Schuetta v. Aurora National Life Assurance Company

Filing 22

ORDER signed by Judge J P Stadtmueller on 11/27/13: granting in part 3 Defendant's Motion to Dismiss insofar as Defendant seeks dismissal of Plaintiff's reformation claim, and dismissing with prejudice Plaintiff's reformation claim ; denying in part 3 Defendant's Motion to Dismiss insofar as Defendant seeks dismissal of Plaintiff's breach of duty and negligence claims, and Plaintiff shall be allowed to proceed on his breach of duty and negligence claims. See Order. (cc: all counsel) (nm)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF WISCONSIN
LEO R. SCHUETTA,
Plaintiff,
v.

Case No. 13-CV-1007-JPS

AURORA NATIONAL LIFE
ASSURANCE COMPANY,

ORDER
Defendant.
The plaintiff, Leo Schuetta, initially filed his complaint in this case on
July 30, 2013, in Racine County Circuit Court. (Docket #1). In it, he alleges
various claims stemming from his allegations that the defendant, Aurora
National Life Assurance Company (“Aurora”), failed to pay him amounts
due and owing to him under an annuity contract. (Compl. ¶¶ 11–32). Aurora
removed the case to this Court on diversity grounds, pursuant to 28 U.S.C.
§§ 1332 and 1441(b).1 Shortly after removing the case to this Court, Aurora
moved to dismiss several counts contained therein pursuant to Rule 12(b)(6)
of the Federal Rules of Civil Procedure. (Docket #3). That motion is now fully
briefed (Docket #4, #18, #19), and the Court renders its decision on the matter.
1.

STANDARD ON MOTION TO DISMISS
In evaluating Aurora’s motion to dismiss pursuant to Rule 12(b)(6),

the Court must determine whether Mr. Schuetta has pled facts that show that
his claim of relief is plausible on its face. Bell Atlantic Corp. v. Twombly, 550

1

Jurisdiction is appropriate in this regard as the parties are citizens of
different states (Mr. Schuetta is a citizen of Wisconsin, while Aurora is organized
under California law and has its principal place of business in New York) (Notice
of Removal at ¶ 4; Compl. at ¶ 1–2), and the amount in controversy exceeds
$75,000.00 (Mr. Schuetta seeks damages of $100,172.52) (Notice of Removal at ¶ 5;
Compl. ¶¶ 14, 19, 24, 28, 32). 28 U.S.C. § 1332.

U.S. 544, 562–63 (2007); Ashcroft v. Iqbal, 556 U.S. 662, 664 (2009). The Court
must accept Mr. Schuetta’s well-pleaded facts as true and consider them in
the light most favorable to Mr. Schuetta, and, doing so, must determine
whether those facts plausibly suggest a right to relief that is more than
speculative. See, e.g., Twombly, 550 U.S. at 562–63; Iqbal, 556 U.S. at 664; Alam
v. Miller Brewing Co., 709 F.3d 662, 665 (7th Cir. 2013); Luevano v. Wal-Mart
Stores, Inc., 722 F.3d 1014, 1027 (7th Cir. 2013); Atkins v. City of Chicago, 631
F.3d 823, 832 (7th Cir. 2011).
2.

BACKGROUND
Mr. Schuetta’s factual allegations are relatively straightforward.2
Prior to May of 1990, Mr. Schuetta worked for Dana Corporation at a

manufacturing plant in Racine County, Wisconsin. (Compl. ¶ 3). During that
time, Dana Corporation purchased annuity contracts from Aurora3 for the
benefit of its employees. (Compl. ¶ 4). As one of Dana Corporation’s
employees, Mr. Schuetta was named as a beneficiary under one of these
contracts, and was accordingly entitled to receive a monthly annuity of
$397.51 from Aurora after his retirement. (Compl. ¶ 5). Mr. Schuetta was also

2

As discussed above, the Court must accept all well-pleaded facts as true
and consider them in the light most favorable to Mr. Schuetta. The Court’s
background discussion proceeds under that understanding; none of its statements
should be considered final findings of fact.
3

