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McEvoy v. Savings Bank Life Insurance Company of Massachusetts

Superior Court of Massachusetts, Suffolk, Business Litigation Session

June 30, 2017

Leslie V. McEvoy, Individually and on Behalf of a Class of Similarly situated Persons
Savings Bank Life Insurance Company of Massachusetts

          Filed July 3, 2017


          Mitchell H. Kaplan, Justice

         The plaintiff Leslie V. McEvoy alleges that she holds a participating whole life insurance policy issued by the defendant Savings Bank Life Insurance Co. (SBLI).[1] In this action, she seeks to enjoin all SBLI's policyholders from voting on a proposed conversion of SBLI from a stock life insurance company to a mutual life insurance company. The case came before the court on June 27, 2017 on the plaintiff's motion for a preliminary injunction enjoining the vote until additional disclosures concerning the plan of conversion demanded By her were made to SBLI's other 480, 000 policyholders. In her complaint, the plaintiff alleges that the vote on the plan of conversion is to occur at a Special Meeting of policyholders scheduled for that purpose on June 28, 2017. It appears, however, that voting has actually been underway for weeks. While the meeting was scheduled for 11:00 A.M. on June 28, 2017, and policyholders present at the meeting who had not previously voted could vote at that time, voting opened on May 19, 2017 and could be accomplished by mail, phone call, or on the internet, so long as the votes were received in time to be counted by the time of the meeting. As a result, the majority of votes cast in this election may well have been received by SBLI management before the annual meeting. In consequence, from a practical perspective a motion brought before the court on the afternoon of June 27th to preliminarily enjoin the vote that was to be completed and tallied the following morning was not timely.

         The proposed conversion of SBLI into a mutual insurance company calls for the SBLI shareholders, 30 Massachusetts banks or banks that had acquired Massachusetts banks, to receive $57.3 million in return for their shares in SBLI. This sum is to be financed through the issuance of Surplus Notes. While SBLI and its financial advisers have been working for some time on the sale of these Surplus Note to certain financial institutions, at oral argument the court was informed that the closing on that transaction was still two or three weeks away. In theory, therefore, the court could still issue a mandatory preliminary injunction voiding the vote, which would of course preclude any possibility that SBLI could issue the Surplus Notes on the schedule now contemplated, and ordering that revised informational materials be sent to policyholders and a new vote undertaken. The court declines to enter such an extraordinary order and, accordingly, DENIES the motion for a preliminary injunction.

         Generally, it is this court's practice to issue a comprehensive memorandum of decision when addressing a motion for preliminary relief in a case of this nature. However, in this case it appears that speed is more important than a carefully crafted explanation of the court's reasoning, so that the plaintiff may consider any other opportunities for the relief she requested. Accordingly, what follows is a summary statement of court's reasoning.



         The history of how Louis D. Brandeis originally devised and promoted the establishment of SBLI and it then came to be reorganized on multiple occasions by the Massachusetts Legislature is set out in prior decisions, including Goldstein v. Savings Bank Life Ins. Co. of Massachusetts, 435 Mass. 760, 761 N.E.2d 938 (2002), and, on remand, the Superior Court's decision on Cross Motions for Summary Judgment dated July 3, 2008 (Gants, J.) ( Goldstein ). Its unique status as the only life insurance company previously required to conform to both G.L.c. 175 and G.L.c. 178A has been noted by the SIC. Id. at 770. Indeed, the conflicts inherent in an entity that owes obligations to shareholders and policyholders has been the catalyst for much prior litigation. It appears that more recent events have increased the shareholder banks' desire to liquidate their interests in SBLI. First, they no longer sell a material number of SBLI policies or annuity contracts and therefore no longer have a business interest in the insurer. More critically, recent adoption of the so-called Basel In capital rules increased the risk weighting for non-publicly traded equity securities owned by banks, like the shares of SBLI, from 100% to 400%. In consequence, SBLI's bank shareholders must increase the capital held against their investment in SBLI by a factor of four.

         Following meetings with financial, actuarial and legal advisors, the plan to convert SBLI to a mutual insurance company wholly owned by its policyholders by having SBLI purchase all shares was adopted by the interested parties as the most expedient means or the shareholders to exit, while permitting SBLI to continue to serve the purpose for which it founded--providing secure, low-cost life insurance. The plan was unanimously approved by SBLI's nine-member board of directors. While these directors are elected by the shareholder banks, five of the members are independent. The shareholders then voted to approve the conversion. The plan also had to be approved by the three-member Policyholders Advisory Board (PAB), a statutorily mandated body established by the Legislature in connection with a 2010 reorganization of SBLI, whose mission is to protect the interests of policyholders and promote SBLI's purpose. The current chair of the PAB is a former Massachusetts Commissioner of Insurance. The PAB unanimously approved the plan of conversion in October 2016, and, following its review of a fairness opinion prepared by the actuarial firm Milliman, Inc. that opined that the conversion was fair to policyholders on an actuarial basis, once again in January 2017. The plan of conversion still, however, required the approval of the Commissioner of Insurance. See G.L.c. 175, § 19D(2). After nearly four months of review, by letter dated May 25, 2017, the Commissioner also approved the plan, subject to conditions not relevant to the pending motion. Among the findings that the Commissioner was required to make in order to approve the conversion is that the plan is " not prejudicial to the policyholders of such company or to the insuring public." Id.

         With respect to this finding, the Commissioner noted that SBLI management was of the view that participating policyholders and the shareholders have an interest in SBLI's surplus, while the staff of the Division of Insurance is of the view that only the shareholders have an interest in the surplus. The $57.3 million to be paid to the shareholders represented an amount substantially less than the percentage of the surplus that SBLI attributed to the shareholders.

         Of particular note to the pending motion, the Commissioner observed that the annual costs of the interest to be paid on the $57.3 million of Surplus Notes, plus the creation of reserves necessary to repay the Notes on maturity (something in the nature of a sinking fund), exceeds the amount of the dividends currently being paid to shareholders. However, because of the new Basel III requirements, pursuant to which the bank shareholders will have to increase their capital in respect of the shares by a multiple of four, their cost of holding SBLI shares will also increase by a factor of four. In consequence, shareholder dividends could be expected to increase by the same factor, an amount which would not violate statutory limitations on dividends that shareholder-owned life insurance companies may issue. At that point, the amount of annual dividends paid to the banks would substantially exceed the interest and reserve expenses associated with the new Surplus Notes.

         The last step in the plan of conversion is a vote to approve the plan of conversion by the policyholders; a majority of policyholders who vote is required for approval. According to the Chair of the PAB, the Commissioner reviewed and approved the disclosures sent to the policyholders soliciting their votes for the plan of conversion (hereafter referred to as the Notice).

         Analysis of the Claims

         It is important to note that the issue before the court on this motion for a preliminary injunction is not whether the plan of conversion is good, bad, or indifferent, as it affects the interests of policyholders, including those that have participating policies and receive annual dividends, as well as those that hold policies that do not provide a right to, annual dividends. Rather, the question is whether any disclosures in the Notice are materially misleading, either by what they say or omit to say. It is also notable that the plaintiff's ...

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