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The West Virginia Investment Management Board v. Variable Annuity Life Insurance Co.

Supreme Court of West Virginia

June 5, 2018


          Submitted: May 16, 2018

          Appeal from the Business Court Division The Honorable Christopher C. Wilkes, Judge; The Honorable Joanna I. Tabit, Judge; and The Honorable Paul T. Farrell, Judge Civil Action No. 09-C-2104

          Benjamin J. Bailey, Esq. Jonathan R. Marshall, Esq. Thomas B. Bennett, Esq. Raymond S. Franks, II, Esq. BAILEY & GLASSER LLP Charleston, West Virginia Counsel for Petitioner The West Virginia Investment Management Board

          J. Jeaneen Legato, Esq. Thomas J. Hurney, Jr., Esq. Michael M. Fisher Esq. JACKSON KELLY PLLC Charleston, West Virginia

          Erin R. Stankewicz, Esq. JACKSON KELLY PLLC Wheeling, West Virginia

          Richard J. Doren, Esq. (pro hac vice) GIBSON, DUNN & CRUTCHER LLP Consolidated Public Retirement Board

          Gerard R. Stowers, Esq. Special Assistant Attorney General J. Mark Adkins, Esq. S. Andrew Stonestreet, Esq. BOWLES RICE LLP Charleston, West Virginia Counsel for Petitioners

          Andrew J. Katz, Esq. Charleston, West Virginia Counsel for Amicus Curiae West Virginia Education Association

          Jeffrey G. Blaydes, Esq. Carbone & Blaydes, P.L.L.C Charleston, West Virginia Counsel for Amicus Curiae American Federation of Teachers, WV AFL-CIO

          Robert M. Bastress, Jr., Esq. Morgantown, West Virginia Counsel for Amicus Curiae West Virginia Association of Retired School Employees West Virginia Employment Lawyers Association Los Angeles, California Counsel for Respondent

          John M. Canfield, Esq. Charleston, WV Counsel for Amicus Curiae West Virginia Chamber of Commerce

          Mychal S. Schulz, Esq. Babst Calland Charleston, West Virginia and Todd A. Mount, Esq. Shaffer & Shaffer, PLLC Madison, West Virginia Counsel for Amicus Curiae Defense Trial Counsel of West Virginia


         "Where the issue on an appeal from the circuit court is clearly a question of law or involving an interpretation of a statute, we apply a de novo standard of review." Syllabus Point 1, Chrystal R.M. v. Charlie A.L., 194 W.Va. 138, 459 S.E.2d 415 (1995).



         This appeal is the latest chapter in a long-existing contractual dispute between the West Virginia Investment Management Board (IMB), the West Virginia Consolidated Public Retirement Board (CPRB) (together, Petitioners) and the respondent, The Variable Annuity Life Insurance Company (VALIC). The first time the parties were before this Court, we reversed summary judgment in favor of VALIC and remanded for further proceedings.[1] This Court also directed that the matter be referred to the Business Court Division. Eventually, the parties agreed to submit the dispute to binding, non-appealable arbitration before a panel of three business court judges due to the complexity of the case. The panel unanimously found in favor of VALIC. Petitioners now contend that the creation and makeup of the arbitration panel was illegal. Petitioners additionally argue that the panel, even if validly created, misapplied the law in reliance on erroneous findings of fact, altogether failed to apply the law of the case created in IMB I, and neglected to decide all issues before it.

         We disagree and find that the Business Court Division Rules provide sufficient flexibility to allow for arbitration by panel if agreed to by the parties. Because the parties were sophisticated and represented by able counsel, we find no cause to void the parties' agreement to submit the matter to binding arbitration, including their agreement to waive appellate review. While we disagree with the characterization of Petitioners' merits-based arguments as challenges to the panel's subject-matter jurisdiction, we nonetheless find Petitioners' arguments that the panel failed to apply the law of the case and neglected to decide all issues before it unavailing. Accordingly, we affirm the order below dismissing the matter from the Business Division docket in reliance on the conclusions reached in the panel's Final Decision.[2]


         As we did when this case was previously before this Court in IMB I, we again find it necessary to provide the appropriate background for the proceedings at issue, despite that the substantive facts are of little use to our analysis in the current appeal because it delves into matters of constitutionality and the legality of the procedures employed below. In IMB I, we explained history of the teachers' retirement plans and the 1990 legislation affecting those plans:

The State Teachers Retirement System ("TRS") was created in 1941 to provide retirement benefits for public school teachers and other school service personnel. From 1941 to 1970, teachers and other professional and school service personnel were required to participate in TRS. While originally a defined contribution plan, TRS became a defined benefit plan in 1970. Due to funding problems affecting the solvency of TRS, the Legislature enacted the "Teacher's Retirement Reform Act" ("Reform Act") in 1990, pursuant to which a defined contribution plan ("DCP") was created. See W.Va. Code §§ 18-7B-1 to -21 (2012 & Supp. 2014). Subject to the provisions of the Reform Act, participants were permitted to allocate their retirement funds among various investment options in the DCP.[3]