In fact, Dana Corporation purchased the annuity contracts from Executive
Life Insurance Company. (Compl. ¶ 4). Executive Life Insurance Company,
however, was placed in conservation by the California Superior Court in 1991; in
1993, Aurora assumed all of Executive Life Insurance Company’s contracts,
including the one purchased by Dana Corporation for the benefit of Mr. Schuetta,
under a rehabilitation plan approved by the California Superior Court (Compl. ¶ 5).
Mr. Schuetta’s claims, thus, lie against Aurora, and the Court will refer only to
Aurora, as opposed to Executive Life, throughout the balance of the body of this
order, for the sake of clarity.

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the beneficiary of a separate $316.00 monthly pension benefit provided by
Dana Corporation upon his retirement. (Compl. ¶ 6).
Mr. Schuetta retired in May of 1990. (Compl. ¶ 6). He thereafter began
to receive his $316.00 per month pension benefit from Dana Corporation.
(Compl. ¶ 6).
However, he did not ever begin receiving his $397.51 monthly annuity
payment from Aurora. (Compl. ¶ 6). In fact, Mr. Schuetta did not seem to
even be aware that he was entitled to receive the annuity payment. (See
Compl. ¶¶ 6–7). This point is supported by the alleged fact that Mr. Schuetta
received a letter from Aurora in September of 1990. (Compl. ¶ 16). Mr.
Schuetta asserts that, when he received that letter, he believed it was sent in
connection to his pension from Dana Corporation; he did not realize that the
letter actually dealt with his annuity from Aurora. (Compl. ¶ 16). Under that
incorrect impression, Mr. Schuetta called Aurora to inform them of several
“mistakes” contained in the letter; of course, these “mistakes” were not
actually mistakes, but were correct recitations of the terms of the annuity
contract that did not comply with Mr. Schuetta’s understanding of his
pension benefit. (Compl. ¶ 16). When Mr. Schuetta called Aurora, Aurora’s
representatives told him to write his corrections on the letter and return it to
them. (Compl. ¶ 16). Mr. Schuetta did so. (Compl. Ex. B). In fact, he wrote in
the amount he expected to receive under his pension plan—a lesser amount
than Aurora informed him he would receive under the annuity
contract—over top of the stated benefit amount before returning the letter.
(Compl. Ex. B).
Throughout this time, Aurora never corrected Mr. Schuetta’s mistaken
impressions. (Compl. ¶ 16). Despite Mr. Schuetta’s mistaken belief, made
clear to Aurora during both a phone conversation and when Mr. Schuetta
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returned the letter with his corrections (which lacked support in Aurora’s
letters), Aurora never corrected Mr. Schuetta’s mistaken beliefs. (Compl.
¶ 16).
Thus, Aurora allegedly never made Mr. Schuetta aware that he was
entitled to the $397.51 monthly annuity. (Compl. ¶¶ 6, 16). Lacking that
awareness, Mr. Schuetta also was not aware that he needed to submit a
notification to Aurora to trigger his receipt of the annuity. (Compl. ¶ 7).
As such, for a period of more than 20 years—from approximately 1991
through 2013—Mr. Schuetta was entitled to receive the $397.51 monthly
annuity, but did not. (Compl. ¶ 7).
He became aware of this only after the death of his wife. (Compl. ¶ 7).
At that time, Aurora called Mr. Schuetta to inform him of the fact that the
annuity in his benefit remained outstanding and that he could begin to
receive it—and all of the amounts owing to him beginning in 1991—if he
submitted a notification form. (Compl. ¶ 7).
Mr. Schuetta submitted the form, but Aurora changed its position, and
told Mr. Schuetta that he would be entitled only to future payments of the
$397.51 monthly annuity, which would commence 60 days after his
submission of the notification form. (Compl. ¶ 8). He would not be entitled
to receive the approximately $100,000.00 in payments that would have been
paid to him if he had timely submitted the notification form in 1991. (Compl.
¶ 8).
Aurora’s refusal to pay that amount precipitated this litigation, in
which Mr. Schuetta claims that he is entitled to receive the entire amount of
payments dating back to 1991. Mr. Schuetta asserts several causes of action
against Aurora: (1) breach of contract (Compl. ¶¶ 11–14); (2) reformation of
contract (Compl. ¶¶ 15–19); (3) equitable estoppel (Compl. ¶¶ 20–24); (4)
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breach of the implied duty of good faith and fair dealing inherent in the
annuity contract (Compl. ¶¶ 25–28); and (5) negligence (Compl. ¶¶ 29–32).
3.

