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Anna Howerton, Floyd R. Burns, and Catherine v. Prudential Insurance Company of America

October 22, 2012

ANNA HOWERTON, FLOYD R. BURNS, AND CATHERINE KUNICKI A/K/A BONVICH, INDIVIDUALLY AND ON BEHALF OF ALL
THE OTHER INDIVIDUALS AND/OR ENTITIES SIMILARLY SITUATED,
PLAINTIFFS-APPELLANTS,
v.
PRUDENTIAL INSURANCE COMPANY OF AMERICA, A NEW JERSEY CORPORATION; ARTHUR F. RYAN, CHAIRMAN AND CHIEF EXECUTIVE OFFICER; FRANKLIN E. AGNEW, FREDERIC K. BECKER, GILBERT F. CASELLAS, JAMES G. CULLEN, CAROLYNE K. DAVIS, ROGER A. ENRICO, ALLAN D. GILMOUR, WILLIAM H GRAY, III, JON F. HANSON, GLEN H. HINER, CONSTANCE J. HORNER, GAYNOR N. KELLEY, BURTON G. MALKIEL, IDA F.S. SCHMERTZ, CHARLES R. SITTER, DONALD L. STAHELI, RICHARD M. THOMSON, JAMES A. UNRUH, P. ROY VAGELOS, STANLEY C. VAN NESS, PAUL A. VOLCKER, AND JOSEPH H. WILLIAMS,
DEFENDANTS-APPELLEES,



Appeal from Circuit Court of Cook County. No. 01 CH 5145 HonorablePeter Flynn, Judge Presiding.

The opinion of the court was delivered by: Justice Cunningham

JUSTICE CUNNINGHAM delivered the judgment of the court, with opinion. Presiding Justice Hoffman and Justice Rochford concurred in the judgment and opinion.

OPINION

¶ 1 On this direct appeal, plaintiffs claim that the trial court erred when it dismissed plaintiffs' complaint with prejudice on the following grounds: (1) as being filed in an improper forum; (2) for failing to join an indispensable party, the New Jersey Insurance Commissioner (Commissioner); and (3) for failure to state a cause of action for breach of fiduciary duty because proximate cause was not properly alleged. For the following reasons, we affirm the ruling of the circuit court of Cook County.

¶ 2 BACKGROUND

¶ 3 On March 26, 2001, plaintiffs Anna Howerton (Howerton), Floyd Burns, and Catherine Kunicki (a/k/a Bonovich) originally filed a class action complaint, individually and on behalf of a class, against Prudential Insurance Company of America (Prudential) and its board of directors. Plaintiffs are policyholders of life insurance policies issued by Prudential and claim to represent similarly situated policyholders as a class. Prudential is a stock life insurance company, incorporated with its principal place of business in New Jersey. At the time of the claimed damages, Prudential was a mutual life insurance company owned by its policyholders, including plaintiffs. Plaintiffs claim in their brief before this court that "each such policyholder maintained an ownership portion of Prudential proportionate to his or her policy and the company's surplus." The policyholders elect the board of directors.

¶ 4 The case at bar stems from a settlement of a prior class action litigation in 1996 (the 1996 case).

¶ 5 In the 1996 case, Prudential allegedly sold fraudulent life insurance policies which had a "vanishing premium," as well as other alleged irregularities between January 1, 1982 and December 31, 1995. These allegedly fraudulent policies were sold through agents and brokers who received commission in compensation for the sales. The agents and brokers were under contract to return to Prudential all commissions received from the sale of any policy cancelled or otherwise terminated.

Prudential entered into a settlement agreement with the New Jersey state insurance regulatory authority*fn1 and the members of the class who had purchased these policies. Plaintiffs in the case at bar were not part of the class in the settlement of the 1996 case because they had purchased their life insurance policies prior to 1982. The United States District Court for the District of New Jersey approved the settlement of the 1996 case, entitled In re Prudential Insurance Co. of America Sales Practices Litigation, 962 F. Supp. 450, 468 (D.N.J. 1997), aff'd, 148 F.3d 283 (3d Cir. 1998), cert. denied sub nom. Krell v. Prudential Insurance Co. of America, 525 U.S. 1114 (1999). The settlement resulted in Prudential paying fines and providing relief to its class members. Prudential, 962 F. Supp. at 473, 488-92. The settlement also included an alternative dispute resolution (ADR) procedure for policyholders who claim improper sales practices by Prudential that the New Jersey court described as "fair and swift alternative to litigation." Id. at 488. The ADR procedure allowed those claiming injuries a forum to resolve their claims outside of court, and Prudential covered the cost of the program, including representation fees.*fn2 Id. The settlement also required Prudential to offer "Basic Claim Relief" to members of the class who either "[did] not feel misled or [did] not desire to participate in the ADR process." Id. at 541.

¶ 6 In 1996, around the time of the settlement,*fn3 Prudential considered attempting to recapture the "commissions associated with premiums that were returned or reduced in the ADR process." Prudential's management was concerned that a recapture campaign would hinder its agents' cooperation in the ADR process, which would in turn hinder Prudential's goal of facilitating policyholder remediation. Thus, Prudential chose not to pursue a recapture program.

¶ 7 On September 14, 2000, Howerton wrote a letter to Prudential demanding that Prudential recapture the commissions received by its agents for those policies that were returned or reduced in the settlement process.

¶ 8 On December 15, 2000, after successfully gaining passage of a New Jersey state law allowing demutualization, Prudential's board unanimously voted to adopt a plan for demutualization. Under the terms of the plan, Prudential would distribute common stock, cash, or policy credits to eligible policyholders to convert Prudential from a mutual insurance company to a stock insurance company which would be owned by its shareholders.

¶ 9 On January 8, 2001, Prudential responded to Howerton's demand letter, informing Howerton that it planned to form a committee to "investigate" the commissions recapture and that the process may take "several months." Prudential formed a "special committee," and with the help of an outside law firm, conducted a year-long investigation into the matter.

¶ 10 On March 14, 2001, Prudential filed their demutualization plan with the New Jersey Department of Insurance. The plan required approval by the Commissioner (N.J. Stat. Ann. §17:17C-4 (West 2000)), as well as a two-thirds approval by Prudential's qualified policyholders (N.J. Stat. Ann. § 17:17C-5 (West 2000)).

ΒΆ 11 On March 26, 2001, plaintiffs filed a class action lawsuit in the circuit court of Cook County against Prudential asserting four counts: (1) that the demutualization plan was an anticipatory breach of Prudential's contracts with all of its policyholders; (2) that defendants breached their duty of good faith and fair dealing, and breached their fiduciary duty in adopting the plan; (3) asking the court to declare that the plan would violate the New Jersey Constitution by impairing the policyholders' contracts; and (4) seeking a declaratory judgment that ...


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