ELIZABETH K. DILLON, District Judge.
Plaintiffs Alfred and Betty Snapp, together with their daughter-in-law, Sharon Snapp, bring this action against Lincoln Financial Securities Corporation (Lincoln), RiverSource Distributors, Inc., and RiverSource Life Insurance Company (together, RiverSource). Plaintiffs assert various claims arising from defendants' alleged securities fraud.
Before the court is defendants' motion to dismiss the complaint for failure to state a claim under Rule 12(b)(6) of the Federal Rules of Civil Procedure. In it, defendants argue that many of plaintiffs' claims are barred by the applicable statute of limitations, and that others fail to state a claim. The matter has been fully briefed and argued. For the reasons set forth below, the court will grant defendants' motion to dismiss.
In late 2007, Alfred and Betty Snapp met with Randy Watts, who was both a Financial Industry Regulatory Authority (FINRA) registered representative of Lincoln Financial and a professional authorized to sell RiverSource variable annuities. The Snapps told Watts that they wanted out of their prior investments that fluctuated with the market, and they wanted to put their life savings in an investment which was safe, like an annuity. Watts recommended that the Snapps invest their life savings in a RiverSource variable annuity. He told them that the investment "would never go below the initial amount they would be investing" and that "it would be paid out in full as a death benefit." (Compl. ¶¶ 11, 14.) Before agreeing, the Snapps "read the paperwork and asked a lot of questions about the alleged guarantee." (Id.)
In 2008, Sharon Snapp met with Watts, who had previously recommended that she invest her late husband's life insurance proceeds in a Hartford variable annuity. Watts recommended to Ms. Snapp that she move her investment into a RiverSource variable annuity, and similarly assured her that "the original amount invested would never decline in value." (Id. ¶ 18.)
By November 2009, every quarterly and annual statement that the Snapps received from RiverSource contradicted Watts's representations that the value would never decline below the initial investment and that the death benefit would equal the initial investment. Mr. and Mrs. Snapp "would often question Mr. Watts about statements received showing a reduction in the annuity's value." (Id. ¶ 13.) Likewise, Ms. Snapp "would receive statements indicating a decline in value, [and] she would ask Mr. Watts about them." (Id. ¶ 19.) Watts repeatedly assured them that their investment would not decline. (Id.)
In 2015, Watts purportedly committed suicide after he was contacted by an investigator regarding thefts from customers. (Id. ¶ 7.) After Watts's death, Mr. and Mrs. Snapp called his office "and found out for the first time" that their death benefit had declined by approximately $197,000. (Id. ¶ 15.) Similarly, Ms. Snapp "learned that her account value" had declined by approximately $80,000. (Id. ¶ 21.)
The Snapps filed a FINRA arbitration claim against Lincoln and RiverSource on April 18, 2016. The arbitration panel granted Lincoln's and RiverSource's motion to dismiss based on FINRA's six-year "eligibility" rule for the submission of claims.
To survive a Rule 12(b)(6) motion to dismiss, a plaintiff's allegations must "state a claim to relief that is plausible on its face." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007)). This standard "requires the plaintiff to articulate facts, when accepted as true, that `show' that the plaintiff has stated a claim entitling him to relief, i.e., the `plausibility of entitlement to relief.'" Francis v. Giacomelli, 588 F.3d 186, 193 (4th Cir. 2009) (quoting Iqbal, 556 U.S. at 678). The plausibility standard requires more than "a sheer possibility that a defendant has acted unlawfully." Iqbal, 556 U.S. at 678.
In determining whether the plaintiff has met this plausibility standard, the court must accept as true all well-pleaded facts in the complaint and any documents incorporated into or attached to it. Sec'y of State for Defence v. Trimble Navigation Ltd., 484 F.3d 700, 705 (4th Cir. 2007). Further, it must "draw[] all reasonable factual inferences from those facts in the plaintiff's favor," Edwards v. City of Goldsboro, 178 F.3d 231, 244 (4th Cir. 1999), but it "need not accept legal conclusions couched as facts or `unwarranted inferences, unreasonable conclusions, or arguments,'" Wag More Dogs, LLC v. Cozart, 680 F.3d 359, 365 (4th Cir. 2012) (quoting Giarratano v. Johnson, 521 F.3d 298, 302 (4th Cir. 2008)).
