A Texas judge has determined a contract between NEXT Financial and Ohio National entities was ambiguous and recommended denying motions for partial summary judgments by both parties in a lawsuit pertaining to non-payment of trail commissions on certain variable annuities contracts.
The decision is being watched closely by a host of broker-dealers who have sued Ohio National for similar reasons.
The parties will have 14 days to file any objection to these recommendations. However, U.S. Magistrate Judge Frances H. Stacy’s ruling through a memorandum and recommendation is not final. The decision rests with U.S. District Court Judge Alfred H. Bennett, who may or may not go along with Stacy's recommendation.
“NEXT Financial believes its position is a strong one,” says Andrew R. Harvin, partner at Doyle, Restrepo, Harvin & Robbins, who is representing NEXT Financial.
“This decision does not mean that we are obligated to pay trail commissions after we ended our contract with this broker-dealer, but simply a denial of both parties’ request of early disposition, and the case will now move into the discovery phase as part of the normal litigation process,” said a Ohio National company spokesperson in a statement to FA-IQ. “We believe the language in the selling agreements states that our obligation to continue paying trail commissions on these variable annuity contracts is contingent on having a selling agreement in force.”
NEXT Financial had filed a lawsuit against four Ohio National entities — Ohio National Life Insurance Company, Ohio National Life Assurance Corporation, Ohio National Equities and parent Ohio National Financial Services Inc. — in November before a state court in Texas. The matter was then transferred to the United States District Court for the Southern District of Texas, Houston Division.
In its complaint, NEXT Financial states that it entered into a selling agreement with Ohio National entities in 2001 with the commissions to be paid out as per a schedule, and that its representatives sold hundreds of individual variable annuity contracts issued by Ohio National.
NEXT Financial received a letter from Ohio National entities on September 21, 2018, regarding the termination of the selling agreement effective December 12, 2018.
In February, NEXT Financial filed a motion for partial summary judgment, seeking declaratory relief and alleging breach of contract. The motion sought for the court to declare that the terms of the selling agreement survive the termination of the agreement, that the Ohio National entities breached the selling agreement and that the Ohio National entities are obligated to pay trail commissions on those annuity contracts sold to NEXT Financial's clients until the contracts are surrendered or annuitized.
In April, Ohio National entities filed their opposition to Next Financial's motion for partial summary judgment and their own cross-motion for partial summary judgment “on NEXT’s claims for breach of contract and for declaratory judgment” as to Ohio National entities’ “purported obligation to continue paying trail commissions on individual variable annuity products.”
Ohio National entities argue that obligation to pay trails ended with the termination of the selling agreement.
The case was referred to the magistrate court in May.
Why did the magistrate court find the contract ambiguous?
In their memorandum and recommendation, Judge Stacy states that this case and the claims are governed by Ohio law. Referring to prior case law, Judge Stacy writes, “Where a contract is found to be ambiguous, summary judgment is improper.”
Here’s why that's important.
NEXT Financial relies on the language of the selling agreement to argue that the trail commission payouts survive the termination of the selling agreement.
The agreement states that “the terms of compensation shall survive this agreement unless the agreement is terminated for cause by” the Ohio National entities, provided that NEXT Financial “remains a broker-dealer in good standing with” self-regulator Finra’s predecessor NASD and other state and federal regulatory agencies and where NEXT Financial “remains the broker-dealer of record for the account.”
Ohio National entities, on the other hand, rely on the language in the commissions schedule to argue that their obligation to pay trails ends with the termination of the selling agreement.
“Trail commissions will continue to be paid to the broker dealer of record while the selling agreement remains in force and will be paid on a particular contract until the contract is surrendered or annualized,” reads the commission schedule.
The magistrate judge wrote that the survival of the terms of compensation in the selling agreement is “not entirely consistent” with the language about trail commissions in the commissions schedule.
“For how could the “terms of compensation” “survive” the selling agreement if all commission payments for the individual annuity contracts under the commission schedule are conditioned upon the selling agreement remaining “in force,” wrote Judge Stacy.
“When the selling agreement and attached commissions schedule are read together, the provisions relied upon by each side cannot be harmonized,” according to the magistrate court decision. “That means that the contract is ambiguous as to whether Defendants were obliged, following the termination of the selling agreement, to continue making trail payments to NEXT.”
That is why summary judgment was not available to either side, ruled Judge Stacy.
Does this ruling impact other Ohio National trail litigation?
NEXT Financial is not the only broker-dealer suing Ohio National entities for the non-payment of trail commissions. The magistrate court’s recommendation could play a role in other similar lawsuits.
Arkansas-based broker-dealer Veritas Independent Partners filed a class action lawsuit against Ohio National entities before the Ohio federal court in November 2018.
On August 13, lawyers for Veritas submitted the recommendations from the NEXT Financial lawsuit before the court, “in further support of Veritas’ request this Court deny Ohio National Life’s Motion for Summary Judgment.”
Geoffrey Moul of Murray, Murphy Moul and Basil, who is representing Veritas, welcomed the ruling in the NEXT Financial case.
“Veritas believes the decision supports Veritas’ position that Ohio National is not entitled to summary judgment in the broker-dealer class action. So, Veritas is pleased that the Court in Texas rejects Ohio National’s efforts to have the case terminated early. For that reason, Veritas has submitted that decision to the Federal Court in Ohio and has asked that the Court in Ohio likewise deny Ohio National’s efforts to have the Court rule that trail commissions are not owed as a matter of law. The Texas decision, therefore, is important support for Veritas’ position that this case should proceed to a trial on the merits," says Moul.
The Texas court also found the contract ambiguous. But Moul says that is not a cause of concern for his case.
“The decision does not worry Veritas. Veritas is confident that when this case goes to trial and after hearing all the evidence, the trier of fact will determine that broker-dealers are entitled to trail commission and that Ohio National has breached the Selling Agreements with broker-dealers,” says Moul.