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PRESCOTT v. ALLSTATE LIFE INSURANCE CO.

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,
v.
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. ¶ 40.)

  LEGAL STANDARDS

  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).

  ANALYSIS

  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 claim.

  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 ...


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