UNITED STATES DISTRICT COURT DISTRICT OF NEW JERSEY
February 2, 2004
CHARLES W. WRIGHT AND KELLEY B. WRIGHT, INDIVIDUALLY AND ON BEHALF OF ALL OTHERS SIMILARLY SITUATED, PLAINTIFFS,
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA, PRUDENTIAL INSURANCE, AND PRUDENTIAL FINANCIAL, INC., DEFENDANTS.
The opinion of the court was delivered by: Dickinson R. Debevoise, Ussdj
Plaintiffs, the insured and beneficiary on a policy issued by Prudential Life Insurance Company of America, have initiated this lawsuit against Prudential *fn1 on behalf of themselves and others similarly situated. *fn2 Plaintiffs claim that Prudential's plan of reorganization breached the terms of a settlement agreement the company reached in 1997 resolving a lawsuit unrelated to its reorganization. Prudential, moving to dismiss the Complaint, argues that the Court does not have jurisdiction to hear Plaintiffs' claim and that - even if it did - Plaintiffs fail to state a claim upon which relief can be granted. The court concludes that it lacks jurisdiction to decide Plaintiffs' claim. Even if it did not lack jurisdiction, however, the claim would fail on the merits.
In February of 1995, Prudential policyholders and former agents filed lawsuits in federal and state courts around the country, alleging that Prudential had engaged in deceptive sales practices. The cases were consolidated, and, in October of 1996, resolved when the parties entered into an MDL Settlement ("Settlement Agreement").
The Settlement Agreement
In the Settlement Agreement, Prudential agreed to make available to Plaintiffs two alternative types of relief: Alternative Dispute Resolution ("ADR") Relief and Basic Claim Relief. (DA 713). In addition, Prudential promised to pay for many of the costs and expenses associated with the lawsuit, including their own and Plaintiffs' attorneys' fees and the costs of administering the ADR process ("Costs & Expenses"). *fn3 Prudential kept that promise and made the payments.
On March 17, 1997, the court approved the Settlement Agreement, concluding that it was "fair, reasonable, and adequate." In re The Prudential Insurance Company of America Sales Practices Litigation, 962 F.Supp. 450, 468 (D.N.J. 1997). *fn4 In his Final Order and Judgment, Judge Wolin included a provision by which the court "retain[ed] exclusive jurisdiction as to all matters relating to administration, consummation, enforcement and interpretation of the Stipulation of Settlement and of this Final Order and Judgment, and for any other necessary purpose." Id. at 566. The Court of Appeals has twice affirmed the Court's authority to enforce the Settlement. In re The Prudential Insurance Company of America Sales Practices Litigation, 314 F.3d 99, 105 (3d Cir. 2002); In re Prudential Insurance Company of America Sales Practice Litigation, 261 F.3d 355, 367-370 (3d Cir. 2001) (both affirming that the court had the authority to enjoin lawsuits maintained on or behalf of class members).
Prudential's Reorganization Plan
Several years after the Settlement Agreement was approved, Prudential publicly announced its intention to convert from a mutual life insurance company (one owned by policyholders) to a stock life insurance company (one owned by shareholders). (DA 122). On December 15, 2000, Prudential's Board of Directors unanimously approved and adopted a plan to effect that conversion ("Plan").
Under the terms of the Plan, each policyholder would surrender her membership interest in Prudential. In exchange, those policyholders deemed eligible *fn5 would receive consideration comprised of (1) a "fixed component" of eight shares in Prudential, and (2) a "variable component" of stock, cash or policy credits in an amount that Prudential would calculate based on estimates of the historical and projected future contributions of the policyholder's eligible policies to Prudential's surplus. (DA 132).
The complex actuarial formula Prudential used to calculate the variable component ("the Formula") required that Prudential add certain payments it had made over the years that were unrelated to the policies (for example, for Y2K preparation) back into the "surplus" before dividing that surplus among policyholders. *fn6 The Costs & Expenses were not among these payments.
The Plan acknowledged that commitments Prudential made under the Settlement Agreement would need to be taken into account in calculating the amount of demutualization consideration due to certain policyholders that had been parties to it. *fn7
State Agency Approval of the Reorganization Plan
N. J. Stat. Ann. Chapter 17C-4 ("Conversion Law") requires that a mutual insurer
(a) . . . file with the commissioner an application for
approval of, and permission to reorganize pursuant to, a plan
of reorganization . . .
