PHL Variable Insurance Company v. Bernard Fidel Irrevocable Trust et al
Filing
207
MEMORANDUM OF LAW AND ORDER. IT IS HEREBY ORDERED: 1. PHL's Motion for Summary Judgment Against Richard Smith [Civil No. 09-629 152 ; Civil No. 09-1923 195 ; Civil No. 1924 131 ) is GRANTED; 2. The Smith Defendants' Moti on for Summary Judgment Against PHL (Civil No. 09-629 160 ; Civil No. 09-1923 201 ; Civil No. 1924 139 ) is DENIED; and 3. The Burns Defendants' Motion for Summary Judgment Against the Smith Defendants (Civil No. 09-629 162 ; Civil No . 09-1923 208 ; Civil No. 1924 146 ) is GRANTED in part and DENIED in part. Count I is hereby amended to assert a claim for breach of express contract. The remaining counts in the Third Party Complaint are hereby dismissed.(Written Opinion). Signed by Chief Judge Michael J. Davis on 6/22/12. Associated Cases: 0:09-cv-00629-MJD-JSM, 0:09-cv-01923-MJD-JSM, 0:09-cv-01924-MJD-JSM(GRR)
UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
PHL Variable Insurance Company,
Plaintiff,
v.
Bernard Fidel 2007 Irrevocable Trust,
by and through its trustee, BNC
National Bank, Richard W. Smith,
The Producers Group Advantage LLC, and
William Stansbury,
MEMORANDUM OF LAW
AND ORDER
Civil No. 09‐629
Defendants.
New Stream Insurance LLC,
Third Party Plaintiff,
v.
PHL Variable Insurance Company,
Third Party Defendant.
Richard W. Smith and The Producers
Group Advantage LLC,
Third Party Plaintiffs,
v.
Bruce Burns and Wholesale Life Insurance
Brokers, Inc.,
Third Party Defendants.
___________________________________________________________________
1
PHL Variable Insurance Company,
Plaintiff,
v.
Sidney Nachowitz 2007 Irrevocable Trust,
by and through its trustee, BNC
National Bank, Richard W. Smith,
The Producers Group Advantage LLC, and
William Stansbury,
Civil No. 09‐1923
Defendants.
Global Secured Capital Fund, LP,
Third Party Plaintiff,
v.
PHL Variable Insurance Company,
Third Party Defendant.
Richard W. Smith and The Producers
Group Advantage LLC,
Third Party Plaintiffs,
v.
Bruce Burns and Wholesale Life Insurance
Brokers, Inc.,
Third Party Defendants.
_____________________________________________________________________
PHL Variable Insurance Company,
Plaintiff,
v.
2
Carmella Damato 2007 Irrevocable Trust,
by and through its trustee, BNC
National Bank, Richard W. Smith,
The Producers Group Advantage LLC, and
William Stansbury,
Civil No. 09‐1924
Defendants,
Global Secured Capital Fund, LP,
Third Party Plaintiff,
v.
PHL Variable Insurance Company,
Third Party Defendant
Richard W. Smith and The Producers
Group Advantage LLC,
Third Party Plaintiffs,
v.
Bruce Burns and Wholesale Life Insurance
Brokers, Inc.,
Third Party Defendants.
______________________________________________________________________
David T. McDowell and Jarrett E. Ganer, Edison, McDowell &
Hetherington, LLP and Stephen P. Lucke and Bryan Keane, Dorsey & Whitney,
LLP, Counsel for Plaintiff and Third Party Defendant PHL Variable Insurance
Company.
Jeffrey C. Weinstein, Mittenthal Weinstein LLP and Patrick M. Biren,
Brownson & Ballou, PLLP, Counsel for Defendants and Third Party Plaintiffs
Richard W. Smith and The Producers Group Advantage LLC.
3
John A. Markert, Coleman, Hull and Van Vliet, PLLP and David P.
Schippers, Schippers & Associates, LLP, Counsel for Third Party Defendants
Bruce Burns and Wholesale Life Insurance Brokers.
____________________________________________________________________
This matter is before the Court on PHL Variable Insurance Company’s
(“PHL”) motions for summary judgment against Richard W. Smith (“Smith”) and
The Producers Group Advantage (“TPGA”) (collectively the “Smith
Defendants”); the Smith Defendants’ motions for summary judgment against
PHL; and Bruce Burns (“Burns”) and Wholesale Life Insurance Brokers, Inc.’s
(“WLIB”) (collectively the “Burns Defendants”) motions for summary judgment
against the Smith Defendants.
I.
Introduction
These cases involve multi‐million dollar life insurance policies that were
issued by PHL based on applications that included gross misrepresentations as to
the applicant’s net worth and income. Prior to the discovery of these
misrepresentations, six figure premiums were paid to PHL, who in turn paid six
figure commissions to the individual producers and sub‐producers who
submitted the applications containing fraudulent statements.
This Court previously granted PHL’s request that the policies at issue be
4
rescinded and declared void ab initio, and allowed PHL to deposit the premiums
paid into the Court registry. At issue in the motions before the Court is whether
the individual producers and sub‐producers responsible for submitting the
fraudulent applications to PHL must refund any or all of the compensation paid
them when said policies were initially issued.
A.
Factual Background
TPGA is a general agent that sells life insurance policies for multiple
insurance companies, including PHL. (Weinstein Declaration Ex. 16 (Smith
Deposition at 10).) Smith is one of three shareholders in TPGA and is also the
sole shareholder of RWS, through which the commission for the Damato Policy
was paid. (Id. at 9.) WLIB is an independent insurance broker that gathers
information from persons seeking life insurance, and then contacts general agents
to see what policies are available and will fit the needs of the proposed client.
(Id. Ex. 15 (Burns Dep. at 101‐02).) At the time the policies at issue in this case
were issued, WLIB had six employees. (Id. at 20.) Burns is the sole shareholder
of WLIB, but was paid a W‐2 wage, and when the company was profitable, Burns
was paid a distribution. (Markert Decl. Ex. E (Malina Aff. ¶¶ 3‐5).)
