United States District Court, N.D. Illinois
October 18, 2004.
AMOS N. PRESCOTT, JR. and R. DONALD PRESCOTT, as Trustees of the AMOS N. PRESCOTT TRUST FBO AMOS N. PRESCOTT JR. CIC AC/UAD 1/30/1976; AMOS N. PRESCOTT JR., as Trustee of the AMOS N PRESCOTT JR. TRUST; and LOUISE H. PRESCOTT, Individually, Plaintiffs,
ALLSTATE LIFE INSURANCE CO., Defendant.
The opinion of the court was delivered by: RUBEN CASTILLO, District Judge
MEMORANDUM OPINION AND ORDER
Amos N. Prescott, Jr. and R. Donald Prescott, in their
capacities as trustees of the Amos N. Prescott Trust; Amos N.
Prescott Jr., in his capacity as trustee of the Amos N. Prescott
Jr. Trust; and Louise H. Prescott ("Plaintiffs") bring suit
against Allstate Life Insurance Company ("Defendant") for breach
of contract, breach of the duty of good faith and fair dealing,
conversion, and breach of fiduciary duty. Pending before the
Court is a motion by Defendant to dismiss counts three, four, and
five of the amended complaint, which are claims based on breach
of the duty of good faith and fair dealing, conversion, and
breach of fiduciary duty, respectively. For the reasons provided
below, this Court partially grants and partially denies
Defendant's motion to dismiss. (R. 17-1.) RELEVANT FACTS*fn1
In 1995 and 1998, Plaintiffs in order to execute a "highly
confidential and proprietary asset allocation investment
strategy" entered into a series of variable annuity contracts
with Defendant. (R. 2, Amended Compl. ¶¶ 9, 11-13.) The purpose
of the annuity contracts was to allow Plaintiffs to transfer
funds "quickly and freely" between investments, usually into and
out of mutual funds and money market accounts. (Id. ¶ 9.) The
annuity contracts contained express Integration Clauses, and
Defendant represented that Plaintiffs would be able to execute
their investment strategy unfettered by any restrictions not
presented in the contracts. (Id. ¶¶ 9, 17, 19-20.) Relying on
the terms presented by Defendant, Plaintiffs invested a total of
$2,327,783.18 in the contracts and were successful in making
profits greater than those which they could have gained without
the flexibility of the annuity contracts. (Id. ¶¶ 15, 22.)
In December 2002 Defendant refused to honor Plaintiffs' request
to transfer funds between certain investments. (Id. ¶ 23.)
Defendant explained to Plaintiffs over the telephone that it had
restricted transfers into certain funds to a maximum of $50,000
per day. (Id.) Plaintiffs had no prior written notice of the
restrictions, although they later received undated letters
confirming Defendant's modification of the annuity contracts.
(Id.) The alterations limited transfers into Morgan Stanley
Variable Investment Series Pacific Growth Fund, Investment Series
European Growth Fund, and the Putnam VT International Growth Fund
to $50,000 per day. (Id. ¶¶ 23-24.) Further refusals to transfer funds occurred in October 2003.
Defendant orally denied Plaintiffs' right to transfer funds and
neglected to send them written notification of the restrictions
until three months later. (Id. ¶ 25.) This second set of
restrictions implemented a $50,000 per day maximum transfer for
the following funds: Morgan Stanley Variable Investment Series,
High Yield, Global Dividend Growth, Global Advantage, Universal
Institutional Funds, Emerging Markets Equity, International
Magnum, U.S. Mid Cap Value, and Mid Cap Growth. (Id.)
Plaintiffs discovered an additional set of transfer
restrictions upon attempting to transfer funds in January 2004.
(Id. ¶ 26.) This set of restrictions limited Plaintiffs to
$50,000 daily transfers in twenty-two additional investment
options. (Id.) Again Plaintiffs received no written notice of
the limitations until after they had attempted transfers. (Id.)
Plaintiffs continued to use the annuity contracts to execute
their investment strategy, placing funds in other investment
options and making $50,000 transfers into the restricted funds
when sensible. (Id. ¶ 34.) The restrictions on the annuity
contracts, however, hampered Plaintiffs' investment strategy and
they accordingly attempted to transfer "a majority" of their
funds to investments not controlled by Defendant. (Id. ¶ 35.)
