Wealthmark Advisors Incorporated et al v. Phoenix Life Insurance Company et al
REPORT AND RECOMMENDATIONS re 44 Motion for Partial Summary Judgment, filed by PHL Variable Insurance Company, Phoenix Life Insurance Company, 64 Motion for Leave to File Document filed by David Shields, Wealthmark Advisors Incorporated, Motions terminated: 64 MOTION for Leave to File Supplemental Response filed by David Shields, Wealthmark Advisors Incorporated. Signed by Judge Elizabeth S Chestney. (aej)
IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF TEXAS
SAN ANTONIO DIVISION
INCORPORATED, DAVID SHIELDS,
PHOENIX LIFE INSURANCE
COMPANY, PHL VARIABLE
REPORT AND RECOMMENDATION
OF UNITED STATES MAGISTRATE JUDGE
To the Honorable United States District Judge Fred Biery:
This Report and Recommendation concerns the Motion for Partial Summary Judgment
(“Motion”) [#44] filed by Defendants Phoenix Life Insurance and PHL Variable Insurance
Company (together, “Defendants” or “Phoenix”) and the Opposed Motion for Leave to
Supplement Response to Defendants’ Motion for Partial Summary Judgment [#64] filed by
Plaintiffs Wealthmark Advisors Incorporated and David Shields (together, “Plaintiffs” or
“Wealthmark”). Pretrial matters have been referred to the undersigned pursuant to Western
District of Texas Local Rule CV-72 and Appendix C [#21].1 The district court has original
jurisdiction over this case pursuant to 28 U.S.C. § 1332(a)(1). The undersigned has authority to
enter a recommendation regarding the summary judgment motion pursuant to 28 U.S.C. §
636(b)(1)(B) and to dispose of the motion for leave pursuant to 28 U.S.C. § 636(b)(1)(A).
The case was initially referred to Magistrate Judge Pamela Mathy on August 10, 2016 [#21],
but was administratively reassigned to the undersigned’s docket on January 17, 2017, after Judge
After considering Defendants’ Motion [#44], the Response filed by Wealthmark [#56]2,
Defendants’ Reply [#59], the case file, and the relevant law, the undersigned recommends that
the District Court GRANT Defendants’ Motion for Partial Summary Judgment [#44].
addition, the undersigned GRANTS Plaintiffs’ Opposed Motion for Leave to Supplement
Response to Defendants’ Motion for Partial Summary Judgment [#64], 3 but the supplemental
evidence submitted by Plaintiffs had no impact on the undersigned’s analysis of Defendants’
summary judgment motion.
FACTS SUPPORTED BY THE RECORD
This is a contract dispute between Phoenix and Wealthmark, as well as Anthony
Friendshuh, a Wealthmark Representative who sold Phoenix insurance products. In June 2010,
Phoenix contracted with Wealthmark to market and sell Phoenix’s insurance products. (See Ex.
11 to Motion.)
Pursuant to the parties’ Annuity Distributor Agreement (“Distributor
In its Response, Wealthmark also requests that the Court grant it summary judgment on its
claim for declaratory relief. (See Response at 2, 6.) Wealthmark previously filed a motion for
summary judgment asking the Court for the same relief, which was denied [#23, #26]. Since that
denial, Wealthmark has not renewed or filed another summary judgment motion, and none is
pending before the Court. An argument in a response does not constitute a cross motion for
summary judgment. See, e.g., Burgess v. Daniels, No. 13-CV-02191-PAB-CBS, 2014 WL
4698773, at *12 n. 5 (D. Colo. Sept. 22, 2014) (noting that “it is procedurally improper to
request affirmative relief in a response brief”); Summit Towers Condo. Ass’n, Inc. v. QBE Ins.
Corp., No. 11-60601-CIV, 2012 WL 12840822, at *4 (S.D. Fla. Apr. 30, 2012) (noting that
“[m]ost of the issues raised by [plaintiff] would be appropriate if it had filed its own motion for
summary judgment, but are procedurally improper when included in a response brief to
[defendant’s] motion for summary judgment”).
In their motion [#64], Plaintiffs seek leave to supplement the summary judgment record with
deposition testimony from Defendants’ corporate representative, Nancy Turner. In these
deposition excerpts, Ms. Turner responded to inquiries regarding Phoenix’s intent in using
certain words in a settlement agreement between Phoenix and the State of Minnesota. This
testimony is extrinsic evidence that can play no role in the undersigned’s interpretation of the
unambiguous terms in the contract at issue. See Tex. v. Am. Tobacco Co., 463 F.3d 399, 407 (5th
Cir. 2006) (“Courts interpreting unambiguous contracts are confined to the four corners of the
document, and cannot look to extrinsic evidence to create an ambiguity.”)