In the usual course of business, WLIB and TPGA entered into oral
5
agreements as to how commissions would be split. (Weinstein Decl. Ex. 16
(Smith Dep. at 26‐27, 81, 84 and 85).) These oral agreements concerned
commission split only ‐ no other terms were addressed, such as when and if
commissions would be returned or refunded. (Id. at 28, Ex. 15 (Burns Dep. at
85).) Pursuant to these oral agreements, commission for the Fidel Policy was
paid by TPGA to WLIB on May 11, 2007; the commission for the Damato Policy
was paid by RWS to WLIB on September 20, 2007; and the commission for the
Nachowitz Policy was paid by TPGA to WLIB on February 2, 2008. (Markert
Decl. Ex. F.)
TPGA’s general practice was to receive medical information on proposed
insureds from brokers such as WLIB and then use that information to determine
what insurance carriers would offer based on that person’s medical history. (Id.
Ex. A (Smith Dep. at 16).) Once TPGA determined the best policy, the financial
information is gathered from the insured, the application is filled out and the
information is submitted to the insurance company. (Id. 16‐17.) With regard to
the policies at issue, the applications were filled out by WLIB employees. (Id. Ex.
C (Burns Dep. at 73).) The applications each contain a certification, which reads
“The Producer hereby confirms he/she has truly and accurately recorded on the
6
application the information supplied by the Proposed Insured; and that he/she is
qualified and authorized to discuss the contract herein applied for.” (Weinstein
Decl. Exs. 2, 4 and 6.)
After the applications were filled out, they were sent to the proposed
insured and the representative of the trust for signature. (Id. Ex. 14 (Burns Dep.
at 76).) The proposed insured was also required to verify that the information
contained therein are those of the proposed insured and that such statements are
full, complete and true to the best of their knowledge. (Id. Exs. 2, 4 and 6.) In
addition, WLIB received independent financial statements to support the
financial representations of the proposed insured, copies of medical records and
an independent inspection report. This information was forwarded to TPGA,
then forwarded to PHL. (Id. Ex. 14 (Burns Dep. at 241‐42), Ex. 15 (Burns Dep. at
104, 105); Ex. 16 (Smith Dep. at 21‐22).) Neither WLIB or TPGA conducted
additional verification of the information that was provided by the proposed
insured. (Id. Ex. 15 (Burns Dep. at 128‐29; Ex. 16 (Smith Dep. at 45).) Smith
testified that he did not review the documents, but that his staff did. (Id. Ex. 16
(Smith Dep. at 21‐22).)
B.
Fidel Policy
7
On or about March 2, 2007, PHL received the application for life insurance
from the Bernard Fidel 2007 Irrevocable Trust (“Fidel Trust”) on behalf of
Bernard Fidel. (Ganer Declaration, Ex. 9.) The Smith Defendants acted as the
general agent with respect to the Fidel Policy, and Bruce Burns was the producer
of the policy. (Id. Ex. 10; Smith Aff. ¶¶ 2 and 4.) The application included a
statement that Fidel’s net worth was $10 million. (Id. Ex. 9.) PHL issued a life
insurance policy, Policy No. 97521141, to the Fidel Trust effective March 19, 2007,
with a total face value of $5 million (“Fidel Policy”). (Id. Ex. 11.) PHL paid Smith
a commission and expense allowance payments totaling $184,285.53 for the
issuance of the Fidel Policy. (Turner Affidavit ¶ 3, Ex. 2.)
It was later determined that the application completed by the Fidel Trust
included fraudulent and material misrepresentations. As a result, the Fidel
Policy was ultimately rescinded and declared void ab initio by Order of this Court
dated June 4, 2010. (Civil No. 09‐629, Doc. No. 62). Thereafter, PHL tendered to
the Court’s registry an amount equal to the premiums paid on the Fidel Policy.
(Ganer Decl., Ex. 3.)
C.
Nachowitz Policy
8
On November 28, 2007, PHL received an application for life insurance from
the Sidney Nachowitz 2007 Irrevocable Trust (“Nachowitz Trust”), to insure the
life of Sidney Nachowitz. (Ganer Aff. Ex. 17.) This application provided that
Nachowitz’s net worth was $46,121,740. (Id.) Again, the Smith Defendants
acted as the broker general agent with respect to the Nachowitz Trust
application, and Burns acted as the producer. (Id. Ex. 18; Smith Aff. ¶¶ 2 and 4.)
PHL ultimately issued a life insurance policy for Nachowitz, effective October 18,
2007 (“Nachowitz Policy”), with a face value of $10 million. (Id. Ex. 19.) PHL
paid Smith commission and expense allowance payments totaling $357,970.60 for
the issuance of the Nachowitz Policy. (Turner Aff. ¶ 4, Ex. 3.)
As with the Fidel Policy, PHL later determined that the application
completed by the Nachowitz Trust included fraudulent and material
misrepresentations. The Nachowitz Policy was ultimately rescinded and
declared void ab initio by Order of this Court dated February 24, 2010. (Civil No.
09‐1923, Doc. No. 53). Thereafter, PHL tendered to the Court’s registry an
amount equal to the premiums paid on the Nachowitz Policy. (Ganer Decl. Ex.
22.)
D.
Damato Policy
9
On July 20, 2007, PHL received an application for life insurance from the
Carmella Damato 2007 Irrevocable Trust (“Damato Trust”) to insure the life of
Carmella Damato. (Id. Ex. 25.) The application noted that Carmella Damato had
a net worth of $14,070,800. (Id.) This application was also submitted to PHL
through the Smith Defendants as broker general agent and Burns as the
producer. (Id. Ex. 26; Smith Aff. ¶¶ 2 and 4.) PHL issued a life insurance policy
to Damato, with death benefits of $10 million (“Damato Policy”) and paid Smith
a commission and expense allowance payments totaling $260,513.11. (Turner
Aff. ¶ 5, Ex. 4.)