The only restrictions expressed in the annuity contracts with
respect to Plaintiffs' right to transfer their money out of the
annuities were that any withdrawal be a minimum of $500 and that
any withdrawal leaving less than $500 would be treated as a full
surrender. (Id. ¶ 34.)
On February 25, 2004, Louise Prescott submitted a request that
a majority of her funds be transferred to American Skandia, a
Prudential Financial Company. (Id. ¶ 36.) Defendant timely
honored her request. (Id.) "Shortly thereafter," the Amos N.
Prescott and Amos N. Prescott Jr. Trusts submitted requests that Defendant transfer a majority of
their funds to American Skandia on March 3 and March 4. (Id. ¶
37.) Defendant refused. (Id. ¶ 38.) Defendant indicated that it
would not honor a request to transfer a portion of the funds and
would only execute the transfer if Plaintiffs withdrew all of
their funds from the annuity contracts. (Id.) On March 16,
Plaintiffs demanded that Allstate honor their requests. (Id. ¶
39.) On March 20, Defendant executed Plaintiffs' requested
transfer, but valued the accounts as of March 16, rather than
when Plaintiffs' request had been received. (Id.) The two-week
delay caused Plaintiffs to lose approximately $301,000. (Id. ¶
This Court will only grant a motion to dismiss if "it appears
beyond doubt that the plaintiff can prove no set of facts in
support of his claim which would entitle him to relief." Conley
v. Gibson, 355 U.S. 41, 45-46 (1957). This Court will accept all
well-pled allegations as true and draw all reasonable inferences
in favor of the plaintiff. Thompson v. Ill. Dep't of Prof'l
Regulation, 300 F.3d 750, 753 (7th Cir. 2002). A complaint
states a claim if it gives the defendant "fair notice of what the
plaintiff's claim is and the grounds upon which it rests."
Conley, 355 U.S. at 47. "The plaintiff is not required to plead
facts or legal theories or cases or statutes, but merely to
describe his claim briefly and simply." Shah v.
Inter-Continental Hotel Chi. Operating Corp., 314 F.3d 278, 282
(7th Cir. 2002).
I. Count III: Breach of Duty of Good Faith and Fair Dealing
Plaintiffs' claim for breach of the duty of good faith and fair
dealing does not state a valid cause of action under Illinois
law. Plaintiffs claim (as an alternative to their second breach
of contract claim) that Defendant breached its duty of good faith
and fair dealing when it refused to timely honor Plaintiffs' fund
withdrawal requests. Plaintiffs characterize Defendant's refusal
as "capricious, intentional with an improper motive, outrageous
and/or in a manner inconsistent with the reasonable expectations
of the parties." (R. 2, Amended Compl. ¶ 51.) Illinois, however,
does not recognize the contractual covenant of good faith and
fair dealing as valid grounds for an independent tort action.
Cramer v. Ins. Exchange Agency, 675 N.E.2d 897, 904 (Ill. 1996)
(noting that "[t]o allow a bad-faith action would transform many
breach of contract actions into independent tort actions. . . . A
bad faith action would encourage plaintiffs to sue in tort, and
not breach of contract, to avoid suit limitation clauses and the
cap on the statutory remedy"); see also Voyles v. Sandia
Mortgage Corp. 751 N.E.2d 1126, 1131 (Ill. 2001); Johnstone v.
Bank of Am. N.A., 173 F. Supp. 2d 809, 817 (N.D. Ill. 2001). As
the Court recognized in Lyons v. SBCI Swiss Bank Corporation
Investment Banking, Inc., "Illinois courts, as well as courts in
this circuit, have consistently stated that no independent cause
of action exists for alleged breach of a covenant of good faith
and fair dealing." No. 94 C 5448, 1995 WL 151810, at *2 (N.D.
Ill. March 31, 1995). Accordingly, Plaintiffs fail to state a
Plaintiffs attempt to characterize their claim as one that
falls into an exception to the rule against tort claims arising
from the contractual duty of good faith and fair dealing.
