Legacy Consulting Group, LLC v. Brenda Gutzman, in Her Capacity as the of the Estate of Grace W. McGaughey ( 2021 )

RENDERED: DECEMBER 16, 2021
TO BE PUBLISHED
Supreme Court of Kentucky
2020-SC-0288-DG
LEGACY CONSULTING GROUP, LLC; AND APPELLANTS
MONEY CONCEPTS CAPITAL
CORPORATION
ON REVIEW FROM COURT OF APPEALS
V. NO. 2018-CA-1580
FAYETTE CIRCUIT COURT NO. 18-CI-00444
BRENDA GUTZMAN, IN HER CAPACITY AS APPELLEES
THE EXECUTRIX OF THE ESTATE OF
GRACE W. MCGAUGHEY, DECEASED;
AND JACKSON NATIONAL LIFE
INSURANCE COMPANY
OPINION OF THE COURT BY JUSTICE VANMETER
AFFIRMING
Under federal and state law, arbitration agreements validly entered into
are generally enforceable. However, arbitration agreements contained within
insurance contracts are not enforceable. The primary issue we decide in this
case is whether Grace McGaughey and, by extension, her estate are bound by
the arbitration provisions contained within the agreement which she signed
with Money Concepts Capital Corporation and Legacy Consulting Group, LLC
in December 2009 when she purchased a variable annuity with Jackson
National Life Insurance Company.1 We hold that under the facts of this
proceeding, neither Ms. McGaughey nor her estate is bound. We therefore
affirm the Court of Appeals.
I. Facts and Procedural Background.
In 2009, Ms. McGaughey, then age 89, was the trustee of the William A.
McGaughey Non-Marital Trust dated April 12, 1992 (“Trust”). From documents
in the record, the Trust owned, or was the beneficiary of, a Hartford Life
annuity with respect to Paul McGaughey who died prior to December 2009.
The payout from that annuity was to be approximately $400,000 to $425,000.
Upon the advice of David W. Hudson,2 an investment advisor/registered
representative of Money Concepts, Ms. McGaughey decided to invest $401,000
in a variable annuity with Jackson, specifically Jackson Perspective L Series
Fixed & Variable Annuity. The 2009 contract between Ms. McGaughey and
Money Concepts, consisting of eleven pages, contained an arbitration
agreement. The Jackson paperwork gave reasons for replacement as
“Annuitant is deceased, to realize gains in tax year 2009, and step up the death
benefit.”
1 As will be explained, this case is an interlocutory appeal from the Fayette
Circuit Court which denied Money Concepts’ and Legacy Consulting’s joint motion to
enforce arbitration terms in their agreement with Ms. McGaughey. We will sometimes
refer to these two parties jointly as “Appellants.” Jackson, while a named party to this
proceeding, did not have arbitration terms in its contract and therefore has not
participated herein.
2According to the Kentucky Secretary of State’s business records, David W.
Hudson formed Legacy Creek, LLC in April 2009. In 2010, its name was changed to
Legacy Consulting Group, LLC.
2
The Contract Data Page for the Jackson Annuity indicated that the
Owner was the Trust. The Annuitant was to be Ms. McGaughey, age 89. The
stated Initial Premium was $401,988.36; the Issue Date was December 29,
2009; and the Income Date was December 29, 2015. The Annuity’s terms
provided that the Premium could be withdrawn at anytime prior to the Income
Date, subject to a possible withdrawal charge. Similarly, in the event of the
death of the Annuitant prior to the Income Date, since the Owner was the
Trust and not a natural person, the Annuity appears to provide for payout to
designated beneficiaries, in this case, the Trust. Because Ms. McGaughey lived
beyond the Income Date, the Income Provisions set forth in the Annuity, pages
23-26, became operable, and Ms. McGaughey was provided with at least five
options: 1) lump-sum distribution; 2) Life Income annuity; 3) Joint and
Survivor annuity; 4) Life annuity with 120 or 240 Monthly Periods Guaranteed;
or 5) Income for a Specified Period. In addition, Jackson provided that other
income options were available, and that the available annuities could be either
Fixed Annuity Payments or Variable Annuity Payments. Annuity, page 24. The
record is clear that Ms. McGaughey did not select a payout option until the
month prior to the Income Date and that Ms. McGaughey chose, or was
advised to choose, the Life Income Annuity with a Fixed Annuitization. Over
the ensuing fifteen or so months, Ms. McGaughey apparently received monthly
payments of $9,695.90, payable quarterly, or a total of approximately
$145,000.
3
Following Ms. McGaughey’s death in March 2017, her daughter, Brenda
Gutzman, was appointed Executrix under her will. Gutzman apparently
questioned the propriety of the Life Income Annuity with Jackson and was
advised that the annuity payments terminated following her mother’s death.