Like the previous policies, the Damato application included fraudulent and
material misrepresentations, and the Damato Policy was ultimately rescinded
and declared void ab initio by Order of this Court dated June 4, 2010. (Civil No.
09‐1924, Doc. No. 44). Thereafter, PHL tendered to the Court’s registry an
amount equal to the premiums paid on the Damato Policy. (Ganer Decl., Ex. 30.)
After amending the complaints in the above actions to add a claim of
breach of contract against the Smith Defendants, PHL demanded that the Smith
Defendants return the compensation he was paid on the above policies, but the
Smith Defendants refused to do so.
10
E.
Contracts between PHL and Smith, TPGA and RWS
On May 24, 2005, Smith, on his own behalf, entered into an Independent
Producer Contract (“IPC”) with PHL. (Turner Aff. Ex. 1.) On January 1, 2007,
PHL entered into a Brokerage General Agent Agreement with RWS Marketing
Services, LLC (“RWS”). (Id. Ex. 6.) Then, on August 29, 2007, PHL and TPGA
entered into a Brokerage General Agent Agreement. (Id. Ex. 5.) Finally, Smith
entered into a Broker Agreement with PHL on February 25, 2008, which governs
commissions paid to Smith on products sold through RWS. (Id. Ex. 7 at PHL/D
000935.) At issue in the cross motions for summary judgment between PHL and
the Smith Defendants is which of the above agreements controls, and whether
that agreement requires the Smith Defendants to repay the compensation paid
them, in the form of commissions and expense allowance payments, for the
above described insurance policies that have been judicially declared rescinded
and void ab initio.
F.
Third Party Complaint
After it was discovered that the Fidel, Nachowitz and Damato applications
contained material misrepresentations and after PHL brought actions against the
respective trusts and the Smith Defendants, the Smith Defendants brought a third
11
party complaint against the Burns Defendants, alleging breach of implied
contract, unjust enrichment, implied indemnity, promissory estoppel, fraud and
negligence. The Smith Defendants seek to have Burns and/or WLIB pay back any
commission paid to WLIB in the amount the Smith Defendants may be adjudged
to owe PHL.
II.
Standard for Summary Judgment
Summary judgment is appropriate if, viewing all facts in the light most
favorable to the non‐moving party, there is no genuine issue as to any material
fact, and the moving party is entitled to judgment as a matter of law. Fed. R. Civ.
P. 56 (c); Celotex Corp. v. Catrett, 477 U.S. 317, 322‐23 (1986). The party seeking
summary judgment bears the burden of showing that there is no disputed issue
of material fact. Celotex, 477 U.S. at 323. This burden can be met “by ‘showing’ ‐
that is, pointing out to the district court ‐ that there is an absence of evidence to
support the nonmoving party’s case.” Id. at 325. The party opposing summary
judgment may not rest upon mere allegations or denials, but must set forth
specific facts showing that there is a genuine issue for trial. Krenik v. County of
Le Sueur, 47 F.3d 953, 957 (8th Cir. 1995).
III.
PHL’s and the Smith Defendants’ Cross Motions for Summary Judgment
12
A.
Which Contract Controls
Under the IPC, Smith was given authority to act as an independent
producer for PHL and to enlist sub‐producers. (Turner Aff., Ex. 1 at PHL/D
000791.) The IPC allowed Smith to solicit applications for all products offered by
PHL, deliver policies, collect and submit the first premiums and service his
business subject to the terms of the IPC. (Id.) The IPC further provided that
Smith would earn commissions on policies and annuities that he or his sub‐
producers secured for PHL. (Id.) The IPC also provided that Smith would
receive compensation for Expense Allowance Payments (“EAP”) incurred in
soliciting and placing insurance or annuity contracts. (Id. at PHL/D 000803.)
When Smith entered into the IPC with PHL, he was assigned producer
code 306697 by PHL. (Turner Aff. ¶ 7.) He was assigned additional producer
codes when he executed the Broker General Agent Agreements on behalf of
TPGA and RWS and the Broker Agreement on behalf of himself (collectively the
“Broker Agreements”). (Id. ¶ 8.) When compensation was paid, it would be paid
under a specific producer code that reflected the contract under which Smith or
his sub‐producer was being compensated. (Id.) The record demonstrates that
commissions and EAPs were made to Richard Smith under the producer code
13
306697 for the Fidel, Nachowitz and Damato polices. (Id. ¶ 9; Exs. 2‐4.)
The IPC further provides:
Should the Company for any reason refund any premium on any policy
sold or annuity hereunder, You shall repay on demand any commissions
or any other compensation received therein, including, but not limited to,
the refund of any premiums under any Free Look Provision. You shall
also refund any advanced commissions or other compensation which
became unearned because of non‐payment of premiums.
(Id. Ex. 1 at PHL/D 000802.) With respect to EAPs, the IPC provides:
In the event the Company makes Expense Allowance Payments to which
You are not entitled under the terms of this Contract and Schedule
attached hereto, You agree to refund any amounts due the Company
promptly upon demand by the Company . . . The terms of this provision
shall not be impaired by termination of this Agreement.
(Id. at PHL/D 000803.)
Because the premiums paid on all policies at issue were refunded when
such funds were deposited in the Court registry, PHL asserts that Smith is
required to refund the compensation he received on said policies pursuant to the
terms of the IPC. Further, as the policies have been judicially rescinded, Smith
did not “earn” any compensation for such policies. It is PHL’s position that the
Smith has materially breached the IPC by failing to refund any of the
compensation paid him on the policies at issue in these cases.
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The Smith Defendants argue that the IPC was superseded and replaced by
the Broker Agreements. The Broker Agreements are nearly identical, and each
provides in pertinent part:
Entire Agreement; Modification. This Agreement replaces and supersedes
all other agreements (written and oral) between [Broker General
Agent/Broker] and Phoenix to the extent that any such agreement pertains
to the Phoenix Products and services specified in Schedule 3.1 . . .
