Rivera v. Allianz Life Ins. Co. of Am., No. 2:10-cv-2266-RLH-GWF, 2011 WL 2976839 (D. Nev. June 28, 2011).

A District Court in Nevada held that in order for the “securities exception” to apply, the class action must “solely” involve a claim concerning a covered security or relate to a security and not merely tangentially relate to a security.  (Editors’ Note:  The order on the motion to dismiss has lots of factual information.  If you want to read it, click here.)

The plaintiffs brought a class action in state court alleging that the language in the Statement of Understanding (“SOU”) and language in the Policy contract issued by the defendants while buying equity index annuity (not variable annuities) was contradictory and fraudulent. (Like you know the difference between equity index annuities and variable annuities anyway.)

Three plaintiffs applied for an Allianz Life MasterDex 10 equity index annuity through their independent insurance agent. At the time of the applications, and before they were submitted, each plaintiff was given a SOU. The annuities were later issued by the defendant, Allianz Life Insurance Company of North America. The defendant AFLS is a subsidiary of Allianz and functions as a registered wholesale broker/dealer with the SEC.

The MasterDex 10 is designed to provide policyholders with a defined stream of income payments for a minimum of ten years after accumulating value for a minimum of five years. Although MasterDex 10 policy holders benefit from market increase, annuity premiums and accumulated value are not invested directly in any equity market or individual security.  Rather, account values accrue based upon a formula tied to the performance of the S&P 500 or the NASDAZ100 equity indices, as calculated monthly.  The MasterDex 10 allows policyholders to benefit from market increases while being insulated from market downturns.  That is, if the sum of the Monthly Index Rates is positive, the value is increased accordingly, but if the Monthly Index Rates is negative (i.e., when the sum of the Monthly Index Rates is negative–when the market is in decline) the annuity simply does not increase; it is not reduced in value.

The plaintiffs contended that the SOU was part of the Policy contract, or part of the application for the Policy.  The defendants contended that the SOU was clearly a summary of the policy provided to a potential applicant to assist the applicant in understanding the Policy and part of neither the application nor the Policy. The SOU says, “We Allianz Life capture the current value of the market index on the date you purchased your contract, as well as on each contract’s “monthiversary.” So if your contract is dated the seventh of the month, for example, your monthiversary will be the seventh day of every succeeding month throughout the life of the contract.” Under SOU, monthly returns are calculated in two steps.  First, the change from the previous month’s index value to the current month’s index value is divided by the previous month’s index value.  Second, this amount is then multiplied by the participation rate.

The Policy contract says, “the Initial Index Value is the value of the Index at the end of the Last Business Day before the start of a Monthly Term.”

Okay, ready for the CAFA part? Thanks for sticking with us. Here it comes.

The plaintiffs asserted six causes of action based on the same alleged misconduct: breach of contract; breach of the covenant of good faith and fair dealing; consumer fraud in violation of the Nevada Deceptive Trade Practices Act; unjust enrichment; accounting; and declaratory relief.

The defendants removed the action to the federal court, and the plaintiffs moved to remand arguing that there was no diversity, and that “securities exception” to CAFA under CAFA, 28 U.S.C. §1332(d)(9)(C) applied. 

The District Court denied the plaintiffs’ motion.

First, the Court found that Allianz Life is an out of state limited liability company. The fact that Allianz is authorized and doing business in Nevada does not establish residency in Nevada for the purpose of destroying diversity, the Court remarked.  

Next, the Court observed that the securities exception did not apply here by any reasonable reading of the statutory language.  First, in order for the exception to apply, the class action must “solely” involve a claim concerning a covered security or relate to a security.  The exception applies only to suits that seek to enforce terms of security instruments; state-law consumer fraud action does not fall within this exception.  It is not enough for a suit to merely tangentially relate to a security; the terms of the security must provide the basis for the claim.  There were multiple claims asserted here, none of which claimed the involvement of securities, except as to the effect of a stock index; thus, the Court concluded that this case clearly did not meet the criteria for the exception.

Accordingly, the Court declined to remand the action to state court.