Agreement”), Wealthmark (the “Distributor”) agreed it would recruit Representatives (also
referred to as “Sub-producers”) for contracting with Phoenix. (Id. at 3.) In addition to recruiting
Representatives, Wealthmark agreed to “cause and require” all of its Representatives to “comply
with the Terms of this Agreement and all applicable state and federal laws.”
(Id. at 4.)
Wealthmark further agreed that it would “make best efforts” to ensure its Representatives were
aware of their obligation to ensure all sales were “appropriate for and suitable to the needs of the
insured” at the time of the sale in accordance with “[a]pplicable Law governing suitability of
insurance products.” (Id. at 3.) Wealthmark agreed to be responsible for all expenses incurred
and to indemnify Phoenix from “all losses, expenses, costs, damages and liability resulting from
negligent acts by Distributor or its Sub-producers, and from acts or transactions by any of them
not authorized by Phoenix.” (Id. at 4.)
In exchange, Phoenix agreed to compensate Wealthmark according to the Compensation
Schedules attached to the Distributor Agreement, subject to a Repayment-of-Commissions
provision, which required Wealthmark to repay earned commissions under certain
In June 2011, Phoenix entered into a Producer Agreement with one of Wealthmark’s
Representatives, Anthony Friendshuh (the “Producer”), a Minnesota licensed Resident Insurance
Producer, to sell its products in Minnesota in exchange for commissions on the sales. (See Ex. 2
to Resp. & Ex. 10 ¶ 2 to Motion.)
On or about February 3, 2014, the Minnesota Attorney General filed suit on behalf of the
State of Minnesota against Friendshuh in the Fourth Judicial District of Hennepin County
captioned State of Minnesota by its Attorney General, Lori Swanson v. Heritage Partners, LLC
et al., No. 27-14-1563. (See Ex. 1 ¶ 2 to Motion.) In this suit, the State of Minnesota alleged
that Friendshuh sold annuities to Minnesota seniors and those approaching retirement, some of
which were allegedly unsuitable or not fully or accurately described. (Id.; see also Ex. 3 at 2 to
Motion.) The State of Minnesota’s Commissioner of Commerce thereafter issued a Cease and
Desist Order, alleging that Friendshuh violated Minnesota law in several different ways
(1) misrepresenting the terms, benefits, or advantages of Phoenix annuity
products; (2) making improper and unsuitable sales to Minnesota clients that were not in his
clients’ best interest, subjecting his clients to surrender penalties and additional years of
surrender charges; (3) engaging in “fraudulent coercive or dishonest practices in connection with
the insurance business”; and (4) failing to make reasonable inquiries to determine suitability
when recommending the purchase of annuities. See In re Friendshuh, 2014 WL 10293771, at *4
(Minn. Dep’t of Commerce Dec. 5, 2014).
In conjunction with its investigation into Friendshuh’s fraudulent practices, the State of
Minnesota served a Civil Investigative Demand on Phoenix. (See Ex. 3 at 2 to Motion.) Phoenix
and the State of Minnesota then entered into a court-approved settlement agreement, the
“Assurance of Discontinuance.”
(Id.; see also Ex. 1 ¶ 3 to Motion.)
The Assurance of
Discontinuance established a claims-review process allowing any affected Minnesota consumer
to request cancellation of his or her Phoenix annuity with full repayment of the premium if the
sale was unsuitable under Minnesota law at the time of the application, or if the sale resulted
from a material misrepresentation of the terms or conditions of the annuity.4 (Ex. 3 at 3-8 to
Motion.) Policyholders who had already surrendered their annuities prior to the Assurance of
Discontinuance or who had previously received rescissions from Phoenix were provided the
The parties vehemently dispute the form of relief provided by the Assurance of Discontinuance.
Phoenix argues that the Assurance of Discontinuance contemplated rescission of the affected
annuities and that rescission actually occurred. Wealthmark, on the other hand, argues that the
Assurance of Discontinuance allowed consumers to surrender—not rescind— their annuities.
opportunity to file a claim to recover additional relief in the form of surrender charges or fees.
(Id. at 6 ¶¶ 5-6.)
