United States District Court, S.D. New York
August 3, 2005.
FREDERICK WEBSTER, SR. and DAVID AVANT, on behalf of themselves and all others similarly situated, Plaintiffs,
NEW YORK LIFE INSURANCE AND ANNUITY CORPORATION, Defendant.
The opinion of the court was delivered by: NAOMI BUCHWALD, District Judge
MEMORANDUM AND ORDER
In March of 2005, defendant New York Life Insurance and Annuity
Company ("NYLIAC") removed this case from the Supreme Court of
the State of New York and moved to dismiss pursuant Fed R. Civ.
P. 12 (b) (1) on the grounds that plaintiff's claims are barred
by the Securities Litigation Uniform Standards Act of 1998
("SLUSA"). Shortly thereafter, Frederick Webster, Sr. ("Webster")
and David Avant ("Avant") (collectively, "plaintiffs") moved for
remand on the ground that their complaint alleges only state law
claims and diversity of citizenship is absent. Oral argument on
this motion was held on July 19, 2005. For the foregoing reasons,
we deny defendant's motion to dismiss and grant plaintiffs' motion to
In 1999 and 2001, plaintiffs purchased variable annuity
policies from defendant. On February 14, 2005,*fn1
plaintiffs filed a class action in the Supreme Court of the State
of New York alleging that defendant had breached their policies
by failing to pay a minimum guaranteed interest rate on their
Plaintiffs allege that they purchased NYLIAC annuity policies
using "Form 999-190." Complaint ¶ 17. Avant's complete policy and
application are attached as Part 1 of the appendix to defendant's
memorandum in support of its motion to dismiss. Page 2 of the
policy, titled "POLICY DATA," presents a variety of information,
including a list of "Allocation Alternatives," identifying
information for Avant, and the annuity's commencement date. Near
the bottom of the page is the following text: "MINIMUM GUARANTEED
INTEREST RATE: 3%." Plaintiffs allege that "[a]lthough the Policy
Data Page identifies multiple annuity accounts available to purchasers
under the contract . . . this minimum guaranteed interest rate
was not limited to any specific account or accounts." Complaint ¶
19. They argue that this phrase established a "minimum guaranteed
interest rate" that applied to the entire investment of investors
who purchased NLYIAC annuity policies using Form 999-190. Id. ¶
18. Plaintiffs are not arguing that NYLIAC was guaranteeing that
amounts invested in mutual funds would grow by a minimum of 3
percent; rather, they claim they were entitled to 3 percent
interest on the balance invested in those funds. Transcript of
Oral Argument at 24. Defendant argues that other language in the
contract established that the minimum rate applied only to the
portion of plaintiffs' money invested in the Fixed Account or the
Dollar Cost Averaging Program ("DCAP"). Def. Support Mem. at 4-6.
I. Applicable Law
In enacting the Private Securities Litigation Reform Act of
1995 ("PSLRA"), Congress imposed stringent pleading requirements and mandatory discovery stays for securities fraud
class actions filed in federal court in order to prevent
meritless securities fraud class actions, called "strike suits."
Spielman v. Merrill, Lynch, Pierce, Fenner, & Smith, Inc.,
332 F.3d 116, 122-23 (2d Cir. 2003). SLUSA, in turn, was enacted to
close a loophole by which claimants eluded the PSLRA's
restrictions by filing in state court alleging state securities
law claims. In re Worldcom, Inc. Securities Litigation,
308 F. Supp. 2d 236, 241-42 (S.D.N.Y. 2004) (quoting Spielman v.
Merrill Lynch, Pierce, Fenner & Smith, Inc., 332 F.3d 116, 123
(2d Cir. 2003).
SLUSA provides in relevant part 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
(1) an untrue statement or omission of a material
fact in connection with the purchase or sale of a
covered security; or
(2) that the defendant used or employed any
manipulative or deceptive device or contrivance in
connection with the purchase or sale of a covered
15 U.S.C. §§ 77p(b), 78bb (f) (1).
Through SLUSA, Congress intended to "provide national, uniform
standards for the securities markets and nationally marketed
securities." Lander v. Hartford Life & Annuity Ins. Co., 251 F.3d 101, 111 (2d Cir. 2001). The Second Circuit
[I]n enacting SLUSA, "Congress could not have spoken
more clearly" about its intention "to completely
preempt the field of certain types of securities
class actions by essentially converting a state law
claim into a federal claim and creating federal
jurisdiction and venue for specified types of state
securities fraud claims." Spielman, 322 F.3d at 123
(emphasis omitted). As we explained in Spielman,
complete preemption "manifests a [c]ongressional
policy determination that the `state law claim in
that area is of necessity so federal in character
that it arises under federal law.'" Id. at 123 n.
