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OTTO v. VARIABLE ANNUITY LIFE INS. CO.

UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS, EASTERN DIVISION


November 8, 1991

BEVERLY J. OTTO, Individually and on behalf of all others similarly situated, et al., Plaintiffs,
v.
VARIABLE ANNUITY LIFE INSURANCE COMPANY, et al., Defendants

Marvin E. Aspen, United States District Judge.

The opinion of the court was delivered by: ASPEN

MEMORANDUM OPINION AND ORDER

The named plaintiff, Beverly Otto, brings this class action against Variable Annuity Life Insurance Company and other affiliated companies (collectively referred to as "VALIC"), seeking to recover for alleged violations of, among other things, § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. In light of the recent Supreme Court decision in Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 111 S. Ct. 2773, 115 L. Ed. 2d 321 (1991), VALIC renews its motion for summary judgment on the ground that Otto's claims under the 1934 Act are time-barred. In the event that this court grants VALlC's motion, class members Frank DeBoer and Dwain Dedrich have petitioned for leave to intervene as named plaintiffs. For the reasons as set forth below, VALIC's motion for summary judgment is granted in part and denied in part. *fn1" DeBoer and Dedrich's petition for intervention in the class action as a matter of right is denied.

 I. Summary Judgment Standard

 Under the Federal Rules of Civil Procedure, summary judgment is appropriate if "there is no genuine issue as to any material fact and . . . the moving party is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c). This standard places the initial burden on the moving party to identify "those portions of 'the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any' which it believes demonstrate the absence of a genuine issue of material fact." Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S. Ct. 2548, 2553, 91 L. Ed. 2d 265 (1986) (quoting Rule 56(c)). Once the moving party has done this, the non-moving party "must set forth specific facts showing that there is a genuine issue for trial." Fed. R. Civ. P. 56(c). In deciding a motion for summary judgment, the court must read all facts in the light most favorable to the non-moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 254, 106 S. Ct. 2505, 2513, 91 L. Ed. 2d 202 (1986); Griffin v. Thomas, 929 F.2d 1210, 1212 (7th Cir. 1991).

 II. Background

 Beverly Otto represents a class of Illinois investors who participated in VALIC's fixed annuity plan between October 17, 1975 (the date of Otto's initial contribution) and August 2, 1982 (the date Otto filed this lawsuit). Otto claims that VALIC failed to disclose the method by which interest was calculated under the fixed annuity plan--specifically, that it used the "banding" or "new money" method of calculating interest, as opposed to, for instance, the "portfolio" method. Under the "banding" method, the current rate of interest is paid only on deposits made during the current period. Prior contributions continue to earn the rate of interest declared during the period in which these contributions were made. As an alternative, under the "portfolio" method, the same rate of interest is paid on all contributions.

 Additionally, Otto asserts that VALIC failed to disclose the method by which a participant in the fixed annuity could potentially earn a higher rate of interest. Otto contends that a "transfer practice" enabled fixed annuity participants to transfer funds to a variable annuity for 120 day, and then transfer the funds back to the fixed annuity. According to Otto, this nondisclosure constitutes a violation of the Securities Act of 1934, breach of contract and common-law fraud.

 On January 19, 1990, we denied VALIC's second motion for summary judgment based in part on then-prevailing Seventh Circuit precedent that the three-year limitations period imposed by Ill. Rev. Stat. ch. 121 1/2, para. 37.130 (1977) applied to § 10(b) cases brought in a federal forum in Illinois. Otto v. Variable Annuity Life Ins. Co., 730 F. Supp. 145, 148 (N.D. Ill. 1990). Further, we indicated that the doctrine of equitable tolling potentially delayed the point at which the limitations period began to run.

 Once again, VALIC moves this court to enter summary judgment on the ground that Otto's claims are time-barred. In light of the recent Supreme Court decision in Lampf, reconsideration of VALIC's motion is appropriate.