Policyholders whose requests for rescission were approved received offers of rescission
with payments calculated as the full amount of the premium paid by the policyholder into the
annuity over the life of the contract (less any amount paid by Phoenix to the Policyholder under
the annuity contract), plus 3.5% interest. (Id. at 4 ¶ 3.) Phoenix was expressly prohibited from
imposing withdrawal or surrender charges or fees on annuity contracts rescinded pursuant to the
Assurance of Discontinuance. (Id.) Policyholders who accepted Phoenix’s rescission offers
executed a Settlement Agreement and Release with Phoenix, in the form of Exhibit E to the
Assurance of Discontinuance. (Id. at 25 -26.)5
Pursuant to these Settlement Agreements,
Phoenix agreed to “rescind” the annuity issued to the policyholder executing the agreement, and
the annuity was “deemed surrendered, terminated, null, void, and without force and effect as of
that date.” (Id. at 25 ¶ 1.)
Pursuant to Assurance of Discontinuance, and following the claims-review process it
established, Phoenix cancelled 222 annuities, returning all premiums plus interest to the affected
policyholders. (Ex. 10 ¶ 3 to Motion.) Phoenix also provided additional relief on 12 annuities
that were rescinded prior to Phoenix entering the Assurance of Discontinuance with the State of
Minnesota, and other relief on 14 annuities that were not rescinded. (Id.) In total, pursuant to
the terms of the Assurance of Discontinuance, Phoenix returned $23,015,074.57 in premiums
and $3,047,538.68 in interest to policyholders. (Id.) Both Wealthmark and Friendshuh had
Policyholders whose annuities had been rescinded prior to the Assurance of Discontinuance
executed a separate Settlement and Release Agreement, attached as Exhibit F to the Assurance of
Discontinuance. (Id. at 27-28.)
received commissions on these sales, prior to their cancellation pursuant to the Assurance of
On or about February 4, 2016, Phoenix served a demand letter upon Friendshuh for a
return of commissions it contends he owed pursuant to the Repayment-of-Commissions
provision of his contract with Phoenix. (See Ex. 4 to Motion; Ex 1 ¶ 4 to Motion.)
Approximately one month later, because Friendshuh failed to respond to the demand, Phoenix
served a demand letter upon Wealthmark, demanding that Wealthmark repay commissions paid
to both Wealthmark and Friendshuh on all of the rescinded annuities pursuant to the Repaymentof-Commissions and indemnity provisions in the parties’ Distributor Agreement. (See Ex. 5 to
Motion; Ex. 1 ¶ 5 to Motion.) In the demand, Phoenix also notified Wealthmark that unless it
could collect the commissions from Friendshuh within thirty days, Phoenix would exercise its
right to transfer the indebtedness to Wealthmark. (Ex. 5 to Motion.) On May 27, 2016, Phoenix
notified Wealthmark that it had been unsuccessful in its attempt to collect the debt directly from
Friendshuh and was therefore exercising its rights to transfer the debt to Wealthmark. (Ex. 6 to
Phoenix then demanded that Wealthmark satisfy its unpaid debt as well as the
transferred Friendshuh debt. (Id.)
Rather than respond directly to Phoenix’s demands, Wealthmark filed suit in Bexar
County District Court [#1-1], alleging that Phoenix negligently handled the sales of its products
in Minnesota. Wealthmark also sought a declaratory judgment that Phoenix is not entitled to
repayment of the commissions on the annuities at issue because Phoenix allegedly “surrendered”
the annuities more than twelve (12) months after issuance. Phoenix removed the case on the
basis of diversity jurisdiction [#1] and counterclaimed for breach of contract [#3], alleging that
Wealthmark breached the Distributor Agreement in the following ways: (1) failing to repay the
commissions earned on the annuities affected by the Assurance of Discontinuance; (2) failing to
pay Phoenix on Friendshuh’s transferred debt; (3) failing to ensure Friendshuh’s compliance
with applicable law concerning annuity sales; and (4) failing to indemnify Phoenix for all losses
it incurred on the annuities sold by Friendshuh. On October 17, 2016, Wealthmark filed a thirdparty complaint against Friendshuh for breach of contract and for indemnity and contribution.
Wealthmark seeks to recover from Friendshuh any and all sums awarded to Phoenix against
Wealthmark in this litigation to the extent that Friendshuh was in whole or in part responsible for
such damages [#31]. To date, neither Friendshuh nor Wealthmark has repaid any commissions
on the annuities rescinded pursuant to the Assurance of Discontinuance. (See Ex. 10 ¶ 3 to
Phoenix’s Motion does not address all of the claims described in the previous paragraph.
