LaPlant v. Northwestern Mutual Life Insurance ( 2012 )

In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 12-3264
MARLEEN M. LAPLANT, individually and on behalf of a class,
Plaintiff-Appellee,
v.
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY,
Defendant-Appellant.
____________________
Appeal from the United States District Court
for the Eastern District of Wisconsin.
No. 11-C-910 — Lynn Adelman, Judge.
____________________
ARGUED OCTOBER 31, 2012 — DECIDED NOVEMBER 28, 2012*
____________________
Before EASTERBROOK, Chief Judge, and FLAUM and SYKES,
Circuit Judges.
EASTERBROOK, Chief Judge. Northwestern Mutual sold an
annuity contract, which the parties call a “Pre-MN annuity,”
to approximately 36,000 persons. Of these, some 3,000 live in
Wisconsin. In 1985 Northwestern Mutual changed the meth-
od it used to calculate the annuitants’ annual dividend. The
annuitants contend that this change violates the terms of the
* This opinion is being issued in typescript. A printed copy will follow.
No. 12-3264 Page 2
annuity contracts, both substantively and with respect to the
notice Northwestern Mutual must give its customers.
This is not the first class action filed by the annuitants. In
2001 the lawyers who today represent Marleen LaPlant, our
representative plaintiff, filed suit in a Wisconsin state court
seeking to represent all annuitants throughout the nation.
The judge declined to certify that class, ruling among other
things that (a) a claim for damages creates individual issues
that make class treatment imprudent, and (b) a national class
is not manageable given differences in the state law applica-
ble to the policies, approximately 45% of which contain
choice-of-law clauses specifying application of the law in the
annuitants’ home state, rather than Wisconsin, where
Northwestern Mutual is incorporated and has its headquar-
ters. Noonan v. Northwestern Mutual Life Insurance Co., 298
Wis. 2d 247 (Ct. App. 2006), affirmed that decision. The cur-
rent suit, reflecting the limits established in Noonan, initially
proposed a class limited to annuitants who live in Wisconsin
and sought only a declaratory judgment that the 1985
change is invalid. A declaratory judgment in favor of the
class could be followed by individual suits seeking damages.
The Wisconsin-only suit was certified as a class action
and tried to the court (since the only proposed remedy was a
declaratory judgment). Judge Dennis J. Flynn ruled in plain-
tiffs’ favor, issuing a sweeping decision declaring that
Northwestern Mutual violated the annuity contracts,
breached its fiduciary duties, and should pay substantial
compensatory and punitive damages. Plant [sic] v. North-
western Mutual Life Insurance Co., No. 08-CV-11988 (Cir. Ct.
Milwaukee County Mar. 7, 2011). The class then amended its
complaint to seek damages for all annuitants in every state.
Contending that the amendment brought the suit within
the scope of the Class Action Fairness Act, 28 U.S.C.
§§ 1332(d), 1453, Northwestern Mutual filed a notice of re-
moval. LaPlant asked the district court to remand, relying on
No. 12-3264 Page 3
§1453(d), which says that the Act “shall not apply to any
class action that solely involves— … (2) a claim that relates
to the internal affairs or governance of a corporation or other
form of business enterprise and arises under or by virtue of
the laws of the State in which such corporation or business
enterprise is incorporated or organized”. (Section
1332(d)(9)(B) contains a materially identical provision for
suits filed initially in federal court.) LaPlant maintained that
the suit “relates to the internal affairs” of Northwestern Mu-
tual because the policyholders of a mutual insurer have an
ownership interest in its governance and profits. Northwest-
ern Mutual replied that the suit relates to the annuity con-
tracts, not to its internal affairs, and that at all events the suit
does not “solely involve[]” Wisconsin’s corporate law, given
the choice-of-law clauses that led to Noonan’s decision
against certifying a national class.
The district court remanded the suit. 2012 U.S. Dist. LEXIS
116872 (E.D. Wis. Aug. 20, 2012). The judge observed that
the appellate decision in Noonan had not held that multiple
states’ laws apply but had concluded only that the state trial
judge had not abused his discretion in so holding. Deeming
the state trial judge’s decision on that point not binding, the
federal district judge declared that the choice-of-law clauses
are invalid and that Wisconsin law applies to the policy-
holders in every state. The district judge also concluded that
all disputes concerning policies issued by a mutual insurer
relate to that insurer’s internal affairs, so that §1453(d)(2) re-
quires a remand. We accepted Northwestern Mutual’s peti-
tion for permission to appeal. See 28 U.S.C. §1453(c)(1).
The application of §1453(d)(2) in litigation concerning a
Wisconsin corporation has the potential to create anomalies.
The internal-affairs doctrine is “a conflict of laws principle
which recognizes that only one State should have the au-
thority to regulate a corporation’s internal affairs—matters
peculiar to the relationships among or between the corpora-
No. 12-3264 Page 4
tion and its current officers, directors, and shareholders—
because otherwise a corporation could be faced with con-
flicting demands.” Edgar v. MITE Corp., 457 U.S. 624, 645
(1982). See also Atherton v. FDIC, 519 U.S. 213, 223 (1997).
