ARLENE SHUSTER v. AXA EQUITABLE LIFE INSURANCE COMPANY

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NOT FOR PUBLICATION WITHOUT THE
                      APPROVAL OF THE APPELLATE DIVISION
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                                       SUPERIOR COURT OF NEW JERSEY
                                       APPELLATE DIVISION
                                       DOCKET NO. A-3160-15T1

ARLENE SHUSTER,

              Plaintiff-Appellant,

v.

AXA EQUITABLE LIFE INSURANCE
COMPANY,

          Defendant-Respondent.
________________________________________

              Argued November 13, 2017 – Decided April 17, 2018

              Before Judges Messano, Accurso, and Vernoia.

              On appeal from Superior Court of New Jersey,
              Law Division, Camden County, Docket No.
              L-4485-14.

              Barbara J. Hart (Lowey Dannenberg Cohen &
              Hart, PC) of the New York and Connecticut
              bars, admitted pro hac vice, argued the cause
              for appellant (Cohn Lifland Pearlman Herrmann
              & Knopf, LLP, Zucker Steinberg & Wixted, PA,
              and   Barbara   Hart,  attorneys;   Peter   S.
              Pearlman, Audra DePaolo, Sung-Min Lee (Lowey
              Dannenberg Cohen & Hart, PC), David C.
              Harrison (Lowey Dannenberg Cohen & Hart, PC)
              of the New York bar, admitted pro hac vice,
              and Joshua H. Grabar (Bolognese & Associates,
              LLC) of the Pennsylvania bar, admitted pro hac
              vice, on the briefs).
              Jay B. Kasner (Skadden, Arps, Slate, Meagher
              & Flom, LLP) of the New York bar, admitted pro
              hac vice, argued the cause for respondent
              (Carl D. Poplar, PA and Jay B. Kasner,
              attorneys; Carl D. Poplar, Jay B. Kasner and
              Kurt Wm. Hemr (Skadden, Arps, Slate, Meagher
              & Flom, LLP) of the New York and Massachusetts
              bars, admitted pro hac vice, of counsel and
              on the brief).

PER CURIAM

      In     1993,   plaintiff    Arlene    Shuster    purchased      a    Flexible

Premium Variable Life Insurance Policy (the Contract) from the

predecessor of defendant, AXA Equitable Life Insurance Company

(AXA).     Plaintiff made two premium payments of $100,000 each in

1993 and 1994.

      In November 2014, plaintiff filed a putative class action

complaint alleging AXA breached the Contract.                Broadly stated, the

Contract permitted policyholders to direct the investment of net

premium amounts — amounts in excess of insurance costs and expenses

—   either    with   the   Guaranteed      Interest    Division      (GID),   which

guaranteed     an    annual   percentage     return,    or    with   a    "Separate

Account" (SA).       At the policyholder's direction, funds in the SA

would be invested with different investment divisions within AXA,

which, by the terms of the Contract, invested "in securities and

other investments whose value [wa]s subject to market fluctuations

and investment risk."         Plaintiff directed investment in particular

SA funds.

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     In the Contract, AXA represented it would comply with all

applicable laws, including those of New York.           Additionally, the

Contract provided, "[w]e will not make any material change in the

investment policy of an investment division of our SA without the

prior approval of the Superintendent of Insurance of New York

State."     Plaintiff claimed that beginning in 2009, AXA pursued a

"volatility-management     strategy"   in   some   of    its   SA    funds,

including those in which she had invested.

     New York law regulates an insurer's investments in separate

accounts, and requires the New York State Department of Financial

Services (DFS) to approve an insurer's "statement as to its methods

of operation of such separate account."

            If the insurer files an amendment of any such
            statement with the superintendent that does
            not change the investment policy of a separate
            account and the superintendent does not
            approve or disapprove such amendment within a
            period of thirty days after such filing, such
            amendment shall be deemed to be approved as
            of the end of such thirty day period . . . .
            An amendment of any such statement that
            changes the investment policy of a separate
            account shall be treated as an original
            filing.

            [N.Y. Ins. Law § 4240(e) (emphasis added).]

Plaintiff alleged that in its filing with DFS, AXA portrayed the

amendment     adopting   its   "volatility-management      strategy"       as




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"routine," permitting implementation of the strategy in due course

without review as a new "original" filing.

     In March 2014, AXA entered into a consent order with DFS

(Consent Order).          The Consent Order summarized DFS's findings

resulting from an investigation commenced in 2011 into AXA's

implementation of changed investment strategies in its "variable

annuity products."        DFS found AXA violated §4240(e) in 2009, 2010

and 2011 "by filing . . . Plans of Operation . . . without

adequately informing and explaining to [DFS] the significance of

the changes to the insurance product."                AXA's adoption of this

investment strategy "limit[ed] the gains that may accrue to a

policyholder's account."        The consent order required AXA to pay a

civil    fine,   obtain    necessary    approvals     for     modifications     and

communicate with policyholders.

