Waddekk & Reed Financial, Inc. V. Torchmark Corp.

• Decision Date: 04 February 2003
• Docket Number: Civil Action No. 01-2372-KHV.
• Citation: 243 F.Supp.2d 1232
• Parties: WADDELL & REED FINANCIAL, INC., Waddell & Reed, Inc., and Waddell & Reed Investment Management Company, Plaintiffs, v. TORCHMARK CORPORATION, Ronald K. Richey, Harold T. McCormick, and Louis T. Hagopian, Defendants.
• Court: U.S. District Court — District of Kansas

243 F.Supp.2d 1232

WADDELL & REED FINANCIAL, INC., Waddell & Reed, Inc., and Waddell & Reed Investment Management Company, Plaintiffs, v. TORCHMARK CORPORATION, Ronald K. Richey, Harold T. McCormick, and Louis T. Hagopian, Defendants.

Civil Action No. 01-2372-KHV.

United States District Court, D. Kansas.

February 4, 2003.

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COPYRIGHT MATERIAL OMITTED

James D. Griffin, Stephen J. Torline, Blackwell, Sanders, Peper, Martin, LLP, Kansas City, MO, Angel D. Mitchell, Kansas City, KS, Thomas H. Dahlk, Megan Sebastian Wright, Trenton P. Bausch, Nicole T. Bock, Thomas H. Dahlk, Steven Grasz, Mefan Sebastian Wright, Blackwell, Sanders, Peper, Martin, LLP, Omaha, NE, for Plaintiffs.

William R. Sampson, Scott C. Nehrbass, Matthew C. Miller, Brenda, Ranee, Mesker, Shook, Hardy & Bacon L.L.P., Overland Park, KS, Hobart A. McWhorter, Jr. James W. Gewin, Michael R. Pennington, Bradley, Arant, Rose & White, LLP, Betsy Palmer Collins, William J. Baxley, Betsy Palmer Collins, Baxley, Dillard, Dauphin & McKnight, Birmingham, AL, for Defendants.

MEMORANDUM AND ORDER

VRATIL, District Judge.

Plaintiffs have filed suit against Torchmark Corporation ("Torchmark") and Ronald K. Richey, Harold T. McCormick and Louis T. Hagopian. Torchmark is the former corporate parent of Waddell & Reed, Inc. The individual defendants are former common directors of Torchmark and Waddell & Reed Financial, Inc. Plaintiffs seek to recover under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq., and assert Kansas common law claims for breach of fiduciary duty, knowing participation in breach of fiduciary duty, and interference with prospective business relations. This matter is before the Court on Defendant Torchmark Corporation's And Defendant Ronald K. Richey's Motion For Summary Judgment (Doc. # 52) filed March 6, 2002. For reasons stated below, defendants' motion is sustained as to the claims of Waddell & Reed, Inc. and Waddell & Reed Financial, Inc. The motion is otherwise overruled.

Summary Judgment Standards

Summary judgment is appropriate if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law. See Fed.R.Civ.P. 56(c); accord Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); Vitkus v. Beatrice Co., 11 F.3d 1535, 1538-39 (10th Cir.1993). A factual dispute is "material" only if it "might affect the outcome of the suit under the governing law." Anderson, 477 U.S. at 248, 106 S.Ct. 2505. A "genuine" factual dispute requires more than a mere scintilla of evidence. Id. at 252, 106 S.Ct. 2505.

The moving party bears the initial burden of showing the absence of any genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Hicks v. City of Watonga, 942 F.2d 737, 743 (10th Cir.1991). Once the moving party meets its burden, the burden shifts to the nonmoving party to demonstrate that genuine issues remain for trial "as to those dispositive matters for which it carries the burden of proof." Applied Genetics Int'l, Inc. v. First Affiliated Sec, Inc., 912 F.2d 1238, 1241 (10th Cir.1990); see also Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586-87, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986); Bacchus Indus., Inc. v. Arvin Indus., Inc., 939 F.2d 887, 891 (10th Cir.1991). The nonmoving party may not rest on its pleadings but must set forth specific facts. Applied Genetics, 912 F.2d at 1241.

"[W]e must view the record in a light most favorable to the parties opposing the motion for summary judgment." Deepwater Invs., Ltd. v. Jackson Hole Ski Corp., 938 F.2d 1105, 1110 (10th Cir.1991). Summary judgment may be granted if the nonmoving party's evidence is merely colorable or is not significantly probative. Anderson, 477 U.S. at 250-51, 106 S.Ct. 2505. "In a response to a motion for summary judgment, a party cannot rely on ignorance of facts, on speculation, or on suspicion, and may not escape summary judgment in the mere hope that something will turn up at trial." Conaway v. Smith, 853 F.2d 789, 794 (10th Cir.1988). Essentially, the inquiry is "whether the evidence presents a sufficient disagreement to require submission to the jury or whether it is so one-sided that one party must prevail as a matter of law." Anderson, 477 U.S. at 251-52,106 S.Ct. 2505.

