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Frank v. Teachers Ins. & Annuity Ass'n





APPEAL from the Circuit Court of Cook County; the Hon. SAMUEL EPSTEIN, Judge, presiding.


This is an interlocutory appeal under Supreme Court Rule 308 (Ill. Rev. Stat. 1973, ch. 110A, par. 308) raising the question of whether, in a suit brought on behalf of some 400,000 annuitants holding contracts with the defendant insurance companies, seeking reformation of those contracts so as to provide for a cash surrender value, due process requires that the named plaintiff notify absent class members of the pendency of the litigation. The trial court answered this question in the affirmative. We disagree, finding such notice to be unnecessary under the circumstances.


The defendants, Teachers Insurance and Annuity Association of America and its companion organization, College Retirement Equities Fund (hereinafter referred to as TIAA and CREF respectively), are nonprofit limited liability life insurers providing a nationwide retirement plan for employees of educational institutions and nonprofit research organizations. TIAA was organized in 1918 to serve as a replacement for the free pension program which had failed under the Carnegie Foundation for the Advancement of Teaching. CREF was established by a special act of the New York Legislature in 1952. Employee contributions, matched or exceeded by employers, now fund the purchase of annuity contracts. Presently, approximately 500,000 individuals, employed at 2,375 educational institutions, hold contracts having an aggregate accumulation of about $5 billion.

In April 1957, the plaintiff, Dr. Minnie Frank, employed as an associate professor of pediatrics at Chicago Medical School, purchased retirement annuity contracts from TIAA and CREF. These contracts were to provide lifetime retirement annuities to the plaintiff commencing in July 1986, or at any earlier date the plaintiff chose, but the language of the contracts specifically indicated that no provision was made for a cash surrender value.

From April 1957 to March 1961, Dr. Frank made premium payments totaling $976.06 to TIAA and $976.06 to CREF, which were matched by her employer. After this, however, neither Dr. Frank nor her employer made any further payments, and she was informed that her contracts were being placed on a paid-up basis. In late 1964, Dr. Frank left the employ of Chicago Medical School.

In June 1966, Dr. Frank's husband, Marvin Lustgarten, acting as her attorney, wrote the defendants asking for advice as to the terms under which the annuity contracts could be reduced to their cash value. In a letter the defendants replied that because of the overall structure of the TIAA-CREF retirement plan, it would not be actuarially sound to permit annuitants to surrender their contract benefits for cash or borrow upon them from TIAA-CREF. About two months later, Mr. Lustgarten again wrote the defendants, asking whether there were any circumstances under which they would pay the cash value of the annuity contracts in a lump sum. In response to this, the defendants sent him their circular, "Repurchase of Retirement Annuities," detailing certain limited circumstances in which it was the policy of TIAA-CREF to waive the "no cash surrender" provisions of an annuity contract and "repurchase" it for a cash lump sum. The conditions for repurchase specified were essentially that the annuitant no longer be employed by a participating institution, that his contract either be no more than 5 years in force or have a "repurchase value," as defined in the circular, of no more than $2,000, and that institutions having contributed toward his annuity consent to the repurchase. Accordingly, the defendants declined to repurchase the plaintiff's annuity contract since it had been in force for more than five years and had a repurchase value well in excess of $2,000.

After some further communication with the defendants, Mr. Lustgarten, on behalf of his wife as the named plaintiff, filed this class action in February 1972 seeking reformation of the TIAA-CREF annuity contracts so as to provide for a right in all annuitants to surrender their contracts before maturity for cash value. Plaintiff's original complaint sought relief on behalf of all persons "similarly situated," charging that the defendants, by their practices regarding the repurchase of certain annuity contracts were allowing improper modification of those contracts at the whim of third parties, namely those in a position to give the consent of contributing employer institutions, and were themselves pursuing a discriminatory policy in permitting only certain favored annuitants or "corporate insiders" to obtain the cash value of their contracts. Although not explicitly alleged, it is clear that the plaintiff felt these actions to be in violation of certain provisions of the New York Insurance Code. *fn1

In response to the defendants' subsequent motion to strike the complaint, the trial court made various findings of law and fact. Basically, these were (1) that because of their conflicting interests in the maintenance of the defendants' repurchase restrictions, those annuitants who qualified under the restrictions and those annuitants, including the plaintiff, who did not each constituted a separate "class", and that accordingly, the plaintiff could only represent the class of those who did not so qualify, (2) that as regards those annuitants who qualified under the repurchase restrictions, there was no illegal discrimination, since section 209 of the New York Insurance Code forbids only discrimination among the members of the same "class", and further that the repurchasing practices of the defendants did not amount to a "contract or agreement" outside of the express terms of the writing so as to violate section 211, but rather simply constituted a voluntary and retractable offer by the insurer of a benefit or concession to the insured, which could be properly made on a nondiscriminatory basis and under such conditions as the insurer saw fit, and (3) that with regard to those annuitants who did not qualify under the repurchase restrictions, the complaint alleged a secret program of discriminatory repurchasing in favor of certain "privileged insiders" only.

