Waddell & Reed Financial, Inc. v. Torchmark Corp.
| Decision Date | 20 November 2003 |
| Docket Number | No. CIV.A. 01-2372-KHV.,CIV.A. 01-2372-KHV. |
| Citation | 292 F.Supp.2d 1270 |
| 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 |
James D. Griffin, Stephen J. Torline, Blackwell, Sanders, Peper, Martin, LLP, Kansas City, MO, L. Steven Grasz, Megan Sebastian Wright, Nicole B. Theophilus, Thomas H. Dahlk, Trenten P. Bausch, Blackwell, Sanders, Peper, Martin, LLP, Omaha, NE, for Plaintiffs.
Betsy Palmer Collins, Alston & Bird, Atlanta, GA, Brenda Ranee Mesker, Matthew C. Miller, Scott C. Nehrbass, William R. Sampson, Shook, Hardy & Bacon, L.L.P., Overland Park, KS, Hobart A. McWhorter, Jr., James W. Gewin, Michael R. Pennington, Bradley, Arant, Rose & White, LLP, Birmingham, AL, William J. Baxley, Baxley, Dillard, Dauphin & McKnight, Birmingham, AL, for Defendants.
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 Defendants' Motion For Partial Dismissal Of Plaintiffs' Amended Complaint (Doc. # 124) filed June 27, 2003. For reasons stated below, defendants' motion is overruled.
Plaintiff's amended complaint alleges the following facts:1
Before November of 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. 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 of 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 of 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. 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.2 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 UILIC 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 blanket restriction.
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 UILIC's terms, Torchmark would terminate W & R Investment as investment adviser for Torchmark accounts and institute legal action. The parties did not reach further agreement, so on May 3, 2000, UILIC sued W & R in the Circuit Court of Jefferson County, Alabama. UILIC also sued W & R Financial, Waddell & Reed Financial Services, Inc., Waddell & Reed Insurance Agency, Inc., and Waddell & Reed Insurance Agency of Alabama, Inc. in that case.3 For ease of reference, the Court collectively refers to all such defendants as the "Alabama Defendants." UILIC asserted claims for breach of contract, conversion and tortious interference with the contractual relations between UILIC and its policyholders. UILIC alleged that the original underwriting agreement between UILIC and W & R was controlling and that W & R could not withhold funds based on the Letter Agreement. UILIC also alleged that W & R had wrongfully replaced and threatened to replace its business with products by other insurance companies.4
Meanwhile, on May 24, 2000, the Alabama Defendants filed their answer and counterclaims against UILIC, joining Torchmark and Richey as third-party defendants to their counterclaims. The counterclaims asserted fraudulent inducement, fraudulent suppression, breach of fiduciary duty, tortious interference with business relations, breach of contract, estoppel and unjust enrichment.5
Beginning in January of 2001, W & R and their investment advisors began to replace UILIC policies with policies issued by Nationwide Insurance Company ("Nationwide"). On March 1, 2001, UILIC filed a second amended complaint in the Alabama litigation. On March 8, 2001, W & R and W & R Financial filed an answer and counterclaims and again included counterclaims against Richey and Torchmark. In the counterclaims, in addition to acts which they had asserted in their initial counterclaims, W & R and W & R Financial alleged certain facts pertaining to events that had occurred after the filing of their initial counterclaims in May of 2000. In particular, W & R and W & R Financial alleged that (1) Torchmark and its affiliates terminated W & R Investment as the investment adviser for Torchmark's general account assets and pension plan assets; (2) beginning in May of 2000 when UILIC filed suit in Alabama, UILIC introduced USA products which competed directly with the products which W & R distributed; (3) UILIC structured the USA products (including credits for certain transaction costs) so that they would be attractive replacements for UILIC products which W & R distributed;6 and (4) UILIC never allowed W & R to distribute USA products. W & R and W & R Financial also alleged that based on Richey's breach of fiduciary duty to W & R Financial, UILIC had negotiated in bad faith with W & R to delay legal action until UILIC could file suit in Alabama and bring USA products to market in May of 2000. See id. ¶ 75. W & R and W & R Financial also alleged that Torchmark and Richey had intentionally interfered with various contractual relations between W & R and UILIC by (1) refusing to give W & R Financial a limited power of attorney to obtain a private letter ruling from the IRS to facilitate recapitalization of its stock, unless W & R altered its arrangement with UILIC; (2) threatening to terminate W & R Investment as investment adviser for Torchmark general account assets and pension plan assets and executing that threat in September 2000; and (3) threatening to institute legal action against W & R and carrying out that threat in May 2000. UILIC, Torchmark and Richey never responded to these counterclaims.
On April 5, 2001, the Alabama court granted partial summary judgment in favor of UILIC, ruling that UILIC had the right to terminate the PUA on 60 days' notice. In terminating the PUA,...
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