Plaintiffs admit that the duty of good faith and fair dealing "is
often denied as an independent source of a tort for the parties
to a contract," but contend that "a cause of action under this
tort still arises in certain circumstances, where as here,
Allstate was given broad discretion in its performance." (R. 20,
Pls.' Resp. at 8.) Plaintiffs point to two cases, BA Mortgage &
International Realty Corporation v. American National Bank and
Trust Company of Chicago, 706 F. Supp. 1364 (N.D. Ill. 1989) and Oil Express National, Inc. v. Burgstone,
958 F. Supp. 366 (N.D. Ill. 1997), that recognize a cause of
action arising derivatively from the covenant of good faith and
fair dealing. (Id. at 8-10). The Illinois Supreme Court's more
recent rulings, however, recognize an exception to the rule
"only in the narrow context of cases involving an insurer's
obligation to settle with a third party who has sued a policy
holder." Voyles, 751 N.E.2d at 1131 (emphasis added). This
exception clearly does not encompass Plaintiffs' claim.
Plaintiffs' claim for breach of the duty of good faith and fair
dealing is therefore dismissed with prejudice.
II. Count IV: Conversion
Plaintiffs' conversion claim survives Defendant's motion to
dismiss. "Conversion is the unauthorized deprivation of property
from a person entitled to its possession." IOS Capital, Inc. v.
Phoenix Printing, Inc., 808 N.E.2d 606, 610 (Ill.App. Ct.
2004). To prove conversion, Plaintiffs must show: (1) Defendant's
unauthorized assumption of control of Plaintiffs' property; (2)
Plaintiffs' right to the property; (3) Plaintiffs' right to
immediate possession of the property; and (4) Plaintiffs' demand
for the immediate possession of the property. Bill Marek's The
Competitive Edge, Inc. v. Mickelson Group, Inc., 806 N.E.2d 280,
285 (Ill.App. Ct. 2004). Plaintiffs allege that Defendant
withheld Plaintiffs' identifiable funds which Plaintiffs had
demanded and to which Plaintiffs had an unfettered and immediate
right. As a result, they state a claim upon which relief may be
Defendant asserts that Plaintiffs' claim for conversion cannot
stand because the withheld funds represented a "general debt"
owed to Plaintiffs, and that the claim appropriately sounds in
debt rather than conversion. (R. 15, Def.'s Mot. at 5.) We are
unable to say at this stage whether Defendant's characterization
of the withheld funds as "debt" rather than as converted property
is appropriate. Drawing all inferences in favor of Plaintiffs, this
Court declines to dismiss on this ground.
Defendants further argue that Plaintiffs have described the
allegedly converted funds with insufficient specificity. (Id.
at 6.) This argument also fails. Money need not be "earmarked" in
order to sustain a claim of conversion. Bill Marek's The
Competitive Edge, Inc., 806 N.E.2d at 285. While "[a] right to
an indeterminate sum is insufficient to maintain a cause of
action in conversion," if the funds are "capable of being
described, identified, or segregated in a specific manner," an
action for conversion may be sustained. Id. Plaintiffs claim
that the funds were "maintained in an identifiable fund," (R. 2,
Amended Compl. ¶ 54), and that the converted funds were "of a
clearly calculable amount capably [sic] of being identified." (R.
20, Pls.' Resp. at 11.) Defendant's argument regarding the
ability to identify the funds may be appropriate in the context
of summary judgment, but it cannot prevail at this stage.
Plaintiffs have thus alleged facts in support of their claim of
conversion sufficient to survive this motion to dismiss.
III. Count V: Breach of Fiduciary Duty
Plaintiffs claim that "[d]ue to the investment component of the
Annuity Contracts, Allstate owes Plaintiffs a fiduciary duty."
(R. 2, Amended Compl. ¶ 65.) Plaintiffs further allege that
Defendant breached that fiduciary duty when it imposed transfer
restrictions on the annuity contracts and refused Plaintiffs'
fund withdrawal requests. (Id. ¶ 66.) Although the amended
complaint does not specify whether Plaintiffs bring suit under
state or federal law, Defendant moves to dismiss both possible
claims as untenable. (R. 15, Def.'s Mot. at 6-8.) Defendant
argues that under Illinois law there is no fiduciary duty between
contracting parties and that Plaintiffs' pleadings fail to state
a claim within the governing federal statute. (Id.) A. State Law Claim
Plaintiffs have failed to state a claim of breach of fiduciary
duty under state law. "It is well established under Illinois law
that parties to a contract . . . do not owe a fiduciary duty to
one another." Burgstone, 958 F. Supp. at 370 (citing Original
Great Am. Chocolate Chip Cookie Co., Inc. v. River Valley
Cookies, Ltd., 970 F.2d 273, 280 (7th Cir. 1992)). There are
some circumstances, however, where a fiduciary relationship
develops between contracting parties. Factors which suggest a
fiduciary relationship include "the degree of business experience
between the parties," Oil Express Nat'l, Inc. v. Latos,
966 F.Supp. 650, 651 (N.D. Ill. 1997), and the "extent to which the
allegedly subservient party entrusts the handling of his business
and financial affairs to the other . . .," In re Estate of
Wernick, 502 N.E.2d 1146, 1153 (Ill.App. Ct. 1986). Indeed, "a
party must prove that it `is heavily dependent upon the advice of
another' in order to establish such a duty." Burgstone,
958 F. Supp. at 370 (quoting Carey Elec. Contracting, Inc. v. First
Nat'l Bank of Elgin, 392 N.E.2d 759, 763 (Ill.App. Ct. 1979)).
