copyrighted Material Omitted] Michael C. Spencer, Milberg Weiss Bershad Hynes & Lerach, L.L.P., New York, N.Y. (Melvyn I. Weiss, Janine L. Pollack and Lee A. Weiss of Milberg Weiss Bershad Hynes & Lerach, L.L.P.; Ronald A. Uitz of Uitz & Associates; Sheldon S. Lustigman and Andrew B. Lustigman of The Lustigman Firm, P.C.; James R. Newcomer of James, Hoyer, Newcomer, Forizs & Smiljanich, P.A.; and Elias A. Alexiades of Hurwitz & Sagarin, L.L.C.; on the brief) for Plaintiffs-Appellants.

Daniel McNeel Lane, Jr., Akin, Gump, Strauss, Hauer & Feld, L.L.P., San Antonio, TX (Barry A. Chasnoff and David R. Nelson of Akin, Gump, Strauss, Hauer & Feld, L.L.P.; and Donald E. Frechette of Edwards & Angell, L.L.P.; on the brief) for Defendants-Appellees.

The Securities Exchange Commission, Washington, DC (David M. Becker, General Counsel; Jacob H. Stillman, Solicitor; Mark Pennington, Assistant General Counsel; Michael A. Conley, Attorney Fellow; and Meyer Eisenberg, Deputy General Counsel; on the brief) submitted a brief as amicus curiae.¹

Before: Oakes, Straub, and Pooler, Circuit Judges.

Straub, Circuit Judge

Plaintiffs-Appellants L. Claire Lander, Charles M. Droz, Julian Block, and Zelda Block brought a class action alleging that the Defendants-Appellees Hartford Life & Annuity Insurance Company and Hartford Life Insurance Company (collectively referred to as "Hartford Life") violated Connecticut statutory and common law through fraudulent representations in the marketing of variable annuity contracts. After the case was removed to the United States District Court for the District of Connecticut (Alfred V. Covello, Chief Judge), the District Court denied the plaintiffs' motion to remand the case back to Connecticut Superior Court and dismissed the plaintiffs' complaint pursuant to the Securities Litigation Uniform Standards Act of 1998 ("SLUSA"), Pub. L. No. 105-353, 112 Stat. 3227 (codified as amended in part at 15 U.S.C. §§ 77p & 78bb(f)), which states, inter alia, that "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... an untrue statement or omission of a material fact in connection with the purchase or sale of a covered security...." On appeal, the plaintiffs contend that these rulings were in error. This appeal thus presents two issues of first impression for this Circuit:²

(1) Whether Congress intended variable annuities to be a "covered security" under SLUSA, and thereby preempt class actions based on state law that allege fraud in the sale of such instruments.

(2) Whether the McCarran-Ferguson Act precludes the application of the preemptive provisions of SLUSA to variable annuities.

Because we conclude that variable annuities are "covered securities" as defined by SLUSA and that, in the circumstances presented here, the McCarran-Ferguson Act, ch. 20, 59 Stat. 33 (1945) (codified as amended at 15 U.S.C. § 1011 et seq.), does not alter the normal rules of preemption, the District Court properly refused to remand the case to Connecticut state court and properly dismissed the case pursuant to SLUSA's directive that all such class actions be based exclusively on federal law. Accordingly, we affirm the judgment of the District Court.

FACTUAL BACKGROUND

The named plaintiffs sue on behalf of a class of individuals who purchased variable annuity policies from Hartford Life in connection with a tax-qualified investment plan, such as an Individual Retirement Account ("IRA") or 401(k) plan.