(Id. at PHL/D 000932.)
After reviewing the terms of the IPC and the various Broker Agreements,
the Court finds the Broker Agreements were not intended to supersede the IPC.
The Broker General Agent Agreements govern those sales of PHL products made
by either RWS or TPGA, and the Broker Agreement is intended to govern those
sales by Smith on behalf of RWS. None of the Broker Agreements, however,
provide for the use of sub‐producers.
On the other hand, the IPC governs those sales of PHL products by Smith
through the involvement of a sub‐producer. Here, the parties do not dispute
that with respect to the policies at issue, a sub‐producer, Bruce Burns, forwarded
the fraudulent applications to Smith. Finally, the record clearly provides that
Smith was paid under the producer code assigned to the IPC. Based on these
15
undisputed facts, the Court finds that the terms of the IPC govern whether the
Smith Defendants are contractually obligated to repay compensation paid on the
above policies. Pursuant to the IPC, Smith “must repay on demand any
commissions or any other compensation received therein” and must refund any
EAPs paid “to which [Smith] is not entitled under the terms of this Contract and
Schedule attached hereto.” (Id. Ex. 1 at PHL/D000802‐803.)1
B.
Whether PHL Refunded the Premiums
The Smith Defendants argue that the premiums paid on the Nachowitz,
Fidel and Damato policies were ultimately divided between PHL and Global
Secured Capital Fund, LP (“Global”) and New Stream Insurance LLC (“New
Stream”) pursuant to the settlement between those parties. The Smith
Defendants thus argue that PHL cannot be said to have refunded the premiums.
As a result, no provision of the Broker Agreements or the IPC has been triggered
requiring the Smith Defendants to return the compensation received on the above
1
Even if the Broker Agreements controlled, those agreements provide that compensation
shall be paid “on payments received by Phoenix for contracts which are produced in accordance
with this Agreement and which are delivered to the proposed contract owner.” (Turner Aff. Ex.
5 at PHL/D 000905; Ex. 6 at PHL/D 001102; Ex. 7 at PHL/D 00924.) The policies at issue have
been voided ab initio, and the premiums refunded, therefore there is no basis upon which the
Smith Defendants can assert that they are entitled to retain any payments on a policy that ‐ by
operation of law ‐ never came into existence.
16
policies.
The Court finds that this argument has no merit. There can be no dispute
that PHL initially placed the entire premiums received on the above policies into
the Court’s registry. At the time the monies were so deposited, many claims
were asserted against the premiums and no determination had been made on
those claims. The fact that a settlement occurred at a later time does not alter the
fact that PHL did, in fact, refund the premiums.
C.
The Smith Defendants’ Affirmative Defenses
The Smith Defendants assert that summary judgment in favor of PHL is
not appropriate as there are genuine issues of material fact as to whether PHL
acted reasonably and in good faith, and whether PHL failed to mitigate its
damages or caused its own damages. Whether PHL was reasonable in entering
into the settlement agreements is a question of law for the court. Osgood v.
Medical, Inc., 415 N.W.2d 896, 903 (Minn. Ct. App. 1987).
The Smith Defendants argue that PHL caused its own damages by entering
into settlement agreements with Global and New Stream. They argue that given
the fraudulent statements contained in the policy applications, it was clear that
PHL had the right to retain all of the premiums paid, as set forth in PHL Variable
17
Ins. Co. v. Lucille Morello 2007 Irrevocable Trust, 645 F.3d 965 (8th Cir. 2011).
Thus, PHL’s agreement to return a portion of the premiums to Global and New
Stream was unreasonable and done in bad faith. The Court disagrees.
At the time PHL entered into settlement agreements with Global and New
Stream, the Morello decision was on appeal. Thus, the settlements were entered
into before PHL knew it would be successful on appeal. In addition, PHL asserts
that it did not know if Global or New Stream would assert new or different
claims in these actions that would not be addressed in the Morello decision.
Based on these facts and circumstances, the Court cannot find that it was
unreasonable for PHL to enter into settlement agreements with Global and New
Stream.
Finally, the Smith Defendants argue in opposition to PHL’s motion that
there are genuine issues of material fact precluding summary judgment in favor
of PHL as to whether PHL acted reasonably and in good faith when it issued the
above policies. The Smith Defendants argue that PHL’s underwriting
department failed to discover any of the material misrepresentations made in the
policy applications at issue in these cases. Had the underwriting department
conducted due diligence as to the information contained in the policy
18
applications, these disputes would not have arisen.
No evidence has been presented to the Court concerning the actions or
inactions of PHL’s underwriting department with respect to the above policies.
To properly oppose summary judgment, however, the Smith Defendants “may
not rest upon mere allegations or denials, but must set forth specific facts
showing that there is a genuine issue for trial.” Krenik, 47 F.3d at 957.
Accordingly, the Court finds that the Smith Defendants have failed to
demonstrate a fact question as to whether PHL acted reasonably or in good faith
with respect to its review of the policy applications at issue.
D.
Offset
The Smith Defendants argue that in the event summary judgment is
entered in favor of PHL, the Court should determine that any monetary award to
PHL be offset by other monies due Smith, but withheld by PHL.
On or about January 31, 2008, PHL charged back $984,025 from Smith
related to policies not at issue here. (Turner Aff. ¶ 10.) PHL also charged back
$538,714 from Smith related to another policy not at issue here. (Id.) Smith
asserts that chargebacks are allowable only on the condition that PHL returned or
refunded premiums. There is no evidence in the record to show that PHL
19
refunded or returned premiums on those policies referenced in paragraph 10 of
the Turner Affidavit as of January 31, 2008. In fact, the record shows that the
Nachowitz, Fidel and Damato policies were rescinded prior to those policies
referenced in paragraph 10. From this evidence, Smith asserts that the
chargebacks referred to in paragraph 10 must be applied to the instant cases,
rather than the referenced policies.
The Court finds that because the above referenced chargebacks concern
policies not at issue in this litigation, such chargebacks are irrelevant and do not
provide an offset in this case.
