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CHICAGO BD. OPTIONS EXCH. v. CONN. GEN. LIFE INS.

United States District Court, Northern District of Illinois, E.D


November 17, 1982

CHICAGO BOARD OPTIONS EXCHANGE, INC., ET AL., PLAINTIFFS,
v.
CONNECTICUT GENERAL LIFE INSURANCE COMPANY, DEFENDANT.

The opinion of the court was delivered by: Shadur, District Judge.

MEMORANDUM OPINION AND ORDER

Chicago Board Options Exchange, Inc. ("CBOE") and the Trustees of its Retirement Income Plan (the "Plan") sue Connecticut General Life Insurance Company ("Connecticut General"), which entered into a group annuity insurance contract (the "Contract") with CBOE to fund benefits under the Plan. Plaintiffs' Complaint charges Connecticut General with:

1. breach of contract (Count I);

    2. deceptive conduct in violation of the
  Illinois Uniform Deceptive Trade Practices Act
  (the "Illinois Act," Ill.Rev. Stat. ch. 121 1/2,
  §§ 311-17) (Count II); and

    3. fiduciary improprieties in violation of the
  Employee Retirement Income Security Act ("ERISA,"
  29 U.S.C. § 1001-1461) (Count III).

Connecticut General has moved under Fed. R.Civ.P. ("Rule") 12(b)(6) to dismiss the entire Complaint for failure to state any cognizable claim. For the reasons stated in this memorandum opinion and order, Connecticut General's motion is granted.

Allegations of the Complaint*fn1

In 1977 CBOE and Connecticut General negotiated the Contract to fund Plan benefits effective July 1, 1978. In entering into the Contract CBOE relied on claimed misrepresentations in Connecticut General's June 1977 proposal (the "Proposal," Complaint Ex. C), including the following sentence in its "highlights" page in which it "summarize[d] the advantages" of its product:

  Funds may be transferred to a new carrier if
  Connecticut General's performance is not entirely
  satisfactory.

Under the Contract the Administrator*fn2 was to direct Connecticut General as to the manner of crediting contributions made on behalf of the Plan's Participants (CBOE employees). Credits were to be allocated to either or both of two types of investment accounts, in such mix as the Administrator designated:

    1. a "Variable Account," representing an
  undivided interest in a group of pooled assets
  (the "Separate Account") maintained by
  Connecticut General in connection with the
  Contract and other group annuity contracts
  (understandably, the value of the Variable
  Account always reflected the market value of the
  underlying assets); and

    2. a "Guaranteed Account," providing a yield in
  the form of an interest rate periodically set in
  advance by Connecticut General (both that
  interest rate and the principal of the Guaranteed
  Account were guaranteed by Connecticut General).

Contract Parts XII and XIII defined CBOE's right to part company with Connecticut General by discontinuing further contributions and causing a transfer of the Participants' Accounts to a new funding agent (keeping the Plan qualified under the Internal Revenue Code).

All amounts allocated to Variable Accounts have always been transferable without limitation upon such discontinuation, subject only to compliance with appropriate procedures for valuation and distribution. As for Guaranteed Accounts, however, Contract § 13.03 has always permitted Connecticut General to defer full payout under these circumstances:

    1. If the aggregate proposed transfers and
  withdrawals from Guaranteed Accounts on the
  effective date of CBOE's departure, together with
  previous transfers and withdrawals during the
  same calendar year — taking into account in each
  instance not only the Contract itself but all
  "contracts in this class of business" — exceed 10%
  of the total Guaranteed Contract funds for all
  "contracts in this class of business" as of the
  beginning of that calendar year, the current
  transfers could be deferred.

    2. In any event such deferral could not block a
  Participant from the transfer of at least 10% of
  his or her Guaranteed Account in each year.

Non-transferred portions of the Guaranteed Accounts would continue to draw interest in the same manner as before.

What triggered the current dispute was an attempted amendment of the Contract by Connecticut General. Contract § 11.02 deals with "Change of Contract":

  (a) Any or all of the terms of this contract may
  be changed from time to time by agreement in
  writing between the Insurance Company and the
  Contractholder. However, any such change shall
  not affect in any way the amount or terms of any
  Retirement Annuity purchased before the effective
  date of such change.

  (b) The Insurance Company may, at any time, make
  any changes, including retroactive changes to the
  provisions of this contract to the extent that
  such changes are required in order to conform the
  contract to the provisions of Section 401(a) of
  the Internal Revenue Code as amended, ERISA or
  any regulation issued by any governmental agency
  to which the Plan or the Insurance Company is
  subject.

  (c) The Insurance Company may change the rates in
  Table A2 without giving advance notice of the
  change, provided such change is not made more
  frequently than once annually. Any such change
  shall be applicable to this contract and to all
  other contracts in the same class of business as
  this contract using the same Assumed Investment
  Return and shall take effect as of the date the
  Insurance Company makes such change. On and after
  the first anniversary of July 1, 1978 the Insurance
  Company may change from time to time any or all of
  the other terms of this contract. Such other change
  may be made by the Insurance Company by giving 90
  days advance notice in writing to the
  Contractholder. Any such change may not affect (i)
  the terms or amounts of any Retirement Annuity
  purchased before the effective date of such change,
  and (ii) the amount of interest credited or accrued
  prior to the effective date of such change.

