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Frank v. Teachers Ins. & Annuity Ass'n

OPINION FILED MAY 26, 1978.

MINNIE FRANK, APPELLEE,

v.

TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA ET AL., APPELLANTS.



Appeal from the Appellate Court for the First District; heard in that court on appeal from the Circuit Court of Cook County, the Hon. Samuel Epstein, Judge, presiding.

MR. JUSTICE UNDERWOOD DELIVERED THE OPINION OF THE COURT:

This is a class action suit seeking reformation of approximately 400,000 retirement-annuity contracts to include a cash-surrender provision. The circuit court of Cook County ordered, inter alia, that plaintiff give individual notice of the pendency of this action to all identifiable class members based on that court's opinion that due process requirements necessitated such notice. The trial court additionally found its order requiring notice involved a substantial ground for difference of opinion, and that an immediate appeal on that issue would materially advance the ultimate termination of the litigation. Accordingly, that court identified the following question for interlocutory appeal pursuant to our Rule 308 (58 Ill.2d R. 308):

"Whether due process of law under the 14th Amendment of the United States Constitution and Article 1, 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."

The trial court's affirmative answer to this question was reversed by the appellate court, which found notice to be unnecessary under the circumstances. (47 Ill. App.3d 821.) We allowed leave to appeal.

A full recitation of the facts and procedural history of this case is contained in the appellate court's opinion. We summarize here only those facts necessary to our conclusion. Defendants, Teachers Insurance and Annuity Association of America (TIAA) and its companion organization, College Retirement Equities Fund (CREF), are nonprofit, limited-liability life insurers providing a nationwide retirement plan for approximately 500,000 employees of educational institutions and nonprofit research organizations. The aggregate assets of these plans, including contributions from both employees and employers, are approximately $5 billion.

Dr. Minnie Frank, the named plaintiff in this class action, purchased retirement-annuity contracts from TIAA and CREF for which she made premium payments totaling $976.06 to TIAA and $976.06 to CREF. These payments were matched by her employer, Chicago Medical School. It is clear from the TIAA and CREF contracts that it was not intended that the purchaser should have any right to surrender the contract for cash, and we do not understand plaintiff to dispute this.

Dr. Frank has not been employed by the Chicago Medical School or any other participating institution for several years, however, and, consequently, has not been a contributing member of the retirement plans during that period. In response to her inquiries concerning a cash-surrender value for her contracts, plaintiff learned from the companies of limited "annuity repurchase" options made available to those whose contracts had been in force 5 years or less or the repurchase values of which were $2,000 or less. Dr. Frank qualified under neither option. Thereafter, plaintiff's attorney husband, Marvin Lustgarten, filed this class action with his wife as the named plaintiff on behalf of the several hundred thousand persons holding contracts with the defendant insurance companies. It is alleged therein that this "secret" annuity-repurchase practice and an alleged practice of permitting certain institutional executives and other favored persons to surrender their contracts are discriminatory and violate the governing New York statutes. The complaint seeks reformation of the contracts of all class members so as to provide to them an otherwise unavailable full-cash-surrender option. Marvin Lustgarten later withdrew as counsel after the court suggested his presence might cause problems with the class action aspect of the case. See Stull v. Pool (S.D.N.Y. 1974), 63 F.R.D. 702; Hamer v. Board of Education (2d Dist. 1977), 52 Ill. App.3d 531; Barliant v. Houghton Mifflin Co. (1st Dist. 1977), 45 Ill. App.3d 494, and cases there cited.

The major thrust of defendants' argument is that reformation of these contracts would substantially alter the retirement scheme contracted for by the defendants with the individual class members. Therefore, urge defendants, each individual class member is entitled to be notified of the pendency of this action in order that he may intelligently decide whether to participate in, oppose, or withdraw from this lawsuit. The no-cash-surrender concept is said by defendants to be a basic principle of the TIAA-CREF contracts. If 400,000 of these contracts are reformed, effectively offering all members the opportunity for cash surrender, it is urged that the validity of prior actuarial calculations will be impaired and the cost-benefit structure of the plan disrupted. It is argued that if the cash-surrender option were exercised by a significant number of contract holders, the resulting diminution in assets could jeopardize defendants' ability to meet their obligations to the remaining members. Plaintiff responds that these arguments cannot be considered, for the record contains no proof of their validity.

This case has not, of course, been heard on its merits, and we indicate no opinion thereon. It is obvious, however, to even the untrained mind that there are substantial differences between a retirement system in which no right, or only a rather narrowly limited right, to withdraw contributions exists, and a system, such as that sought by plaintiff, in which the contributors may withdraw their contributions on demand. Similarly, it seems to us entirely possible, if not probable, that other members may not share plaintiff's enthusiasm for an unlimited cash-surrender privilege, or may believe the remedy for discriminatory cash-surrender practices, if such practices exist, is to enjoin the companies from continuing them — to eliminate the practices completely rather than render them uniformly available.

These observations suggest serious questions regarding the adequacy of the representation which a plaintiff in the position of Dr. Frank offers to other members of the class who are still contributing participants or even annuitants in the retirement system, and whose interests and views may differ from, or be opposed to, those of Dr. Frank. We do not, of course, now decide the issue of the adequacy of plaintiff's representation, for it is not now before us for that purpose. Rather, we simply observe that these questions persist despite the trial court's preliminary finding that plaintiff's representation is adequate. It may well be, if this case proceeds as a class action to a hearing on the merits, that evidence will be introduced establishing the conflict suggested by defendants. Should this occur, the trial judge may wish to reconsider, at least as to those members with conflicting interests, his earlier finding that plaintiff's representation was adequate. In that event the court may dismiss the class action or, depending on the proof, determine that plaintif can proceed as the representative of a smaller class composed of persons with more compatible interests. We do not mean to imply, however, that our holding as to the necessity of notice to all other contract holders would be vitiated by a reduction in the size of the class, should that occur.

Our purpose in mentioning this is to call to the attention of the trial courts> the possibility of utilizing our Rule 308 as a means of reviewing and resolving the representational issue at an early stage of the proceedings as was done with the notice issue here. Where questions are raised as to adequacy of representation or the necessity of notice, and the trial judge believes evidence would be helpful in the resolution of those questions, we see no valid objection to requiring the parties to present such evidence before a finding and order are made on either question. And, if the trial court believes there to be "substantial ground for difference of opinion" (Rule 308) as to the correctness of his order, and that immediate appeal may materially advance ultimate disposition, an interlocutory appeal could then be sought. Since a named plaintiff, because of the cost, may not wish to prosecute the action if individual notice must be given to the members of a large class or if it cannot be prosecuted as a class action, an early, authoritative determination of those issues would, in some cases, seem desirable. See Forde, Class Actions in Illinois: Toward a More Attractive Forum For This Essential Remedy (1977), 26 De Paul L. Rev. 211, 231-33.

In his order requiring notice the trial judge stated:

"This Court is of the opinion that due process of law, as interpreted by the United States Supreme Court in Eisen vs. Carlisle & Jacquelin, 40 L.Ed.2d 732, decided May 28, 1974, and in 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 ...


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