As already noted, defendants argue that many of plaintiffs' claims are time-barred. Statutes of limitation and statutes of repose are affirmative defenses that may be raised in a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6). United States v. Kivanc, 714 F.3d 782, 789 (4th Cir. 2013) (citing Dean v. Pilgrim's Pride Corp, 395 F.3d 471, 474 (4th Cir. 2005)). While a Rule 12(b)(6) motion "invites an inquiry into the legal sufficiency of the complaint, not an analysis of potential defenses to the claims set forth therein, dismissal nevertheless is appropriate when the face of the complaint clearly reveals the existence of a meritorious affirmative defense." Brockington v. Boykins, 637 F.3d 503, 506 (4th Cir. 2011) (internal citations and quotations omitted).
To their motion to dismiss, Lincoln and RiverSource attach 14 exhibits. Exhibit A, the only exhibit to which the Snapps object, is the FINRA dispute resolution order. Exhibits B through N are the Snapps' RiverSource annuity statements. To their memorandum in opposition to defendants' motion to dismiss, the Snapps attach one exhibit, to which defendants do not object, which includes a 2007 RiverSource welcome letter, RiverSource's "how to contact us" page, and the Snapps' 2007 contract verification record.
Typically, when a defendant moves to dismiss under Rule 12(b)(6), a court is "limited to considering the sufficiency of allegations set forth in the complaint and the `documents attached or incorporated into the complaint.'" Zak v. Chelsea Therapeutics Int'l, Ltd., 780 F.3d 597, 606 (4th Cir. 2015) (quoting E.I. du Pont de Nemours & Co. v. Kolon Indus., Inc., 637 F.3d 435, 448 (4th Cir. 2011)). If a court goes beyond these documents during the pleading stage of litigation, then it "improperly converts the motion to dismiss into a motion for summary judgment." Id. "Such conversion is not appropriate where the parties have not had an opportunity for reasonable discovery." E.I. du Pont de Nemours & Co., 637 F.3d at 448.
Accordingly, a court should generally focus its "inquiry on the sufficiency of the facts relied upon by the plaintiff[] in the complaint." Zak, 780 F.3d at 606. It may, however, consider extrinsic documents attached to the pleadings that are "`integral to and explicitly relied on in the complaint,'" when the documents' authenticity is unchallenged. Id. (quoting Am. Chiropractic Ass'n v. Trigon Healthcare, Inc., 367 F.3d 212, 234 (4th Cir. 2004)).
Here, the only document attached to the pleadings that falls outside these parameters is defendants' Exhibit A, the FINRA dispute resolution order. All of the other documents meet the requirements for consideration at the motion-to-dismiss stage. The court thus considers the annuity statements and the Snapps' exhibit in deciding Lincoln's and RiverSource's Rule 12(b)(6) motion, and excludes Exhibit A.
Lincoln and RiverSource argue that the Snapps' Virginia Securities Act claims in Count I are time-barred under the two-year limitations period. The court agrees.
The Virginia Securities Act imposes liability in connection with the purchase or sale of a security.
The Snapps allege that Lincoln and RiverSource violated the Virginia Securities Act "by engaging in a course of deceptive schemes, devices, [and] misrepresentations . . . related to the sale of securities." (Compl. ¶ 37.) But the relevant transactions—the Snapps' purchase of the annuities at issue—occurred in late 2007 and early 2008. (Id. ¶¶ 9, 18.) The parties agree that the operative date of the Snapps' assertion of their claims for statute-of-limitations purposes is April 18, 2016. Because the Snapps failed to assert their claims under the Virginia Securities Act within the "absolute cutoff" of the two-year limitation, see Caviness, 983 F.2d at 1305, Count I must fail.
Count II of the complaint asserts claims against Lincoln and RiverSource under section 10(b) of the Securities Exchange Act of 1934 (the Exchange Act), 15 U.S.C. § 78j(b). Like the Virginia Securities Act, the Exchange Act imposes liability for material misrepresentations with respect to the "purchase or sale" of a security. 15 U.S.C. § 78j(b). Section 10(b) claims are subject to a five-year statute of repose and a two-year statute of limitations.