     Plaintiff's complaint alleged AXA breached its contractual

promise to comply with applicable law and not make material changes

in the SA's operating plan without DFS approval.                 It alleged the

breach    resulted   in     AXA's   implementation       of    the    volatility-

management strategy that "reduced the returns" in funds held by

plaintiff and other class members.

     The   Securities      Litigation       Uniform   Standards      Act   of   1998

(SLUSA), specifically, 15 U.S.C. § 78bb(f), provides:



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          Limitations on remedies.

          (1)    Class action limitations.

               No covered class action based upon the
          statutory or common law of any State or
          subdivision thereof may be maintained in any
          State or Federal court by any private party
          alleging —

                 (A) a misrepresentation or omission
                 of a material fact in connection
                 with the purchase or sale of a
                 covered security; or

                 (B)   that the defendant used or
                 employed    any   manipulative    or
                 deceptive device or contrivance in
                 connection with the purchase or sale
                 of a covered security.

          (2)    Removal of covered class actions.

               Any covered class action brought in any
          State court involving a covered security, as
          set forth in paragraph (1), shall be removable
          to the Federal district court for the district
          in which the action is pending, and shall be
          subject to paragraph (1).

AXA removed plaintiff's complaint to federal district court and

asked that venue be transferred to the Southern District of New

York, where another action, Zweiman v. AXA Equitable Life Ins.

Co., 
146 F. Supp. 3d 536 (S.D.N.Y. 2015), was pending at the time.

Before AXA's change of venue motion was heard, AXA moved to dismiss

the complaint, arguing it was precluded by SLUSA.

     Plaintiff   opposed   the   motions   and   moved   to   remand   the

complaint to the Law Division.     She argued her complaint alleged

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a   breach   of   the   Contract   and   did   not   allege   AXA   made   any

"misrepresentation or omission" to policyholders "in connection

with the purchase or sale of a covered security."1

      In a comprehensive written decision, the district court judge

concluded "AXA's misrepresentation [wa]s an essential predicate

for [plaintiff's] breach of contract claim."             However, applying

four factors relevant to whether the misrepresentation satisfied

the "in connection" prong of SLUSA, see Rowinski v. Salomon Smith

Barney Inc., 
398 F.3d 294, 302 (3d Cir. 2005), the judge concluded

AXA failed to make the required showing. He remanded the complaint

to the Law Division.




1
  Plaintiff also asserted in a letter to the court that transfer
was not appropriate because Zweiman "involves annuity products
whereas [this case] involves life insurance policies with
substantively different terms." While continuing to assert before
us that differences exist between the two investment products,
plaintiff acknowledged before the Law Division that "[i]f the
[C]onsent [O]rder . . . provides that AXA's violation of [§]42-
40(e) is limited solely to annuities, then life insurance policy
holders wouldn't have a claim." Furthermore, plaintiff's brief
does not attach any significance to the difference between her
variable life insurance policy and the annuities that were the
subject of Zweiman, except to say that the district court judge
in Zweiman recognized that every SLUSA preclusion analysis was
fact sensitive and his analysis did not consider the facts alleged
in plaintiff's complaint. Zweiman, 
146 F. Supp.  at 546 n.21.



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      AXA promptly filed a motion to dismiss.2                   It claimed among

other   things     that    plaintiff      failed     to    allege     AXA    made   any

misrepresentation         to    policy    holders,        or   that    she   suffered

consequential damages from any breach of the Contract.                       AXA also

reiterated    that      SLUSA    precluded    plaintiff's        complaint.         AXA

supplemented its motion with the recently issued New York federal

district court's decision in Zweiman, in which the judge concluded

SLUSA precluded class claims in that suit for breach of contract

based upon the Consent Order.            Zweiman, 
146 F. Supp. 3d at 539.

      After   considering        oral    argument,      the    Law    Division   judge

essentially relied on the Zweiman court's analysis, and the United

States Supreme Court's decision in Merrill Lynch, Pierce, Fenner

&   Smith   Inc.   v.     Dabit,   
547 U.S. 71     (2006).      He    dismissed

plaintiff's complaint with prejudice because SLUSA precluded the

action.3    This appeal ensued.



2
  Plaintiff has not asserted, nor could she, that AXA's motion in
the Law Division was precluded by res judicata, collateral estoppel
or other similar doctrines. See Kircher v. Putnam Funds Trust,

547 U.S. 633, 647 (2006) ("Collateral estoppel should be no bar
to such a revisitation of the preclusion issue, given that [28
U.S.C.] § 1447(d) prevents the funds from appealing the District
Court's decision.").
3
 The judge's order also dismissed the complaint for other reasons,
including failure to state a cause of action, Rule 4:6-2(e),
failure to plead fraud with particularity, Rule 4:5-8(a), and
forum non conveniens. Although AXA asserts they provide alternate
reasons to affirm the judgment, we need not consider these issues.