Instead, Phoenix is only requesting summary judgment on the following issues: (1) Wealthmark
is not entitled to a declaratory judgment that is not required to repay the commissions affected by
the Assurance of Discontinuance; (2) Phoenix is entitled to summary judgment that Wealthmark
breached the Repayment-of-Commissions provision in the Distributor Agreement; (3) Phoenix is
entitled to summary judgment on Wealthmark’s negligence claim because it is barred by the
economic loss doctrine; and (4) Phoenix is entitled to summary judgment that Wealthmark
cannot recover for reputational harm on a negligence claim.
Summary Judgment Standard
Summary judgment is appropriate under Rule 56 of the Federal Rules of Civil Procedure
only “if the pleadings, depositions, answers to interrogatories, and admissions on file, together
with the affidavits, if any, show that there is no genuine issue as to any material fact and that the
moving party is entitled to a judgment as a matter of law.” Celotex Corp. v. Catrett, 477 U.S.
317, 322 (1986); see also FED. R. CIV. P. 56(c). A dispute is genuine only if the evidence is such
that a reasonable jury could return a verdict for the nonmoving party. Anderson v. Liberty
Lobby, Inc., 477 U.S. 242, 248 (1986).
The party moving for summary judgment bears the initial burden of “informing the
district court of the basis for its motion, and identifying those portions of [the record] which it
believes demonstrate the absence of a genuine issue of material fact.” Catrett, 477 U.S. at 323.
Once the movant carries its burden, the burden shifts to the nonmoving party to establish the
existence of a genuine issue for trial. Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp.,
475 U.S. 574, 587 (1986); Wise v. E.I. Dupont de Nemours & Co., 58 F.3d 193, 195 (5th Cir.
1995). The non-movant must respond to the motion by setting forth particular facts indicating
that there is a genuine issue for trial. Miss. River Basin Alliance v. Westphal, 230 F.3d 170, 174
(5th Cir. 2000). The parties may satisfy their respective burdens by tendering depositions,
affidavits, and other competent evidence. Topalian v. Ehrman, 954 F.2d 1125, 1131 (5th Cir.
1992). The Court will view the summary judgment evidence in the light most favorable to the
non-movant. Rosado v. Deters, 5 F.3d 119, 123 (5th Cir. 1993).
“After the non-movant has been given the opportunity to raise a genuine factual issue, if
no reasonable juror could find for the non-movant, summary judgment will be granted.”
Westphal, 230 F.3d at 174. However, if the party moving for summary judgment fails to satisfy
its initial burden of demonstrating the absence of a genuine issue of material fact, the motion
must be denied, regardless of the nonmovant’s response. Little v. Liquid Air Corp., 37 F.3d
1069, 1075 (5th Cir.1994) (en banc). A party can move for summary judgment on a part of a
claim or defense or on a certain issue of law. Norton v. Assisted Living Concepts, Inc., 786 F.
Supp. 2d, 1173, 1187 (E.D. Tex. 2011). The award of a partial summary judgment is a ruling
that certain issues are deemed established for trial. FDIC v. Massingill, 24 F.3d 768, 774 (5th
Cir. 1994), supplemented, 30 F.3d 601 (5th Cir. 1994).
The District Court should grant Phoenix’s motion for partial summary judgment. First,
Phoenix has proved the breach element of its counterclaim as a matter of law (and defeated
Wealthmark’s request for declaratory relief) because Phoenix rescinded—and did not
surrender— the annuities at issue in this case and, therefore, Wealthmark breached unambiguous
terms in the Repayment-of Commissions provision.
Phoenix is also entitled to summary
judgment on Wealthmark’s negligence claim because it has proved as matter of law that the
economic loss doctrine precludes any negligence claim that arises out of the contractual duties
between the parties, and Wealthmark has not provided any authority or evidence to support an
argument that the duty it is alleging Phoenix violated had its origin in anything other than
A. Wealthmark breached the Repayment-of-Commissions provision as a matter of law.
Phoenix seeks summary judgment on Wealthmark’s request for a declaratory judgment
that Phoenix is not entitled to the return of any commissions. The flip side of the same coin,
Phoenix also seeks partial summary judgment as to liability on its breach of contract
counterclaim, arguing that Wealthmark is contractually obligated under the Repayment-ofCommissions provision of the Distributor Agreement to repay commissions on all annuities
affected by the Assurance of Discontinuance. Wealthmark opposes summary judgment, arguing
that the words “deemed surrendered” contained in Exhibit E to the Assurance of Discontinuance
reveal that the annuities at issue were “surrendered”—not rescinded—and therefore Wealthmark
is absolved of all liability pursuant to footnote (e) in the Compensation Schedules in the
Both Wealthmark’s request for declaratory judgment and Phoenix’s breach of contract
counterclaim require the Court to interpret the same contracts. Under Texas law 6, “the burden of
proof in a declaratory judgment [action] . . . is not controlled by the position of the parties on the
docket as plaintiff or defendant.” Singh v. Bajwa, No. CIV.A.3:08-CV-0383-D, 2008 WL
3850545, at *1 (N.D. Tex. Aug. 19, 2008) (quoting Harkins v. Crews, 907 S.W.2d 51, 58 (Tex.
