Kolbe & Kolbe Millwork Co., Inc. et al v. Manson Insurance Agency, Inc. et al

Filing 49

ORDER granting in part and denying in part 31 Motion to Dismiss. Signed by District Judge William M. Conley on 10/25/13. (rep)

IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF WISCONSIN

KOLBE & KOLBE MILLWORK, CO., INC.,
AWARD HARDWOOD FLOORS, LLP,
SUPERIOR MILLING, INC., and
TRUSTOR COATINGS, LLP,
on behalf of themselves and other similarly
situated individuals and/or entities,
Plaintiffs,

OPINION AND ORDER

v.
12-cv-00879-wmc
MANSON INSURANCE AGENCY, INC.,
ST. PAUL FIRE & MARINE INSURANCE COMPANY,
THE TRAVELERS INDEMNITY COMPANY,
DAVID R. SCHOLFIELD,
TIMOTHY MATHWICH,
ABC INSURANCE COMPANY,
XYZ INSURANCE COMPANY,
Defendants.

For years, Manson Insurance Agency sold insurance throughout Wisconsin on
behalf of national insurers, including The Travelers Indemnity Company and St. Paul
Fire & Marine Insurance Company.

Manson also collected premium payments and

distributed rebate checks for national insurers, in an arrangement known as ―agency
billing.‖

Unfortunately, mediating these financial transactions between clients and

insurers created an opportunity for Manson executives to embezzle, and embezzle they
did -- ultimately diverting several million dollars to their own use.

This lawsuit is a

putative class action by the insureds to recover their money, naming as defendants not
only Manson and its guilty executives, but also Travelers and St. Paul Fire & Marine.

Plaintiffs seek to hold the national insurers directly liable for their negligence in
supervising Manson, as well as indirectly liable on an agency theory. Travelers and St.
Paul Fire & Marine have responded with a joint motion to dismiss, contending that the
alleged facts form no basis for direct or derivative liability. The court agrees with this
argument in large part, but finds that the complaint does state a viable cause of action
against the national insurers with respect to Manson‘s acts of fraud accomplished under
the guise of apparent agency authority. As explained in further detail below, the motion
to dismiss will be denied as to that claim, but granted in all other respects.

BACKGROUND1
Until 2009, Manson Insurance Agency, Inc. (―Manson Insurance‖) sold personal
and commercial insurance policies in Wisconsin as an authorized agent of several
national insurance companies, including defendants St. Paul Fire & Marine Insurance
Company and Travelers Indemnity Company (who for reasons of simplicity will be
referred to collectively as ―Travelers‖).

Manson Insurance had the authority to

underwrite, bind and issue insurance policies on Travelers‘ behalf, and to conduct all
necessary functions incidental to this authority. Under what is known as ―agency billing‖
practice, Manson Insurance also acted as Travelers‘ authorized billing agent for existing
policies, collecting premiums, disbursing credits and rebates, and acting as a
communications intermediary on all billing matters. Travelers retained the authority to

1

For the purposes of this motion, the court will construe all of plaintiffs‘ factual
allegations as true and draw all reasonable inferences in their favor. Fed. R. Civ. P.
12(b)(6); Santiago v. Walls, 599 F.3d 749, 756 (7th Cir. 2010).
2

control Manson Insurance‘s collection and distribution duties, along with the authority
to audit, monitor and supervise its activities.
At some point, David Scholfield, Timothy Mathwich and other top Manson
executives (collectively, ―Manson‖) began to skim from this stream of money flowing
between the policyholders and national insurers. Their fraudulent scheme had two parts:
(1) a ―premium add-on‖ element, in which they sent inflated premium invoices to clients,
and (2) a ―credit and rebate conversion‖ element, in which they cashed rebate checks
from Travelers meant for clients. To facilitate the latter theft, Manson set up a P.O. Box
in Wausau, Wisconsin, as a centralized address for Travelers‘ customer accounts.
Travelers was aware that Manson Insurance was collecting mail at a single P.O. Box, and
that it had authority to communicate with customers regarding financial matters, but did
not further investigate its books or billing practices.

The executives were eventually

caught by the FBI, leading to their criminal prosecution and ultimately to this lawsuit.