In her second amended complaint, again seeking reformation of the contracts but only on behalf of those who did not qualify under the repurchase restrictions, the plaintiff more explicitly set forth a number of ways in which the defendants' policies and practices allegedly violated section 209 and section 211 of the New York Insurance Code. First, it was alleged that by their active, written misrepresentations, both in the language of the contracts and in the letter with which they would routinely respond to inquiries regarding surrender for cash, the defendants had caused annuitants to "sleep on their rights" to surrender their contracts for cash under the provisions of "Repurchase of Retirement Annuities" until such rights had ceased to exist. Secondly, it was alleged that the repurchase restrictions set forth in that circular were in themselves an unfair discrimination among annuitants of the same class. Finally, certain allegations essentially equivalent to those made in the original complaint were restated. These were that there was discrimination in favor of certain corporate insiders regardless of their status under the repurchase restrictions, that the repurchase plan constituted a contract or agreement outside of the written contract, and that the repurchase of annuity contracts amounted to a benefit or consideration given to annuitants yet not recited in the written contracts.

In response to plaintiff's second amended complaint, the defendants filed an amended answer together with a motion to strike and dismiss or in the alternative to order notice to absent class members. Two principal lines of defense were raised in the motion to strike and dismiss and repeated as affirmative defenses in the amended answer. The first of these was that all of plaintiff's theories had either been disposed of by the trial court's earlier findings or were offered wholly without factual support. We believe that the allegations of the second amended complaint concerning an agreement external to the written contract and the giving of unrecited consideration were expressly precluded by the court's prior findings. Further, it would appear highly doubtful that given the trial court's view that all annuitants not qualifying under the repurchase restrictions constituted the plaintiff class, and that section 209 of the New York Insurance Code forbids only discrimination among the members of such a "class", *fn2 the plaintiff's allegations that the repurchase restrictions in themselves amount to an improper discrimination could be deemed to state a cause of action. However, since the trial court, in its order of February 10, 1975, denied the motion to strike and dismiss as untimely, and made no specific comments as to the "affirmative defense" that the plaintiff had failed to state a cause of action, we will concern ourselves with all those allegations of the second amended complaint not expressly precluded by the trial court's prior findings.

The second line of defense raised in the motion and answer was that a class action could not be maintained since the plaintiff did not adequately represent the class members. This the court rejected, finding in its order that all of the prerequisites of a class action, including the adequacy of representation, had been satisfied. *fn3

On the motion to order notice, however, the court ruled favorably, ordering that the plaintiff give individual written notice to all class members who could be identified, informing them of the pendency of the action, its nature, the fact that the terms of their annuity contracts might be altered, and the fact that they could choose to opt out of the action or, if they did not so choose, could intervene.

Finally, the court, on its own motion, joined by counsel for the plaintiff, found that, in accordance with Supreme Court Rule 308 (Ill. Rev. Stat. 1973, ch. 110A, par. 308), "* * * the portion of this order pertaining to the giving of notice is a substantial ground for * * * difference of opinion, and that an immediate appeal from this order will materially advance the ultimate termination of the litigation." The court then identified the crucial question of law as follows:

"Whether due process of law under the 14th Amendment of the United States Constitution and Article I, Section 2 of the Illinois Constitution, requires that Plaintiff in the case before this Court notify the absent members of the class of annuity contract holders whose contracts she seeks to have reformed of the pendency of this action.

This Court is of the opinion that due process of law, as interpreted by the United States Supreme Court in Eisen v. Carlisle & Jacquelin, 40 L.Ed.2d 732, decided May 28, 1974, and other cases, requires that Plaintiff, in the circumstances before this Court, inform the members of the class of contract holders she seeks to represent of the pendency of this action. Due process of law requires that these persons be given an opportunity to participate in or to withdraw from this lawsuit.

There is no statute nor rule in Illinois governing the question of notice to class members in a class action, and case law falls short of deciding the point. There is an over-powering need for resolution of the question by the Illinois courts> of review, so that the ultimate termination of this and similar other litigation may be materially advanced. Class actions will then be enabled to ...

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