DISCUSSION
Aurora has moved to dismiss only three of those claims: the

reformation of contract claim (the “reformation claim”); the breach of implied
duty of good faith and fair dealing claim (the “breach of duty claim”); and
the negligence claim. (Docket #3). The Court has considered the parties’
arguments in that regard, and agrees with Aurora that the reformation claim
must be dismissed. It, however, disagrees as to the breach of duty claim and
economic loss doctrine claims, and finds that Mr. Schuetta is entitled to
proceed on those claims.
3.1

Reformation Claim

There is little question that the Court must dismiss Mr. Schuetta’s
reformation claim.
Under Wisconsin law, when an agreement between parties “fails to
express a prior agreement between [them] because of either the mutual
mistake of both parties regarding the contents or effect of the [contract] or the
mistake of one party coupled with fraud or inequitable conduct by the other
party, the [contract] may be reformed to reflect the prior agreement.”
Milwaukee Metro. Sewerage Dist. v. Am. Int’l Specialty Lines Ins. Co., 598 F.3d
311, 317 (7th Cir. 2010) (citing Russ ex rel. Schwartz v. Russ, 302 Wis.2d 264,
734 N.W.2d 874, 885 (2007); Vandenberg v. Continental Ins. Co., 244 Wis.2d 802,
628 N.W.2d 876, 889 n. 35 (2001)). This is because “Wisconsin has adopted the
rule found in Restatement (Second) of Contracts § 166,” providing that if one
party induces another to enter into a contract through a “fraudulent
misrepresentation as to the contents or effect of a writing evidencing or
embodying in whole or in part an agreement, the court at the request of the
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recipient may reform the writing to express the terms of the agreement as
asserted.” Metavante Corp. v. Emigrant Sav. Bank, 619 F.3d 748, 766 (7th Cir.
2010) (citing Hennig v. Ahearn, 230 Wis. 2d 149, 601 N.W.2d 14, 26 (1999)).
In other words, reformation of a contract is appropriate where one
party fraudulently induces another to enter into a contract by representing
that the written contract says (or will say) something that it ultimately does
not. In such an instance, courts may intervene and order that the contract be
reformed to reflect the agreement that the duped party believed he or she
was entering.
That is simply not the case that the Court confronts, here. Mr. Schuetta
does not allege that Aurora made any false representations to him (or to
Dana Corporation) when the contract was formed. The only allegedly false
representations occurred after formation, when Aurora allegedly failed to
inform Mr. Schuetta of his mistaken beliefs. But those alleged
misrepresentations had no effect, whatsoever, on the contract. In fact, it
seems that the contract provided exactly what was bargained for between
Aurora and Dana Corporation: annuity benefits for retired employees that
would take effect upon notice from the employee. Mr. Schuetta complains
that Aurora made misrepresentations to him that impeded the performance
of that contract, but there is no allegation that the contract said something
different than what the parties agreed upon.
Accordingly, Mr. Schuetta has not stated a valid claim for reformation
of contract, and the Court is obliged to dismiss that portion of his complaint.
3.2