OPINION
Dismissal pursuant to Rule 12(b)(6) is proper ―when the allegations in a
complaint, however true, could not raise a claim of entitlement to relief.‖ Bell Atl. Corp.
v. Twombly, 550 U.S. 544, 558 (2007). To survive a motion to dismiss, a complaint must
―plead[] factual content that allows the court to draw the reasonable inference that the
defendant is liable for the misconduct alleged.‖

Ashcroft v. Iqbal, 556 U.S. 662, 678

(2009). The plaintiff need not provide detailed factual allegations, but must provide
―enough facts to raise [the claim] above the level of mere speculation.‖ Riley v. Vilsack,
3

665 F. Supp. 2d 994, 997 (W.D. Wis. 2009). In reviewing the sufficiency of a complaint
under the plausibility standard, the court will accept the well-pleaded facts in the
complaint as true, but ―need not accept as true legal conclusions, or threadbare recitals of
the elements of a cause of action, supported by mere conclusory statements.‖ Brooks v.
Ross, 578 F.3d 574, 581 (7th Cir. 2009).
Plaintiffs have presented a six-count complaint, consisting of claims for: (1)
common law conversion; (2) negligence on the part of Travelers in supervising and
monitoring Manson;2 (3) civil liability under Wis. Stats. § 895.446 for the crimes of theft
and unauthorized use of identifying information and documents; (4) common law
intentional misrepresentation; (5) common law negligent misrepresentation; and (6)
common law strict liability misrepresentation.
Mathwich, Scholfield and Manson Insurance Company (again, collectively
―Manson‖) have defaulted, and for purposes of this opinion there is no dispute that the
complaint alleges viable claims as to those defendants. Travelers‘ liability, on the other
hand, is the subject of vigorous debate. The allegations show that Manson acted outside
the scope of its agency relationship with Travelers when it committed the acts of theft
and fraud, and give no indication that Travelers was negligent in supervising and
monitoring Manson at the time the torts were committed. Therefore, Count 2 must be
dismissed entirely, and Counts 1 and 3-6 must be dismissed insofar as they rely on a
theory of respondeat superior for Manson‘s actions. Even so, Travelers does not get away
completely unscathed: because Manson was acting as an apparent agent of Travelers when
2

Although Count 2 is directed at all defendants, plaintiffs have clarified in their brief
that it is meant to apply only to Travelers. (Dkt. #40, at 32-33.)
4

it defrauded plaintiffs, Travelers may be liable on an apparent agency theory for
Manson‘s tortious ―premium add-on‖ scheme under Counts 1 and 4-6.

I. Travelers’ Derivative Liability for Manson’s Torts (Counts 1 & 4-6)
Under Wisconsin common law, agency doctrine allows a person to bind and be
bound by the actions of another designated to act on his or her behalf. Troy Co. v. Perry,
68 Wis.2d 170, 174, 228 N.W.2d 169, 171 (1975) (quoting Restatement (Second) of
Agency § 1(1) (1958)). The two necessary actors are a ―principal‖ and an ―agent,‖ the
latter of which is defined as ―a person authorized by another to act on his account and
under his control.‖ Arsand v. City of Franklin, 83 Wis.2d 40, 48, 264 N.W.2d 579, 583
(Wis. 1978).
―Agents‖ are further divided into (1) ―servants‖ (agents for purposes of performing
physical tasks on behalf of ―masters‖); and (2) ―non-servant‖ agents (agents for purposes
of contracting or other non-physical tasks). Id. at 49-50. When a master/servant agency
relationship exists, derivative liability for an agent‘s acts is also known by the Latin
phrase respondeat superior.

Id. at 47-48.

―Under the doctrine of respondeat superior, a

master is subject to liability for the tortious acts of his or her servant.‖ Pamperin v. Trinity
Mem'l Hosp., 144 Wis.2d 188, 198, 423 N.W.2d 848, 852 (1988). The related doctrine
of ―apparent‖ agency operates to bind a party to the actions of a person he or she has
caused third parties to reasonably believe is the party‘s agent, even when no agency
relationship actually exists or when the agent is acting outside the scope of any actual
agency authority. See Restatement (Second) of Agency §§ 159, 261; Schaefer v. Dudarenke,
5

89 Wis.2d 483, 489-90, 278 N.W.2d 844, 847 (Wis. 1979). Seeking to hold Travelers
liable for the Manson‘s torts, plaintiffs argue that Manson was both servant and an
apparent agent of Travelers.