 III. Discussion

 A. VALIC's Motion for Summary Judgment

 In Lampf, the Supreme Court held that actions brought pursuant to § 10(b) of the 1934 Act and Rule 10b-5 are governed by a 1-and-3-year limitations period. Lampf, 111 S. Ct. at 2782. Thus, a plaintiff must file suit within one year after the discovery of the facts constituting the violation, and, in any case, within three years after such violation. Moreover, the Supreme Court explicitly refused to apply the doctrine of equitable tolling, concluding that the doctrine was "fundamentally inconsistent with the 1-and-3-year structure." Id.

 At the onset, we observe that Otto does not contest the retroactive application of Lampf to the present case. Significantly, the Court in Lampf applied the 1-and-3-year limitation retroactively to the litigation in which the new rule was announced, despite the fact that the plaintiff had justifiably relied on Oregon's 2-year statute under state-borrowing principles. Lampf, 111 S. Ct. at 2782-83. Although this retroactive application was undertaken without any discussion of the retroactivity issue, and was effected over a dissenting opinion that noted that the Court had previously declined to apply new statute of limitations rules to the litigation in which the new rule was announced, id. at 2785-87 (O'Conner, J., dissenting), subsequent Supreme Court pronouncements make clear that Lampf must be give retroactive application. On the same day it issued the Lampf decision, the Court recognized the fallacy in a refusal to apply retroactively to all civil cases pending on direct review a rule of federal law previously applied retroactively in the case announcing the rule. See James B. Beam Distilling Co. v. Georgia, 111 S. Ct. 2439, 115 L. Ed. 2d 481 (1991). Moreover, the Court in Northwest Savings Bank, PaSA v. Welch, 111 S. Ct. 2882, 115 L. Ed. 2d 1048 (1991), specifically confirmed the retroactive application of to all pending actions. In that case, the plaintiffs filed suit under § 10(b), alleging material misrepresentations and omissions in connection with purchases of interests in an oil and gas drilling venture. The district court dismissed the action, applying the 1-and-3-year federal limitations rule. Welch v. Cadre Capital, 735 F. Supp. 467 (D. Conn. 1989). The Second Circuit reversed on appeal, holding that its decision in Ceres Partners v. Gel Associates, 918 F.2d 349 (2d Cir. 1990) (adopting the 1-and-3-year federal limitations rule), should not be applied retroactively. Welch v. Cadre Capital, 923 F.2d 989, 995 (2d Cir. 1991). However, on June 28, 1991, the Supreme Court vacated the judgment of the Second Circuit and remanded the case for further consideration in light of James Beam and Lampf. Northwest Savings, 111 S. Ct. at 2882.

 Seizing upon the three-year limitations period adopted in Lampf, VALIC argues that all claimed violations based on purchases that occurred prior to August 2, 1979 are barred. We agree. However, a question remains as to whether Otto's investment activity gave rise to a violation after August 2, 1979. VALIC, citing Klein v. Goetzmann, 770 F. Supp. 78 (N.D.N.Y. 1991), contends that all purchases, whether or not effected more than three year before the suit was filed, are barred because they were allegedly induced by misrepresentations made before August 2, 1979. In Klein, the court concluded that the claims of class members who purchased stock not more than three years before the filing of the suit were nonetheless time-barred. Id., slip op. at 9 n.8. Although not explicit, the court apparently reasoned that the fraudulent activity, and not the subsequent purchases, constitutes the date of the violation for statute of limitations purposes. This rationale finds roots in Lampf : "Litigation instituted pursuant to § 10(b) and Rule 10b-5 therefore must be commenced . . . within three years after such violation. As there is no dispute that the earliest of plaintiff-respondents' complaints was filed more than three years after petitioner's alleged misrepresentations, plaintiff-respondents' claims were untimely." Lampf, 111 S. Ct. at 2782.