Gutzman then sued Money Concepts, Legacy Consultants and Jackson in the
Fayette Circuit Court alleging several common law and statutory claims. Based
on the arbitration agreement, Money Concepts and Legacy Consulting moved to
compel arbitration. The trial court initially held the motion in abeyance,
pending limited discovery as to the signed documents, and ultimately denied
the motion to compel. Money Concepts and Legacy Consulting then filed an
interlocutory appeal with the Court of Appeals. That court affirmed the trial
court, opining that “the product at issue is for insurance based on the
description of the portfolio as a fixed account and the regular payments of the
same amount . . . consistent with an insurance product.” Legacy Consulting
Grp., LLC v. Gutzman, 2018-CA-001580-MR, 2020 WL 2781708, at *9 (Ky. App.
May 29, 2020). Consequently, that court held that the arbitration agreement
was unenforceable. KRS3 417.050(2). Money Concepts and Legacy Consulting
filed a petition for discretionary review, which we granted.
3 Kentucky Revised Statute.
4
II. Analysis.
The analytical framework for this dispute is relatively simple. If the
investment product which Ms. McGaughey selected, with the advice of Legacy
Consulting and Money Concepts, was “insurance,” which under KRS 304-1.030
includes a fixed payment annuity, then the arbitration agreement is
unenforceable. KRS 417.050(2); see also Ernest & Young, LLP v. Clark, 323
S.W.3d 682, 688 (Ky. 2010) (stating that McCarran-Ferguson Act, 15 U.S.C. §
1012(b), “establishes a doctrine of ‘reverse preemption’ that expressly exempts
from federal preemption state statutes enacted to regulate insurance, leaving
the regulation of insurance to the individual state[]”). Conversely, if the
investment product was a security, including a variable rate annuity, then the
arbitration agreement applies. As might be expected, the parties diverge as to
their respective views on the investment product. Appellants focus on the
original 2009 Jackson Annuity and its Accumulation Phase in which Ms.
McGaughey bore the risk of the investment. Gutzman, by contrast, focuses on
the post-Income Date during which Ms. McGaughey received a fixed rate
annuity.
Appellants argue that the determination of whether a contract
constitutes “insurance” within the meaning of the McCarran-Ferguson Act is
determined by federal law. SEC v. Variable Annuity Life Ins. Co., 359 U.S. 65,
69 (1959) (stating “the meaning of ‘insurance’ or ‘annuity’ under these Federal
Acts [the McCarran-Ferguson Act and the Security Act of 1933, 15 U.S.C. §§
77a-77aa] is a federal question[]”). In Variable Annuity, the Court discussed
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the differences between the variable annuities at issue in that case and
traditional fixed annuities. As to the latter, the Court noted that “traditionally
and customarily they . . . offer[] the annuitant specified and definite amounts
beginning with a certain year of his or her life. The standards for investment of
funds underlying these annuities have been conservative.” Id. Conversely,
variable annuities were invested to a greater degree in common stocks, and the
benefit payments vary with the success of the investment policy. Id. The Court
concluded that “the concept of ‘insurance’ involves some investment risk-
taking on the part of the company.” Id. at 71.
Justice William J. Brennan, Jr., wrote a concurring opinion in which he
fleshed out in more detail the provisions of the variable annuity at issue. Like
Ms. McGaughey, the annuitant had the option to cash out. Id. at 86 (Brennan,
J., concurring). Importantly for our decision, the variable aspect of the annuity
payout continued following the pay-in period. Justice Brennan noted:
Before the maturity date, when the schedule of payments in
the contract ceases and the payments out commence, the investor
can draw down his ‘units' in cash, and dispense with all ‘annuity’
features. Failing this, he is entitled to elect one of several annuity
alternatives. These are in the sample policy, a straight life annuity
on the life of the investor, a straight life annuity with 10 years'
payments certain, and a joint and survivor annuity on the life of
the investor and another. Again, while the duration of the
company's obligation to pay is independent of its investment
experience, the amount of each payment is not a direct money
obligation but a function of the status of the company's portfolio.
Id. at 86. In this case, Ms. McGaughey elected a fixed payout that was not
dependent on Jackson’s portfolio.
6
Appellants argue that a focus on the post-December 2015 aspect of the
annuity ignores the plain language of the contract as established in December
2009. Again, we turn to the Supreme Court for guidance.
Eight years after Variable Annuity, the Court had an occasion to address
another variable annuity product. SEC v. United Benefit Life Ins. Co., 387 U.S.
202 (1967). In United, the annuity premiums were invested in a “‘Flexible
Fund’ with the object of producing capital gains as well as an interest return,
and the major part of the fund is invested in common stocks.” Id. at 205. The
Court noted,
After maturity the policyholder has no further interest in the
“Flexible Fund.” He has either received the value of his interest in
cash, or converted to a fixed-payment annuity in which case his
interest has been transferred from the “Flexible Fund” to the
general reserves of the company, and mingled, on equal terms per
dollar of cash value, with the interests of holders of conventional
deferred annuities.
Id. The SEC’s position was that the portion of the contract involving the
“Flexible Fund” in the pre-maturity phase was “separable and a ‘security,’
within the meaning of the Securities Act.” Id. The Court noted the parties’
agreement that “the provisions dealing with the operation of the fixed-payment
annuity were purely conventional insurance provisions, and thus beyond the
purview of the SEC.” Id. The lower courts ruled against the SEC on the basis
that the contract was to be considered as a whole and not fragmented as
argued by the SEC. Id. They held that under the contract as a whole, the
company bore investment risk which “gave the entire contract the character of
insurance.” Id.
