Antitrust Law Daily Wrap Up, RICO—9th Cir.: Annuity purchaser fails to allege actionable predicate acts, (Feb 25, 2015)

By Greg Hammond, J.D.

An index annuity purchaser failed to demonstrate that a life insurance company engaged in fraudulent schemes concerning premium bonuses; the application of the annuity’s market value adjustment; or the circumvention of state nonforfeiture laws. The U.S. Court of Appeals in San Francisco therefore affirmed an order by the federal district court in Tucson, awarding summary judgment in favor of the insurance company (Eller v. EquiTrust Life Insurance Co., February 24, 2015, Hurwitz, A.).

Background. Paul Harrington purchased an EquiTrust MarketPower Bonus Index Annuity from an insurance agency in 2007. The annuity included a “10% premium bonus,” which defendant EquiTrust Life Insurance Co. added to the accumulation value a sum equal to 10 percent of the premiums paid during the first year. Harrington filed a putative class action against EquiTrust, alleging that the company violated the Racketeer Influenced and Corrupt Organizations Act (RICO), as well as Arizona law. The district court granted EquiTrust’s motion for summary judgment, finding that Harrington failed to prove any actionable predicate acts. The court, however, did not award costs to EquiTrust. Harrington timely appealed the summary judgment, and EquiTrust timely appealed the denial of costs.

In support of his appeal, Harrington alleged three fraudulent schemes: (1) the promise of premium bonuses; (2) the applications of the Annuity’s market value adjustment; and (3) the circumvention of state nonforfeiture laws.

Premium bonus. Harrington first argued that the promise in the annuity of a “10% premium bonus” was fraudulent because EquiTrust failed to disclose that it does not invest any additional money in the market when crediting the bonus to an annuitant’s account. He also argued that the 10 percent bonus is illusory. The court rejected his arguments, however, finding that EquiTrust had no duty to disclose its pricing policies or method for valuing its products, because no fiduciary relationship or statutorily required disclosure was alleged. Further, the court found that EquiTrust delivered exactly what it promised—a 10 percent bonus that was accurately described and properly credited to Harrington’s accumulation value. The bonus was therefore not illusory.

Market value adjustment. Harrington next argued that the brochure failed to explain that the disclosed constant in the market value adjustment (MVA) formula decreased upward adjustments and increased downward ones, which was fraudulent. The district court properly rejected this argument, the court concluded, because EquiTrust “meticulously” explained the MVA and provided examples of how it operates in different circumstances, and EquiTrust never promised anything different.

Nonforfeiture law. In his final argument, Harrington asserts that the annuity effectively has an optional maturity date, which violates the model standard nonforfeiture law for individual deferred annuities, and is an attempt by EquiTrust to defraud Arizona regulators. Once again, the court rejected Harrington’s claim, finding that Harrington provided no authority for his proposition that an insurer’s willingness to consider providing relief on a case-by-case basis to its annuitants from the fixed-term provisions of an annuity contract mutates the annuity into one with an optional maturity date. Further, Harrington had no conceivable injury from EquiTrust’s internal policy, as the potential of relief from the annuity’s fixed maturity date can only add value to his annuity. The lower court’s order of summary judgment was therefore affirmed.

Costs. On appeal, EquiTrust argued that the lower court erred by not awarding costs to the prevailing party, pursuant to Federal Rule of Civil Procedure 54(d). While the district courts have discretion to decline an award of costs to the prevailing party, they must explain a denial, the appellate court noted. Because the district court in this case failed to explain why it denied an award of costs to EquiTrust, the appellate court vacated the order denying costs and remanded the case to allow the district court to award costs or state its reasons for denying them.

The case number is 12-17267.

Attorneys: Steve W. Berman (Hagens Berman Sobol Shapiro LLP) for Plaintiff-Appellant. Margaret A. Grignon (Reed Smith LLP) for Defendant-Appellee.

Companies: EquiTrust Life Insurance Co.

Cases: RICO AlaskaNews ArizonaNews CaliforniaNews HawaiiNews IdahoNews MontanaNews NevadaNews OregonNews WashingtonNews