E.
Conclusion
Based on the above, the Court finds that PHL has demonstrated that
pursuant to the IPC, Smith was required to repay to PHL any commissions or
any other compensation received in the event PHL refunds a premium. PHL has
further demonstrated that it refunded the premiums with respect to the above
policies, and that Smith has not repaid the commissions and other compensation
he received with respect to such premiums. Accordingly, PHL is entitled to
summary judgment against the Smith Defendants as to Count II of the First
Amended Complaints in the above‐referenced actions.
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IV.
The Burns Defendants’ Motion for Summary Judgment
A.
Whether Burns Can Be Held Personally Liable
1.
Piercing the Corporate Veil.
Burns argues that although he is the sole shareholder of WLIB, at all times
relevant herein, he was acting as an employee of WLIB. Thus, he is entitled to the
protections afforded him as an employee ‐ namely that he cannot be held
personally liable for any of the claims included in the Third Party Complaint.
With regard to cases venued in Minnesota, the determination of shareholder
liability is measured by the law of the state where the company is incorporated ‐
in this case Illinois. Furst v. Beygeh, 192 Minn. 454, 458, 257 N.W. 79, 81 (Minn.
1934).
The Smith Defendants argue that with respect to the policies at issue,
Burns was acting on his own behalf ‐ not as an employee, officer or director of
WLIB. For example, they argue that the agreements to split commissions on the
policies at issue were between Smith and Burns, not TPGA or WLIB. (Weinstein
Decl., Ex. 16 (Smith Dep. at 27).) Also, Burns listed his personal social security
number on the policy application documents. (Id., Exs. 2‐7.) The IPC between
PHL and Smith requires that “all applications for the products offered under this
21
contract shall be solicited only by individuals (hereinafter “Sub‐producers”)
representing You who have been duly licensed under the applicable insurance
laws to secure such applications and who indicate on each such application that
it has been solicited on Your behalf.” (Id., Ex. 1, p. 8.) (emphasis added). Further,
the Smith Defendants assert that Burns, in his individual capacity, was licensed
to sell insurance products in Minnesota, while WLIB was not. (Id. Exs. 11‐13.)
As demonstrated above, however, the commission payments for the
policies at issue were made payable to WLIB. (Markert Decl. Ex. F.) The fact that
Burns is the “person” at WLIB that is licensed to sell insurance in Minnesota, on
behalf of WLIB, has no bearing on whether he was acting in his personal
capacity, or as an employee. Minnesota law allows an individually licensed
producer to write insurance and earn a commission on behalf of a company.
Minn. Stat. § 60K.48, subd. 3(b). Accordingly, personally liability will not be
imposed on Burns on the basis that he was acting as an individual, apart from
WLIB.
Under Illinois law, there is a presumption that a corporation is “separate
and distinct from its officers and directors, and those parties will not be held
personally liable for the corporation’s debts and obligations.” Judson Atkinson
22
Candies, Inc. v. Latini‐Hohberger Dhimantec, 529 F.3d 371 (7th Cir. 2008)
(quoting Tower Investors, LLC v. 111 E. Chestnut Consultants, Inc., 864 N.E.2d
927, 941 (Ill. App. Ct. 2007)). In order to pierce the corporate veil, Illinois courts
apply a two prong test: “(1) there must be such unity of interest and ownership
that the separate personalities of the corporation and the individual or other
corporation no longer exist; and (2) circumstances must be that such an
adherence to the fiction of separate corporate existence would sanction a fraud or
promote injustice.” Dimmitt & Owens Fin., Inc. v. Superior Sports Prod., Inc.,
196 F. Supp. 2d 731, 738 (N.D. Ill. 2002).
The Court can consider the following factors in determining whether there
is a sufficient “unity of interest” to justify disregarding the corporate form:
(1) inadequate capitalization; (2) failure to issue stock; (3) failure to observe
corporate formalities; (4) nonpayment of dividends; (5) insolvency of the
debtor corporation; (6) nonfunctioning of the other officers or directors; (7)
absence of corporate records; (8) commingling of funds; (9) diversion of
assets from the corporation by or to a shareholder; (10) failure to maintain
armʹs length relationships among related entities; and (11) whether the
corporation is a mere facade for the operation of the dominant
shareholders. . . . Significantly, no single factor is determinative in deciding
whether to disregard a corporate entity.
Id, 196 F. Supp.2d at 738 (citations omitted).
The Burns Defendants argue no evidence has been produced to justify
23
disregarding the corporate form of WLIB. The undisputed facts show that WLIB
was incorporated in 1998, it had employees in addition to Burns, WLIB has filed
corporate tax returns and there is no commingling of Burns’ personal funds with
those of the corporation. (Malina Aff. ¶¶ 2‐5.) When paid by the Smith
Defendants for the policies at issue, the checks were made payable to WLIB.
(Markert Decl., Ex. F.) The Smith Defendants argue that the corporate veil should
be pierced because WLIB is no longer in business, Burns is the only shareholder
and there is no record that WLIB held regular corporate meetings.
The Court finds that the evidence before it does not create a genuine issue
of material fact that the corporate form should be disregarded in this case. It is
not enough to show that Burns is the only shareholder, and that he did not
conduct corporate meetings. Instead, there must be evidence that Burns
“disregarded [WLIB’s] corporate entity, such as by intermixing its finances with
his own or using it as a thinly capitalized sham to avoid liability . . .” Melko v.
Dionisio, 580 N.E.2d 586, 595 (Ill. 1991). The Smith Defendants have presented
no such evidence.
2..
Whether Burns Engaged in Wrongdoing.
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An exception to the general rule that an officer of a corporation cannot be
held liable for the debts of the corporation exists when the officer is alleged to
have taken part in the illegal act that gave rise to the corporate liability.
Musikiwamba v. ESSI, Inc., 760 F.2d 740, 753 (7th Cir. 1985). The Smith
Defendants assert there are disputed material facts as to whether Burns
participated in the alleged preparation of the fraudulent policy applications that
are at issue.