Connecticut General purported to amend the Contract by unilateral action in September 1981, to take effect January 1, 1982 (Connecticut General claims it complied with the 90-day notice provision of Section 11.02(c), though Complaint ¶ 12 states, "On November 13, 1981, CBOE became aware, for the first time [of the purported amendment]
*fn3). By that amendment (the "Amendment") Connecticut General substituted "Guaranteed Account A" for the existing Guaranteed Account and created a new "Guaranteed Account B" for all contributions made after December 31, 1981. Because the Amendment also contemplated an automatic annual transfer of 10% of Guaranteed Account A to Guaranteed Account B, the deferral provisions of Contract § 13.03 would be automatically triggered every year.*fn4

By letter dated December 14, 1981 (Complaint Ex. G) the Administrator directed Connecticut General to transfer all CBOE employees' accounts (including both Variable and Guaranteed Accounts) to a new funding agent July 1, 1982. One week later the Administrator wrote Connecticut General challenging the Amendment and the proposed Guaranteed Account transfer as invalid (Complaint Ex. H). Connecticut General has refused to accede to that direction and challenge, adhering instead to the terms of the Amendment.

CBOE's first effort to invalidate the Amendment took the form of a complaint filed with the Illinois Department of Insurance (the "Department") December 31, 1981. Some months later the Department rejected that challenge entirely:

  After a comprehensive review of this letter, your
  complaint letter and the contract provisions, we
  are unable to discern any violation of the
  Illinois Insurance Code by the insurer's
  amendments to the contract. The contract entered
  into between the Chicago Board of Options
  Exchange and Connecticut General granted
  Connecticut General the right to unilaterally
  amend the contract as stated in Section 11.02 of
  the General provisions. No unfair discrimination
  or detrimental capability is caused by the
  amended contract provisions.

CBOE has sought review of the Department's decision by an administrative review complaint (still pending) in the Circuit Court of Cook County.

This opinion will deal in turn with each aspect of plaintiffs' three-pronged assault identified at the outset. None successfully states a cause of action.

Count I

Apart from the notice contention referred to at n. 3, Count I claims the Amendment breached Contract § 11.02 because CBOE did not give its "agreement in writing" under Section 11.02(a). That argument is frankly nonsensical and scarcely merits discussion.

In literal terms Contract § 11.02(c) authorized the Amendment by Connecticut General's sole action, simply by notice to (and not consent of) CBOE. There are several reasons for not distorting that literal meaning, as CBOE's contention would do:

    1. Each of Contract §§ 11.02(a), (b) and (c) is
  stated independently of the others. As even CBOE
  recognizes, Section 11.02(b) and the first
  paragraph of Section 11.02(c) do not incorporate
  the consent provision of Section 11.02(a). There is
  then no rational basis for skewing the second
  paragraph of Section 11.02(c) by reading it with a
  totally different meaning.

    2. If CBOE's written consent were required
  under Section 11.02(c)'s second paragraph, its
  90-day advance notice provision would be rendered
  wholly meaningless. By contrast, Section 11.02's
  literal reading gives all of its provisions a
  rational meaning and relationship.

    3. Section 11.01 states flatly the Contract
  "may be modified or amended only by written
  agreement of the Insurance Company . . ." — a
  requirement wholly consistent with Connecticut
  General's concurrence being required under each
  subsection of Section 11.02 (subsection (a) with
  CBOE's agreement, (b) and (c) without). Section
  11.01 does not however impose a like condition of
  CBOE's agreement to all amendments.

Because nothing in CBOE's allegations supports the notion its agreement to the Amendment was needed,*fn5 Count I cannot survive Connecticut General's motion.

Count II

Count II alleges dual deception on Connecticut General's part, in violation of the Illinois Act:

    1. In its 1977 Proposal, Connecticut General
  misleadingly stated without qualification that
  contractholders could withdraw their funds if
  Connecticut General's "performance is not
  entirely satisfactory."

    2. In its 1981 description of the Amendment,
  Connecticut General deceptively stated the
  Amendment would offer employees better return
  rates and options "without sacrificing any of
  their existing rights" and "without changing [the
  employer's] basic plan design."

Again neither claimed misrepresentation rises to the level of a cognizable claim.

As for the alleged 1981 misrepresentations, Count II neither alleges nor implies any resulting injury. Indeed, the possibility of damage is refuted by CBOE's own conduct. It concededly believed the Amendment was inimical to its interests, for it both objected to Connecticut General and complained to the Department of Insurance before the January 1, 1982 effective date. It cannot be heard to say it was deluded to its detriment by the claimed 1981 misrepresentations.

