Otto v. Variable Annuity Life Insurance Co.

814 F.2d 1127 (7th Cir. 1986)

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Nature of the Case

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Facts

D is in the business of selling annuities, which qualify for tax-exempt status under section 403(b) of the Internal Revenue Code. D offers its various annuity plans to an organization's employees. If an employee chooses to participate, he or she directs the employer to contribute a portion of the employee's salary to purchase an annuity. D offers the employee two types of annuity contracts: the fixed annuity and the variable annuity. Under both plans, the principal and any return accumulate during the life of the contract. Under the fixed D guarantees the principal and an interest rate of 4 percent per year for the first ten years and 3 1/2 percent thereafter. 'Excess' interest over the guaranteed rate is paid to fixed annuity participants at the discretion of D. Under the variable neither the principal nor the rate of return is guaranteed; both fluctuate with D's investment performance. P purchased a fixed annuity in 1975 and on August 2, 1982, she brought this class action. P claims that D failed to disclose the manner in which interest was calculated under the fixed annuity plan -- specifically, that it used the 'banding' or 'new money' method for crediting 'excess' interest to the fixed annuity account. Under the banding method, the current rate of excess interest is paid only on deposits made during the current period. All prior contributions continue to earn the rates of excess interest declared during the periods in which those contributions were made. P also claims that the Ds failed to disclose the method by which a participant in the fixed annuity plan could maximize his or her rate of return. P alleged violations of the Securities Exchange Act of 1934 (the 1934 Securities Act), the Employee Retirement Income Security Act of 1974 (ERISA), and the Racketeer Influenced and Corrupt Organizations Act (RICO). P alleged conspiracy, breach of contract and common law fraud. Ds motioned for summary judgment. The court granted summary judgment on the 1934 Securities Act, and ERISA counts, in that D's fixed annuity did not constitute a security within the meaning of the federal securities laws or an employee benefit plan within the meaning of ERISA. The court dismissed the RICO count on the grounds that the complaint failed to specify an enterprise and each defendant's role in the alleged pattern of racketeering activity. The conspiracy count was dismissed for failure to allege any facts. With the dismissal of these federal claims which had furnished the basis of pendent jurisdiction, the court dismissed the contract and common law fraud claims. P appealed. The court then granted a petition for rehearing. D asserts that it has the right to freely alter past interest bonds.