(f) The commissioner shall approve the application and permit
the reorganization pursuant to the plan of reorganization if
he finds, following a public hearing, that: (1) the
application conforms to the requirements of this section; (2)
the plan is fair and equitable to the policyholders of the
mutual insurer; (3) the plan promotes the best interest of the
mutual insurer and its policyholders; (4) the plan provides
for the enhancement of the operations of the reorganized
insurer; (5) the plan is not contrary to law; (6) the plan is
not detrimental to the public; and (7) after giving effect to
the reorganization, the reorganized insurer will have an
amount of capital and surplus the commissioner deems to be
reasonably necessary for its future solvency.
Pursuant to the Conversion Law, on March 14, 2001, Prudential filed its application for approval of the Plan with the Commissioner. Throughout May, 2001, Prudential mailed information to approximately 10 million policyholders that included, inter alia, the Plan, notice that the Commissioner would hold a public hearing about the Plan, and instructions for policyholders on how to vote to approve or disapprove the proposed demutualization.
At the public hearing, which was held on July 17 and 18, 2001, eight representatives of Prudential made a presentation about the Plan and twenty-one interested persons made oral comments; in addition, the Commissioner received 121 written comments from members of the public. (DA 126-27; DA 157). Some of those comments dealt with concerns regarding the interaction of the Plan and the Settlement Agreement. *fn8 Plaintiffs did not submit comments or participate in the hearing.
Policyholders approved the Plan by a large margin. On August 1, 2001, Prudential submitted a certification of the results of the policyholder vote. (DA 128).
On October 15, 2001, the Commissioner issued a lengthy opinion approving the Plan as "fair and equitable." *fn9 In the opinion, the Commissioner addressed each of the concerns that had been raised by commenters at the hearing and affirmed that none of them prevented the Plan from being worthy of approval. (DA 157-174). Among the concerns the Commissioner addressed were those relating to the interaction between the Plan and the Settlement Agreement. As with the other concerns, the Commissioner disposed of these. (DA 182).
Plaintiffs did not seek judicial review of the Commissioner's decision. Other policyholders, however, challenged the Commissioner's decision (on grounds other than those the Plaintiffs raise here *fn10 ) to the New Jersey Superior Court, Appellate Division ("Appellate Division") as required by the subsection (h) of the Conversion Law. On July 27, 2003, the Appellate Division rejected the policyholders' contentions and affirmed the Commissioner's conclusion that the Plan was "fair and equitable." In re Plan of Reorganization of The Prudential Insurance Company of America. (DA 222-85). *fn11
Plaintiffs contend that the fact that Prudential had paid - and hence the company's surplus had been reduced by the amount of - the Costs & Expenses by the time policyholder demutualization consideration was calculated in effect meant that the policyholders ended up paying for the costs of the lawsuit that led up to the settlement. *fn12 This, Plaintiffs argue, was in direct violation of the Settlement Agreement in which Prudential had promised not to shift the Costs & Expenses back to the Plaintiffs.
Plaintiffs maintain that the Costs & Expenses should have been among the payments (e.g., the Y2K preparation costs) that the Formula required Prudential to add back into the "surplus" for the purposes of calculating the amount of consideration policyholders would receive. Complaint ¶29. Because it was not, Plaintiffs argue, the Formula breaches the terms of the Settlement Agreement.
Plaintiffs allege that the court has jurisdiction over their claim. At first blush, this contention appears correct for two reasons. First, resolution of Plaintiffs' breach of contract claim would require interpretation of the Settlement Agreement, and Judge Wolin explicitly retained exclusive jurisdiction over matters relating to interpretation of the Settlement Agreement. In re The Prudential Insurance Company of America Sales Practices Litigation, 962 F.Supp. at 566. Courts have repeatedly affirmed the power of a court approving a settlement agreement to exercise its discretion to retain jurisdiction over the enforcement of that agreement, so long as it does so explicitly in the dismissal order, which Judge Wolin did. Kokkonen v. Guardian Life Ins. Co. of America, 114 S.Ct. 1673, 1676 (1994). Accord e.g., Shaffer v. GTE North, Inc., 284 F.3d 500, 503 (3d Cir. 2002); In re Phar-Mor, Inc. Securities Litigation, 172 F.3d 270, 274 (3d Cir. 1999). Second, even if Judge Wolin had not retained exclusive jurisdiction in this court, a federal court would have jurisdiction over Plaintiffs' breach of contract claim under 28 U.S.C. § 1332 because there is complete diversity among the parties.
After further consideration, however, the court concludes that it lacks - and all federal courts lack - jurisdiction to decide this case because such jurisdiction belongs exclusively to the Appellate Division. *fn13 This is because though on its face Plaintiffs' claim is for breach of contract, in its substance it is actually a challenge to the Commissioner's approval of the Plan, which under New Jersey law may only be made in the New Jersey state court system. ****
Although Plaintiffs frame their allegation as a claim for breach of the Settlement Agreement, what they are actually challenging is the fairness of the Plan that includes the Formula. Plaintiffs themselves, in their Reply Brief, concede this fact when they observe that "Prudential could have structured its demutualization plan in accordance with the Settlement, but it did not, and that is precisely why Plaintiffs bring this case." Plaintiffs' Reply Brief at 9-10. In the Complaint, Plaintiffs even specify the part of the Plan to which they object. Complaint ¶¶28-29.