App.—San Antonio 1995, writ denied)). Rather, “the party asserting the affirmative of the
controlling issues [is the one who] bears the burden.” Id. (quoting Myrad Props., Inc. v. LaSalle
Bank Nat’l Ass’n, 252 S.W.3d 605, 625-26 (Tex. App.—Austin 2008, pet. filed)). Because
Phoenix is the party asserting the claim for breach of contract, it bears the burden at trial and on
summary judgment of proving the existence of each element of its breach of contract
counterclaim as a matter of law. Id.
The elements of a breach of contract claim are (1) the existence of a valid contract; (2)
performance or tendered performance by the party asserting the claim; (3) breach of the contract
by the party against whom the claim is brought; and (4) damages sustained as a result of the
breach. Smith Int’l Inc. v. Egle Grp., LLC, 490 F.3d 380, 387 (5th Cir. 2007) (citing Valero
Mktg. & Supply Co. v. Kalama Int’l, L.L.C., 51 S.W.3d 345, 351 (Tex. App.—Houston [1st]
2001, no pet.). The parties do not dispute that the Distributor Agreement is a valid contract, that
Phoenix tendered performance in the form of commissions on sales, or that Phoenix sustained
Because this is a diversity case, the Court must look to Texas law to determine who has the
burden of affirmatively proving or disproving the claims in this case. See Ideal Mut. Ins. Co. v.
Last Days Evangelical Ass’n, 783 F.2d 1234, 1240 (5th Cir. 1986) (holding that the issue of
burden proof is substantive rather than procedural and is therefore governed by the forum state’s
some amount of damages if Wealthmark breached the contract. (See Resp. at 2 ¶ 3, at 5 ¶ 2; Ex.
10 ¶ 3 to Motion.) Accordingly, the sole issue is whether Wealthmark breached the Repaymentof-Commissions provision of the Distributor Agreement by failing to repay the commissions
Wealthmark and Friendshuh had been paid for the annuities cancelled pursuant to the Assurance
of Discontinuance. If the terms of the contracts are plain and unambiguous, the construction of
the contracts and its legal effect are questions of law that the Court can decide on summary
judgment. See Phillips v. Union Bankers Ins. Co., 812 S.W.2d 616, 618 (Tex. App.—Dallas
1991, no writ).
1. The Distributor Agreement
The Repayment-of-Commissions provision of the Distributor Agreement unambiguously
requires repayment of rescinded annuities. In construing a written contract, a court seeks to
ascertain the “true intent” of the parties as expressed in the instrument. Nat’l Union Fire Ins. Co.
v. CBI Indus., Inc., 907 S.W.2d 517, 520 (Tex. 1995); Coker v. Coker, 650 S.W.2d 391, 393
(Tex. 1983). To determine the parties’ “true intent,” courts must, applying rules of contract
construction and interpretation, first determine whether there is any ambiguity in the contract.
Gulf Ins. Co. v. Burns Motors, Inc., 22 S.W.3d 417, 423 (Tex. 2000); DeWitt Cty. Elec. Coop. v.
Parks, 1 S.W.3d 96, 100 (Tex. 1999). If a contract can be given a “certain or definite legal
meaning or interpretation,” then it is unambiguous, and the court will construe the contract as a
matter of law, looking only to the “four corners” of the agreement. Barnard Const. Co., Inc. v.
City of Lubbock, 457 F.3d 425, 428 (5th Cir. 2006); Tex. v. Am. Tobacco Co., 463 F.3d 399, 407
(5th Cir. 2006). Where a contract is unambiguous, extrinsic evidence—evidence submitted for
the purpose of showing what the parties intended—is inadmissible to contradict, vary, or add to
the terms the contract. Am. Tobacco, 463 F.3d at 407; In re H.E. Butt Grocery Co., 17 S.W.3d
360, 369 (Tex. App.—Houston [14th Dist.] 2000, orig. proceeding).