The Smith Defendants assert that each of the applications at issue include
material misrepresentations as to the net worth and income of the applicant.
Further, these applications each include a statement that the producer “confirms
that he or she has truly and accurately recorded on the application the
information supplied by the proposed insured and that he or she is qualified and
authorized to discuss the contract herein applied for.” (Weinstein Decl. Exs. 2, 4
and 6.) Burns testified, however, that he did not record any of the information on
the applications and that he permitted his signature to be stamped on the
Nachowitz application before it was completed or signed by Nachowitz. (Id., Ex.
15 (Burns Dep. at 100, 104‐05); Ex. 14 (Burns Dep. at 140, 159, 204).) Burns also
authorized the drafting and stamping of his signature on a cover letter with
25
respect to the Nachowitz application, in which he falsely states that Nachowitz
had been his client for over a year, and falsely represented Nachowitz’s
employment and business history, and states that Nachowitz’s net worth of $46
million. (Id. Ex. 14 (Burns Dep. at 101‐05); Ex. 19.) Burns also testified that
although applicants are supposed to sign the application in the presence of a
witness, WLIB implemented a policy to witness the insured’s signature outside of
their presence, based on a photocopy of their driver’s license. (Id. Ex. 15 (Burns
Dep. at 98).)
The Smith Defendants further assert that Burns entered into a relationship
with Jason Mitan and an entity known as Cambridge Management, under which
WLIB would pay it referral fees for clients referred to WLIB. (Weinstein Decl.,
Ex. 15 (Burns Dep. at 46 and 129‐30).) Such referral fees were paid on the
Nachowitz and the Damato Policies. (Id., Ex. 14 (Burns Dep. at 48); Ex. 15 (Burns
Dep. at 129‐30).) The payment of such referral fees, however, was contrary to the
Producer Report which provides: “I agree that no person other than the
undersigned shall profit by any commission on insurance issued on this
application. Commission will be paid as described according to the contracts on
filed in the home office.” (Id. Exs. 3, 5, and 7.) The Smith Defendants argue that
26
the applications at issue were all prepared in a similar manner, and although
Burns denies wrongdoing, the pattern of fraud and the processes Burns engaged
in to complete, witness and submit the applications demonstrates that he did, in
fact, participate in the fraud.
The Burns Defendants respond that while the Smith Defendants point to
certain alleged violations of protocol when the applications were completed,
none of these alleged violations were illegal. Further, PHL’s Chief Underwriter
testified that it was not necessary that the producer obtain information on the
application directly from the proposed insured; it would be understood that this
information could come from tax attorney’s or financial planners or other such
professionals. (Weinstein Decl., Ex. 42 at 125‐26.) This underwriter also testified
that there is no requirement that the producer independently verify the financial
condition of the applicant. (Id. at 119‐20.)
The Court finds that the Smith Defendants have not demonstrated that
genuine issues of material fact exist as to whether Burns knowingly participated
in a scheme to present applications for multi‐million dollar life insurance policies
that included materially false statements. Specifically, the Smith Defendants
point to no evidence that the Burns Defendants knew or should have known that
27
the information provided in the applications were not accurate. In addition, no
evidence has been presented from which the fact finder could reasonably infer
the Burns Defendants knew or should have known of the fraud. Accordingly, the
Court finds no basis upon which to find Burns individually liable.
B.
Breach of Implied Contract
The Burns Defendants assert that under either Minnesota, Florida or
Illinois law, a claim for breach of implied contract cannot lie where there is an
express contract. See Kovtan v. Frederiksen, 449 So.2d 1 (Fla. Dist. Ct. App.
1984); Barry Mogul & Assoc., Inc. v. Terrestris Dev. Co., 643 N.E.2d 245, 251 (Ill.
Ct. App. 1994); Schimmelpfennig v. Gaedke, 27 N.W.2d 416, 420 (Minn. 1947).
There is no dispute that the parties had an oral agreement as to how commissions
would be split among them, and that there was no agreement concerning the
repayment or refund of commissions paid. The Burns Defendants assert that
because there is no express agreement as to the repayment or refund of
commissions, the Smith Defendants assumed the business risk of having to repay
commissions to PHL on the policies at issue without any contribution from the
Burns Defendants.
Acknowledging that the record includes evidence of an express agreement
28
concerning commission splitting, the Smith Defendants move the Court to amend
their complaint to assert a claim of breach of express contract. The Federal Rules
of Civil Procedure provide that the Court should freely grant leave to amend a
complaint when justice so requires. Fed. R. Civ. P. 15 (a)(2). Here, the Smith
Defendants assert that the Burns Defendants have impliedly consented to such an
amendment, by raising the existence of this express contract in their motion for
summary judgment. The Burns Defendants acknowledge that Rule 15 (a)(2) must
be liberally construed, but argue the motion to amend should be denied where
such amendment would be futile.
Pursuant to Illinois law, when interpreting a contract, the Court must first
determine the threshold inquiry is whether the contract is ambiguous. Bourke v.
Dun & Bradstreet Corp., 159 F.3d 1032, 1036 (7th Cir. 1998). “In Illinois, ‘[a]n
instrument is ambiguous only if the language used is reasonably or fairly
susceptible to having more than one meaning, but it is not ambiguous if a court
can discover its meaning simply through knowledge of those facts which give it
meaning as gleaned from the general language of the contract. A contract is not
rendered ambiguous simply because the parties do not agree on the meaning of
its terms.’” Id. Where an ambiguity exists, the Court can “look to extrinsic
29
evidence to clear up a contract’s ambiguity.” Markin v. Chebemma Inc., 526 F.
Supp. 2d 890, 896 (N.D. Ill. 2007).
