Monday, August 3, 2015

No. 111: Shadow Insurance—A Legal Setback in the Struggle against the Life Insurance Shell Game

On July 21, 2015, U.S. District Judge Jesse M. Furman issued an Opinion and Order dismissing for lack of jurisdiction a class action lawsuit relating to the use of shadow insurance. He ruled the plaintiffs had failed to show they suffered a "concrete injury-in-fact," as required to establish standing under the U.S. Constitution. He dismissed the complaint, and he denied the plaintiffs' motion for class certification as moot. (See Ross v. AXA Equitable Life, U.S. District Court, Southern District of New York, Case No. 1:14-cv-2904.)

The Ross (Yale) Lawsuit
The initial complaint was filed in April 2014. At that time, the lead plaintiff was Andrew Yale. On February 24, 2015, the judge granted Yale's unopposed motion to substitute—"due to family medical issues"—Jonathan Ross and David Levin as lead plaintiffs. Two days later they filed an amended complaint. On March 24 they filed a second amended complaint. On April 1 they filed a motion to certify the class. On April 14 AXA filed a motion to dismiss the complaint. On May 5 the plaintiffs filed an opposition to the motion to dismiss. On May 12 the defendant replied to the plaintiffs' opposition. Here, with citations omitted, are the two concluding paragraphs of Judge Furman's July 21 Opinion and Order (NYDFS is the New York Department of Financial Services):
For the reasons stated above, the Court concludes that Plaintiffs fail to demonstrate an injury sufficient to "satisfy the strictures of constitutional standing," and that the Complaint must therefore be dismissed for lack of subject-matter jurisdiction. In light of that conclusion, the Court need not and will not address Defendant's other grounds for dismissal. Further, Plaintiffs' motion for class certification must be and is denied as moot.
The Court does not arrive at its conclusion lightly. The pervasiveness of shadow insurance in New York—and AXA's alleged failure to disclose details of those transactions—may well pose a threat to the stability and reliability of the state's insurance system, as NYDFS suggested. Nevertheless, the Court cannot address the legality or propriety of AXA's conduct without the constitutional authority to do so. The absence of "a substantial controversy ... of sufficient immediacy and reality to justify judicial resolution" does not, of course, mean that Plaintiffs—or life insurance policyholders more generally—are without recourse. To the contrary, one of the purposes of the injury-in-fact requirement is to ensure that generalized claims of this nature are "committed ... ultimately to the political process." Notably, it appears that that process has at least partially served its purpose in this case: As plaintiffs themselves concede, the NYDFS promulgated a new regulation after its investigation "explicitly requiring disclosure of additional information regarding shadow insurance transactions." Ultimately, having to establish an injury-in-fact worthy of federal judicial intervention, it is those political channels (or, perhaps, state court) through (or in) which plaintiffs must seek to resolve their grievances.
Other Shadow Insurance Lawsuits
Several shadow insurance lawsuits have been filed in federal courts. Aside from the cases discussed in Nos. 107 (June 30, 2015) and 110 (July 17, 2015), and in addition to Ross, other cases have been consolidated under Senior District Judge Denise L. Cote in the same court as the Ross case. Among those other cases are two lawsuits against Metropolitan Life Insurance Company. (See Robainas v. Metropolitan Life and Intoccia v. Metropolitan Life, U.S. District Court, Southern District of New York, Case Nos. 1:15-cv-3061 and 1:14-cv-9926.)

On July 22, the day after Judge Furman issued his ruling, an attorney for Metropolitan Life sent a letter to Judge Cote about Judge Furman's "well reasoned" decision in the "nearly identical" Ross case. The attorney "wanted to be sure the Court had the benefit of Judge Furman's thinking as it considers [Metropolitan Life's] motion to dismiss" the Robainas complaint, and he attached Judge Furman's decision "for the Court's convenience."

On July 23 an attorney for Ross sent a courtesy letter to Judge Furman and attached a copy of a letter sent to Judge Cote in response to the above mentioned July 22 letter. In the letter to Judge Cote the attorney for Ross said: "Plaintiffs intend to appeal Judge Furman's decision and respectfully submit that it would be error for this Court to adopt the reasoning of that opinion in the MetLife cases." He described the analysis in Judge Furman's ruling as "flawed for several independent reasons," and he identified those reasons. Presumably the appeal will be filed in the U.S. Court of Appeals for the Second Circuit.

My Open Records Law Request in Iowa
In No. 109 (July 13, 2015) I discussed the May 2015 independent auditor reports filed by the eight "limited purpose subsidiaries" (LPSs) domiciled in Iowa. I mentioned dubious assets carried by the LPSs in their financial statements as of the end of 2014. Six of the LPSs carry as assets items that are not allowed under generally accepted accounting principles (GAAP) and are not allowed under statutory accounting practices. The other two LPSs carry as assets items that are not allowed under GAAP.

On July 24, pursuant to the Iowa Open Records Law, I requested copies of the documents associated with each of those dubious assets, including documents reflecting the Iowa Insurance Division's approval of those assets. The Division denied my request. I now plan to appeal the denial to Nick Gerhart, the Iowa insurance commissioner.

Available Material
I am offering a complimentary 28-page PDF consisting of three items: the 23-page July 21 Opinion and Order by Judge Furman, the two-page July 22 letter to Judge Cote from an attorney for Metropolitan Life, and the three-page July 23 letter to Judge Cote from an attorney for Ross. Email and ask for the package relating to the case of Ross v. AXA Equitable Life.