The Repayment-of-Commissions provision unambiguously requires Wealthmark to
promptly repay all compensation (including commissions) paid by Phoenix (whether or not
Wealthmark paid a portion of the compensation to its Representative or Sub-producer), under
various different circumstances, including “[s]hould Phoenix for any reason refund or return any
amount of any premium payment made on a Phoenix Product.” (See Ex. 11 to Motion at 8-9.)
This same provision permits Phoenix to transfer to Wealthmark any indebtedness owed by
Wealthmark’s Representatives “due to cancellation, refunds or any other adjustments or charges
against [the] Representative’s commissions,” provided Phoenix first attempts to collect the
amount due directly from the Representative.
But the Repayment-of-Commissions
provision is explicitly contingent on the Compensation Schedules. Pursuant to footnote (e) of
the Compensation Schedules, Wealthmark is not obligated to return 100% of commissions
earned on contracts “full[y] or partial[ly] surrender[ed]” more than six months after issuance.
(Id. at 12) (emphasis added). Instead, Wealthmark is subject to a “50% charge back . . . upon a
full or partial surrender of the contract in months 7-12.” (Id.)7
Thus, Phoenix is entitled to summary judgment on Wealthmark’s request for declaratory
judgment and partial summary judgment on the liability portion8 of its breach of contract
counterclaim if: (1) it has proved that no genuine issue of material fact exists that it refunded or
returned any amount of any premium payment made on the annuities affected by the Assurance
of Discontinuance, and (2) that the refunds did not constitute surrenders.
The contract does not explicitly address whether Wealthmark must repay any portion of the
commissions where the contract is surrendered more than twelve months after issuance.
Although Wealthmark’s position is that no repayment is due under such circumstances, the Court
need not reach this issue for purposes of this report and recommendation.
The amount of damages caused by this breach is a fact issue Phoenix intends to raise at trial.
(See Motion at 2.)
2. The Assurance of Discontinuance
The Assurance of Discontinuance unambiguously requires rescission—not surrender—of
the affected annuities. The Assurance of Discontinuance unambiguously refers to Phoenix’s
obligation to rescind annuities that were the result of unsuitable sales or that resulted from a
material misrepresentation, upon the policyholder’s request.
In fact, the Assurance of
Discontinuance uses the term “rescind” (or some variation thereof) nearly twenty different times.
Rescission “puts an end to a contract . . . plac[ing] the parties in the position that they would
have occupied if no such contract had ever been made.” In re SeaQuest Diving, LP, 579 F.3d
411, 419 (5th Cir. 2009). Thus, pursuant to the Repayment-of-Commissions provision of the
Distributor Agreement, Wealthmark was contractually obligated to promptly repay all
compensation (including commissions) paid by Phoenix for these rescinded annuities.
Wealthmark, however, claims it is not liable to repay the commissions, focusing on the
single use of the term “surrendered” in the Settlement and Release Agreement, attached as
Exhibit E to the Assurance of Discontinuance. (Resp. at 3-4.) According to Wealthmark, this
language reveals that the annuities cancelled pursuant to the Settlement and Release Agreement
were “surrendered” as opposed to rescinded. Citing footnote (e) in the Compensation Schedule,
Wealthmark argues that it has no obligation to repay commissions on annuities surrendered more
than twelve months after issuance. Wealthmark’s position is not persuasive.
First, Wealthmark urges the Court to give controlling effect to two words, “deemed
surrendered,” and to take them out of context, which would violate basic rules of contract
construction. In construing an unambiguous contract such as the Assurance of Discontinuance,
“courts should examine and consider the entire writing in an effort to harmonize and give effect
to all the provisions of the contract so that none will be rendered meaningless.” Coker, 650
S.W.2d at 393 (emphasis in original). In other words, “[n]o single provision taken alone will be
given controlling effect; rather, all the provisions must be considered with reference to the whole
instrument.” Id. see also Calpine Producer Servs., L.P. v. Wiser Oil Co., 169 S.W.3d 783, 787
(Tex. App.—Dallas 2005, no pet.) (pursuant to the “Four Corners Rule,” “the intention of the
parties is to be ascertained from the instrument as a whole and not from isolated parts thereof.”)
Further, “[i]n harmonizing these provisions, terms stated earlier in an agreement must be favored
over subsequent terms.” Coker, 650 S.W.3d at 393.