An annuity is a contract between a seller (usually an insurance company) and a buyer (usually an individual, also referred to as the "annuitant") whereby the annuitant purchases the right to receive a stream of periodic payments to be paid either for a fixed term or for the life of the purchaser or other designated beneficiary. For traditional or "fixed" annuities, the stream of payments begins immediately or soon after the contract is purchased. The contract will specify the amount of interest that will be credited to the annuitant's account as well as the amount of payments to be received under the contract. See Joan E. Boros & W. Randolph Thompson, A Vocabulary of Variable Insurance Products, 813 PLI/Comm 11, 15-16 (2001). Fixed annuities are typically thought of as insurance products because the annuitant receives a guaranteed stream of income for life, and the insurer assumes and spreads the "mortality risk" of the annuity-the risk that the annuitant will live longer than expected, thereby receiving benefits that exceed the amount paid to the seller of the policy. Id. at 20.

Variable or deferred annuities differ in that the stream of payments that the annuitant receives does not immediately commence upon purchase of the contract. Instead, the purchaser of a variable annuity will make either a single payment or series of payments to the seller, who will then invest this principal in various securities, usually mutual funds or other investments. See id. The annuitant typically controls how the principal is invested, choosing from a set of portfolios according to the annuitant's investment strategy. During the accumulation phase of the annuity-from the time the policy is purchased to the time it begins to pay out-the value of the annuity will rise or fall depending on the performance of the underlying securities in which the annuitant's principal is invested. See SEC, Variable Annuities: What You Should Know, http://www.sec.gov/investors/pubs /varannty.htm (May 22, 2001) ("SEC, Variable Annuities"). After a defined number of years the policy will reach its maturity date and begin to pay benefits to the annuitant, known as the "payout" phase. The annuitant is not guaranteed a certain level of benefits under the policy, instead, the payment amount will vary depending upon the value of the portfolio upon maturity and the annuitant's life expectancy. See id.

Variable annuities are typically characterized as "hybrid products," possessing characteristics of both insurance products and investment securities. See Boros & Thompson, supra, at 28. For example, by providing periodic payments that will continue for the life of the annuitant, variable annuities provide a hedge against the possibility that an individual will outlive his or her assets after retirement, thereby making the policies similar to insurance contracts. See SEC, Variable Annuities. In addition, most variable annuity contracts contain a death benefit whereby the beneficiary of the policy will receive a specified amount if the annuitant dies before the payout period begins. See id. Finally, like fixed annuities, the insurer assumes and pools the risk of policyholders outliving the expected term of the annuity. But at the same time, variable annuities possess characteristics akin to those of investment securities. Most notably, unlike the beneficiary of a fixed annuity, the variable annuitant bears the investment risk of the underlying securities. See id. Because the amount of benefits paid to the annuitant under the contract is not fixed, but will vary depending on the performance of the investment portfolio, many consumers use variable annuities as a tool for accumulating greater retirement funds through market speculation. Variable annuities must be registered with the SEC as securities under the Securities Act of 1933, codified at 15 U.S.C. § 77a et seq. See SEC v. Variable Annuity Life Ins. Co., 359 U.S. 65, 69-73 (1959). While variable annuities are primarily sold by insurance companies, the policies must be offered through "separate accounts."³ These separate accounts must be registered with the SEC as investment companies under the Investment Company Act of 1940, codified at 15 U.S.C. § 80a-1 et seq. See Prudential Ins. Co. of Am. v. SEC, 326 F.2d 383 (3d Cir.), cert. denied, 377 U.S. 953 (1964).

Under the Internal Revenue Code, funds placed in variable annuity contracts receive preferred tax treatment, and are taxed only when the annuitant begins to draw them from the account. See, e.g., 26 U.S.C. § 72. During the accumulation phase of the investment, gains derived from appreciation of the assets are not taxed. It is only during the payout phase when money is withdrawn from the policy that the income to the policyholder or beneficiary is taxed. See SEC, Variable Annuities. This tax treatment provides variable annuities with a valuable advantage over "straight" investment products such as mutual funds or other equities. The tax advantage of variable annuities, however, will not be realized if the funds used to purchase the policy are already tax deferred. See id. In other words, if funds set aside through a tax deferred...