Herndon v. Equitable Variable Life Insurance Company

[PUBLISH]

IN THE UNITED STATES COURT OF APPEALS

FOR THE ELEVENTH CIRCUIT FILED
________________________
U.S. COURT OF APPEALS
ELEVENTH CIRCUIT
No. 02-15358 MARCH 28, 2003
Non-Argument Calendar THOMAS K. KAHN
________________________ CLERK

D. C. Docket No. 02-00073-CV-4

THOMAS R. HERNDON,
Individually, and on behalf of others similarly situated,

Plaintiff-Appellant,

versus

EQUITABLE VARIABLE LIFE INSURANCE COMPANY,

Defendant-Appellee.

________________________

Appeal from the United States District Court
for the Southern District of Georgia
_________________________
(March 28, 2003)

Before TJOFLAT, BIRCH and RONEY Circuit Judges.

PER CURIAM:

The issue on this appeal is whether a variable life insurance policy is a

“covered security” under the Securities Litigation Uniform Standards Act of 1998
(“SLUSA”), 15 U.S.C. §§ 77p(c), 78bb(f) and 28 U.S.C. §§ 1331, 1367, 1441, and

1446, a question of first impression in this Circuit. Plaintiff Thomas R. Herndon filed

in state court an eleven-count class action complaint against Equitable Variable Life

Insurance Company (“Equitable”), alleging various Georgia state law claims arising

from the sale of a variable life insurance policy. Upon removal to federal court by

Equitable, the district court held that the policy was a “covered security” and

dismissed with prejudice on the ground that SLUSA (1) makes federal courts the

exclusive venue for class actions alleging state law claims in connection with the sale

of “covered securities,” (2) provides for removal of such state class actions to federal

court, and (3) requires federal courts to dismiss such lawsuits. Herndon appeals.

Neither party requested oral argument, and we agree that oral argument would not be

useful in the decisional process.

We hold that the district court correctly held that a variable life insurance

policy is a “covered security” under SLUSA and that the state law claims were “in

connection with the purchase or sale” thereof. We therefore AFFIRM the dismissal

of the removed complaint, with prejudice, there being no question that it met the

statutory requirements for dismissal.

In 1996, Brent J. Savage purchased from Equitable a variable life insurance

policy insuring his fifteen year old son. On the application, Savage indicated that his

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son had neither smoked nor used any other tobacco products for the previous twelve

months. Savage later assigned that policy to the plaintiff, Thomas R. Herndon, who

then, through Savage’s law firm, filed a class action lawsuit in Georgia state court.

Although we do not address the merits of Herndon’s claim, the lawsuit alleged

that Equitable deliberately mis-designated Savage’s son, as well as a putative class

of other insureds, as a tobacco user so that it could charge higher premiums.

Equitable answered that the policy’s Prospectus clearly disclosed that the premiums

for insureds under the age of twenty, such as Savage’s son, were set without reference

to whether the insured used tobacco. As such, Equitable argued, there was never a

misrepresentation.

Congress passed SLUSA with the intent to make federal court the exclusive

venue for class actions alleging state fraud claims in the sale of “covered securities.”

Congress accomplished this goal by providing for the removal of state class action

lawsuits to federal court, and requiring federal courts to dismiss those lawsuits that

meet certain statutory requirements. See Riley v. Merrill Lynch, Pierce, Fenner &

Smith, Inc., 292 F.3d 1334, 1341 (11th Cir. 2002). The Riley opinion summarized

SLUSA’s requirements:

Under SLUSA, the removing party must show that (1) the
suit is a “covered class action,” (2) the plaintiffs’ claims are
based on state law, (3) one or more “covered securities”

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 has been purchased or sold, and (4) the defendant
misrepresented or omitted a material fact “in connection
with the purchase or sale of such security.”

Id. at 1342. Once the factors have been shown by the removing party, the case

requires immediate dismissal.

Herndon concedes this is a “covered class action” based on state law claims but

argues that (1) a variable life insurance policy is not a “covered security” under

SLUSA, and (2) the misrepresentations and omissions in dispute were not made “in

connection with the purchase or sale of such a security.” Herndon also argues that

the district court improperly dismissed his case in its entirety rather than dismissing

only the class action components.

(1) A variable life insurance policy is a “covered security” under SLUSA.

