Allegations That Financial Advisor Misrepresented Investments Amount to Single Claim

The plaintiffs – Crystal Kilcher, Daniel Kilcher, Anthony Muellenberg, and Troy Muellenberg – were siblings and members of the Shakopee Mdewakanton Sioux Community (the "Community"). Members of the Community were eligible to share in the profits generated by the Community's gaming enterprise when they turned 18 years old. After each plaintiff turned 18, their mother introduced them to Helen Dale, a financial advisor and registered agent of Transamerica Financial Advisors, Inc. (TFA).

The plaintiffs alleged that Dale gave similar advice to each of them, recommending the purchase of whole life insurance policies and fixed annuities. According to the plaintiffs, at age 18, they each purchased a $10 million whole life insurance policy at Ms. Dale's direction; the premiums for those policies ranged from $5,000 to $6,000 per month.

Crystal and Daniel Kilcher said that they later purchased millions of dollars of whole life insurance on their spouses, as well as $1 million whole life insurance policies on each of their children. Crystal Kilcher and Troy Muellenberg said that, heeding Dale's advice, they purchased supplemental insurance policies that covered living expenses in the event that they were to become unable to work due to sickness or injury. Dale allegedly recommended the supplemental insurance product even though the plaintiffs' primary source of income was the distribution they received from the Community. Dale also allegedly recommended that Daniel Kilcher purchase certain riders to his life insurance policy that provided benefits that the Community would have provided at no charge.

Each plaintiff also alleged that they invested in various annuities that were subject to surrender charges if funds were withdrawn before the annuity matured. According to the plaintiffs, the money invested in the annuities was inaccessible and generated little interest, while the annuities charged high fees and were ill-suited for the plaintiffs' investment goals. For example, they alleged, when Daniel Kilcher needed funds to complete the remodeling of his home, he surrendered certain annuities and paid the fees associated with doing so. Despite Daniel Kilcher's need for liquidity at that time, Dale nonetheless allegedly purchased more of the same kind of annuities for him, an action that Daniel Kilcher believed constituted churning by Dale.

The plaintiffs asserted that they purchased insurance products from and continued to make investments through Dale for a number of years, when a financial advisor reviewing Anthony Muellenberg's portfolio discovered that his investments were unsuitable for his age, background, and investment goals. The other plaintiffs alleged that they then discovered that their portfolios were similarly unsuitable for their respective situations.

The plaintiffs filed individual claims against Dale and TFA with the Financial Industry Regulatory Authority (FINRA). They alleged, among other things, that Dale had breached the fiduciary duty she owed to them, that she had misrepresented the nature of the investments, and that she had sold them unsuitable investments. The plaintiffs alleged that the investments were unsuitable because they were not sufficiently liquid, were subject to significant transaction costs, and had been sold to generate high commissions for Dale.

The FINRA arbitration proceedings were consolidated by agreement of the parties and the arbitration panel determined that certain claims were ineligible for submission and dismissed other claims. The plaintiffs eventually withdrew their claims from arbitration.

The plaintiffs sued Dale in a Minnesota trial court, alleging breach of fiduciary duty, unsuitability, negligent misrepresentation, fraudulent misrepresentation, fraud, and violations of state securities laws.

The court held that Dale owed a fiduciary duty to the plaintiffs, but did not decide whether she had breached that duty. The parties and Dale's professional liability insurance carrier, Continental Casualty Company, entered into a settlement agreement under which Continental agreed to pay $1 million under the policy, less Ms. Dale's defense costs, and the plaintiffs agreed to dismiss with prejudice their action against Ms. Dale. 

The settlement agreement permitted the plaintiffs to file a declaratory judgment action against Continental so that a court could decide whether the plaintiffs' claims against Dale involved the same "wrongful acts" and/or "interrelated wrongful acts" as defined by the policy. If the plaintiffs prevailed and the court held that they had submitted more than one claim, Continental agreed that it would pay an additional $1 million, the aggregate policy limit.

The plaintiffs filed their action. The district court held that the relevant policy language was not ambiguous and that the plaintiffs had submitted more than one claim against Dale.

Continental appealed.

The policy

The Life Agent/Broker Dealer Solutions Policy defined "claim" as:

a. a written demand for monetary damages, or

b. civil adjudicatory or arbitration proceeding for monetary damages, against an Insured for a Wrongful Act, including any appeal therefrom brought by or on behalf of or for the benefit of any Client. 

 

The policy further provided that:

[m]ore than one Claim involving the same Wrongful Act or Interrelated Wrongful Acts shall be considered as one Claim. 

 

The policy defined "interrelated wrongful acts" as:

any Wrongful Acts which are logically or causally connected by reason of any common fact, circumstance, situation, transaction or event. 

 

The policy defined "wrongful act" as:

any negligent act, error or omission of … the Insureds in rendering or failing to render Professional Services. 

The circuit court's decision

The circuit court reversed.

In its decision, it explained that to determine whether the plaintiffs had submitted more than one claim, it had to consider Ms. Dale's allegedly wrongful acts and decide whether they constituted interrelated wrongful acts.

The circuit court found that the plaintiffs' claims shared the fact "that the wrongful acts were committed by Dale, whose motive was to generate commissions." It added that they, in turn, were "logically related" by reason of the following common facts and circumstances: Each plaintiff presented the same opportunity to Dale: a young, unsophisticated investor who began earning a significant income and whose mother had introduced Dale as a financial advisor.

Moreover, the circuit court continued, as time passed and each plaintiff's relationship with Dale grew, the plaintiffs "continued to present" the same opportunity to Dale: an investor who trusted her to act in his or her best interest. Dale also "engaged in the same method or modus operandi," the circuit court added, advising each plaintiff "to purchase unsuitable whole life insurance policies and unsuitable annuities."

The circuit court then rejected the plaintiffs' contention that the acts of selling whole life insurance policies to the plaintiffs were not related to the acts of selling whole life insurance policies to Crystal and Daniel Kilcher for their children and spouses or to the acts of selling supplemental insurance policies to Crystal Kilcher and Troy Muellenberg. Agreeing with the plaintiffs, the circuit court concluded, would mean that it would have to engage in improper "micro-distinguishing," adding that the offering of unsuitable investments also logically was connected to the churning claim, which resulted from Dale's advice that Daniel Kilcher purchase inappropriate annuities, while she simultaneously liquidated similarly inappropriate annuities on his behalf.

The case is Kilcher v. Continental Cas. Co., No. 13–1986 (8th Cir. April 3, 2014). Attorneys involved include: Richard A. Simpson, argued, Washington, DC (Gary P. Seligman, Washington, DC., Andrew L. Margulis, New York, NY., Leland H. Jones, Washington, DC., on the brief), for appellant; Kristine Kroenke, argued, Minneapolis, MN (Kyle E. Hart and Gordon P. Heinson, Minneapolis, MN, on the brief), for appellee.