In this case, the Snapps committed themselves to complete the purchase of the annuities in late 2007 and early 2008. (Id. ¶¶ 9, 18.) Because the Snapps did not assert their securities fraud claims until 2016, the Snapps' claims in Count II are barred by the statute of repose.
Counts III and IV of the complaint assert common law fraud and constructive fraud claims under Virginia law. Lincoln and RiverSource argue that Counts III and IV must be dismissed as time-barred under the statute of limitations. Again, the court agrees.
Section 8.01-243(A) of the Virginia Code provides that "every action for damages resulting from fraud, shall be brought within two years after the cause of action accrues." Va. Code § 8.01-243(A). A cause of action for fraud accrues "when such fraud, mistake, misrepresentation, deception, or undue influence is discovered or by the exercise of due diligence reasonably should have been discovered." Va. Code § 8.01-249(1). The Supreme Court of Virginia has interpreted the due diligence requirement in § 8.01-249 as "such a measure of prudence, activity, or assiduity, as is properly to be expected from, and ordinarily exercised by, a reasonable and prudent man under the particular circumstances; not measured by any absolute standard, but depending on the relative facts of the special case." STB Marketing Corp. v. Zolfaghari, 393 S.E.2d 394, 397 (Va. 1990) (citations and internal quotation marks omitted). In order to successfully maintain a claim for fraud, plaintiffs "bear the burden `to prove that [they] acted with due diligence and yet did not discover the fraud or mistake until within the statutory period of limitation immediately preceding the commencement of the action.'" Terry Phillips Sales, Inc. v. SunTrust Bank, No. 3:13-cv-468, 2014 WL 670838, at *5 (E.D. Va. Feb. 20, 2014) (quoting Hughes v. Foley, 128 S.E.2d 261, 263 (Va. 1962)). In other words, the Snapps must allege that, even through the exercise of due diligence, they would not have discovered Watts's fraudulent conduct until during, or more recently than, April 2014.
The Snapps' common law fraud and constructive fraud claims are based on Watts's alleged point-of-sale misrepresentations in 2007 and 2008. (Compl. ¶¶ 45, 49.) In particular, the Snapps allege that Watts misrepresented to them that 1) the value of their annuities would never decline below the initial investment, and 2) the annuities would pay out as a death benefit equal to their initial investment. (Id. ¶¶ 11-12, 18.) The Snapps assert that they did not discover these misrepresentations until Watts's suicide in November 2015, when "the Snapps spoke to Gina at his office, and found out for the first time that Mr. Watts's statements" were not true. (Id. ¶ 15.)
Even drawing all reasonable inferences in the Snapps' favor, the court concludes that Watts's misrepresentations reasonably should have been discovered, and the cause of action for fraud thus accrued, well before April 2014. See Cozart, 680 F.3d at 365 ("[The court] need not accept . . . unwarranted inferences, unreasonable conclusions, or arguments.") (internal citations omitted). On the one hand, the court rejects Lincoln's and RiverSource's argument that the fraud claims accrued when the Snapps first received annuity statements in late 2008 that contradicted Watts's representations. Lincoln and RiverSource rely on Mountcastle v. Caliber Home Loans & Flagstar Bank, No. 2:15-cv-169, 2015 WL 13035371, at *1 (E. D. Va. Oct. 30, 2015), a fraud case in which the plaintiff claimed that bank representatives told her that they could lower her interest rate to 2%, but in fact applied a 7% interest rate to her mortgage loan. The Mountcastle court granted the defendants' motion to dismiss, reasoning that the cause of action accrued "the day Plaintiff saw the alleged interest rate error" in her loan documents. 2015 WL 13035371, at *2. This case is less clear cut. Although the late 2008 annuity statements began to contradict Watts's assertion that the value would never decline below the initial investment, the court does not conclude that his misrepresentations should have been discovered upon the very first contradictory annuity statement because, alone, it could have represented a mere aberration.