A. Respondeat Superior
A master‘s respondeat superior liability extends to acts of servants undertaken in the
course of the agency relationship, which is defined by ―whether the servant has stepped
aside from the business of his principal to accomplish an independent purpose of his
own, or whether he was actuated by an intent to carry out his employment and to serve
his master.‖

Linden v. City Car Co., 300 N.W. 925, 926 (Wis. 1941); see also

Restatement (Second) of Agency § 228 (―Conduct of a servant is within the scope of
employment if, but only if: . . . (c) it is actuated, at least in part, by a purpose to serve the
master . . . .‖).
Travelers acknowledges that Manson was its agent for the purposes of selling
insurance and for billing customers, including the tasks of invoicing and transferring
payments under the ―agency billing‖ relationship. (Def‘s Br., dkt. #32, at 13 n.2.) But
Travelers argues -- and the court agrees -- that even reading the complaint in the light
most favorable to plaintiffs, Manson was not acting within the scope of that agency
relationship when it overbilled customers and stole their rebate checks. None of the
allegations suggest that this stolen money was ever passed on to Travelers, or that the
Manson executives were motivated in their scheme by a desire to advance Travelers‘
business. Indeed, the Manson executives were arguably stealing from Travelers itself, if
6

not directly, then at least by destroying the value Travelers sought to deliver to its
customers and by undermining customer good will.
In response, plaintiffs point to the portion of the complaint alleging that
Mathwich and Scholfied ―[a]t all times acted within the scope of its agency, on behalf of
Travelers.‖

(Am. Compl. ¶41.)

This is only a legal conclusion, which is no longer

adequate to meet the pleading standards imposed by Fed. R. Civ. P. 8(a) after Twombly
and Iqbal, even if it might arguably have been before. Plaintiffs‘ blunt allegation that the
Manson defendants were acting to further Travelers‘ interests shares the very weakness
criticized in Iqbal -- it attributes a facially implausible state of mind to a defendant
without any support from concrete factual allegations. See Iqbal, 556 U.S. at 680-81
(holding that a court is not required to accept legal conclusions cast in the form of factual
allegations if those conclusions cannot reasonably be drawn from the facts alleged).
Indeed, it is contradicted by the specific facts alleged: Manson‘s blatant thefts at issue
were in their interest, not Travelers‘.
Contrary to plaintiffs‘ suggestion, the existence of some master/servant relationship
between Travelers and Manson does not provide a basis to assume that Manson‘s
harmful acts were taken in furtherance of the agency relationship. See Heritage Christian
Schools, Inc. v. ING N. Am. Ins. Corp., 851 F. Supp. 2d 1154, 1159 (E.D. Wis. 2012)
(―[N]o principle of agency law of which I am aware imputes to the principal liability for
unlawful acts that do not benefit the principal simply because the agent also engages in
similar, lawful acts that do.‖). In this respect, the factual allegations in this case are
comparable to Korntved v. Advanced Healthcare, S.C., 2005 WI App 197, 286 Wis.2d 499,
7

704 N.W.2d 597 (2005), an unsuccessful lawsuit against a medical laboratory for the
torts of its lab technician employee. The technician in Korntved abused her work access
to a medical records database, viewing private records for her own purposes in violation
of the laboratory‘s internal policies and Wisconsin privacy laws. Id. at ¶¶2-4. Although
the misbehaving employee was unquestionably a ―servant‖ of her employer in the sense
that the employer had a right to control her actions on the job, including her access to
the database, the Korntved court found the employer not liable as a matter of law because
the employee‘s actions were outside the scope of this master/servant relationship -- her
motives were entirely personal. The court might just as easily have been speaking of this
case when it observed that the employer ―was damaged by [the employee‘s] indiscretions
. . . . [the employer] did not benefit from [her] actions nor did [it] authorize such
actions, [so it] should not be held liable for her willful, intentional and criminal actions.‖
Id. at ¶3.