Section 1453(d)(2) reflects the view that, when just one
state’s law applies to a nationwide class, a state court can
provide a satisfactory resolution. Yet Wisconsin does not
uniformly employ the internal-affairs doctrine. In Beloit Liq-
uidating Trust v. Grade, 270 Wis. 2d 356 (Wis. 2004), the Su-
preme Court of Wisconsin applied Wisconsin law to a suit
concerning the internal affairs of a Delaware corporation.
Northwestern Mutual does not contend, however, that a
state’s adoption of the internal-affairs doctrine is essential to
a remand under §1453(d)(2), which asks whether the dispute
“relates to” internal affairs and not what law the state court
will apply (apart, that is, from the “solely” language).
The parties do, however, dispute how we should resolve
uncertainties about whether a particular suit relates to inter-
nal affairs. The district court concluded, and the class con-
tends, that “relates to” should be read broadly and that the
existence of other issues (here, the interpretation of the con-
tracts) should not prevent a remand. Northwestern Mutual
sees the word “solely” as defeating a broad reading of “re-
lates to”. Although at least one circuit has held that the
statutory language reflects a preference for remand to state
court, see Greenwich Financial Services Distressed Mortgage
Fund 3 LLC v. Countrywide Financial Corp., 603 F.3d 23, 29 (2d
Cir. 2010), this circuit’s approach is to read the exceptions in
§1332(d) and §1453(d) without a presumption for either re-
manding or retaining jurisdiction. We try to give the statuto-
ry language a natural meaning in light of its context, without
a thumb on the scale. See, e.g., Appert v. Morgan Stanley Dean
Witter, Inc., 673 F.3d 609 (7th Cir. 2012); Katz v. Gerardi, 552
F.3d 558 (7th Cir. 2009).
No. 12-3264 Page 5
Congress did not define “internal affairs”, but neither did
it signal a departure from that term’s ordinary meaning,
which the Supreme Court restated in Edgar: “matters peculi-
ar to the relationships among or between the corporation
and its current officers, directors, and shareholders”. By that
standard, LaPlant’s claim does not relate to Northwestern
Mutual’s internal affairs. The suit does not involve the iden-
tity or authority of the firm’s officers or directors, and the
annuitants are not shareholders.
True, policyholders in a mutual have “ownership” inter-
ests, but that is not enough. Holders of corporate bonds also
have ownership interests, especially when the issuer does
not pay the promised return (the very sort of claim LaPlant
makes). Yet disputes between corporations and their credi-
tors regularly are resolved under the law of contract; they
are not thought of as disputes about internal corporate af-
fairs. Annuity policies are effectively debt contracts, and this
suit depends on the terms of promises that Northwestern
Mutual made in the “Pre-MN annuities.” Money due under
a contract is not a dividend for corporate-law purposes, no
matter what the contract calls it. In corporate law, a dividend
is discretionary with the board. The annuitants are entitled
to be paid, not to a role in Northwestern Mutual’s corporate
governance.
One logical implication of holding that a dispute between
annuitants and mutual insurers relates to the insurer’s inter-
nal affairs would be that any dispute about the meaning of
any of the issuer’s policies relates to the firm’s internal af-
fairs—for holders of standard policies, no less than holders
of annuities, have remote “ownership” interests in mutual
insurers. Yet suits about the meaning of an advertising-
injury coverage, or an exclusion for intentional torts, are de-
cided every day without either judge or litigants dreaming
that they need to understand or address corporate law. The-
se are disputes about the policies, resolved under insurance
No. 12-3264 Page 6
law rather than the Model Business Corporations Act and
the internal-affairs doctrine. Just so with disputes about the
meaning of annuity contracts. A court should proceed in this
suit the same way it would if the issuer were a for-profit in-
surer with shares traded on the New York Stock Exchange
rather than a mutual insurer. Judge Flynn relied on New
York and Wisconsin insurance law and several states’ laws
about marketing but scarcely mentioned Wisconsin’s corpo-
rate law. That pretty much shows that this dispute does not
concern the internal affairs of a Wisconsin corporation.
What’s more, the class relies heavily on Wis. Stat. §632.62, a
provision covering how “participating” policies share in di-
visible surplus. Section 632.62 is part of Wisconsin’s insur-
ance code rather than its corporate code.
The annuitants are entitled to the full measure of their
rights no matter the issuer’s financial structure, but under
contract law and insurance law (and potentially securities
law, since annuities can be securities if not regulated as in-
surance policies, see SEC v. United Benefit Life Insurance Co.,
387 U.S. 202 (1967)) rather than corporate law. LaPlant and
the class have not cited any decision, by any state court, ap-
plying the internal-affairs doctrine to claims by annuitants
based on promises made in their policies, and we conclude
that §1453(d)(2) does not apply.
The choice-of-law clauses found in about 45% of the an-
nuities reflect their status as regulated insurance products.