"[M]ere allegations that one businessman simply trusted another
to fulfill his contractual obligations is certainly not enough"
to establish such a duty. Carey Elec. Contracting Inc.,
392 N.E.2d at 764. Here, Plaintiffs have pleaded no facts to suggest
that their dealings with Defendant were anything other than arms
length, nor that Defendant played an advisory role with respect
to Plaintiffs' investments. Because Plaintiffs allege nothing
beyond normal contractual expectations, the state-law breach of
fiduciary duty claim is dismissed.
B. Federal Law Claim
Plaintiffs have also failed to state a claim of breach of
fiduciary duty under federal law. Plaintiffs and Defendant agree
that the variable annuity contracts in question are investment contracts under federal securities law and that Defendant was
subject to the duties imposed by the Investment Company Act of
1940 ("ICA") with respect to those contracts. 15 U.S.C. § 80a-35.
Under §§ 36(a) and (b) of the ICA, private parties may bring
claims for breach of fiduciary duty. In re Nuveen Fund Litig.,
No. 94 C 360, 1996 WL 328006, at *6 (N.D. Ill. June 11, 1996).
Plaintiffs claim that Defendant, in imposing the transfer
restrictions and refusing Plaintiffs' requested fund withdrawals,
violated the fiduciary duty imposed by the ICA.
Section 36(a) provides a claim against a defendant who "has
engaged . . . in any act or practice constituting a breach of
fiduciary duty involving personal misconduct. . . ."*fn2
15 U.S.C. § 80a-35(a). Defendant moves to dismiss Plaintiffs' claim
under § 36(a) because "plaintiff has failed to plead personal
misconduct or self-dealing." (R. 22, Def.'s Reply at 6.) Indeed,
§ 36(a) does not provide redress for a general breach of fiduciary duty.
Rather, a cognizable claim must contain allegations of a breach
"involving personal misconduct;" to hold otherwise would render
these modifying words in the statute superfluous. While other
courts have adopted more liberal standards for section 36(a)
claims, see, e.g., Young v. Nationwide Life Ins. Co.,
2 F. Supp. 2d 914, 927 (S.D. Tex. 1998), we find that "personal
misconduct" refers to "misconduct that involves self-dealing by
investment company or other insiders." Nuveen, 1996 WL 328006
at *11. As the Nuveen court noted, "Congress adopted the ICA
primarily to address the unique problems of investment adviser
self-dealing in the investment fund industry." Id. at *10.
Plaintiffs do not allege any self-dealing or even personal
impropriety by Allstate and therefore fail to state a claim under
Section 36(b) allows a claim "for breach of fiduciary duty in
respect of such compensation or payments paid by such registered
investment company or by the security holders thereof to such
investment advisor or person." 15 U.S.C. § 80a-35(b). Plaintiffs
have not pled any facts nor made any arguments with respect to
this subsection. In the interest of thoroughness, the Court
concludes that the pleadings do not sustain a claim under this
section of the statute. See Nuveen, 1996 WL 328006 at *14
(noting that "every court addressing a § 36(b) claim has required
the plaintiff to demonstrate that the compensation or payment
received by the investment adviser was disproportionate to the
services rendered"). For the reasons set forth in this
subsection, we dismiss Plaintiffs' federal claim of breach of
For all of the reasons provided above, this Court partially
grants and partially denies Defendant's motion to dismiss. (R.
17-1.) Defendant's motion to dismiss is granted with prejudice as to count three (the breach of the covenant of good
faith and fair dealing claim) and without prejudice as to count
five (the state and federal breach of fiduciary duty claims).
Defendant's motion to dismiss count four (the conversion claim)