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Investor
in Variable Annuity can Sue for Beach of Fiduciary Duty
An investor who allegedly lost money when defendant Allstate
Life Insurance Co. refused to transfer money between investment
alternatives in his variable annuity has stated a claim
for breach of fiduciary duty, the U.S. District Court for
the Northern District of Illinois ruled Oct. 22 in a case
under Illinois law (McDonnell v. Allstate Life Insurance
Co., N.D. Ill., 04 C 3076, 10/22/04).
However, the court dismissed the investor's claims for breach
of contract, breach of good faith and fair dealing, and
conversion for failure to state a claim on which relief
can be granted.
Flexibility
In an opinion by Judge Amy J. St. Eve, the court recounted
that in January 1998, plaintiff William McDonnell and Allstate
entered into a variable annuity contract. Allegedly, there
were no transfer restrictions under the original contract,
and McDonnell selected Allstate because of the flexibility
it afforded him in moving his money between various mutual
funds and a money market account. McDonnell invested approximately
$365,666 initially and more money later, the court stated.
It said that in December 2002, Allstate imposed a number
of restrictions, including a $50,000 cap on the amount an
investor could transfer in a single day to certain mutual
funds. In October 2003, Allstate again refused to allow
McDonnell to move his investment funds into a certain group
of investment alternatives, the court recited. Finally,
in January 2004, Allstate allegedly further restricted McDonnell's
ability to transfer money into another group of mutual funds.
In the lawsuit that followed, McDonnell claimed the restrictions
on his ability freely to transfer his funds violated his
variable annuity contract and resulted in lost profits.
He also contended that Allstate delayed for almost a month
in transferring most of his funds to another annuity product
controlled by Prudential Financial Co. During this time,
McDonnell claimed, the value of his annuity fell more than
$100,000.
Limited Circumstances
Allstate countered with a dismissal motion, which the court
granted in part. First, it said, under Illinois law, the
covenant of good faith and fair dealing is not an independent
source of duties for parties to a contract, except under
certain exceptions not applicable here. Similarly, it wrote,
"[t]he money at issue here does not fall within the
limited circumstances under which Illinois provides for
a claim for conversion."
In this connection, the court noted that according to McDonnell,
it took Allstate nearly a month to honor his request to
transfer most of the money in his variable annuity account
to another account. However, it wrote, McDonnell "does
not allege that during this one month period, Allstate converted
the money to its own use."
The court also observed that when McDonnell asked Allstate
to transfer his funds, "Allstate had the obligation
to transfer the money. Because an action for conversion
of funds may not be maintained to satisfy the mere obligation
to pay money, ... the Court grants Defendant's motion to
dismiss Count IV."
Fiduciary Duty
However, the court allowed McDonnell's claim for breach
of fiduciary duty to proceed. In so deciding, it noted that
under Illinois law, to state such a claim, a plaintiff must
show:
¥ the existence of a fiduciary duty;
¥ a breach of that duty; and
¥ damages proximately resulting from the breach.
According to the court, a fiduciary relationship may arise
as a matter of law from the parties' relationship, such
as that between a lawyer and client. It also may arise from
the facts of a particular situation??for example, "where
there is trust reposed on one side and resulting superiority
and influence on the other."
To determine whether a fiduciary duty exists in this case,
the court said it must look to the nature of the parties'
annuity contract. It said that contrary to Allstate's argument,
annuity contracts "are not ordinary insurance contracts
... because such contracts contain aspects of both securities
and insurance products."
More Than a Mere Party
In this case, it said, the parties' contract is a tax?deferred
variable annuity. In such an annuity, unlike a fixed deferred
annuity, the rate of return is not guaranteed. "Instead,
the purchaser invests in professionally managed investment
products, such as mutual funds, and receives a rate of return
contingent on the success of the underlying investments."
Such contracts must be registered under the 1933 Securities
Act, the court noted.
It concluded that based on the nature of the parties' contract,
"Allstate is more than a mere party to the contract.
Under Illinois law, brokers who receive fees or commissions
for executing investments transactions can serve as agents
to their customers, and thus have a fiduciary duty to their
customers that is limited to actions occurring within the
scope of their agency."
In this case, the court stated, McDonnell alleged that Allstate
failed to meet its responsibility to transfer funds between
various investment options at his request. He also claimed
this failure resulted in lost profits. Viewing the allegation
in the light most favorable to the plaintiff, the court
concluded that McDonnell sufficiently alleged a claim for
breach of fiduciary duty under Illinois law.
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