Breach of Duty Claim

On the other hand, the Court must allow Mr. Schuetta’s breach of
duty claim to proceed. Mr. Schuetta contends that, by failing to correct his
mistaken impression regarding the notice of annuity he received, Aurora
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breached duties of good faith and fair dealing that were implicit in the
annuity contract.
In Wisconsin, “every contract implies good faith and fair dealing
between the parties to it.” Bozzacchi v. O’Malley, 211 Wis. 2d 622, 626, 566
N.W.2d 494 (Ct. App. 1997). See also Metavante, 619 F.3d at 765–66 (citing
Kreckel v. Walbridge Aldinger Co., 295 Wis. 2d 649, 721 N.W.2d 508, 514 (2006));
Alumni Research Found. v. Xenon Pharms., Inc., 591 F.3d 876, 885 n. 5 (7th Cir.
2010); India Breweries, Inc. v. Miller Brewing Co., 612 F.3d 651, 660 (7th Cir.
2010). “A contracting party can breach its duty of good faith even if it does
not violate any express term of the contract.” Williamson v. Mills, 2013 WI
App 155, ¶ 11, 350 Wis. 2d 507, 838 N.W.2d 137 (citing Foseid v. State Bank of
Cross Plains, 197 Wis. 2d 772, 796, 541 N.W.2d 203 (Ct. App. 1995)). “The duty
of good faith obliges each party not to intentionally do anything to prevent
the other party either from carrying out his or her part of the agreement or
from receiving the fruits of the contract.” Williamson, 2013 WI App 155, ¶ 11
(citing Tang v. C.A.R.S. Prot. Plus, Inc., 2007 WI App 134, ¶ 41, 301 Wis. 2d
752, 734 N.W.2d 169). See also Racine Harley-Davidson, Inc. v. Harley-Davidson
Motor Co., Inc., 2008 WI App 135, ¶ 23, 313 Wis. 2d 831, 756 N.W.2d 810
(citing Wis. JI-Civil 3044). In fact, “contracts impose on the parties thereto a
duty to do everything necessary to carry them out,” and imply that each
party “will not intentionally and purposely do anything to prevent the other
party from carrying out his [or her] part of the agreement.” Metropolitan
Ventures, LLC v. GEA Assocs., 2006 WI 71, ¶ 35, 291 Wis. 2d 393, 717 N.W.2d
58 (citing Ekstrom v. State, 45 Wis. 2d 218, 222, 172 N.W.2d 660 (1969)).
Additionally, a breach of the duty of good faith can be “shown by proof of:
evading the spirit of the bargain [or] exhibiting lack of diligence.” Non

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Typical, Inc. v. Transglobal Logistics Grp., Inc., No. 10-CV-1058 2011 WL
1792927 (E.D. Wis. May 11, 2011) (citing Foseid, 197 Wis. 2d at 796–97, 541
N.W.2d at 213). This general duty of good faith and fair dealing “is intended
as a guarantee against arbitrary or unreasonable conduct by a party.” Denil
v. deBoer, Inc., 748 F. Supp. 2d 967, 978–79 (W.D. Wis. 2010), aff’d, 650 F.3d 635
(7th Cir. 2011) (quoting Foseid, 197 Wis. 2d at 796, 541 N.W.2d at 213 (internal
quotation marks omitted)). “The touchstones of good faith are honesty and
reasonableness.” Racine Harley, 2008 WI App 135, ¶ 23 (citing Schaller v.
Marine Nat’l Bank, 131 Wis. 2d 389, 403, 388 N.W.2d 645 (Ct. App. 1986)).
Mr. Schuetta’s claims fit perfectly within the above-described mold of
claims asserting the breach of the implied duty of good faith and fair dealing.
He alleges that Aurora’s representatives knew of his misunderstanding of the
letter he received, and—in spite of that knowledge—chose not to correct his
misunderstanding. He argues that Aurora’s unreasonable and/or dishonest
decision not to explain the situation to Mr. Schuetta prevented him from
carrying out his part of the contract. In other words, he argues that Aurora
intentionally, or through lack of diligence, prevented him from receiving the
fruits of the annuity contract. Under the case law described above, this states
a claim for breach of the implied duty of good faith and fair dealing—even
if Aurora was in complete compliance with the terms of the annuity contract.
See, e.g., Williamson v. Mills, 2013 WI App 155, ¶ 11; Non Typical, 2011 WL
1792927; Denil, 748 F. Supp. 2d at 978–79; Racine Harley, 2008 WI App 135,
¶ 23; Metropolitan Ventures, 2006 WI 71, ¶ 35; Tang, 2007 WI App 134, ¶ 41;
Foseid, 197 Wis. 2d at 796, 541 N.W.2d 203; Ekstrom, 45 Wis. 2d at 222, 172
N.W.2d 660.