SLUSA defines a “covered security” as “a security issued by an investment

company that is registered, or that has filed a registration statement, under the

Investment Company Act of 1940.” 15 U.S.C. § 77r(b)(2). The Supreme Court has

held that a “variable annuity” is a “security” that is required to be registered with the

Securities and Exchange Commission (“SEC”) under the Securities Act of 1933,

codified at 15 U.S.C. § 77a. See Securities & Exch. Comm’n v. Variable Annuity Life

Ins. Co. of Am., 359 U.S. 65, 69-73 (1959). The Supreme Court has not yet decided

whether a variable life insurance policy is a “covered security” under SLUSA.

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 The question here is whether a variable life insurance policy is a “covered

security” under SLUSA, an issue not previously decided by this Court but eloquently

answered in the affirmative by the district court. See Herndon v. Equitable Life

Assurance Soc’y, ___ F. Supp.2d ___ (S.D. Ga. 2002). Other district courts are in

accord with the district court’s decision. See Araujo v. John Hancock Life Ins. Co.,

206 F. Supp.2d 377, 382 (E.D. N.Y. 2002); In re Lutheran Bhd. Variable Ins. Prod.

Co. Sales, 105 F. Supp.2d 1037, 1040 (D. Minn. 2000); Lasley v. New England

Variable Life Ins. Co., 126 F. Supp.2d 1236, 1239 (N.D. Cal. 1999).

Several circuits have tangentially decided the issue, holding that variable

annuities, without the life insurance component presented in this case, are covered

securities under SLUSA. See Dudek v. Prudential Sec., Inc., 295 F.3d 875, 878 (8th

Cir. 2002); Patenaude v. Equitable Life Assurance Soc’y, 290 F.3d 1020, 1024 (9th

Cir. 2002); Lander v. Hartford Life & Annuity Ins. Co., 251 F.3d 101 (2d Cir. 2001).

In Lander, for example, the Second Circuit held that variable annuities, by

themselves, are “covered securities” under SLUSA because they are “securities” and

their sub-accounts are registered with the SEC under the Investment Company Act.

Id. at 109. The key distinction, as argued by Appellant, is that this case, unlike

Lander and the cases from our other sister circuits, involves a variable annuity with

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a life insurance component. We find that distinction to be inconsequential to an

analysis of SLUSA’s definition of “covered security.” See 15 U.S.C. § 77r(b)(2).

Both Lander and this case involve insurance companies who issued a variable

annuity which was both required to be and was actually registered with the SEC.

Both the Lander defendant and Equitable were also required to and did register the

respective plaintiffs’ individual annuity accounts with the SEC pursuant to the

Investment Company Act of 1940. The fact that a variable life insurance policy

account adds a life insurance component to the investment does not negate the fact

that the statutory requirements of SLUSA have been met with regard to the annuity

component of the insurance policy. As such, a variable life insurance policy is a

“covered security” under SLUSA.

Herndon’s post-complaint reallocation of Savage’s premium payments to a

money market account is irrelevant. First, this Court is limited to reviewing

allegations concerning “the time during which it is alleged that the misrepresentation,

omission, or manipulative or deceptive conduct occurred . . ..” 15 U.S.C. § 77p(f)(3).

Second, in any event, at least one court has held money market mutual funds to be

covered securities under SLUSA. See Kenneth Rothschild Trust v. Morgan Stanley

Dean Witter, 199 F. Supp.2d 993, 1000 (C.D. Cal. 2002). We need not decide that

issue.

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(2) The misrepresentations and omissions in dispute were made “in
connection with” the purchase of such a security.

Herndon argues that the district court erred by determining that the alleged

misrepresentations and omissions in dispute were not made “in connection with” the

purchase or the sale of the variable life insurance policy to Savage. He argues that

the misrepresentations were made with respect to the sale of the type of insurance

policy (i.e., a policy for a non-smoker) and were “tangential” to the variable life

insurance contract. This Court has recently dismissed a similar argument on SLUSA

grounds, and we need not readdress it in this case. See Behlen v. Merrill Lynch, 311

F.3d 1087, 1094 (11th Cir. 2002) (rejecting argument that a broker’s increased fees

and commissions to an investor otherwise eligible for lower fees and commissions

were incidental to and not made “in connection with” the purchase or sale of

securities).

(3) The district court properly dismissed the case in its entirety rather
than dismissing only the class action components.

According to the record on appeal, Herndon made no argument in the district

court that it improperly dismissed the complaint in its “entirety.” This could foreclose

the issue. See Brown v. ITT Consumer Fin. Corp., 211 F.3d 1217, 1221 n.1 (11th Cir.

2000). In any event, Equitable properly points out that the amended complaint

alleges only a class action, and does not allege an individual claim.

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 The district court’s grant of Equitable’s motion to dismiss based on SLUSA’s

preemption of the Georgia state law claims was proper.

AFFIRMED.

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