Becher v. Northwestern Mut. Life Ins. Co., No. CV 10-6264 PSG AGRX, 2010 WL 5138910 (C.D. Cal. Dec 09, 2010).

A District Court in California remanded the case to the state court finding that the defendant’s unilateral change to the payment of dividends related to the internal affairs of the insurance company, hence, removal under CAFA was improper.

The plaintiff filed a class action lawsuit in California state court against the defendant, the Northwestern Mutual Life Insurance Company, a corporation based in Wisconsin. For a number years prior to 1985, the defendant, a mutual insurance company, offered annuities that gave the annuitant or policyholder the opportunity to benefit from the defendant’s profits and growth through the payment of annual dividends. The plaintiff brought this action alleging breach of contract and fiduciary duties since the defendant unilaterally changed the methodology for allocating payments under the annuities.

The defendant removed the action to federal District Court asserting diversity jurisdiction under CAFA. The plaintiff sought remand of the action to state court under the ‘internal affairs’ provision of CAFA. 

The District Court noted that the internal affairs provision of CAFA states that a federal court shall not have jurisdiction when the claims relate to the internal affairs of a corporation, and arises under or by virtue of the laws of the state of incorporation. The Court also noted that the Ninth Circuit has not addressed whether the removing party or the party seeking remand has the burden of showing that the internal affairs provision ‘does not’ or ‘does’ apply.

The Court next noted that the plaintiff asserted both breach of contract and breach of fiduciary duty claims based on the defendant’s improper payment of dividends under purchased annuities, and as such both were ‘related’ to the ‘internal affairs’ of the defendant. The Court observed that in State Farm Mut. Auto Ins. Co v. Superior Court, 114 Cal. App. 4th 434, 442 (Cal. Ct. App. 2003), a class of insurance policyholders sued State Farm, for breach of contract and breach of the covenant of good faith and fair dealing. Regarding the choice of law, the California Court of Appeals ultimately determined that because the breach of contract and other claims related to the declaration of dividends, it concerned ‘internal affairs’ of State Farm, therefore, Illinois law applied. 

As the plaintiffs in State Farm, the plaintiffs here contended that the class was allegedly entitled to receive dividends. After recognizing that the annuities were not as profitable as hoped, the defendant unilaterally and deceptively altered annuity payments owed by moving away from dividends in the form of ‘divisible surplus’ towards only the payment of the ‘interest earned’ on certain bonds. 

As the facts in this case were strikingly similar to those in State Farm, the Court concluded that the plaintiff’s claims related to the ‘internal affairs’ of the defendant. 

The Court also concluded that since the only claims in this case were the breach of contract and breach of fiduciary duties, and since those claims were related to the ‘internal affairs’ of the defendant, the Court would have to apply the substantive laws of the state of incorporation, which were the laws of Wisconsin.

The defendant, however, insisted that other states’ laws would apply to the claims in this case, and, therefore, CAFA’s ‘internal affairs’ provision did not apply. The defendant based this argument entirely on a Wisconsin state court’s determination in parallel litigation. In Noonan v. Northwestern Mut. Life Ins. Co., Appeal No. 2005 of AP 1653 (Wis. App. 2005), the trial court denied the plaintiffs’ motion to certify a class after determining that, based on Wisconsin’s choice of law rules, it was possible that other states’ laws may be applied and that a class action would be unmanageable. 

The Court remarked that in this case, the internal affairs doctrine requires the Court to apply Wisconsin law. And even though the Noonan court was wrestling with Wisconsin choice of law rules, those rules did not apply in this case; only Wisconsin substantive law did. Moreover, the Court found that even if Wisconsin substantive law incorporated the laws of other states, the claims in this case would nevertheless ‘arise under or by virtue of’ the Wisconsin law that incorporated those other laws. The Court found that the defendant’s reliance on Noonan was misplaced.

Accordingly, the Court concluded that this case related to the internal affairs of the defendant, and it granted the plaintiff’s motion to remand.