         So, on October 8, 1991, the CPRB entered into an annuity contract with VALIC to offer DCP enrollees a high-yield, fixed annuity investment. The 1991 Contract provided that VALIC would guarantee a minimum annual interest rate of at least 4.5% in perpetuity, and contained an endorsement providing that "in the case of withdraw for transfer to another funding entity only 20% of the Surrender Value may be withdrawn once a year" (the 20% Rule). Application of the 20% Rule was subject to only two exceptions: (1) the surrender value remaining would be less than $500; or (2) the withdrawal is for transfer to the funding entity for the West Virginia ORP Common Stock Fund or the West Virginia ORP Bond Fund. In March 2008, the Legislature passed House Bill 101, which, effective July 1, 2008, permitted DCP members to elect to transfer their retirement funds from DCP to TRS if at least sixty-five percent of the total DCP membership opted to do so.[4] Seventy-eight percent of the members opted to transfer their funds to TRS. Because the threshold requirement had been met, the State requested liquidation of the investments of the transferring members from all DCP fund providers, including VALIC. VALIC invoked the 20% Rule and agreed, in accordance with that rule, that it would transfer 20% of the funds each year over a five-year period, or, in the alternative, would agree to a fee of $11.2 million for an immediate withdrawal of the full amount.

         This issue prompted discussions between CPRB, IMB, and VALIC, during which a transfer of the funds to a bond fund option (as an exception to the 20% Rule) was contemplated, but ultimately failed because IMB could not agree to the bond fund's requirements. The parties then negotiated a new contract in November 2008 (the 2008 Contract). VALIC received assurances that the 2008 contract was "not an attempt by the CPRB or IMB to liquidate the assets in the new fixed annuity contract." The parties agreed that the 2008 Contract would be "materially similar (i.e., form, endorsements, rates, and terms) to the [1991] contract issued to the CPRB for the [DCP]." The 2008 Contract did, however, designate IMB as signatory.[5] Critically, the 20% Rule was not altered in any way from the 1991 Contract to the 2008 Contract. On December 10, 2008, Petitioners requested that VALIC transfer $248 million from the fund governed by the 1991 Contract to one governed by the 2008 Contract. Eight days later, IMB requested withdrawal of all funds held under the 2008 Contract on or before December 21, 2008. Pursuant to the 20% Rule, VALIC again refused to allow withdrawal of the full $248 million in one lump sum, but agreed to transfer 20% per year over a five year period.[6] Petitioners filed this action initially seeking only a declaratory judgment that VALIC was required to pay the amount in a lump sum rather than in five equal installments over the period of 2009 to 2013. After removal and remand from federal court, however, Petitioners amended their complaint to seek damages in the form of "lost investment opportunities, " claiming that had they been permitted to withdraw all of the funds in a lump sum, they could have made a greater rate of return than VALIC's guaranteed 4.5% interest.

         The parties filed cross-motions for summary judgment. VALIC argued, among other things, that the suit with regard to the 1991 Contract did not present a justiciable controversy, and the CPRB did not have standing to assert relief in connection with the 2008 Contract. Petitioners argued, among other things, that the 20% Rule endorsement should be construed in their favor. The circuit court granted VALIC's motion for summary judgment, finding that Petitioners presented no justiciable controversy, and determined that the 20% Rule endorsement was unambiguous and should be construed in favor of VALIC. Accordingly, the circuit court entered summary judgment in favor of VALIC. Petitioners then appealed that order to this Court in IMB I.

          In IMB I, we held that both IMB and CPRB had standing to pursue the action.[7] And, we held that the suit presented a justiciable controversy.[8] More important for our review of this appeal, however, we explained that the 20% Rule endorsement language was "decidedly ambiguous."[9] We reasoned that because the 1991 contract formed the basis of the 2008 contract, which the parties agreed were "materially similar, " the circuit court should not have precluded from its review evidence relating to the 1991 contract.[10] Thus, we reversed the grant of summary judgment and remanded the matter for further proceedings consistent with the opinion.[11] We also referred the matter to the Business Court Division.[12]

         Following the remand in IMB I, the parties engaged in extensive discovery that focused on developing parol evidence consistent with this Court's directive. The additional discovery included written discovery, affidavits, and seven additional depositions. The deponents included the CPRB executive director who participated in negotiations for the 1991 Contract, VALIC's former chief actuary, CPRB's Executive Director from 2003 to 2005, and CPRB's Rule 30(b)(7) witness.[13] Most relevant for purposes of this appeal, CPRB's representatives conceded that VALIC could not have guaranteed the 4.5% interest rate if the funds could be withdrawn at any time, in total and without restriction; that no one at CPRB had ever stated the view-prior to this litigation- that the 20% Rule did not apply to the transfers attempted in 2008; and that it had been reported to the CPRB Board upon review of the 20% Rule that the "annuity could only be liquidated through five annual withdrawals over a multi-year period."