When Plaintiffs challenge conduct that is mandated by a Plan, or omissions permitted by a Plan, they actually challenge that Plan itself. See, e.g., Craft v. Florida Federal Savings & Loan Association, 786 F.2d 1546, 1552-53 (11th Cir. 1986) (finding that a challenge to a demutualizing company's increase in the size of its stock offering was actually a challenge to the demutualization plan because the terms of that plan allowed - indeed required - the increase). The court will treat this claim as what it actually is, as opposed to what the Plaintiffs' call it. ****
Because Plaintiffs challenge the Plan, as opposed to independent conduct on the part of Prudential, the injury they claim "is wholly a consequence of the [Commissioner's] approval of the Plan." Harr v. Prudential Federal Savings and Loan Association, 557 F.2d 751, 754 (10th Cir. 1977). As such, the proper form for Plaintiffs' challenge would thus have been an appeal of that approval to the Appellate Division. *fn14
New Jersey law explicitly requires that any and all challenges to the Commissioner's decision be raised exclusively in New Jersey courts. N. J. Stat. Ann. 17C-4 (h) ("The commissioner's order approving or disapproving a plan of reorganization shall be a final agency decision subject to appeal in accordance with . . . the Rules Governing the Courts of the State of New Jersey"); R. 2:2-3(a)(2) ("appeals may be taken to the Appellate Division as of right . . . to review final decisions or actions of any state administrative agency or officer"); In re Failure by the Dep't of Banking & Ins. To Transmit a Proposed Dental Fee Schedule to OAL, 764 A.2d 494, 498 (N.J. App. Div. 2001) ("The exclusive method for review of action or inaction of a State administrative agency ... is by direct appeal to [the Appellate Division]) (internal citations omitted). *fn15
The Appellate Division shows "substantial deference" to decisions of the Commissioner; in order to prevail there, a plaintiff must fulfill the heavy burden of demonstrating that the Commissioner's decision was "arbitrary and capricious, unreasonable, or violative of expressed or implicit legislative policies." See, e.g., Id. at 499, 501. See also In re Reorganization of Medical Inter-Insurance Exchange of New Jersey, 746 A.2d 25, 30 (N. J. App. Div. 2000) (the agency decision carries a strong presumption of reasonableness, and the court must not substitute its judgment for that of the agency . . . the expertise of the Commissioner "in the field of insurance must be given great weight.").
Plaintiffs may not avoid this burden by mischaracterizing their claim as a common law breach of contract claim rather than what it actually is - a challenge to the Plan and the Commissioner's approval of it. See, e.g., Mutschler v. New Jersey Department of Environmental Protection, 766 A.2d 285, 289-90 (N.J. App. Div. 2001) ("The Appellate Division's exclusive jurisdiction does not turn on the theory of the challenging party's claim or the nature of the relief sought . . . Thus, this court's exclusive jurisdiction extends . . . to claims that are joined with claims within the jurisdiction of another court . . . If a challenge to the action or inaction of a state administrative agency is brought in a trial court, that court has the responsibility to transfer the matter to this court on the motion of a party or `on its own initiative.'"). *fn16
Though in another context, courts have held that the plaintiff "is master to decide what law he will rely upon," *fn17 even in that context a federal court will not exercise jurisdiction over a case as framed by the plaintiff if "the claim appears to be immaterial and made solely for the purpose of obtaining jurisdiction." Steel Company v. Citizens for a Better Environment, 523 U.S. 83, 89 (1998).
Several courts of appeal have considered the analogous situation in which a plaintiff challenges a federal agency's final approval of the defendant company's demutualization plan in district court - when exclusive authority to review such approvals lies with the federal court of appeals - by claiming the plan violates a federal law. All of these courts have held that the plaintiff may not, through "artful pleading," *fn18 escape review by the appeals court and the deference that court must show to agency decisions.
In Craft, for example, subscribers to a stock offering by a demutualizing company claimed that the company violated federal securities law in the process of demutualizing. The district court dismissed for lack of subject matter jurisdiction because it construed the claim as a challenge to the agency approval of the demutualization plan, and such challenges could, by statute, only be brought before the court of appeals. The Eleventh Circuit affirmed, noting that it "view[ed] the [Plaintiffs'] anti-fraud claims as bare bones allegations made to escape the exclusive review provisions of the [statute giving the court of appeals exclusive jurisdiction over petitions to review the agency's decisions]." Id. at 1554.