5. (quoting Cicio v. Does, 321 F.3d 83, 92 (2d Cir.
2003) (further internal quotation omitted)). It
therefore "provides in practice an exception to the
well-pleaded complaint rule," id., such that when
SLUSA's conditions have been satisfied, "the
plaintiff has necessarily invoked federal question
jurisdiction, even though he [or she] did not wish
to," and the court must dismiss for failure to state
a claim because SLUSA has preempted the state law
basis for the claim, id. at 131-32 (Newman, J.,
Dabit v. Merrill Lynch, Pierce, Fenner, & Smith, Inc.,
295 F.3d 25, 33-34 (2d Cir. 2005).
However, SLUSA has "broad, but not unlimited, scope."
Spielman, 332 F.3d at 123 (emphasis in original). To dismiss an
action under SLUSA, the defendant must show that "(1) the action
is a `covered class action' under SLUSA; (2) the action purports
to be based on state law; (3) the action involves a `covered
security' under SLUSA; (4) the defendant misrepresented or omitted a material fact or employed a deceptive
devise; (5) `in connection' with the purchase or sale of such
security." Araujo v. John Hancock Life Ins. Co.,
206 F. Supp. 2d at 380, 381 (E.D.N.Y. 2002) (citing 15 U.S.C. § 77p(b)).
Here, the parties disagree only about the fourth element.
Plaintiffs argue that their complaint does not allege any untrue
statement, omission of a material fact, or manipulative or
deceptive device or contrivance. Plaintiffs further contend that
their complaint merely alleges a breach of contract claim under
state law and so falls outside the scope of SLUSA. Defendant
counters that plaintiffs' complaint was "artfully drafted to
avoid the terms `misleading,' `misrepresentation,' `omission,'
`fraud,' `deception,' or `scheme.'" Def. Reply Mem. at 2. The
complaint, it argues, "effectively allege[s] misrepresentations
and omissions of material fact regarding the inapplicability of
the 3% minimum guaranteed interest rate to the Separate Account."
Def. Support Mem. at 11-12.
A party need not bring a claim for fraud in order to give rise
to SLUSA preemption. For example, in Korsinsky v. Salomon Smith
Barney Inc., the court explained that: The "master of the complaint" rule does not limit the
Court to the face of the complaint, however, or to
plaintiff's characterization of his claims. Still v.
DeBuono, 927 F. Supp. 125, 128 (S.D.N.Y. 1996). "In
certain limited circumstances, a federal court may
look behind the complaint to preclude a plaintiff
from defeating federal question jurisdiction through
`artful pleading,' that is, by disguising a federal
claim as a claim arising under state law." Bowlus v.
Alexander & Alexander Servs., Inc.,
659 F. Supp. 914, 918 (S.D.N.Y. 1987).
No. 01 Civ. 6085, 2002 WL 27775 at *2 (S.D.N.Y. Jan. 10, 2002).
In Korsinsky, the parties disagreed as to whether the action
involved a misrepresentation or omission, but while "the
complaint clearly state[d] that `[t]his is not an action for
fraud,' it outline[d] several instances of alleged
misrepresentations" made by the defendants. Id. at *4. The
court held that plaintiff's allegations "regarding an alleged
scheme by defendants to issue artificially positive ratings on
AT&T stock" constituted "material misrepresentations or omissions
regarding the value of the securities," and that the claims
alleged in the complaint therefore "f[e]ll under the purview of
SLUSA." Id. at *5-*6.
