Marleen Laplant v. Northwestern Mut

In the
United States Court of Appeals
For the Seventh Circuit
No. 12-3264
M ARLEEN M. L AP LANT, individually
and on behalf of a class,
Plaintiff-Appellee,
v.
T HE N ORTHWESTERN M UTUAL
L IFE INSURANCE C OMPANY,
Defendant-Appellant.
Appeal from the United States District Court
for the Eastern District of Wisconsin.
No. 11-C-910—Lynn Adelman, Judge.
A RGUED O CTOBER 31, 2012—D ECIDED N OVEMBER 28, 2012
Before E ASTERBROOK, Chief Judge, and F LAUM and
S YKES, Circuit Judges.
E ASTERBROOK, 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 method it used to calculate the an-
2 No. 12-3264
nuitants’ annual dividend. The annuitants contend that
this change violates the terms of the annuity con-
tracts, 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 Wis-
consin 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 appli-
cable 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 headquarters. Noonan v. Northwestern
Mutual Life Insurance Co., 298 Wis. 2d 247 (Ct. App. 2006),
affirmed that decision. The current 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 plaintiffs’ favor, issuing a sweeping decision
declaring that Northwestern Mutual violated the annuity
No. 12-3264 3
contracts, breached its fiduciary duties, and should pay
substantial compensatory and punitive damages. Plant
[sic] v. Northwestern 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 removal. LaPlant asked the district court to
remand, relying on §1453(d), which says that the Act
“shall not apply to any class action that solely in-
volves— . . . (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 busi-
ness enterprise is incorporated or organized”. (Section
1332(d)(9)(B) contains a materially identical provision
for suits filed initially in federal court.) LaPlant main-
tained that the suit “relates to the internal affairs” of
Northwestern Mutual because the policyholders of a
mutual insurer have an ownership interest in its gover-
nance and profits. Northwestern Mutual replied that the
suit relates to the annuity contracts, 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. L EXIS
116872 (E.D. Wis. Aug. 20, 2012). The judge observed that
4 No. 12-3264
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 policyholders 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)
requires a remand. We accepted Northwestern Mutual’s
petition for permission to appeal. See 28 U.S.C. §1453(c)(1).
The application of §1453(d)(2) in litigation con-
cerning 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 authority to regulate a corpora-
tion’s internal affairs—matters peculiar to the relation-
ships among or between the corporation and its current
officers, directors, and shareholders—because otherwise
a corporation could be faced with conflicting 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 satisfac-
tory resolution. Yet Wisconsin does not uniformly employ
the internal-affairs doctrine. In Beloit Liquidating Trust v.
Grade, 270 Wis. 2d 356 (Wis. 2004), the Supreme Court
of Wisconsin applied Wisconsin law to a suit con-
cerning the internal affairs of a Delaware corporation.
Northwestern Mutual does not contend, however, that
No. 12-3264 5
a state’s adoption of the internal-affairs doctrine is essen-
tial 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 internal affairs. The district court concluded,
and the class contends, that “relates to” should be read
broadly and that the existence of other issues (here, the
interpretation of the contracts) should not prevent a
remand. Northwestern Mutual sees the word “solely” as
defeating a broad reading of “relates to”. Although at
least one circuit has held that the statutory language
reflects a preference for remand to state court, see Green-
wich 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 remanding or retaining jurisdiction. We try to give
the statutory 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).
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 peculiar to the relationships among or between
the corporation and its current officers, directors, and
shareholders”. By that standard, LaPlant’s claim does not
6 No. 12-3264
relate to Northwestern Mutual’s internal affairs. The
suit does not involve the identity or authority of the
firm’s officers or directors, and the annuitants are not
shareholders.
True, policyholders in a mutual have “ownership”
interests, 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 corpo-
rations and their creditors regularly are resolved under
the law of contract; they are not thought of as disputes
about internal corporate affairs. 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 internal affairs would be that any dispute
about the meaning of any of the issuer’s policies relates
to the firm’s internal affairs—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 decided every day
without either judge or litigants dreaming that they need
No. 12-3264 7
to understand or address corporate law. These are
disputes about the policies, resolved under insurance
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 insurer 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 corporate 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
divisible surplus. Section 632.62 is part of Wisconsin’s
insurance 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 insurance 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, applying 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
annuities reflect their status as regulated insurance prod-
8 No. 12-3264
ucts. Many states require insurance policies to be gov-
erned 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 litigation cannot be resolved
“solely” under Wisconsin’s corporate law even if it were
within the scope of the internal-affairs doctrine (which, to
repeat, it isn’t). The district court thought otherwise,
proceeding in two steps. First, it applied Wisconsin’s
common-law choice-of-law principles, see Heath v. Zellmer,
35 Wis. 2d 578 (1967), and found that, in the absence
of a choice-of-law clause, Wisconsin law would apply.
Second, it concluded that any contract specifying a dif-
ferent 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 Dealership Law, which forbids any contractual
departure from its provisions. Wis. Stat. §135.025(3).
Wisconsin’s insurance law lacks any equivalent lan-
guage. 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 state trial court determined
that the choice-of-law clauses in these very contracts
No. 12-3264 9
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 validity 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 resolve
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 absence of a statute such as §135.025(3). The
dispute in Drinkwater 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 pro-
ceeds 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
10 No. 12-3264
of their citizens. That’s what Drinkwater concluded. 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 calculate damages and when (if ever) punitive
damages are available for breach of contract (which
the plaintiffs want to recast 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 deter-
mine whether to certify a nationwide class for damages
and, having resolved that and any other procedural
issue, must decide the case on the merits.
A federal court inherits a removed case in its procedural
posture on the date of removal. When this case was
removed, Judge Flynn was free to reconsider his own
decision—to consider not only whether it was substan-
tively correct but also whether the Uniform Declaratory
No. 12-3264 11
Judgments Act, which Wisconsin has adopted, Wis. Stat.
§806.04, permits the maneuver by which the class
sought to get around Noonan’s holding that Wisconsin
law does not allow the annuitants to pursue a class-wide
claim for damages. The doctrine of law of the case there-
fore 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 decision on the
merits (should the federal district court enter a judgment
based on it) as we would be had the identical decision
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).
V ACATED AND R EMANDED
12-6-12