7The Supreme Court disagreed, stating “[f]irst, we do not agree with the
Court of Appeals that the ‘Flexible Fund’ contract must be characterized in its
entirety. Two entirely distinct promises are included in the contract and their
operation is separated at a fixed point in time.” Id. at 207. Thus, and contrary
to Appellants’ argument, we, in fact, look at the distinct promises included in
the contract and their operation at fixed points in time. See also Nat’l Home
Ins. Co. v. King, 291 F. Supp. 2d 518, 527 (E.D. Ky. 2003) (noting well-
established principle that “whether a particular contract is one of insurance
does not depend on what it is called, but what it does[]”) (citations omitted).
This conclusion is buttressed by the Ninth Circuit Court of Appeals
decision in Patenaude v. Equitable Life Assurance Society, 290 F.3d 1020 (9th
Cir. 2002), abrogated on other grounds by Kircher v. Putnam Funds Tr., 547
U.S. 633, 636 n.1 (2006), in which the court addressed whether state law
claims involving variable annuities were preempted by the Securities Litigation
Uniform Standards Act. Pub. L. No. 105-353, 112 Stat. 3227 (codified in
scattered sections of 15 U.S.C.). The court noted that variable annuities are
“hybrid” products, “retain[ing] some aspects of both a security and an
insurance product. To understand the interplay, we must deconstruct the
product.” 290 F.3d at 1027. The Court then stated,
As hybrid products, variable annuities are properly subjects of
hybrid regulation. There is nothing inappropriate or
inconsistent about the securities component being subject to
federal securities regulation and the insurance aspects being
subject to state regulation. For that reason, nothing in SLUSA
displaces state insurance regulation, nor “invalidate[s], impair[s],
8
or supersede[s] any law enacted by any State for the purpose of
regulating the business of insurance.” 15 U.S.C. § 1012(b).
290 F.3d at 1027 (emphasis added).
The annuity in this case was initially set up as a variable rate annuity.
Under case law, that initial investment was not insurance, but rather a
security. The issue, however, in this case is whether, following the Income
Date, when Ms. McGaughey elected a fixed income annuity, did the annuity
become insurance? The question seems to answer itself. If Ms. McGaughey
had elected in December 2009 to invest in the variable annuity and, at that
same time, elected a fixed rate payout, then perhaps Appellants would stand
on firmer ground.4 The facts are, however, that the payout was left open and
Jackson provided Ms. McGaughey with multiple options. From the limited
record before us, Legacy Consulting may have been involved in some form or
fashion in advising Ms. McGaughey as to her options.5 In other words, Ms.
McGaughey was making a new investment, which could have continued as a
security or become insurance. In this case, her investment in December 2015
4 Appellants cite a number of opinions to support their argument that a variable
rate annuity is a security and not insurance: Am. Equity Inv. Life Ins. Co. v. SEC, 613
F.3d 166 (D.C. Cir. 2010) (holding that variable annuities were covered securities
under the Securities Litigation Uniform Standards Act); Lander v. Hartford Life &
Annuity Ins. Co., 251 F.3d 101 (2nd Cir. 2001); Peoria Union Stock Yards Co. v. Penn
Mut. Life Ins. Co., 698 F.2d 320 (7th Cir. 1983); Cooper v. Pac. Life Ins. Co., 229 F.R.D.
245 (S.D. Ga. 2005); Malone v. Addison Ins. Mktg., Inc., 225 F. Supp. 2d 743 (W.D. Ky.
2002); Dean & Homer, Inc. v. Commonwealth, Pub. Prot. Cabinet, 451 S.W.3d 659 (Ky.
App. 2014). None of these opinions, however, compel the result Appellants seek as
none deal with the issue presented in this case.
5 The record contains Ms. McGaughey’s December 2015 election as to the Fixed
Annuity. This document appears to have Legacy Consulting as its source. Appellants’
Brief, App’x 4.
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was insurance. As a result, KRS 417.050(2) provides that the arbitration
provision is unenforceable.
III. Conclusion.
We affirm, therefore, the Court of Appeals opinion affirming the Fayette
Circuit Court’s Order denying Money Concepts Capital Corporation and Legacy
Consulting Group, LLC’s motion to compel arbitration. This matter is
remanded to the Fayette Circuit Court.
All sitting. All concur.
COUNSEL FOR APPELLANTS:
Eric Gribbon
Akerman LLP
Andrew Robinson Smith
Steptoe & Johnson PLLC
COUNSEL FOR APPELLEE,
BRENDA GUTZMAN:
Thomas Kelly Herren
Herren & Adams LLP
COUNSEL FOR APPELLEE,
JACKSON NATIONAL LIFE INSURANCE
COMPANY:
Jacinta F. Porter
Frost, Brown & Todd LLC
10