On the other hand, by November 2009, every quarterly and annual statement that the Snapps received from RiverSource directly contradicted Watts's representations that the value would never decline below the initial investment and that the annuities would pay out as a death benefit an amount equal to their initial investment. The complaint demonstrates the Snapps' actual notice of this contradiction. See, e.g., Compl. ¶ 13 ("The Snapps . . . would often question Mr. Watts about statements received showing a reduction in the annuity's value."); id. ¶ 19 ("When [Ms. Snapp] would receive statements indicating a decline in value, she would ask Mr. Watts about them.") To conclude instead, that a reasonable person would not have discovered that Watts's statements were misrepresentations before April 2014—despite a uniform barrage of annuity statements to the contrary from November 2009 to April 2014—would stretch reason to its breaking point. The Snapps' common law fraud claims are thus time-barred.
The Snapps contend that Lincoln and RiverSource should be prevented from asserting statute of limitations defenses under a theory of equitable estoppel. The doctrine of equitable estoppel "bars a statute of limitations defense by a defendant who, by his own conduct, lulls another into a false sense of security." Neal v. Stryker Corp., No. 1:11-cv-62, 2011 WL 841509, at *3 (E.D. Va. Mar. 8, 2011) (internal citations omitted). In order for the doctrine to apply, a plaintiff must show that the defendant took "actions it should unmistakably have understood would cause the [plaintiff] to delay filing his charge." Price v. Litton Bus. Sys., 694 F.2d 963, 965-66 (4th Cir. 1982). The doctrine typically applies "where a defendant has misrepresented to a plaintiff his legal rights . . . or has used settlement negotiations to induce delay." Caviness, 983 F.2d at 1302 (citations omitted). A plaintiff seeking to invoke equitable estoppel must demonstrate that he or she "reasonably relied on the words and conduct of the person to be estopped in allowing the limitations period to expire." Barry v. Donnelly, 781 F.2d 1040, 1042 (4th Cir. 1986).
When faced with a Rule 12(b)(6) motion to dismiss "where it is apparent that the statute of limitations expired before the filing of the plaintiff's complaint, the plaintiff has the burden of pleading facts that would support a finding that equitable estoppel applies." Neal, 2011 WL 841509, at *3. If the plaintiff fails to do so, dismissal is appropriate. See, e.g., Stack v. Abbott Labs., Inc., 979 F.Supp.2d 658, 665 (M.D.N.C. 2013) (dismissing claim as time-barred and rejecting equitable estoppel argument because "the complaint fails to plead facts to make an equitable estoppel claim plausible"); Neal, 2011 WL 841509, at *3 (dismissing claim as time-barred and rejecting equitable estoppel argument because plaintiff's "extended delay" before filing suit "eliminates as a matter of law the possibility that he had timely filed this action based on . . . equitable estoppel"); Cominelli v. Rector & Visitors of the Univ. of Va., 589 F.Supp.2d 706, 718 (W.D. Va. 2008) (dismissing claim as time-barred and rejecting equitable estoppel argument because plaintiff failed "to allege any facts in his Complaint that would support a conclusion that Defendants [acted] with the aim of lulling him into a false sense of security concerning the statute of limitations"), aff'd 362 F. App'x 359 (4th Cir. 2010).
Here, the complaint fails to plead facts to make an equitable estoppel claim plausible. While the court obviously does not condone Watts's misrepresentations, nothing in the complaint bears the conclusion that Watts acted "with the aim of lulling [the Snapps] into a false sense of security concerning the statute of limitations." 589 F. Supp. 2d at 718. Furthermore, the complaint describes the consistent decline in value recorded in the annuity statements (Compl. ¶¶ 13, 19), illustrating that the Snapps were "confronted with evidence that clearly and overwhelmingly indicate[d] [Watts's] assurances . . . would not be upheld," Gitter v. Cardiac & Thoracic Surgical Assoc., Ltd., 419 F. App'x. 365, 370 (4th Cir. 2011). Thus, the principles of equitable estoppel do not apply to prevent the application of the statute of limitations in this case.