As for the asserted 1977 misrepresentations, they run afoul of the three-year limitation period set by Section 10a(e) of the Consumer Fraud Act (Ill.Rev.Stat. ch. 121 1/2, § 270a(e)), which controls actions under the Illinois Act. That clock starts ticking when a plaintiff first experiences (or, in some circumstances, first discovers) all the elements of injury stemming from the deceptive acts.*fn6 See Airprint Systems, Inc. v. Burroughs Corp., No. 81 C 2119, slip op. at 1-2 (N.D.Ill. Aug. 20, 1981).

At least on the face of the Complaint, plaintiffs' misrepresentation injury (if any) arose when the Contract (including its Section 13.03) became effective in 1978. From that very beginning point, plaintiffs' ability to withdraw funds under the Contract was already circumscribed — and any alleged inconsistency between that limited ability and the unfettered right assertedly represented in the earlier Proposal already existed.

It may be that plaintiffs' injury became more tangible after the Administrator's unsuccessful effort to discontinue the Contract, but on the current allegations that would not affect when that injury was first incurred. Nor, on the present Complaint, can plaintiffs invoke the discovery rule to toll this statute of limitations, for Count II alleges no factual basis for doing so.

Indeed, even if a different assumption were made arguendo — that plaintiffs' injury occurred when the Amendment was adopted — the current misrepresentation claim would face another difficulty: There is no effective allegation of proximate causation between the 1977 deceptive statements and the current injury. Even had CBOE in fact been misled into entering the Contract, it could have averted damage by exercising its Section 13.03 withdrawal rights at any time before the Amendment restricted the effect of such exercise.

In sum, then, Count II must also fail under the current Complaint. It remains only to examine Count III.

Count III

  Count III says Connecticut General, by adopting the
Amendment, breached its fiduciary responsibilities under ERISA
§§ 404 and 406, 29 U.S.C. § 1104 and 1106. That claim must be
rejected because CBOE itself has acknowledged those fiduciary
rules are inapplicable to Connecticut General.

ERISA § 3(21)(A), 29 U.S.C. § 1002(21)(A), defines the persons
to whom the statute's fiduciary obligations extend:

   . . a person is a fiduciary with respect to a
  plan to the extent (i) he exercises any
  discretionary authority or discretionary control
  respecting management of such plan or exercises
  any authority or control respecting management or
  disposition of its assets, (ii) he renders
  investment advice for a fee or other
  compensation, direct or indirect, with respect to
  any moneys or other property of such plan, or has
  any authority or responsibility to do so, or
  (iii) he has any discretionary authority or
  discretionary responsibility in the
  administration of such plan. . . .

Connecticut General fits none of those categories.

No serious contention can be made for application of subsections (ii) or (iii), or the "management of such plan" provision of subsection (i), to Connecticut General.*fn7 It is not an investment advisor, and the Plan management and administration are specifically vested in the Administrator. At most it might arguably be claimed Connecticut General "exercises . . . authority or control respecting management or disposition of [the Plan's] assets."

But that possible aspect of "fiduciary" status with respect to the Guaranteed Accounts — the only ones at issue in this litigation — is directly negated by the parties' own contrary intentions. It takes only a brief excursion through the Plan's relevant provisions to demonstrate Count III's claim is refuted by the very documents on which it must depend:

    1. "Fiduciary" is given the same meaning in
  Plan § 1.17 as under ERISA § 3(21)(A). Thus the
  extent to which "fiduciary" functions are vested in
  Connecticut General under the terms of the Plan —
  and only that extent — measures the extent to
  which Connecticut General is a "fiduciary" under
  ERISA.

    2. Plan § 1.29 defines a Participant's
  "Guaranteed Account" as the portion of all
  contributions for his or her benefit invested in
  Connecticut General's general portfolio, not its
  "Separate Account" or any other particular assets.

    3. Plan § 1.30 defines a Participant's "Variable
  Account" as the portion of all contributions for
  his or her benefit invested in Connecticut
  General's "Separate Account."

    4. Plan § 1.35 in turn defines "Separate Account"
  as a pooled separate account of specific assets.

    5. Plan Article X defines its "Fiduciary Duties
  and Responsibilities." And Plan § 10.4 expressly
  defines and limits Connecticut General's liability
  as a "Fiduciary . . . to that arising from its
  arrangement of any assets of the Plan held by the
  Insurance Company in its Separate Account"
  (emphasis added).*fn8

In short, the parties themselves have circumscribed "the extent . . . [to which Connecticut General] exercises any authority or control respecting management or disposition of [the Plan's] assets" (ERISA § 3(21)(A)). That extent reaches only to Variable Accounts, not Guaranteed Accounts. By the parties' own withholding of ERISA-defined "fiduciary" responsibilities from Connecticut General as to Guaranteed Accounts, they have precluded CBOE's assertion of a claim based on a breach of such non-existent ERISA duties.*fn9

Conclusion

Plaintiffs have struck out on all three counts. Their Complaint is dismissed under Rule 12(b)(6) for failure to state a claim upon which relief can be granted.


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