West Virginia Record

Tuesday, July 16, 2019

Justices: State entitled to ‘full surrender’ of annuity contracts

By Jessica M. Karmasek | Nov 18, 2014


CHARLESTON – The West Virginia Supreme Court of Appeals says the state is entitled to a “full surrender” of two annuity contracts without delays in payment or surrender charges.

The West Virginia Investment Management Board, or IMB, and the West Virginia Consolidated Public Retirement Board, or CPRB, appealed to the state’s high court two orders entered by the Kanawha Circuit Court.

The orders entered by Judge James Stucky in October 2013 separately granted summary judgment to The Variable Annuity Life Insurance Company, or VALIC, against IMB and the board.

“Our review of the record compels us to conclude that the trial court erred in finding that VALIC had not denied any right asserted by the Board under the 1991 contract,” Justice Allen Loughry wrote for the court in the opinion released Friday.

Until 1991, public school employees in West Virginia participated in the Teachers’ Retirement System, a defined benefit pension plan wholly managed by the state.

By the early 1990s, the TRS had unfunded liabilities of more than $3 billion.

In 1992, state lawmakers passed legislation creating the state Teachers’ Defined Contribution Plan, which the CPRB administers.

Pursuant to the statute, teachers who were employed as of July 1991 could either remain in the TRS or transfer to the DCP. Those hired after July 1991, and before the DCP closed to new participants on July 1, 2005, automatically became participants in the DCP.

The DCP offered a number of investment options, including the VALIC annuity.

Pertinent to this case are two fixed annuity contracts issued by VALIC; the first on Oct. 8, 1991 – the 1991 contract – and the second on Nov. 6, 2008 – the 2008 contract.

Both of the contracts issued by VALIC contain an identically-worded endorsement – the terms of which purport to govern the rights of the parties with regard to a participant’s decision to surrender his or her investment in the annuity.

Directly impacting the case was the Legislature’s decision to permit DCP members to voluntarily transfer their retirement funds to TRS effective July 1, 2008.

This transfer could only take place if 65 percent of actively-contributing DCP members elected to make the transfer. More than 78 percent of the relevant DCP participants elected to make the transfer.

The record shows that VALIC, or its agent, was fully apprised of the legislation, House Bill 101, that would permit electing DCP members to join TRS.

VALIC also was aware of the resulting need to remove the assets of DCP participants electing to transfer to TRS from its annuity fund.

During discussions between the board and VALIC in advance of the DCP participants’ vote, VALIC indicated there was likely to be a “surrender charge” of $11.5 million “in the event that all assets were cashed out in the same year.”

This potential charge – which had not been anticipated by the board – spawned additional and ongoing communications between VALIC, CPRB and IMB concerning the transfer of moneys subject to the 1991 contract of those DCP participants electing to join TRS.

The board then decided, along with IMB, to obtain a second annuity contract, the 2008 contract, from VALIC.

The 2008 contract was designed “as an investment and funding vehicle” to accomplish the transfer.

Therefore, on Dec. 10, 2008, IMB and the board submitted a request to VALIC to transfer $248,345, 458.77 from the 1991 contract to the 2008 contract.

VALIC effectuated the transfer pursuant to their request.

On Dec. 18, 2008, IMB requested withdrawal of all funds held under the 2008 contract on or before Dec. 21, 2008.

However, the funds were subject to withdrawal restrictions that limited IMB and the board to removing 20 percent of the surrender amount per year.

Based on VALIC’s refusal to surrender the entirety of the affected funds in a lump sum, IMB and CPRB instituted a declaratory judgment action against VALIC.

VALIC removed the case to federal court, which remanded the case back to the circuit court.

At that time, IMB and the board amended their complaint to seek damages arising from VALIC’s refusal to timely release the funds at issue.

Cross motions for summary judgment were filed, and on Oct. 21, 2013, the Kanawha Circuit Court granted VALIC’s motion for summary judgment against IMB and the board.

IMB and CPRB appealed to the state Supreme Court, asserting the trial court erred.

The justices sided with IMB and the board in their 35-page ruling, saying the circuit court’s finding was “clearly tied” to its acceptance of VALIC’s argument that the board never requested a cash payout under the 1991 contract.

“Only by turning a blind eye to the events that transpired in this case can it even be suggested that the Board failed to assert its claimed right to an aggregate payout of the subject funds,” Loughry wrote.

“VALIC cannot expect this Court, or any court for that matter, to believe that the statutory objective of gaining access to the funds of the electing DCP members was not adequately articulated by the Board in a manner that VALIC fully comprehended.

“On the facts of this case, the Board’s failure to submit the form authorizing the withdrawal of funds is simply not determinative of whether the Board previously asserted its right to a lump sum payout.”

The justices said there is “little doubt” that VALIC, “while fully apprised of the petitioners’ objective to acquire those funds in aggregate fashion,” acted in “direct response” to that specific request.

“Hence, the trial court’s hinging of its ruling on the absence of a cash demand by the Board in June 2008 or later is nothing more than a red herring,” they wrote.

The Supreme Court ruled that the circuit court erred in granting summary judgment and dismissing the claims raised by IMB and CPRB.

More specifically, it ruled that both IMB and the board were proper parties to bring the lawsuit.

The high court also found that IMB and CPRB had sufficiently alleged damages.

Given the “complexity” of the issues in the case, and a prior request by IMB and the board, the case has been transferred to the Business Court Division.

When the business court receives the referral, it will schedule proceedings to determine the remaining liability and damage issues in the case.

Anthony Majestro of Charleston law firm Powell & Majestro PLLC argued for IMB and the board before the Supreme Court. Majestro, along with Gerard Stowers and Lenna Chambers of Bowles Rice, represented both boards.

Majestro called the verdict a “great victory” for the State.

“We are very pleased that the Supreme Court unanimously rejected VALIC’s arguments and reversed the circuit court’s dismissal of the State’s damage claims,” he said Tuesday.

“It means that the State will have the opportunity to prove its claim that its teacher pensions plan was harmed by up to $91 million as a result of the refusal in 2008 to promptly surrender the annuity held by VALIC when the State requested it to do so.”

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West Virginia Investment Management Board West Virginia Supreme Court of Appeals

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