         Prior to the pretrial conference, Judge Christopher C. Wilkes-the Business Court Division Chair and Presiding Judge-expressed concern, echoed by the parties, that the complexity of the issues involved might prove difficult for resolution by a lay jury.[14]These concerns prompted Judge Wilkes to offer to hold a bench trial or other alternative dispute resolution. The parties reportedly "liked the idea of arbitration, but worried that the case presented too much information for one arbitrator to absorb." In response, Judge Wilkes offered to secure a panel of arbitrators to hear their dispute according to whatever terms were agreed upon by the parties. Counsel for the parties sought the possibility of securing three business court judges to serve as the arbitration panel to be conducted the next day, but it could not be arranged on such short notice. Judge Wilkes advised the parties that he would not serve on the panel, but the parties requested that Judge Wilkes do so because he was already intimately acquainted with the admittedly complex issues, having presided over the case for the past year. The parties then took leave to consult with their respective clients and reconvened, at which time all counsel agreed to the alternative dispute resolution and at the parties' request, Judge Wilkes cancelled the jury trial scheduled to begin the following day. The parties then agreed that they would attempt to mediate the case once more, and asked that Judge Wilkes serve as the mediator since he not only was aware of all issues, but also was available to conduct the mediation the following day due to cancellation of the jury trial. In the event that the mediation was unsuccessful, the parties agreed that the matter would be submitted to binding, non-appealable arbitration before Judge Wilkes, and Business Court Judges Joanna I. Tabit and Paul T. Ferrell, who were specifically chosen by the parties. The parties likewise stipulated to detailed parameters for the arbitration. The parties reduced the pertinent points of their agreement to writing and submitted it to the Business Court on September 20, 2016 as a Joint Stipulation:

WHEREAS, the parties came to an agreement to stay this action and submit to binding arbitration if they are not able [to] resolve it through mediation;
NOW THEREFORE, IT IS HEREBY STIPULATED AND AGREED, by and between the parties, as follows:
1. This action will be stayed.
2. The parties have waived their right to trial by jury or bench.
3. The parties shall mediate this dispute before Judge Wilkes on September 20, 2016.
4. In the event the action is not resolved through mediation, the parties shall submit to binding arbitration before a three-judge panel comprise of Judge Wilkes, Judge Joanna I. Tabit, and Judge Paul T. Farrell ("the arbitration"). Any dispute arising prior to the arbitration shall be resolved by Judge Wilkes.
5. The arbitration shall take place over a three-day period that is mutually convenient to the panel members and parties.
a. On the first day of arbitration, Plaintiffs shall have up to five hours to present a proffer of evidence.
b. On the second day of arbitration, Defendant shall have up to five hours to present a proffer of evidence.
c. On the third day of arbitration, both parties shall have up to three hours to present argument.
6. Seven (7) calendar days before the arbitration is scheduled to begin, the parties may submit pre-arbitration memoranda not to exceed twenty-five (25) pages.
7. At the arbitration, the proffers must be drawn from materials and testimony in the discovery record in the case or publicly available sources.
a. In the event a party intends to proffer testimony of a witness that is not in the discovery record, that testimony must be provided by affidavit in advance of the arbitration.
b. Any affidavit prepared pursuant to paragraph 6(a), above, shall be served on opposing party by e-mail at least fourteen (14) calendar days before the arbitration is scheduled to begin.
c. The opposing party may, at their election, depose any witness whose testimony is presented by affidavit. The deposition shall occur prior to the first date the arbitration is scheduled to begin. The deposition shall be limited to the subject matter of the testimony set forth in the affidavit.
8. Within fourteen (14) calendar days following the conclusion of the arbitration, the parties may submit written arguments in memoranda not to exceed (thirty) 30 pages in length.
9. The arbitration panel shall issue a reasoned decision applying West Virginia law within thirty (30) calendar days after the conclusion of the arbitration.
10. The arbitration shall be confidential, except to the extent disclosure is required by law.
11. The decision of the arbitrators is final and non-appealable.
12. Upon issuance of the panel's reasoned decision, the above-captioned action shall be dismissed with prejudice.
13. The parties shall bear their own costs, including attorneys' fees.

         After entering the parties' Joint Stipulation, Judge Wilkes conducted a mediation, but not before informing the parties that any information they did not wish him to know as a member of the arbitration panel should be kept confidential from him during the mediation. The mediation was unsuccessful and the matter was scheduled on the court's public docket for a ...

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