Wealthmark fails to explain how its construction of the two-word phrase could be
harmonized with the Assurance of Discontinuance’s repeated use of the terms “rescind” and
“rescission.” Rescission and surrender are distinct legal concepts. Although both rescission and
surrender result in a contract’s termination, rescission results in restoring both parties to the
status quo (i.e., return of all premiums along with interest without the imposition of fees)
whereas surrender simply entitles a party to the cash surrender value of the policy. Baty v.
ProTech Ins. Agency, 63 S.W.3d 841, 855 (Tex. App.—Houston [14th Dist.] 2001, pet. denied)
(citing Sid Richardson Carbon & Gasoline Co. v. Interenergy Res., Ltd., 99 F.3d 746, 754 (5th
Cir. 1996) (“Under Texas law, parties may mutually agree to ‘rescind’ a contract, restoring the
status quo ante.”)); Green v. Am. Nat’l Ins. Co., 452 S.W.2d 1, 3, (Tex. Civ. App.—San Antonio
1970, no writ). In fact, even if Phoenix had never entered the Assurance of Discontinuance, its
policyholders were contractually permitted to unilaterally surrender their annuity contracts upon
written request in exchange for a “Cash Surrender Value” calculated as the annuity’s
Accumulation Value adjusted by any applicable Market Value Adjustment less the applicable
surrender charges and taxes. (See Ex. 10 ¶ 4 and Ex. 12 at 5 to Motion.) Wealthmark’s
proposed construction therefore means that the policyholders would have gained no rights under
the Assurance of Discontinuance that they did not already have.
It is possible to harmonize “deemed surrendered” with the other terms of the Assurance
of Discontinuance. “Surrendered” does not stand alone; it is qualified by the word “deemed.”
The best reading of the phrase “deemed surrendered” in context of the rest of the contract is that
if the policyholder accepts the rescission, the annuity would be regarded as surrendered so that
the policyholder would have no continuing rights in the annuity, including the right to surrender
for cash value. “Deemed surrendered” is followed by the words “terminated, null, void, and
without force and effect,” which clarifies the effect of the rescission—cancellation of the annuity
3. The language in the Settlement and Release Agreement does not transform
Phoenix’s rescission of the annuities into surrenders.
Moreover, the uncontroverted evidence in the summary judgment record indicates that
Phoenix, in fact, rescinded 234 annuities. (See Ex. 10 ¶ 3 to Motion.) Therefore, even if the
contract could be construed to permit the policyholders to surrender or rescind their annuities,
they did not. Because the annuities were rescinded, pursuant to the Repayment-of-Commissions
provision of the Distributor Agreement, Wealthmark is obligated to repay the commissions.
B. Wealthmark’s claim for negligence is barred by the economic-loss doctrine.
Phoenix is entitled to summary judgment on Wealthmark’s claim for negligence, which is
barred by the economic-loss doctrine. The “economic loss rule generally precludes recovery in
tort for economic losses resulting from a party’s failure to perform under a contract when the
harm consists only of the economic loss of a contractual expectancy.” Chapman Custom Homes,
Inc. v. Dallas Plumbing Co., 445 S.W.3d 716, 718 (Tex. 2014). But the rule “does not bar all
tort claims arising out of a contractual setting.” Id. “Thus, a party states a tort claim when the
duty allegedly breached is independent of the contractual undertaking and the harm suffered is
not merely the economic loss of a contractual benefit.” Id. (economic-loss rule did not bar suit
against plumber because the plumber’s duty not to damage the house was independent of any
obligation undertaken in his plumbing subcontract with the builder, and the damages allegedly
caused by the breach of that duty extended beyond the economic loss of any anticipated benefit
under the plumbing contract).
The gravamen of Wealthmark’s negligence claim against Phoenix is that Phoenix
negligently handled the sale of its own products in Minnesota in terms of how the company
interacted with and managed its relationship with Friendshuh. (Compl. ¶ 23; Resp. at 5.) The
damages Wealthmark seeks for this negligence claim include lost revenue and reimbursement for
expenses, costs incurred in marketing and promoting Phoenix products, damages for reputational
harm9, and punitive damages. (Ex. 7 at 4 to Motion & Ex. 8 at 4 to Motion.)