 Otto, however, unlike the plaintiff in Klein or in Lampf, is not alleging a series of discrete misrepresentations which can be easily fixed in time. *fn2" Rather, Otto's claim is premised on continuing omissions of fact--the method by which interest was calculated and the method by which a participant in the fixed annuity could potentially earn a higher rate of interest. It is axiomatic that pinpointing the time of an omission is an entirely different task than measuring the occurrence of a material misrepresentation. Such an assessment can only be made with reference to the purchase or sale that the omission induced. *fn3"

 In the present case, Otto initially purchased interests in VALIC's fixed annuity on October 17, 1975. Despite the fact that Otto's account became dormant after April 1, 1978 (i.e., she did not continue to contribute to the annuity), she continued to earn, and was credited with, interest on her prior investments in the annuity. According to VALIC's expert, Professor Kellison, any interest earned by the participant in excess of the guaranteed 4% was treated as new money and was reinvested into a new band. Kellison Dep. at 17. Otto was under no legal obligation to retain in VALIC's annuity plan either the initial contributions or any of the interest subsequently earned and reinvested. As such, each reinvestment of the interest earned constituted an independent investment decision, or more specifically, a "purchase" for purposes of § 10(b). See Goodman v. Epstein, 582 F.2d 388, 413 (7th Cir. 1978) (Under the circumstances of a continuing relationship, the crucial fact in determining when the "purchase" of a security occurs is "whether an investment decision remains to be made by the party from whom disclosure is withheld, and not upon when the agreement to purchase . . . was executed."), cert. denied, 440 U.S. 939, 99 S. Ct. 1289, 59 L. Ed. 2d 499 (1979). To the extent that the omission is material, each and every investment decision made after August 2, 1979, by Otto and the other class members would constitute a separate violation under § 10(b) and Rule 10b-5. Peoria Union Stock Yards Co. Retirement Plan v. Penn Mut. Life Ins. Co., 698 F.2d 320, 326 (7th Cir. 1983) (applying Illinois' 3-year statute of limitations, and concluding that a § 10(b) claim based on periodic contributions to the annuity under a continuing material omission is not barred even though the original investment was more than three years before the filing of the suit). Accordingly, only those claims by class members who purchased and subsequently withdrew their interest in VALIC's fixed annuity prior to August 2, 1979, are barred by the three-year limitations period adopted by Lampf.

 With regard to the second limitations period employed in Lampf, VALIC contends that Otto failed to file suit within one year after the discovery of the facts constituting the violation. We note that full knowledge of the facts constituting the violation is not required. As stated by the Seventh Circuit, "the one-year limitation period begins to run even when a plaintiff is placed on 'inquiry notice' of possible misrepresentations." DeBruyne v. Equitable Life Assurance Soc'y, 920 F.2d 457, 466 (7th Cir. 1990). Whether an event constitutes "inquiry notice" is a question of whether "such discovery should have been made by the exercise of reasonable diligence. Id. As such, "the objective 'reasonable diligence' standard does not lend itself easily to summary judgment." Id. VALIC argues that various notices in which the banding method is ostensibly disclosed placed Otto on at least inquiry notice as of April 1, 1979. Otto counters by claiming that these notices obscured, rather than disclosed, VALIC's method of interest payment. As this court noted in our previous opinion, dated January 19, 1990, "this issue is clearly one of material fact that may not be appropriately resolved on a motion for summary judgment." Otto, 730 F. Supp. at 149. The Supreme Court's decision in @f has done nothing to alter this conclusion. If it is determined, as a matter of fact, that any or all of the class members discovered or should have discovered, by the exercise of reasonable diligence, the nondisclosure before August 2, 1981, then the claims of those class members will be barred under Lampf.

 B. Petition to Intervene

 In light of the above discussion, DeBoer and Dedrich's petition for leave to intervene as named plaintiffs in this class action is denied. As stated by the petitioners, the purpose of their petition is to preserve the rights of the intervenors and of the 20,000 plus class members in the event that Otto's claim is determined to be time-barred. We have concluded that Otto's claim is not barred in its entirety. Therefore, we find no reason to add additional named plaintiffs at this late date. Moreover, petitioners have made no showing that they fulfill the requirements for class representatives outlined in Federal Rule of Civil Procedure 23. Accordingly, we deny petitioner's motion to intervene.

 IV. Conclusion

 For the reasons as set forth above, only those claims by class members who purchased and subsequently withdrew their interest in VALIC's fixed annuity prior to August 2, 1979, are barred by the limitations period adopted by Lampf. Accordingly, VALIC's motion for summary judgment is granted in part and denied in part. DeBoer and Dedrich's petition to intervene is denied. It is so ordered.


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