Factual Background

For purposes of defendants' motion for summary judgment, the following facts are uncontroverted, deemed admitted or, where disputed, viewed in the light most favorable to plaintiffs.

Before November 1998, Waddell & Reed, Inc. ("W & R") and United Investors Life Insurance Company ("UILIC") were wholly-owned subsidiaries of Torchmark. UILIC issued variable insurance products which W & R distributed and underwrote.¹ Before March 4, 1998, individual defendant Ronald K. Richey was chief executive officer and chairman of the board of Torchmark. Co-defendants Harold T. McCormick and Louis T. Hagopian were directors of Torchmark.

In November 1998, Torchmark spun off W & R. W & R is now a separate and independent company which markets insurance and annuity products. Waddell & Reed Financial, Inc. ("W & R Financial") is now the parent corporation of W & R, and Waddell & Reed Investment Management Company ("W & R Investment") is now a subsidiary of W & R. After the spin off, Torchmark and its former parent corporation, W & R Financial, shared seven directors including Richey, McCormick and Hagopian.

Before the spin off, UILIC compensated W & R for its distribution and underwriting services under a compensation schedule which had been established in 1990 under a principal underwriting agreement ("PUA"). Immediately before the spin off, UILIC and W & R amended the PUA to provide that it would terminate on December 31, 1998, shortly after the spin off. UILIC and W & R had planned to execute a new contract which in part reflected the economic reality that the companies were no longer owned by the same parent corporation. The parties could not reach such an agreement by December 31, 1998, so they again amended the PUA to allow further negotiations in 1999. In early 1999, however, negotiations ceased, and W & R began evaluating proposals from other life insurance companies. In approximately May 1999, W & R and Security Benefit Life Insurance Company ("Security Benefit") agreed in principle to jointly develop and distribute variable life and annuity products beginning January 1, 2000.

On April 19, 1999, UILIC entered into a secret agreement with United Securities Alliance, Inc. ("USA") to develop a new variable product that USA (but not W & R) would distribute.² Around late June of 1999, to secure continued distribution of its products until USA products could be introduced, UILIC in bad faith resumed negotiations on a new agreement with W & R. On July 8, 1999, W & R and UILIC reached agreement with regard to compensation and product features effective January 1, 2000 (the "Letter Agreement"). Since August of 1999, the Waddell & Reed entities have characterized the agreement as binding, while UILIC and Torchmark have characterized the agreement as tentative. The Letter Agreement provided that in exchange for W & R's agreement to stop considering possible deals with other insurance companies (including Security Benefit) and to not replace existing UILIC policies, UILIC would pay a certain percentage on the assets of W & R's existing, in-force variable annuity book of UILIC business.³ The agreement also provided that UILIC and W & R would commit the necessary resources to design, create, implement and introduce competitive products and product features. Based on this agreement, W & R ceased negotiations with Security Benefit. Despite its belief that the Letter Agreement was binding, W & R also continued to negotiate with UIIC on a more formal agreement. During those negotiations, UILIC asked W & R to agree not to replace UILIC variable life insurance and annuity policies with policies issued by another insurance company. W & R refused to agree to such a provision.

In January of 2000, W & R began to withhold revenue which it was receiving from customers on UILIC business. Through its independent financial advisors, W & R also began distributing UILIC's new variable product, the Advantage Gold Variable Annuity. W & R maintains that UILIC did not object to the sale of its products or demand that W & R return any monies which it had received. UILIC did inquire about how W & R calculated its compensation, but it did not object after W & R explained the calculation method.

UILIC and W & R continued to negotiate the enforceability of the Letter Agreement and a possible restriction on W & R's ability to replace UILIC policies. During the negotiations, Torchmark threatened that if W & R did not agree to the terms proposed by UILIC, Torchmark would terminate W & R Investment as investment adviser for Torchmark accounts and institute legal action. The parties, however, did not reach further agreement. As a result, on May 3, 2000, UILIC sued W & R in the Circuit Court of Jefferson County, Alabama. See Alabama Complaint, attached as Exhibit 11 to Defendant Torchmark Corporation's And Defendant Ronald K. Richey's Motion For Summary Judgment (Doc. # 52) filed March 6, 2002 ("Defendants' Motion For Summary Judgment"). In that case, UILIC also sued W & R Financial, Waddell & Reed Financial Services, Inc., Waddell & Reed Insurance Agency, Inc., and Waddell & Reed Insurance Agency of Alabama, Inc. For ease of reference, the Court collectively refers to all such defendants as the "Alabama Defendants."⁴ UILIC asserted claims for breach of contract, conversion and tortious interference with the contractual relations between UILIC and its policyholders. UILIC...