The Distributor Agreement governs the parties’ rights and obligations with respect to
sales of Phoenix’s products by Wealthmark and any of its Representatives (including
Friendshuh). To the extent Wealthmark alleges that it was harmed by Phoenix’s breach of the
contractual obligations the Distributor Agreement imposes on Phoenix, the economic-loss rule
bars Wealthmark’s negligence claim for economic damages. Neither Plaintiffs’ live pleading nor
their response to Defendants’ summary judgment motion identifies any non-contractual duty that
Phoenix owed Plaintiffs. Although Wealthmark argues, in general terms, that Phoenix owed
Wealthmark contends that it suffered reputational harm in the insurance community from being
associated with a company whose alleged practices led to an attorney general investigation and
the return of millions of dollars in premiums. (See Compl. ¶¶ 19-23.) Phoenix has moved for
partial summary judgment on this issue, arguing that reputational damages are not a recoverable
on claims for negligence. Because the undersigned recommends that the District Court grant
summary judgment on Wealthmark’s negligence claim, it need not reach Phoenix’s argument
that damages for reputational harm are never recoverable on a negligence claim.
other duties, Wealthmark has failed to identify any specific statutory, common-law, or other
source of such a duty. Indeed, Wealthmark admits that the only other duty governing the sale of
Phoenix’s products in Minnesota and Phoenix’s interactions with Friendshuh is set forth in
another contract—the Producer Agreement— executed by Phoenix and Friendshuh. (See Resp.
at 5 ¶ 3.)
This is not a situation where Phoenix’s conduct—the allegedly negligent mishandling of
its relationship with a sales representative—could have resulted in its liability to Wealthmark
even in the absence of a contractual relationship between Phoenix and Wealthmark. Cf. Sw. Bell
Tel. Co. v. DeLanney, 809 S.W.2d 493, 494 (Tex. 1991) (“If the defendant’s conduct—such as
negligently burning down a house—would give rise to liability independent of the fact that a
contract exists between the parties, the plaintiff’s claim may also sound in tort. Conversely, if the
defendant’s conduct—such as failing to publish an advertisement—would give rise to liability
only because it breaches the parties’ agreement, the plaintiff’s claim ordinarily sounds only in
contract.”); see also Chapman, 224 S.W.3d at 718 (citing DeLanney with approval for its
reasoning). Here, the only duties that Phoenix owes Wealthmark would arise out of the parties’
contractual relationship. Thus, Defendants are entitled to summary judgment on Wealthmark’s
negligence claim pursuant to the economic-loss rule.
For the reasons discussed above, the undersigned recommends that the District Court
GRANT Phoenix’s Motion for Partial Summary Judgment [#44] as follows:
(1) Phoenix should be granted partial summary judgment on its breach of contract
counterclaim for the return of commissions pursuant to the Repayment-of-
Commissions provision of the Distributor Agreement, and the amount of
damages owed for the breach is an issue of fact reserved for trial;
(2) Phoenix should be granted summary judgment that Wealthmark’s request for
a declaratory judgment is denied; and,
(3) Phoenix should be granted summary judgment on Wealthmark’s negligence
IT IS FURTHER ORDERED that Plaintiffs’ Opposed Motion for Leave to Supplement
Response to Defendants’ Motion for Partial Summary Judgment [#64] is GRANTED.
Instructions for Service and Notice of Right to Object/Appeal
The United States District Clerk shall serve a copy of this report and recommendation on
all parties by either (1) electronic transmittal to all parties represented by attorneys registered as
a “filing user” with the clerk of court, or (2) by mailing a copy to those not registered by certified
mail, return receipt requested. Written objections to this report and recommendation must be
filed within fourteen (14) days after being served with a copy of same, unless this time period is
modified by the district court. 28 U.S.C. § 636(b)(1); FED. R. CIV. P. 72(b). The party shall file
the objections with the clerk of the court, and serve the objections on all other parties. A party
filing objections must specifically identify those findings, conclusions or recommendations to
which objections are being made and the basis for such objections; the district court need not
consider frivolous, conclusive or general objections. A party’s failure to file written objections
to the proposed findings, conclusions and recommendations contained in this report shall bar the
party from a de novo determination by the district court. Thomas v. Arn, 474 U.S. 140, 149–52
(1985); Acuña v. Brown & Root, Inc., 200 F.3d 335, 340 (5th Cir. 2000). Additionally, failure to
file timely written objections to the proposed findings, conclusions and recommendations
contained in this report and recommendation shall bar the aggrieved party, except upon grounds
of plain error, from attacking on appeal the unobjected-to proposed factual findings and legal
conclusions accepted by the district court. Douglass v. United Servs. Auto. Ass’n, 79 F.3d 1415,
1428–29 (5th Cir. 1996) (en banc).
SIGNED this 15th day of August, 2017.
ELIZABETH S. ("BETSY") CHESTNEY
U.S. MAGISTRATE JUDGE
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