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Michael S. Rulle Family Dynasty Trust v. AGL Life Assurance Co.

July 7, 2010

THE MICHAEL S. RULLE FAMILY DYNASTY TRUST, PLAINTIFF,
v.
AGL LIFE ASSURANCE COMPANY, DEFENDANT.



The opinion of the court was delivered by: Schiller, J.

MEMORANDUM

Bernard Madoff's deceit bilked unsuspecting investors out of billions of dollars. Among those who lost money due to Madoff's fraud was the Michael S. Rulle Family Dynasty Trust ("Rulle Trust"), the contract holder of a life insurance policy issued by Defendant AGL Life Assurance Company ("AGL") and on which Michael S. Rulle is the named insured.The insured elected to have the premiums invested in the Tremont Opportunity fund, which in turn selected some investments that Madoff managed. As a result, the value of the investment account in Plaintiff's policy decreased. Plaintiff filed a lawsuit seeking to hold AGL responsible for this investment loss. The Amended Complaint alleged violations of federal and state securities laws, breach of contract, breach of fiduciary duty, negligence, negligent misrepresentation, unjust enrichment, and breach of the implied covenant of good faith and fair dealing. Presently before the Court is Defendant's motion to dismiss the Amended Complaint. For the reasons that follow, the Court will grant the motion in part and dismiss the securities law, breach of contract, and breach of good faith and fair dealing claims. The Court will leave for another day the negligence, breach of fiduciary duty, negligent misrepresentation, and unjust enrichment claims to allow the parties to further brief the issue of which state's laws should govern these claims.

I. BACKGROUND

A. The Players

The Rulle Trust is a beneficiary and contract holder under a variable life insurance policy known as the Flexible Premium Variable Life Insurance Contract issued by AGL Life Assurance Company. (Am. Compl. ¶ 2.) Michael S. Rulle is the insured. (Am. Compl. Ex. A [Policy] at 3.) At the time he applied for the Policy, Rulle worked at Hamilton Partners, Ltd. making investment decisions. (Id. at "Agent's Report.") The terms of the Policy are governed by Alaska law. (Am. Compl. ¶ 25; Policy at 3, 9.)

AGL is an affiliate company of the Phoenix Companies, Inc. (Am. Compl. ¶ 2.) The Phoenix Equity Planning Corporation ("Phoenix Equity"), formerly named PFG Distribution Company, is a broker-dealer licensed by the SEC and is also registered with the Financial Industry Regulatory Association ("FINRA"). (Id. ¶¶ 4, 5.) Both AGL and Phoenix Equity are controlled by PFG Holdings, Inc. (Id. ¶ 5.) AGL and Phoenix Equity entered into an agreement whereby AGL would sell its variable life insurance securities products through Phoenix Equity as the licensed broker-dealer. (Id. ¶ 6.) AGL and Phoenix Equity share some officers and directors in common. (Id. ¶ 8.) John Hillman, the Director, President, and CEO of AGL, and the Director and Vice President of Phoenix Equity, is a FINRA licensed broker. (Id. ¶ 10.)

B. The Solicitation

Hillman sought to have Rulle invest in American Masters Opportunity Insurance Fund, L.P., a "fund of funds" AGL obtained that subsequently was renamed the Tremont Opportunity Fund. (Id. ¶¶ 18-19.) Hillman told Rulle that the American Masters Opportunity Fund was a reputable "fund of funds" selected by AGL to participate in the Flexible Premium Variable Life Insurance Policy of AGL as one of the two Investment Accounts in which net premiums could be allocated. (Id. ¶ 20.) Hillman represented that the American Masters Opportunity Fund was highly diversified and "the investor would be as far removed from making investment decisions as possible." (Id.) Hillman told Rulle that "in the range of 7% or less of the funds" Rulle invested would be placed with any one manager. (Id. ¶ 22.) The Rulle Trust and AGL entered into a Flexible Premium Variable Life Insurance Contract on or about October 5, 2001. (Id. ¶ 2.) The Policy had an initial face amount of $17,600,000 and the initial premium to be paid by Plaintiff was $1,200,000. (Policy at 3.) Plaintiff paid this first premium payment and additional premium payments of $1,200,000, $1,000,000, and $250,000 in 2002, 2003, 2004. (Am. Compl. ¶ 41.)

C. The Policy and Its Terms

A variable universal life insurance policy allows the policy holder to invest a portion of the premiums in optional investment accounts offered by the policy. (Am. Compl. ¶ 24.) Because the investments are held within a policy, gains inside the policy are shielded from income taxes, as is the payout when the insured dies. (Id.) The policy is suitable only for those "of substantial financial means." (AGL Mot. to Dismiss Ex. 1 [AGL Private Placement Memorandum ("AGL PPM")] at 10.) According to the AGL PPM, one had to qualify to purchase a flexible premium variable life insurance policy and could do so only by demonstrating "substantial experience in making investment decisions of this type." (Id.)