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Therefore, the Court finds that Mr. Schuetta has adequately stated a
claim for breach of the implied duty of good faith and fair dealing, and
therefore the Court will allow him to proceed on that claim.
3.3

Negligence Claim

Finally, the Court turns to Mr. Schuetta’s negligence claim. On this
claim, Mr. Schuetta alleges that Aurora owed him and all other annuity
recipients a duty of care to ascertain their identity and ensure that they
received benefits as necessary. (Compl. ¶ 30). Thus, Mr. Schuetta argues,
Aurora’s failure to realize that he was entitled to an annuity constitutes a
negligent breach of that duty of care. (Compl. ¶ 31). Aurora has moved to
dismiss this claim, asserting that it is barred under Wisconsin’s economic loss
doctrine. This is a much closer question than the ones considered above.
“The economic loss doctrine is a judicially created doctrine that seeks
‘(1) to maintain the fundamental distinction between tort law and contract
law; (2) to protect commercial parties’ freedom to allocate economic risk by
contract; and (3) to encourage the party best situated to assess the risk of
economic loss, the commercial purchaser, to assume, allocate, or insure
against that risk.’” Walker v. Ranger Ins. Co., 2006 WI App 47, ¶ 7, 289 Wis. 2d
843, 711 M.W.2d 683 (quoting Van Lare v. Nogt, Inc., 2004 WI 110, ¶ 17, 274
Wis. 2d 631, 683 N.W.2d 46). It generally prevents a contracting party from
recovering purely “economic losses”—or damages resulting from a product’s
failure to live up to expectations or to adequately perform its intended
use—under tort law, when the claimed losses are associated with the
contractual relationship. Kaloti Enters., Inc. v. Kellogg Sales Co., 2005 WI 111,
¶ 27, 283 Wis. 2d 555, 699 N.W.2d 205. See also Below v. Norton, 2008 WI 77,
¶ 24, 310 Wis. 2d 713, 751 N.W.2d 351. Thus, to determine whether the
economic loss doctrine applies, the Court must look to the nature of the
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damages the plaintiff seeks. Ralph C. Anzivino, The Economic Loss Doctrine:
Distinguishing Economic Loss from Non-Economic Loss, 91 MARQ . L. REV . 1081,
1081–82 (2008) (citing Sunnyslope Grading, Inc. v. Miller, Bradford & Risberg,
Inc., 148 Wis. 2d 910, 916, 437 N.W.2d 213, 215 (1989); RESTATEMENT (THIRD )
OF