Here, the parties do not dispute that their commission split agreements
were oral agreements, and that the commission split was negotiated for each
policy placed. The parties also agree that they did not specifically address
whether commissions would be repaid if a policy was rescinded and the
premiums refunded by the insurer. Silence as to a particular aspect of the parties’
agreement may render such an agreement ambiguous. Rossetto v. Pabst Brewing
Co., Inc., 217 F.3d 539, 546 (7th Cir. 2000) (applying Illinois law). The same is true
under Minnesota and Florida law. See, e.g., QFS, Inc. v. Juno Enterprises, Inc.,
1995 WL 238935, at *1 (Minn. Ct. App. Apr. 25, 2995) (agreement was ambiguous
because it was silent on whether commissions would be paid in a certain
circumstance); Sullivan v. Sullivan, 2002 WL 1467533, at *3 (Minn. Ct. App. July
9, 2002) (citing Columbia Heights Motors, Inc. v. Allstate Ins. Co., 275 N.W.2d 32,
34 (Minn. 1979)) (parol evidence can be used to determine parties’ intent); Hunt
v. First Nat. Bank of Tampa, 381 So.2d 1194, 1197 (Fla. Ct. App. 1980) (finding
that where a contract fails to address the rights or duties of the parties under
certain conditions, such failure results in a latent ambiguity, and the court may
30
look to extrinsic evidence to determine the parties’ intent). The Court finds that
based on the record before it, the agreement of the parties is ambiguous as to
their rights and duties in the event a policy is rescinded and the premium
refunded.
As noted above, the laws of Illinois, Minnesota and Florida provide that
where a contract term is ambiguous, the court may look to extrinsic evidence to
determine the parties’ intent with respect to such term. At his deposition,
Richard Smith testified that insurance agents “know[] that when a case is done,
there’s a chance something could go wrong. A million things could go wrong. . .
. If a policy gets rescinded, if a client returns a policy for whatever reason and the
carrier refunds the premiums, there is going to be a charge‐back and everybody
involved in the commission has to pay back.” (Weinstein Decl., Ex. 16 (Smith
Dep. at 27).) Also, at his deposition, Burns admitted that if a policy was not
placed, the commission would not be earned, and he would not get paid. (Id.
Decl., Ex. 15 (Burns Dep. at 72‐73).) Based on this evidence, the Court finds there
are genuine issues of material fact as to whether the parties intended that if the
policy that generated a commission was rescinded and the premiums refunded,
such commission would be refunded. Accordingly, the Court will allow the
31
Smith Defendants to amend their complaint to add a claim of breach of contract,
and allow such claim to proceed. Summary judgment as to the claim for breach
of implied contract will be granted, as no such claim can be asserted where there
is an express contract.
C.
Unjust Enrichment
The Burns Defendants assert that because there is an express contract, the
claim for unjust enrichment fails. The law of Minnesota, Illinois and Florida is
consistent, and supports this position. In Illinois, “unjust enrichment” is not an
independent cause of action. Pirelli Armstrong Tire Corp. v. Walgreen, 631 F.3d
436, 447 (7th Cir. 2011). Both Minnesota and Florida provide that a claim for
unjust enrichment cannot stand where there is an express contract. Zarrella v.
Pac. Life Ins. Co., 755 F.Supp.2d 1218, 1227 (S.D. Fla. 2010); Sharp v.
Laubersheimer, 347 N.W.2d 268, 271 (Minn. 1984). Based on the settled law on
this issue, the unjust enrichment claim must be dismissed.
D.
Promissory Estoppel
With respect to the claim of promissory estoppel, the laws of Minnesota,
Florida and Illinois require evidence of a promise, that the promisor intended
reliance on the promise and that the promise must be enforced to prevent an
32
injustice. See Olson v. Synergistic Techs. Bus. Sys., Inc. 628 N.W.2d 142, 152
(Minn. 2001); Advanced Mktg. Sys. Corp. v. ZK Yacht Sales, 830 So. 2d 924, 927
(Fla. App. 4 Dist. 2002); Newton Tractor Sales, Inc. v. Kubota Tractor Corp., 906
N.E.2d 520, 523 (Ill. 2009).
The Smith Defendants assert that the confirmations in the applications for
life insurance, whereby the producer “confirms that he/she has truly and
accurately recorded on the application the information supplied by the proposed
insured and that he/she is qualified and authorized to discuss the contract herein
applied for” can be construed as a promise by Burns as to the completeness and
accuracy of the statements contained in the application. The Court disagrees.
Any statement or confirmation contained within the insurance applications
cannot be construed as a promise to the Smith Defendants; rather the
applications were for the benefit of PHL and submitted to PHL. Further, the
language of the confirmation provides that the licensed producer was confirming
only that he accurately recorded the information provided by the proposed
insured, not that he verified the information. Accordingly, the Smith
Defendants’ claim of promissory estoppel must be dismissed.
33
E.
Fraud
A claim for fraud has the following elements: “(1) a false statement
concerning a material fact; (2) knowledge by the person making the statement
that the representation is false; (3) the intent by the person making the statement
that the representation will induce another to act on it; and (4) reliance on the
representation to the injury of the other party.” Lance v. Ward, 457 So.2d 1008,
1011 (Fla. 1984). See also, Flynn v. Am. Home Prods. Corp., 627 N.W.2d 342, 349
(Minn. Ct. App. 2001); Razdan v. Gen. Motors Corp., 979 F. Supp. 755, 759 (N.D.
Ill. 1997).
In support of their fraud claim, the Smith Defendants argue that Burns
falsely verified that he accurately recorded information on the policy applications
at issue, and that the information recorded was false. Burns also provided false
information regarding his relationship with Nachowitz, and Nachowitz’s
business career and net worth. For example, the Nachowitz application was
accompanied by a cover letter signed by Burns, in which he stated that Sidney
Nachowitz had been his client for approximately one year. (Weinstein Decl. Ex.
