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CCLD Addresses Ripeness Doctrine and the “Stranger Rule” in Tortious Interference Claims, Partially Dismisses Claims for Breach of Corporate-Owned Group Variable Life Insurance Policies

Athene Life and Annuity Co., et al. v. Am. Gen. Life Ins. Co., et al., C.A. No. N 19C-10-055 PRW CCLD (Del. Super. May 18, 2020)

Policy holders (the “Plaintiffs”) brought a suit against American General Life Insurance, Co. (“American General”) for breach of corporate-owned group variable life insurance policies (the “Policies”) and against certain related entities managing the Policies, ZC Resource Investment Trust (“ZCRIT”) and ZC Resource LLC (“ZC Resource”) (together with ZCRIT, “ZC Defendants”) (together with ZCRIT and American General, “Defendants”) for tortious interference with contract. When the Defendants moved to dismiss, the Delaware Superior Court’s Complex Commercial Litigation Division (“CCLD”) granted the motion in part on ripeness grounds and denied it in part.

By way of background, the Plaintiffs allocated premium payments among different investment options in a portfolio called SVP Balanced Portfolio (the “SVP Portfolio”). The SVP Portfolio consisted of (1) an equity and bond portfolio (the “Corresponding Portfolio”) and (2) a guarantee (the “SVP Product”) that was calculated as the difference between the total value of the SVP Portfolio and the net asset value of the Corresponding Portfolio. Each investment portfolio was managed by ZCRIT, of which ZC Resource is a trustee. The documents governing the Policies included Commitment Letters stating that American General would not “modify, amend or change any of the Transaction Documents in any way which could change in any material respect the rights of the Owner and/or the terms and conditions of the transactions reflected in the [Transaction] Documents.” The ZCRIT Commitment Letters included similar language. 

For life insurance policies to maintain a favorable tax status, federal tax law requires that no single investment may constitute more than 55% of a portfolio (the “Diversification Rule”). American General reserved the right to manage the investments to comply with the Diversification Rule. Plaintiffs could exit their investment in the SVP Portfolio in two ways: (1) by reallocating to another investment (subject to certain terms), or (2) surrendering and receiving the value of its investment within a specified time period (the “Surrender Protocol”). The parties later amended the Surrender Protocol to give American General “sole discretion” over the timing of payment after surrender. 

Over time, the Corresponding Portfolio underperformed and the obligation under the SVP Product grew dramatically. In the fall of 2011, the value of the SVP Product neared 55% of the total value of the portfolio. In response, Defendants issued supplements (the “2011 Supplements”) to the private placement memoranda instituting, among other things, a 55% cap (the “55% Cap”) on the SVP Product. Athene objected to the 2011 Supplements.

The Defendants argued that the 2011 Supplements, including the 55% Cap, were necessary to ensure that the Policies complied with the Diversification Rule and maintained favorable tax status. Athene disagreed, arguing that the fluctuations in the SVP Product fell within the Internal Revenue Code’s (“IRC”) safe harbor for market fluctuations. Athene attempted to obtain a private letter ruling from the Internal Revenue Service (“IRS”) supporting its position, but the IRS declined to rule. 

Plaintiffs brought a lawsuit in the Delaware Court of Chancery in 2011 seeking, among other things, a declaratory judgment regarding its interpretation of the IRC safe harbor and the legality of the 55% Cap. The Court in that proceeding declined to rule on the question, finding that the claims were not ripe, because “any limit on the 55% Cap was only theoretical.” Subsequently, the 55% Cap was implicated, resulting in the reduction in value of a single death benefit by $9,000 (the “Death Benefit Reduction”). Plaintiffs filed suit again for breach of contract for entering into the 2011 Supplements and a tortious interference claim against the ZC Defendants. 

This time, the Court held that the breach of contract and declaratory judgment claims relating to the Death Benefit Reductions were ripe and survived the motion to dismiss. The Court found however that the issue of whether the 55% Cap reduced the value of the SVP Product, and, as a result, the amount that would be paid upon surrender, was still unripe. The Court reasoned that the surrender had not occurred and “the circumstances at the time of the surrender cannot be known [and] would necessitate speculation,” rendering any such opinion “hypothetical and advisory.”

The Court also found that all claims against ZC Resource had to be dismissed because the Delaware Statutory Trust Act (at 12 Del. C. § 3803(b)) provides that a trustee of such an entity, when acting in that capacity, cannot be personally liable to any person “other than the statutory trust or beneficial owner,” and there were no allegations that ZC Resource acted outside the scope of its authority as trustee. 

The Defendants also argued that there could be no claim for tortious interference against ZCRIT because it was an affiliate of American General and so was not a stranger “to both the contract and the business relationship giving rise to and underpinning the contract[.]” The Court reasoned, however, that Delaware courts had departed from the “stranger rule,” in part, because it runs “contrary to the Delaware Supreme Court’s adoption of the multi-factor balancing approach under Section 766 of the Second Restatement of Torts” and Delaware has not adopted an “absolute (rather than [a] limited) affiliate privilege.” The Court found it reasonably conceivable that the policies underlying the limited affiliate privilege – preserving a parent’s ability to protect its economic interest in a subsidiary – were not implicated by the relationship between ZCRIT and American General. Thus, the Court dismissed all claims other than the claims relating to the Death Benefit Reductions against American General and ZCRIT and the tortious interference claim against ZCRIT.  

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