TORTS : PRODS . LIAB. § 1 (1998); E. River S.S. Corp. v. Transamerica Delaval

Inc., 476 U.S. 858, 869–71 (1986)) (noting that, “According to the economic
loss doctrine, a buyer who purchases a defective product and suffers ‘solely
economic loss’ is required to recover his damages through contract law,” but
that “if the product causes ‘personal injury’ or ‘other property’ damage, then
negligence and strict liability theories are available. The nature of the loss
incurred dictates whether the buyer’s claim is to be brought in contract or
tort.”).
“The genesis of the economic loss doctrine lies in products liability
cases,” and the Uniform Commercial Code’s provision of warranties and
remedies is one of “the critical rationales underlying the doctrine.” Ins. Co.
of N. Am. v. Cease Elec. Co., 2004 WI 139, ¶¶ 26, 32, 276 Wis. 2d 361, 688
N.W.2d 462. On that basis, the Wisconsin Supreme Court has declined to
extend the doctrine to cover service contracts. Id., at ¶ 36. In doing so, the
Court cited the inapplicability of the U.C.C.—seemingly Article 2 thereof,
given the fact that the Cease court cited two extraterritorial cases that
distinguished between “goods” under Article 2 and “services”—to service
contracts. Id. (citing Cargill, Inc. v. Boag Cold Storage Warehouse, 71 F.3d 545,
550 (6th Cir. 1995); McCarthy Well Co., Inc. v. St. Peter Creamery, Inc., 410
N.W.2d 312, 315 (Minn. 1987) (“a recognition of tort actions in cases under
the U.C.C. would upset the remedies contained in the U.C.C.; when the
rationale is not applicable, i.e., when the U.C.C. does not apply, there is no
reason for the [economic loss] rule to apply.”)).
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And this is the primary point that gives the Court pause: while,
technically, an annuity contract may be a “product,” it does not seem to meet
the definition of “goods” provided in Article 2, and therefore does not seem
to entitle Mr. Schuetta to any U.C.C. warranty or remedy. Wis. Stat.
§§ 402.105(1)(c) (“‘Goods’ means all things…which are movable…,
investment securities (ch. 408), and things in action.”), 408.103(2) (“An
‘investment company security’ is a security.…‘Investment company security’
does not include an insurance policy or endowment policy or annuity contract
issued by an insurance company.” (emphasis added)). Therefore, one of the very
foundations of the economic loss doctrine—something that the Cease court
focused on very closely in determining not to apply the doctrine to a service
contract—does not support application of the doctrine in this case to an
annuity contract. Cease, 2004 WI 139, at ¶ 36. Moreover, an annuity contract
is not the type of product that is generally of concern in economic loss
doctrine cases, which most often deal with manufactured products that are
under warranty. While those products may be defective, such that they fail
or do not live up to a contracting party’s expectations, insurance contracts are
of a different ilk. For example, here, Mr. Schuetta is not claiming that the
“product” he is a beneficiary of—the annuity contract—was defective in
some way. Rather, he is asserting that Aurora’s representatives acted
deficiently.
Given these distinctions between the case at hand and the general
application of and policy behind the economic loss doctrine, the Court finds
that it would be inappropriate to apply the economic loss doctrine, here.
With all of the foregoing said, the Court notes that this appears to be
an entirely novel issue of law, which neither Wisconsin’s state nor federal
courts have yet addressed. To the extent that the parties, particularly Aurora,
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uncovers some contrary authority and wishes to have the Court reconsider
this issue, they may so move at any time prior to trial.
However, for the time being, the Court believes it wisest to deny
Aurora’ motion to dismiss this count. It will do so, and allow discovery to
proceed on this issue.
4.

CONCLUSION
For the above-stated reasons, the Court determines that it is obliged

to grant Aurora’s motion to dismiss insofar as that motion seeks dismissal of
Mr. Schuetta’s reformation claim. It must also deny Aurora’s motion as the
motion relates to Mr. Schuetta’s breach of duty and negligence claims.
Accordingly,
IT IS ORDERED that Aurora’s motion to dismiss (Docket #3) be and
the same is hereby GRANTED in part, insofar as Aurora seeks dismissal of
Mr. Schuetta’s reformation claim, and Mr. Schuetta’s reformation claim be
and the same is hereby DISMISSED with prejudice, pursuant to Rule
12(b)(6) of the Federal Rules of Civil Procedure; and
IT IS FURTHER ORDERED that Aurora’s motion to dismiss (Docket
#3) be and the same is hereby DENIED in part, insofar as Aurora seeks
dismissal of Mr. Schuetta’s breach of duty and negligence claims, and Mr.
Schuetta shall be allowed to proceed on his breach of duty and negligence
claims.
Dated at Milwaukee, Wisconsin, this 27th day of November, 2013.
BY THE COURT:

J.P. Stadtmueller
U.S. District Judge
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