Similarly, in Harr, depositors in a mutual association claimed that the plan authorizing the association's conversion into a stock association violated federal securities law. The Tenth Circuit held that
The cause of action, no matter how otherwise described, must
in the first instance be a challenge to the approval by the
Bank Board of the plan of conversion . . . It is "The Plan"
itself which is the real basis for the arguments advanced here
by Plaintiffs. The attempted reliance on Rule 10b-5 is at
best a secondary or derivative position. . . the sole thrust
of Plaintiffs' argument is directed to what in reality was the
agency decision. This attack cannot be changed in its
substance by a Rule 10b-5 gloss in what is really a collateral
proceeding directed to derivative matters or consequences.
Harr, 557 F.2d at 753-54. See also Ordower v. Office of Thrift Supervision, 999 F.2d 1183, 1188 (7th Cir. 1993) (Plaintiffs challenging agency approval of a demutualization plan "may not [rather than appeal the agency decision to the court of appeals] wage [in district court] a collateral attack on the valuation approved by the [agency] by describing the repetition of that valuation in the proxy materials as a form of fraud or deceit").
In these cases, federal statutes provided that the court of appeals had jurisdiction to review the agency action. The courts found that the district courts lacked jurisdiction in order to comply with Congressional intent that animated those federal statutes regarding which court within the federal system had jurisdiction to hear the appeals from final agency action. Considerations of federalism make it all the more urgent that the court find an absence of jurisdiction in this case as the clear intent with which the court must comply is that of the New Jersey state legislature. N. J. Stat. Ann. 17C-4 (h).
Merits of the Claim
Because the court holds that it lacks jurisdiction to decide this case, it may not reach the merits. See Steel Co., 523 U.S. at 94 ("Without jurisdiction the court cannot proceed at all in any cause. Jurisdiction is power to declare the law, and when it ceases to exist, the only function remaining to the court is that of announcing the fact and dismissing the cause.") (internal quotations and citation omitted). It is appropriate to note, however, that even if the court were to accept Plaintiffs' claim as they present it - as a breach of contract claim over which the court has exclusive jurisdiction - the claim would likely fail on the merits.
Plaintiffs claim that Prudential breached the provisions of the Settlement Agreement in which the company agreed to pay for the Costs & Expenses. *fn19 Plaintiffs nowhere claim that Prudential reneged on this agreement and failed to pay for the Costs & Expenses. Instead, they argue that a breach occurred because the company's overall worth was reduced as a result of Prudential paying the Costs & Expenses, and hence Plaintiffs - several years later - received less demutualization compensation than they would have had there never been a lawsuit the costs and expenses of which Prudential was obliged to pay.
Even assuming, as the court would have to under Fed. R. Civ. P. 12(b)(6), that all the allegations in the Complaint are true, it is difficult to understand how Prudential's conduct as described by Plaintiffs could fulfill the elements of any breach of contract claim. As Prudential points out, "[n]othing in the Settlement [Agreement] provides that Prudential was required to pay additional consideration to Plaintiffs to offset the collateral effects, if any, that the Settlement might have on the overall value of Prudential in the event it reorganized in the future." (Prudential's brief at 14).
The demutualization was an event wholly independent of the lawsuit and the Settlement Agreement in which it culminated. Had Prudential not paid the Costs & Expenses, its overall worth could have been reduced in some other way during the nearly four years that passed between the court's approval of the Settlement Agreement and the Commissioner's approval of the Plan. Thus, there is no way to be certain that the money Prudential expended on the Costs & Expenses would necessarily have been a part of the company's surplus at the time of demutualization had the company not been under order to pay for the Costs & Expenses.
The Settlement Agreement required simply that Prudential pay for the Costs & Expenses, which Prudential did. It is thus difficult to imagine how Plaintiffs could convince a court that Prudential failed to perform its duties under the contract.
Plaintiffs' alternative claim of unjust enrichment is even weaker. The first requirement of a claim for unjust enrichment is that the defendant have received a benefit. Mayor and Council of Borough of Rockaway v. Klockner & Klockner, 811 F.Supp. 1039, 1058 (D.N.J. 1993). The Commissioner found, however, that "100% of the value of the ultimate parent of the reorganized insurer is allocated to eligible policyholders." (DA 196) Prudential did not retain any of its surplus. The company also did not receive any benefit from its failure to add to the amount divided up among eligible policyholders the amount the company had paid for Costs & Expenses, as Plaintiffs suggest it should have. Plaintiffs thus have not stated a claim for unjust enrichment.
For the foregoing reasons, the court will dismiss for lack of subject matter jurisdiction. An appropriate order will be entered.