19.) At his deposition, however, Burns admitted that Nachowitz was not a
personal client of his, rather he was a client of Cambridge. (Id. Ex. 14 (Burns
34
Dep. at 102).) He further testified that he had no personal knowledge of
Nachowitz’s financial information. (Id. (Burns Dep. at 108).) The Smith
Defendants further argue that under the totality of the evidence, Burns was
involved in procuring a number of large life insurance policies based on false
representations, and that from such evidence, there is a fact question as to
whether Burns did in fact materially participate in a fraud.
To succeed on a fraud claim, however, there must be evidence that the
Burns Defendants knew or should have known that the information provided on
the applications for insurance at issue here was false. The Court finds that no
evidence has been submitted that to show that Bruce Burns or any other person
at WLIB knew, or should have known, that the financial information included on
the policy applications for Damato, Nachowitz and Fidel was false at the time the
applications were filled out and submitted to PHL. The same is true with respect
to the cover letter. There is no evidence that Burns or another WLIB employee
was aware that the information in the cover letter included false information.
Finally, the Smith Defendants cannot base their claim of fraud on the
confirmation statement included in the application, because that confirmation
only required a certification that information was accurately recorded ‐ not that
35
the information was accurate.
G.
Negligence
The elements of a negligence claim are a duty of care, breach of that duty,
damages, and that the breach was the proximate cause of such damages.
Anderson v. State, Dep’t of Nat. Res., 693 N.W.2d 181, 186 n.1 (Minn. 2005); Blue
v. Envtl. Eng’g, Inc., 803 N.E.2d 187, 194 (Ill. App. 1 Dist. 2003); R.J. Reynolds
Tobacco Co. v. Brown, 70 So.3d 707, 717 (Fla. App. 4 Dist. 2011). Whether a duty
exists is a question of law. Presbrey v. James, 781 N.W.2d 13, 17 (Minn. Ct. App.
2010); Castro v. Brown’s Chicken and Pasta, Inc., 732 N.E.2d 37, 42 (Ill. App. 1
Dist. 2000); Jenkins v. W.L. Roberts, Inc., 851 So.2d 781, 783 (Fla. Dist. Ct. App.
2003).
The Smith Defendants assert their negligence claim is based on the duty to
verify the information provided by a proposed insured, and that this duty is
encompassed by a claim of negligent procurement of insurance. To prove such a
claim requires proof that “(1) that the agent owed a duty to the insured to
exercise reasonable skill, care, and diligence in procuring insurance; (2) a breach
of that duty; and (3) a loss sustained by the insured that was caused by the
agent’s breach of duty.” Graff v. Robert M. Swendra Agency, Inc., 800 N.W.2d
36
112, 116 (Minn. 2011). See also Busey Truck Equip., Inc. v. Am. Family Mut. Ins.
Co., 299 S.W.3d 735, 738 (Mo. Ct. App. 2009); Willis Ins. Agency, Inc. v. Luckey,
466 So.2d 1197 (Fla App. 3 Dist. 1985). As is clear from the elements of such a
claim, the duty is owed to the insured, not between insurance agents. In
addition, the claim requires that the breach of duty caused the failure to provide
agreed upon insurance. Here, there is no claim that appropriate insurance was
not issued. Accordingly, to the extent that the Smith Defendants assert a claim of
negligent procurement of insurance, such claim has no merit.
There is no authority establishing a duty, between a general agent and a
broker, to verify information supplied by an insured. See, e.g., Allendale Mut.
Ins. Co. v. Bull Data Sys., Inc., 1994 WL 710771, at *11 (N.D. Ill. Dec. 16, 1994)
(finding under Illinois law, duty of insured to provide accurate information to
insurer does not extend to insured’s broker). In fact, an insurer is entitled to rely
on the statements of the insured. See Shaughnessy v. New York Life Ins. Co., 203
N.W. 600 (Minn. 1925); Fretwell v. Kansas City Life Ins. Co., 643 F. Supp. 2d 1317,
1323 (N.D. Fla. 2009); Royal Neighbors of Am. v. Boman, 52 N.E.2d 264, 266
(1898). Based on the above, the Court finds that the Smith Defendants claim of
negligence must be dismissed.
37
D.
Implied Indemnity
A claim for implied indemnity requires a finding that the Burns
Defendants were negligent in its actions relating to the insurance application
process, and that the negligence caused the Smith Defendants to incur damages.
See O’Connell v. Jackson, 140 N.W.2d 65, 69 (1966); Dade Cty Sch. Bd. v. Radio
Station WQBA, 731 So.2d 638, 642 (Fla. 1999); Bristow v. Griffitts Constr. Co., 488
N.E.2d 332, 336 (1986). Because the Court has found that the negligence claim is
without merit, summary judgment as to this claim will be appropriate as well.
E.
Conclusion
Based on the above, the Court finds that the record supports a claim for
breach of contract, and will thus allow the Smith Defendants to amend their
complaint to assert such a claim. Genuine issues of material fact, however, exist
as to terms of this express contract and whether there has been a material breach.
The Burns Defendants are entitled to summary judgment as to the remaining
claims in the Third Party Complaint.
IT IS HEREBY ORDERED:
1.
PHL’s Motion for Summary Judgment Against Richard Smith [Civil
No. 09‐629 (Doc. No. 152); Civil No. 09‐1923 (Doc. No. 195); Civil No.
38
1924 (Doc. No. 131)] is GRANTED;
2.
The Smith Defendants’ Motion for Summary Judgment Against PHL
[Civil No. 09‐629 (Doc. No. 160); Civil No. 09‐1923 (Doc. No. 201);
Civil No. 1924 (Doc. No. 139)] is DENIED; and
3.
The Burns Defendants’ Motion for Summary Judgment Against the
Smith Defendants [Civil No. 09‐629 (Doc. No. 162); Civil No. 09‐1923
(Doc. No. 208); Civil No. 1924 (Doc. No. 146)] is GRANTED in part
and DENIED in part. Count I is hereby amended to assert a claim
for breach of express contract. The remaining counts in the Third
Party Complaint are hereby dismissed.
Date: June 22, 2012
s/ Michael J. Davis
Michael J. Davis
Chief Judge
United States District Court
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