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Annuity Suitability Lawsuit Leads Court To Address Question About Arbitrability Of Annuitant’s Capacity To Enter Into Contract

Annuities, Blogs

A federal district court this week confirmed that arbitration was not the proper way to decide issues raised in a case involving claims of unfair practices in connection with annuity sales to a senior citizen.

In Sommers v. Cuddy, No. 2:08-cv-78-RCJ-RJJ, 2011 WL 2633068 (D.Nev. July 5, 2011), the United States District Court for the District of Nevada granted a motion to clarify the court’s prior order, and stated that it found that “the arbitration provision does not relate to the claims asserted by Plaintiffs, and litigation on the underlying claims shall commence before the Court.”

The plaintiffs are Andrea Sommers and Harry Sueishi, as Guardians of Edith Self, an adult ward, and the defendants are Personnel Benefits Group, Inc., that company’s president, and several insurers. They filed a 2008 complaint alleging that they sought to “halt the use of unfair and abusive practices by Defendants in marketing and selling unsuitable annuity policies to senior citizens.” The plaintiffs alleged in their complaint that the defendants “designed a scheme specifically to exploit and prey upon the finances of vulnerable senior citizens” and “accomplished their scheme by utilizing the deceptive marketing of estate or financial planning services in order to obtain the seniors’ financial information.”

The plaintiffs also alleged that this purported scheme began to target Edith Self in 1999, when defendants “began a sophisticated and fraudulent scheme to defraud Self by gaining her trust” with the purpose of gaining access to “Self’s substantial assets and property.” Based on these allegations, plaintiffs filed their complaint for (1) violation of the Racketeer Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C. §§ 1961, et seq.; (2) violations of Nevada consumer protection laws; (3) breach of fiduciary duty; (4) aiding and abetting breach of fiduciary duty; (5) bad faith; (6) fraudulent misrepresentation; (7) negligent misrepresentation; (8) fraudulent inducement/fraud; (9) civil conspiracy; and (10) unjust enrichment.

Following the filing of the complaint, the defendants gouth to compel arbitration and stay proceedings. The court then granted the motions to compel arbitration, ruling that the defendants moved to compel arbitration pursuant to the Federal Arbitration Act and the alleged agreements entered into between the parties – agreements signed by Self that contained arbitration provisions.

Plaintiffs challenged the alleged agreements on the basis that Self was “mentally unfit” at the time she signed the contracts. The court said it was required to direct the parties to proceed to arbitration because plaintiffs challenged the validity of the entire agreement and not just the arbitration clause.

The plaintiffs moved for reconsideration, and the court subsequently found that the contracts did not create “a duty to arbitrate the issue of whether Edith Self had the mental capacity to enter into an agreement with the Defendants.” In particular, the court said that the arbitration provision at issue stated that “all controversies that may arise between the parties concerning performance or breach of this Agreement … shall be determined by arbitration” and that “Edith Self’s mental capacity to enter into a contract does not relate to the performance or breach of the agreement.” Thus, the court said, “whether a contract was entered into between Self and the Defendants is a matter for the Court to decide.”

The parties then disputed the meaning of the court’s ruling. In their motion for clarification, the defendants stated that they understood the court’s order to mean that the court would proceed on the issue of Edith Self’s mental capacity and, after determining that issue, the court would then determine whether it should compel arbitration. The plaintiffs, on the other hand, argued that the court’s order provided that the entire proceeding, including the underlying causes of action, should proceed before the court.

The court, in its July 5 decision on clarification of the previous order, reviewed black letter law concerning the Federal Arbitration Act (“FAA”). The FAA, the court said, provides that agreements to arbitrate disputes “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U .S.C. § 2. Section 4 of the FAA provides for the petition to a district court for an order compelling arbitration when a party fails to arbitrate under an agreement. Under Section 4, “[a] party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration may petition any United States district court … for an order directing that such arbitration proceed in the manner provided for in such agreement.” 9 U.S.C. § 4. Under that provision, “[i]f the making of an arbitration agreement or the failure, neglect, or refusal to perform the same be in issue, the court shall proceed summarily to the trial thereof” and that if it is found that “no agreement in writing for arbitration was made or that there is no default in proceeding thereunder, the proceeding shall be dismissed.” If, however, it is found “that an agreement for arbitration was made in writing and that there is a default in proceeding thereunder, the court shall make an order summarily directing the parties to proceed with the arbitration in accordance with the terms thereof.”

In this week’s Sommers opinion, the court concluded that the claims must be determined by the court:

In this matter, the Court clarifies its order to hold that the claims asserted in Plaintiffs’ Complaint are to be determined by the Court. As noted in the Court’s previous Order . . ., the arbitration provision relates specifically to controversies arising between the parties on the issues of performance or breach of the agreements. The claims for relief asserted by Plaintiffs, on the other hand, involve RICO, breach of fiduciary duty, bad faith, fraudulent misrepresentation, negligent misrepresentation, fraud, civil conspiracy and unjust enrichment. Because Defendants have not tied these claims to the performance and breach of the agreements at issue, the Court does not need to compel arbitration under the FAA.

Sommers v. Cuddy, 2011 WL 2633068.