Similarly, in Araujo, the court held that a plaintiff could
not "plead what [were] in essence securities fraud claims even
though they [were] framed as state law claims." Araujo,
206 F. Supp. 2d at 384 (citing Korkinsky, 2002 WL 27775 at *4). The Araujo plaintiff had "dresse[d] his claims"
as breach of contract and unjust enrichment, but the "crux of the
. . . complaint" was a "scheme to charge policyholders premiums
under variable life insurance policies during `risk-free'
periods." Id. at 385. The court found that this alleged scheme
was a "misrepresentation of a material fact because it
concern[ed] the value of the policy" and that SLUSA therefore
applied to the complaint and prevented a class action based upon
state law. Id. at 385.
However, in Norman v. Salomon Smith Barney Inc.,
350 F. Supp. 2d 382 (S.D.N.Y. 2004), we see the outer boundary of SLUSA's
reach. The Norman plaintiffs were customers who had employed
the defendant for individual investment management services, and
sued for breach of contract and breach of fiduciary duties on the
grounds that defendant did not reveal that its research analysts'
recommendations were tainted by conflicts of interest. Judge
Lynch found that, "[r]egardless of the factual merits of these
claims, they are not securities fraud claims, nor claims that
depend on establishing material misrepresentations or omissions
in connection with the purchase or sale of securities, within the
meaning of SLUSA." Norman, 350 F. Supp. 2d at 387. Just as
"plaintiffs may not avoid SLUSA pre-emption simply by artful pleading that avoids the
actual words `misrepresentation' or `fraud,' neither may
defendants avoid every possible claim by recasting any lawsuit in
which a securities broker is a defendant into a securities fraud
action." Id. at 386 (citing MDCM Holdings Inc. v. Credit
Suisse First Boston, 216 F. Supp. 2d 251, 257 n. 12 (S.D.N.Y.
2002); Gray v. Seaboard Securities, Inc., 241 F. Supp. 2d 213,
219 (N.D.N.Y. 2003)).
Here, defendant argues that the complaint "effectively asserts
that the way in which the policy specifications were listed on
the Data Page misled Plaintiffs into concluding that guaranteed
interest was paid on the policy Separate Account values." Def.
Support Mem. at 13. According to defendant, plaintiffs' claim
relies on allegations that the Policy Data Page "misleads as to
the application of the minimum guaranteed interest rate," and
therefore amounts to an assertion that Policy Data Page was a
fraudulent and deceptive practice employed by defendant. Def.
Support Mem. at 12.
At oral argument, counsel for defendant contended that
plaintiff's complaint, properly understood, alleges a material
omission of the fact that the guaranteed interest rate on the
data policy page does not apply to the variable account values, or of
the omission that this was the defendant's interpretation of the
contract. Transcript of Oral Argument at 10, 15, 16, 28, 31. We
do not believe plaintiffs have in fact alleged any
misrepresentation by defendant. Unlike the cases upon which
defendant relies, such as Korkinsky and Araujo, plaintiffs
have not described any circumstances that constitute
misrepresentation. Defendant's argument is essentially an
assertion that "[y]ou have to assume in any lawsuit there's a
disputed truth, and if there's a disputed truth, then there is
either an untrue statement or there is an omission of a material
fact." Transcript of Oral Argument at 31. But while a contract
dispute commonly involves a "disputed truth" about the proper
interpretation of the terms of a contract, that does not mean one
party omitted a material fact by failing to anticipate, discover
and disabuse the other of its contrary interpretation of a term
in the contract. We decline to delve into the semantics of what
is a "fact." Instead we note that because the language of a
contract controls, rather than the parties' subjective intent,
parties to a contract must agree on the language to form a
contract, but do not need to disclose their interpretations of
that language in order to avoid charges of fraud.*fn2 Were we to endorse the
proposition that a disagreement over the application of words in
a contract is "effectively" a claim that the contract itself was
a deceptive practice, SLUSA would swallow up all of contract law.
In prosecuting their state law class action contract claim,
plaintiffs will not prevail by establishing that they did not
understand the terms of the contract. Instead, they will have to
establish that the terms of the contract support their
interpretation of the agreement. Thus, we find that SLUSA does
not apply to the plaintiffs' complaint. Dismissal under SLUSA is
therefore unwarranted, and remand to state court is required.
Therefore, for the reasons set forth above, defendant's motion
to dismiss is denied, and plaintiffs' motion to remand is
granted. SO ORDERED.