                                          7                                    A-3160-15T1
       Plaintiff contends the success of her breach of contract

claim did not require she prove "a misrepresentation or omission

of a material fact in connection with the purchase or sale of a

covered security," 15 U.S.C. § 78bb(f)(1)(A) (emphasis added), and

therefore the complaint was not precluded by SLUSA.                We disagree

and affirm.

       "Our review, accepting the facts alleged in the complaint as

true   and   drawing    all   reasonable    inferences    in   favor   of   the

plaintiff, is plenary."         Rowinski, 
398 F.3d 298 (citing In re

Adams Golf, Inc. Secs. Litig., 
381 F.3d 267, 273 (3d Cir. 2004)).

In this area, one maxim is clear:

             [C]ourts have noted that plaintiffs should not
             be permitted to escape SLUSA by artfully
             characterizing a claim as dependent on a
             theory other than falsity when falsity
             nonetheless is essential to the claim, such
             as by characterizing a claim of falsity as a
             breach of the contractual duty of fair
             dealing.

             [In re Kingate Mgmt. Litig., 
784 F.3d 128, 140
             (2nd. Cir. 2015).]

       The Supreme Court has broadly interpreted the "in connection

with" element of SLUSA "and held the requisite connection is

established     where    a    'fraudulent    scheme'     and   a    securities

transaction 'coincide.'"        Rowinski, 398 F.3d   at 300 (quoting SEC

v. Zandford, 
535 U.S. 813, 825 (2002)).           And, while "Zandford's

'broad' interpretation is not boundless[,] . . . courts have . . .

                                      8                                A-3160-15T1
scrutinized the pleadings to arrive at the 'essence' of a state

law claim, in order to prevent artful drafting from circumventing

SLUSA preemption."    Id. at 301 (citations omitted).

     In Rowinski, the court identified four factors relevant "in

distinguishing between preempted claims and those remaining within

the province of state law."     Id. at 302.

           [F]irst, whether the covered class action
           alleges a "fraudulent scheme" that "coincides"
           with the purchase or sale of securities;
           second, whether the complaint alleges a
           material    misrepresentation   or    omission
           "disseminated to the public in a medium upon
           which a reasonable investor would rely";
           third, whether the nature of the parties'
           relationship is such that it necessarily
           involves the purchase or sale of securities;
           and fourth, whether the prayer for relief
           "connects" the state law claims to the
           purchase or sale of securities.

           [Ibid. (citations omitted).]

However,     the   court   cautioned   these   "non-inclusive       four

factors . . . are not requirements, but rather guideposts in a

flexible preemption inquiry[,]" and "[i]n a SLUSA case involving

different facts or allegations, other considerations also may be

relevant."    Id. at 302 n.7.

     We need not detail the Supreme Court's explication of the "in

connection" prong of SLUSA since Rowinski.     Citing Dabit, and the

Court's own refinement of Dabit in Chadbourne & Parke LLP v.

Troice, 
134 S. Ct. 1058 (2014), the judge in Zweiman wrote:

                                  9                             A-3160-15T1
           In light of Troice and Dabit, the "in
           connection with" doctrine can be articulated
           as follows: the fraud must be of the type that
           is material to someone other than the
           fraudster to buy, sell, or hold a covered
           security; and, if so, any claim involving that
           transaction (or lack thereof) — regardless of
           whether the plaintiff herself was induced to
           take a position — is precluded.

           [Zweiman, 
146 F. Supp. 3d at 550.]

We agree with this synthesis of the controlling case law.                      When

applied to the facts alleged in plaintiff's complaint, SLUSA

precludes her breach of contract claim.

      It is undisputed that plaintiff alleged AXA breached the

Contract by misrepresenting the nature and scope of its volatility

management strategy in order to secure DFS approval without the

review compelled by an "initial" filing.             This misrepresentation

to DFS resulted in AXA initiating the particular trading strategy

and trading securities within the SA accounts, allegedly to the

detriment of plaintiff and putative class members.

      Plaintiff   contends   AXA's    non-public      DPS      filings   did    not

induce her to make any investment decision and therefore the

misrepresentation cannot be "in connection" with the purchase or

sale of covered securities as required by SLUSA.                   However, the

Supreme Court has rejected such a cramped construction. See Dabit,


547 U.S.  at 85 (quoting United States v. O'Hagan, 
521 U.S. 642,

658   (1997)   ("The   requisite   showing   .   .    .   is    'deception     "in

                                     10                                  A-3160-15T1
connection   with   the   purchase    or   sale   of   any   security,"   not

deception of an identifiable purchaser or seller.'"))             Under the

terms of the Contract, plaintiff retained the ability to transfer

her shares in the SA account to "one or more other divisions of

[the] SA or to [the] GID" upon her written request.             Plaintiff's

claim for damages relies wholly upon the assertion that AXA's

misrepresentation to DFS resulted in AXA implementing a trading

strategy for the investments she maintained in the SA accounts

that inured to her detriment.        The broad interpretation of the "in

connection" prong applied by the Supreme Court and other courts

means that SLUSA precludes plaintiff's titular breach of contract

claim.

     Affirmed.




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