Many states require insurance policies to be governed by the
law of the state in which the insured lives (or the policy is
issued) rather than the law of the state in which the insurer
is incorporated. And if multiple states’ law applies, this liti-
gation cannot be resolved “solely” under Wisconsin’s corpo-
rate law even if it were within the scope of the internal-
affairs doctrine (which, to repeat, is isn’t). The district court
thought otherwise, proceeding in two steps. First, it applied
Wisconsin’s common-law choice-of-law principles, see Heath
No. 12-3264 Page 7
v. Zellmer, 35 Wis. 2d 578 (1967), and found that, in the ab-
sence of a choice-of-law clause, Wisconsin law would apply.
Second, it concluded that any contract specifying a different
set of legal rules is ineffectual as contrary to the public policy
reflected in Heath. Because the main function of contractual
choice-of-law clauses is to specify a body of law other than
the one that would be selected using common-law methods,
the upshot of the district court’s decision is that all choice-of-
law clauses are invalid in Wisconsin.
For this startling proposition the district court cited only
Bush v. National School Studios, Inc., 139 Wis. 2d 635, 642
(1987). Bush dealt with a suit under the Wisconsin Fair Deal-
ership Law, which forbids any contractual departure from
its provisions. Wis. Stat. §135.025(3). Wisconsin’s insurance
law lacks any equivalent language. Bush acknowledged that
Wisconsin regularly enforces choice-of-law clauses. 139 Wis.
2d at 642, citing Jefferis v. Austin, 182 Wis. 203, 205 (1923);
Brown v. Gates, 120 Wis. 349 (1904). The a state trial court de-
termined that the choice-of-law clauses in these very con-
tracts are valid—and although the appellate decision in
Noonan held that this ruling was not an abuse of discretion,
by LaPlant’s lights what the appellate court should have
held is that the clauses are invalid and that a national class
therefore could have been certified. We are not disposed to
disagree with the holding of a Wisconsin trial court, and the
strong implication of a Wisconsin appellate court, on the va-
lidity of these particular contractual clauses as a matter of
Wisconsin law. Under Erie our task is to resolve a dispute
about state law the way the state’s highest court would re-
solve it, and our best assessment is that the Supreme Court
of Wisconsin would agree with the approach already taken
by the state’s trial and appellate judges.
LaPlant relies on Drinkwater v. American Family Mutual
Insurance Co., 290 Wis. 2d 642 (2006), for the proposition that
choice-of-law clauses can be deemed invalid even in the ab-
No. 12-3264 Page 8
sence of a statute such as §135.025(3). The dispute in Drink-
water concerned an insurer’s claim to subrogation under a
contract that gave the insurer a right to be repaid from an
insured’s tort recoveries against third parties. A clause in the
contract pointed to Iowa law, but Drinkwater nonetheless
held that Wisconsin law applied until the victim—a citizen
of Wisconsin injured in an accident in Wisconsin—had been
made whole by the combination of insurance proceeds and
damages in tort. Only after a make-whole recovery could the
contractual right to subrogation kick in. We said earlier that
many states insist that their own insurance law, and not the
law of the insurer’s home state, apply to policies issued in or
for the benefit of their citizens. That’s what Drinkwater con-
cluded. And that is also what the choice-of-law clauses in the
“Pre-MN annuity” contracts provide. Drinkwater, which held
that the law of the insured’s state prevails over the law of the
insurer’s (or employer’s) state, does not suggest to us that
the Supreme Court of Wisconsin would conclude that the
law of Wisconsin necessarily governs all annuities issued by
a Wisconsin insurer, even if the policies themselves and the
law of the annuitants’ home states provide otherwise. (The
class does not contend that any other state’s domestic law
would be repugnant to Wisconsin, so that potential limit on
choice-of-law clauses is inapplicable.)
This is a contract case, not a corporate-governance case.
And multiple states’ law applies to these contracts. Every
state enforces promises, but states differ in how they calcu-
late damages and when (if ever) punitive damages are avail-
able for breach of contract (which the plaintiffs want to re-
cast as a tort claim for breach of fiduciary duty). Section
1453(d)(2) therefore does not permit a remand, and this class
action must be finally resolved in federal court. The district
judge must determine whether to certify a nationwide class
for damages and, having resolved that and any other proce-
dural issue, must decide the case on the merits.
No. 12-3264 Page 9
A federal court inherits a removed case in its procedural
posture on the date of removal. When this case was re-
moved, Judge Flynn was free to reconsider his own deci-
sion—to consider not only whether it was substantively cor-
rect but also whether the Uniform Declaratory Judgments
Act, which Wisconsin has adopted, Wis. Stat. §806.04, per-
mits the maneuver by which the class sought to get around
Noonan’s holding that Wisconsin law does not allow the an-
nuitants to pursue a class-wide claim for damages. The doc-
trine of law of the case therefore does not prevent the district
judge from evaluating both sides’ contentions. And law of
the case does not apply at all once a trial court’s decision is
on appeal; we will be as free to review Judge Flynn’s deci-
sion on the merits (should the federal district court enter a
judgment based on it) as we would be had the identical deci-
sion been made initially by the federal district judge. See,
e.g., Williams v. CIR, 1 F.3d 502 (7th Cir. 1993) (a trial court’s
decision never binds an appellate court through the doctrine
of law of the case).
VACATED AND REMANDED