The Snapps also contend that Lincoln and RiverSource should be prevented from asserting statute of limitations defenses under a theory of obstruction. Under Virginia Code § 8.01-229(D), a statute of limitations is tolled when a defendant uses any direct or indirect means to obstruct the filing of an action.
In order to rely on this tolling provision, a plaintiff "must establish that the defendant undertook an affirmative act designed or intended, directly or indirectly, to obstruct the plaintiff's right to file her action." Newman v. Walker, 618 S.E.2d 336, 337 (Va. 2005) (internal citations and quotations omitted). For the statute of limitations to be tolled, "[c]oncealment of a cause of action . . . must consist of some trick or artifice preventing inquiry, or calculated to hinder a discovery of the cause of action by the use of ordinary diligence." 618 S.E.2d at 338 (internal citations and quotations omitted) (emphasis added). Furthermore, the fraudulent concealment of the cause of action "must be of that character which involves moral turpitude, and must have the effect of debarring or deterring the plaintiff from his action." Id. (internal citations and quotations omitted).
The Snapps argue that Watts's false statements about the value of their investments constituted "affirmative acts to conceal his previous fraud." (Pl.'s Opp'n 10, Dkt. No. 10.) But the Snapps have conceded that they regularly received annuity statements that contradicted Watts's representations, and the statements caused them to "often question" and "ask" about the reduction in value. (Compl. ¶¶ 13, 19). The Snapps do not allege that Watts directly or indirectly prevented them from receiving their annuity statements, from reviewing their annuity statements, or from discussing the contradictions with anyone else in order to reconcile the annuity statements with his representations. This case is not at all like Evans v. Trinity Industries, Inc., 137 F.Supp.3d 877, 880-82 (E.D. Va. 2015). In Evans, a products liability action, the court denied the defendant-manufacturer's motion for judgment on the pleadings because it held that the plaintiff-motorists sufficiently alleged fraudulent concealment tolled the statute of limitations. 137 F. Supp. 3d at 884. The court reasoned that the plaintiffs' allegations were sufficient because they alleged that a jury in separate qui tam suit found that the defendant made unapproved modifications, which it knew created dangerous conditions, but represented to Federal Highway Administration that the product was not modified. Id. at 880, 884. In contrast, the Snapps have failed to allege any facts that would support the conclusion that Watts's statements constituted affirmative acts to obstruct the filing of their action within the meaning of Virginia Code § 8.01-229(D). The obstruction tolling provision does not save their claims.
The Snapps' final argument as to why the statute of limitations should not apply centers on the "continuing representation" exception. This exception applies "where there is an undertaking or agency which requires a continuation of services," such as the services of a doctor or attorney, and mandates that "the statute of limitations does not begin to run . . . until the termination of the undertaking or agency." Keller v. Denny, 352 S.E.2d 327, 329 (Va. 1987) (citations omitted). In particular, the continuing representation exception "pertains to claims for breach of fiduciary duty" but "does not apply to fraud actions." Terry Phillips Sales, Inc. v. SunTrust Bank, No. 3:13-cv-468, 2014 WL 670838, at *5 n.4 (E.D. Va. Feb. 20, 2014) (citations omitted).
The continuing representation exception does not apply to the Snapps' common law fraud claims. See id. Even if it did, the Snapps do not allege that Watts's sale of the annuity "require[d] a continuation of [his] services" as a financial advisor. Keller, 352 S.E.2d at 329. Rather, their "purchase of the [annuities] was a particular and severable undertaking . . . that did not require the continuing services of Defendants." Smith ex rel. Clearview Baptist Church v. CNA Fin. Corp., No. 7:01-cv-653, 2003 WL 24253672, at *9 (W.D. Va. Nov. 28, 2003) (citations omitted) (holding that the continuing representation doctrine did not apply to save breach of fiduciary claim as to purchase of promissory notes). The Snapps' common law fraud claims are time-barred.
Lincoln and RiverSource argue that the Snapps' "unsuitability" claims in Count V— regarding defendants' "unsuitable recommendations" as to securities and investments—do not constitute an independent cause of action. See § 10(b); Va. Code §§ 13.1-502; 14 VAC 5-45-40. The Snapps concede this point. The court will dismiss Count V.
