Two men share securities regulation news

Breaking news and expert analysis on legal and compliance issues

[Back To Home][Back To Archives]

From Securities Regulation Daily, March 19, 2014

Securities Act claim based on misleading prospectus barred by statute of repose

Where plaintiffs misread the terms of an insurance policy loan relating to interest payments, the insurance company did not breach the contract or its fiduciary duty by its actions. In addition, a Securities Act claim that the prospectus was misleading was barred by the Act’s statute of repose (McCormick v. Independence Life and Annuity Co., March 18, 2014, Griesbach, W.).

Background. The plaintiffs bought a variable life insurance policy in 1987 from a predecessor of Independence Life and Annuity Company. They then took out a loan against the policy and did not pay the annual interest, which was to accrue at 4.7%. The “Policy Loans” clause provided that when a policyholder took out a loan, the insurer would transfer that amount out of the sub-accounts as collateral for the loan. Although the transfers earned 4% a year for the insured, the insurer charged 4.7% a year as interest on the amount of the loan. The insurer required that the loan interest be paid annually, or else it would be added to the principal of the loan and bear interest.

The plaintiffs alleged that the policy automatically deducted their annual payment and, thus, when Independence charged them additional interest, it overcharged them. They argued that although they did not write checks to Independence to cover the interest every year, the policy itself automatically “paid” the interest by removing funds from sub-accounts and transferring them to Independence’s general account.

No breach of contract or fiduciary duty. The court disagreed with the plaintiffs’ interpretation.  Funds transferred pursuant to the Policy Loans clause were not interest payments. The court noted that the policy itself contemplated that holders would actually pay the interest in the traditional sense. As the clause said, “If the interest is not paid by the end of the policy year, it will be added to the principal of the loan and will bear interest.” Because the interest was not paid, the insurer was entitled to charge interest on the unpaid interest (as the policy itself warned) resulting in an effective rate of interest higher than 0.7%.

Because the plaintiffs’ misreading of the policy was the foundation of most of their claims (breach of contract and fiduciary duty, bad faith, declaratory relief), all of those claims were dismissed.

Securities claim barred by statute of repose. The plaintiffs also asserted a federal claim for violation of Securities Act of 1933 on the grounds that the prospectus issued at the time the policy was purchased was misleading. In particular, the amended complaint alleged that the prospectus asserted that interest on policy loans would be deducted from the policy’s cash value if not paid when due.

Section 13 of the Securities Act provides for a three-year statute of repose. Because the plaintiffs’ policy was offered and accepted in 1987, the statute of repose would seem to bar the action. However, the plaintiffs argued that their purchase of the insurance policy was ongoing because they continued to make payments on it due to shortfalls owing to the insurer’s charging of interest on interest. Consequently, they believed their injury was ongoing and renewed with the payment of each premium. Not so, said the court. The statute sets the trigger as the day the security was “offered,” which means when the security was first offered. As a result, the claim expired more than two decades ago.

Citing precedent, the court held that equitable tolling does not apply to statutes of repose. A statute of repose creates “an absolute date after which a potential defendant may enjoy the repose that comes from knowing any claims are now expired.” Thus, even if equitable considerations warranted tolling, such relief would be unavailable, said the court. Accordingly, the securities claim was also dismissed.

The case is No. 12-C-763.

Attorneys: George Burnett (Liebmann Conway Olejniczak & Jerry SC) for Joseph C. McCormick. Paul E. Benson (Michael Best & Friedrich LLP) for Independence Life and Annuity Co.

Companies: Independence Life and Annuity Co.

LitigationEnforcement: FraudManipulation SecuritiesOfferings WisconsinNews

Securities Regulation Daily

Introducing Wolters Kluwer Securities Regulation Daily — a daily reporting service created by attorneys, for attorneys — providing same-day coverage of breaking news, court decisions, legislation, and regulatory activity.


A complete daily report of the news that affects your world

  • View full summaries of federal and state court decisions.
  • Access full text of legislative and regulatory developments.
  • Customize your daily email by topic and/or jurisdiction.
  • Search archives for stories of interest.

Not just news — the right news

  • Get expert analysis written by subject matter specialists—created by attorneys for attorneys.
  • Track law firms and organizations in the headlines with our new “Who’s in the News” feature.
  • Promote your firm with our new reprint policy.

24/7 access for a 24/7 world

  • Forward information with special copyright permissions, encouraging collaboration between counsel and colleagues.
  • Save time with mobile apps for your BlackBerry, iPhone, iPad, Android, or Kindle.
  • Access all links from any mobile device without being prompted for user name and password.