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April 17, 2003


The opinion of the court was delivered by: John F. Grady, United States District Judge


Before the court is defendant's motion to dismiss the complaint pursuant to Federal Rule of Civil Procedure 12(b)(6). For the reasons stated below, the motion is granted in part and denied in part.


Plaintiff Emerald Investments Limited Partnership ("Emerald") is an entity that invests in annuities. To carry out its proprietary trading strategy, Emerald requires a high degree of flexibility in moving its money quickly and freely among investments.

On March 17, 1999, Emerald invested $2.5 million in each of two annuities (the "Annuities"), for a total of $5 million, that were issued by defendant Allmerica Financial Life Insurance and Annuity Company ("Allmerica"). Plaintiff American National Bank and Trust Company of Chicago holds title in the Annuities for the benefit of Emerald, and Emerald, as beneficial owner, controls, manages, and supervises all investment decisions related to the Annuities. The owner of the Annuities may invest contributions in a variety of investment options in "sub-accounts" managed by Kemper Gateway, primarily stock, bond, and money market mutual funds. Plaintiffs allege that Allmerica advertises to the general public that flexible trading is allowed in the annuity products it sells.

The parties entered into "Kemper Annuity Contracts" (the "Contracts") setting forth the terms and conditions governing the Annuities. The Contracts contain integration clauses stating that "[t]he entire contract consists of this contract, any application attached at issue and any endorsements." (Complaint, Exs. A & B, Contracts, at 18.) The applications were attached, but no endorsements were. Regarding transfers among accounts, the Contracts provide, in relevant part:

Prior to the Annuity Date, the Owner may transfer amounts among accounts by Written or Telephone Request to the Principal Office. . . .
There is no charge for the first twelve transfers per contract year. A transfer charge of up to $25 may be imposed on each additional transfer.
(Complaint, Exs. A & B, Contracts, at 10.)

In December 2001, Allmerica sent letters regarding the Annuities (the "December Letters") to Emerald that stated in part:

We are writing to you as the owner(s) off the Contract(s) referenced above regarding the transfer activity among the investment portfolios (the "Underlying Funds") for the Contract(s). The Contract(s) is not designed for use by individuals, professional market timing organizations or other entities that do "market timing", programmed transfers, frequent transfers or transfers that are large in relation to the total assets of an Underlying Fund. Market timing and frequent transfers adversely affect the investment management and investment returns of the Underlying Funds. . . .
We have been monitoring the transfer activity in recent months in the Contract(s) referenced above and have concluded that frequent transfers in the Contract(s) are adversely affecting the Underlying Funds and other investors who have invested in these Funds. As a result, you must comply with Allmerica's Transfer Rules and Procedures for Market Timers and Frequent Traders. A copy of the Transfer Rules and Procedures for Market Timers and Frequent Traders is enclosed with this letter for your reference. . . .
The Transfer Rules and Procedures will become effective as of December 1.7, 2001. However, any investment executive or adviser authorized to act on your behalf must continue at this time to direct all transfer requests to us by fax transmission by 2:00 PM Eastern Time on Allmerica's Transfer/Payment/Allocation Form.
(Complaint, Ex. C.)

Allmerica's Variable Product Transfer Rules and Procedures for Market Timers and Frequent Traders (the "Transfer Rules"), copies of which were attached to the December Letters, consist of four pages of detailed rules regarding transfers among accounts related to contracts that Allmerica has deemed "Market Timing Contracts." Among other things, the Transfer Rules contain procedures for transfers via mail, facsimile transmittal, or telephone. The Transfer Rules state that no more than four transfers per Contract will be permitted in any one calendar month. Transfers into sub-accounts that are designated "Limited Access Funds" (a list of which is attached to the Transfer Rules), in which Emerald invests, are permitted only once a month. Moreover, if transfers both into and out of a particular Limited Access Fund are made in the same month, then no further transfers into that Limited Access Fund may be made for a period of six months.

The Transfer Rules state that "[n]o additional payments will be permitted into annuity contracts which are subject to these (Transfer Rules]." (Complaint, Ex. D, at 3.) In addition, the Transfer Rules state that they are subject to change at any time without notice, and that Allmerica "reserves" the right to reject transfers that it deems to be "of such magnitude or otherwise of a nature as to possibly be disruptive to the underlying sub-accounts or funds or otherwise be injurious to other Policyholders or [Allmerica] (even if otherwise made in accordance with these Transfer Rules)." (Id. at 4.)

For approximately the next seven months after receiving the December Letters and Transfer Rules, Emerald did not trade in the Annuities. On April 4, 2002, counsel for Emerald sent a letter to Mark A. Hug, President of Allmerica, informing Mr. Hug that Emerald believed there was no support for the new Transfer Rules and that the Contracts provided that owners were permitted to make "transfers among accounts." (Complaint, Ex. F.) Counsel for Allmerica responded by reiterating Allmerica's position that Emerald's Annuities were subject to the Transfer Rules. (Id., Ex. G.)

On June 5, 2002, Emerald attempted to "trade on" the Annuities (the complaint does not specify in what manner), but was refused by Allmerica because Emerald had not submitted the Transfer/Payment Allocation Form referred to in the December Letters. On June 26, 2002, Joe Petti of Allmerica's Relationship Management Group left a voice-mail message with counsel for Emerald, stating that Allmerica would not accept any more trades by Emerald unless Emerald executed the Transfer/Payment Allocation Form and accepted the new Transfer Rules. Emerald has since been unable to execute transfers. The total value of the Annuities as of July 2002 was approximately $12.5 million. To remove its money from the accounts, Emerald would be charged a 4% surrender fee.

Plaintiffs contend that Allmerica's imposition of the Transfer Rules and its refusal to allow plaintiffs to make transfers among the Annuities without plaintiffs' acceptance of the Transfer Rules constitute breach of contract and the duty of good faith and fair dealing. Plaintiffs filed this action on July 24, 2002. The complaint sets forth a breach of contract claim (Count I); a promissory estoppel claim, based on the prospectus for the Annuities (Count II, pled in the ...

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