Lincoln and RiverSource argue that the Snapps' claims for negligence and negligent supervision in Count VI are inadequate as a matter of law. The court agrees.
Negligence requires an independent duty, and the duty cannot arise solely by virtue of a contract. See Augusta Mut. Ins. Co. v. Mason, 645 S.E.2d 290, 293-94 (Va. 2007). The Snapps fail to establish that Lincoln and RiverSource owed them an independent legal duty of care with respect to the suitability and attendant risks of the annuities.
Even if the claims were cognizable, they would be time-barred under the two-year statute of limitations for negligence claims, which is not subject to a discovery rule. Va. Code § 8.01-230. The Snapps argue that the claims are not time-barred because of equitable estoppel, obstruction, and/or the continuing representation rule. These arguments fail for the reasons stated above in sections E.2-4. For these reasons, Count VI will be dismissed.
Lincoln and RiverSource next argue that the Snapps' negligent retention claim fails because financial damage alone is not sufficient to establish a prima facie claim of negligent retention. The court agrees.
Although the "Virginia Supreme Court has not squarely addressed the question of whether a plaintiff must plead physical harm" to state a negligent retention claim, Young v. CitiMortgage, Inc., No. 5:12-cv-79, 2013 WL 3336750, at *10 n.12 (W.D. Va. July 2, 2013), "based upon the weight of the authority from other courts, and the Virginia Supreme Court's language . . . a plaintiff alleging negligent retention must allege serious and significant physical harm," Ingleson v. Burlington Med. Supplies, Inc., 141 F.Supp.3d 579, 586 (E.D. Va. 2015). Because the Snapps fail to plead physical harm, their claim for negligent retention in Count VII will be dismissed.
As the Snapps acknowledge, the two-year statute of limitations for breach of fiduciary claims, Va. Code § 8.01-248, runs from the date of the injury, "not the date of discovery." Smith ex rel. Clearview Baptist Church v. CNA Fin. Corp., No. 7:01-cv-653, 2003 WL 24253672, at *8 (W.D. Va. Nov. 28, 2003) (citing Goldstein v. Malcolm G. Fries & Assoc., Inc., 72 F.Supp.2d 620, 626 (E.D. Va. 1999)). The Snapps argue, though, that their breach-of-fiduciary claims are not time-barred because of equitable estoppel, obstruction, and/or the continuing representation rule. These arguments fail for the reasons stated above in sections E.2-4. Count VIII is thus time barred.
A breach of contract claim requires: (1) a legally enforceable obligation of a defendant to a plaintiff; (2) the defendant's violation or breach of that obligation; and (3) injury or damage to the plaintiff caused by the breach of obligation. Cook, 2015 WL 178108, at *16. Lincoln and RiverSource argue that they were under no legally enforceable obligation. The Snapps assert that the obligation arises under defendants' "contracts" vis-à-vis FINRA's rules and Virginia insurance regulations.
Although there is no case on point in Virginia, courts in other jurisdictions presented with similar facts have reasoned that recognizing such third-party-beneficiary liability in the form of a breach of contract claim would effectively give plaintiffs a private cause of action where they otherwise do not have one.
Last, Lincoln and RiverSource argue that the Snapps' vicarious liability claim in Count X should be dismissed because vicarious liability is a theory of liability, not a separate cause of action. The court agrees. See Lim v. Tisack, No. 7:16-cv-00029, 2017 WL 1194516, at *7 (W.D. Va. Mar. 30, 2017) (quoting Rohrbaugh v. Kreidler, 71 Va. Cir. 298, 304 (Va. Cir. 2006)). To the extent it attempts to assert a stand-alone vicarious liability claim, Count X will be dismissed.
Included within the Snapps' memorandum in opposition to defendants' motion to dismiss is a brief paragraph in which they move for leave to amend the complaint. (Dkt. No. 10, at 20.) The Snapps have not specified how they desire to do so, and it is unclear to the court how an amended complaint would sufficiently state a claim for relief in this case.
For the foregoing reasons, the court will grant defendants' motion to dismiss in its entirety, and deny plaintiffs' motion to amend without prejudice.
An appropriate order will follow.