According to the Amended Complaint, Plaintiff was able to choose among two investment accounts for investment of the Policy premiums. (Am. Compl. ¶ 45.) One of these options was the American Masters Opportunity Insurance Fund, whose objective was to: (1) achieve long-term capital appreciation and (2) consistently generate positive returns irrespective of stock market volatility or direction, while focusing on the preservation of capital. (Policy at 5.) The investment account sought to "invest with various portfolio managers believed to be able to meet the Partnership's objectives." (Id.) Pursuant to the Policy, however, AGL could "establish and operate the Variable Account as a managed account or an account which purchases shares from the portfolios of funds managed by investment managers retained by [AGL]." (Id. at 13.) AGL was also able to contract with investment managers or manage directly the assets held in the Investment Accounts. (Am. Compl. ¶ 30; Policy at 13.) AGL could also "deduct an Asset Charge from the Account Value allocated to Investment Accounts that [were] managed directly as well as any costs and expenses [that arose] from such Investment Accounts. In either case, investment managers [were] selected by us in our discretion." (Am. Compl. ¶ 30; Policy at 13.) The Rulle Trust invested in the American Masters Opportunity Insurance Fund, L.P. Account, which later changed its name to Tremont Opportunity Fund III, L.P., a Delaware Partnership managed by Tremont Partners, Inc. ("Tremont"). (Am. Compl. ¶¶ 12-13; Def.'s Mem. of Law in Supp. of Mot. to Dismiss [Def.'s Mem.] at 3 n.4.)

The Policy states the "[t]he Account Value [of the Investment Accounts] will increase or decrease in accordance with increases and decreases in the value of the Investment Accounts in which the Account Value is invested." (Policy at 14.)

The value of an investment account reflects:

* Any amounts transferred to the Investment Account during the current Valuation Period;

* The investment income and realized and unrealized capital gains credited to such assets in the Valuation Period;

* Any amounts transferred from an Investment Account during the current Valuation Period;

* Realized and unrealized capital losses charged against those assets during the Valuation Period;

* Any amount charged or reserved against the Investment Account for taxes;

* Any expenses charged or reserved against the Investment Account for expenses incurred in operating such Investment Account;

* The mortality and expense risk charge for the Valuation Period; and

* Any other Monthly Charges deducted from the Investment Account for This Contract.

(Policy at 13.) The Account Value of the Policy is the value of the Investment Accounts plus the value of the Borrowed Fund.*fn1 (Id. at 15.) The Account Value of the Contract when the Initial Premium was received equaled the Net Premium invested in the Investment Accounts minus the cost of Insurance Charges, Policy Loads, and any charges for Special Insurance Class Rating. (Id.) Subsequently, the Account Value factors in, among other items, new Net Premiums invested in the Investment Accounts, any increase in value of the Investment Account due to investment results, partial withdrawals, insurance charges, and policy loads. (Id.) The Net Account Value is "the Account Value minus any Contract Loan Balance and accrued unpaid interest." (Id.)

The assets in the Investment Accounts belong to AGL; Policy Owners, such as Rulle, possess no legal, equitable, direct or indirect interest in any specific investment item held in the Investment Accounts or the Policy. (AGL PPM at 37.) Consistent with this statement, contract owners had no right to require Tremont or any manager "to acquire or dispose of any particular asset, to make, fund or allocate funds to any investment or to incur or pay any particular liability of a portfolio." (Def.'s Mot. to Dismiss Ex. 2 [American Masters Opportunity Insurance Fund, L.P. Confidential Private Placement Memorandum] ("AMO PPL") at 34.) The AMO PPL continues, "[t]here will be no prearranged plan between the General Partner (or any Manager) and any Contract Owner to invest any amounts in any particular assets or subject to any particular arrangement." (Id.) Thus, Tremont was vested with sole discretion in determining the allocation of portfolio assets. (Id.) The AMO PPL states "[t]he Partnership and each portfolio thereof intends to comply with the diversification requirements imposed by [the tax code], and the regulations thereunder." (Id. at 33.) A portfolio is considered diversified only if:

(i) no more that 55% of the value of the total assets of the portfolio is represented by any one investment, (ii) no more than 70% of the value of the total assets of the portfolio is represented by any two investments, (iii) no more than 80% of the value of the total assets of the portfolio is represented by any three investments, and (iv) no more than 90% of the value of the total assets is represented by any four investments. Thus, under this general rule, a portfolio is required to invest a specified portion of its assets in at least five distinct investments. (Id. at 34.)

D. The AGL Private Placement Memorandum

Hillman also provided Rulle with the AGL PPM. The AGL PPM offered as "Investment Accounts" a Money Market Account or the American Masters Opportunity Insurance Fund, L.P. Account. (AGL PPM at 1.) Similar to the language in the Policy, the AGL PPM noted that American Masters Opportunity sought to achieve long-term capital appreciation and consistently generate positive returns irrespective of stock market volatility or direction, while focusing on capital preservation. (Id. at 38.) The AGL PPM also touted the use of a multi-manager investment format, in which Tremont would select the various portfolio managers. (Id.) The format was "designed to provide investors with a diversified investment portfolio, as well as enable them to obtain above-average returns over a market cycle." (Id. at 38.) However, investors were warned: "There can be no guarantee of future performance and there is no assurance that the Partnership will be able to achieve its investment objectives or be profitable." (Id. (emphasis in original).) Investors were also informed that the value of their Investment Account would fluctuate based on the performance of the investments selected by the investment managers. (Id. at 11.) Therefore, "Policy Owners [bore] the entire investment risk, including the risk of loss of principal for all amounts invested in the Policy." (Id.) The AGL PPM also set forth various risk factors attached to the investments, noting that "[w]hen a Policy Owner invest[ed] in the Investment Accounts, the Policy Owner [was] assuming the entire risk of an investment in the underlying securities, including the risk of loss of the entire principal." (Id. at 14.) Plaintiff was informed that, "[t]he risk may include, among others:

(1) the risk of poor performance or default by one or more issuers of securities that comprise the Investment Accounts' assets...." (Id. at 14-15.) Neither the AGL PPM or AMO PPM, however, defined the terms "investment performance" or "investment results" to include money lost by fraud or theft. (Am. Compl. ΒΆΒΆ 37-39.) Moreover, Plaintiff argues, fraud or ...


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