B. Apparent Agency
The question is a much closer one when it comes to application of the doctrine of
apparent authority or apparent agency on the facts alleged here. Under this doctrine, ―a
principal may be held liable for the acts of one who reasonably appears to a third person,
through acts by the principal or acts by the agent if the principal had knowledge of those
acts and acquiesced in them, to be authorized to act as an agent for the principal.‖
Pamperin, 144 Wis.2d at 203, 423 N.W.2d at 853-54. Apparent agency is commonly
applied in contract disputes, but it appears a less-than-firmly settled question under
8

Wisconsin law whether the doctrine extends to tort claims. Because the greater weight of
authority suggests it is available for tort claims, the court concludes that the apparent
authority bestowed upon Manson by Travelers in the eyes of plaintiffs means that
Travelers may be liable for Manson‘s frauds, at least as alleged.
i.

Availability of the Doctrine

The parties strenuously disagree over the threshold question of whether it is
possible to apply the doctrine of apparent authority to Wisconsin tort claims.

This

disagreement is understandable, given seemingly contradictory treatment of this issue by
the Wisconsin Supreme Court.

Moreover, while the Second Restatement of Agency

supports the use of the ―apparent agency‖ doctrine in tort cases, see Restatement
(Second) of Agency §§ 261-67, there are few examples of the doctrine being applied -- or
even discussed -- in recent tort cases under Wisconsin law.
Plaintiffs contend that there is no need to settle the broad question of whether the
apparent authority applies to all Wisconsin tort claims because the state legislature has
already said that the doctrine extends to claims against insurance companies.
Specifically, plaintiffs cite to Wis. Stat. § 628.40, which states that ―[e]very insurer is
bound by any act of its agent performed in this state that is within the scope of the
agent‘s apparent authority.‖

Taken out of context and read generously, this quoted

phrase arguably resolves the doctrines applicability to tort claims, although a closer look
at the statutory context would support a different reading. See Roberts v. Sea-Land Servs.,
Inc., 132 S.Ct. 1350, 1357 (2012) (citation omitted) (―It is a fundamental canon of

9

statutory construction that the words of a statute must be read in their context and with
a view to their place in the overall statutory scheme.‖).
Section 628.40 is found within a Code chapter entitled ―Insurance Marketing‖
that addresses the solicitation and formation of insurance contracts – in other words,
applies to the acts of an insurance agent as sales agent rather than as a billing agent. In
this light, the most sensible interpretation of § 628.40 makes insurers liable for the torts
of their agents committed during the course of insurance sales, which makes sense given
the general congruence of interests between insurer and agent when it comes to selling
policies. The apparent agency relationship at issue in this case does not fall into that
category.

Rather, plaintiffs claim to have been relying on the apparent authority of

Manson to collect and forward premium payments during the life of the policy, which
falls within Manson‘s clerical ―agency billing‖ responsibilities.
In the absence of controlling statutory law, the court must turn to Wisconsin
common law jurisprudence for guidance on the subject of whether ―apparent authority‖
can be invoked in tort cases generally. The few Wisconsin law cases that have touched
on the question in the past century leave a somewhat inconsistent, but fortunately fairly
one-sided, record. A brief survey of the relevant law should probably begin with the
1932 case Ripon Knitting Works v. Railway Express Agency, 207 Wis. 452, 240 N.W. 840
(Wis. 1932), in which the Wisconsin Supreme Court affirmed a decision in favor of a
manufacturer and against a shipping agency for the fraudulent acts of its agent, who
repeatedly overcharged the manufacturer under the guise of presenting legitimate
shipping bills. Id. at 842. The court cited § 485 of the Restatement (First) of Agency for
10

the proposition that ―[a] principal who puts an agent in a position while apparently
acting within his authority, to commit a fraud upon third persons, is subject to liability to
such third persons for such fraud.‖ Id.
Other early Wisconsin cases acknowledged the applicability of the doctrine of
apparent authority to tort claims, although admittedly in dicta. E.g. Motor Castings Co. v.
Milwaukee Cnty Bank, 254 Wis. 493, 499, 36 N.W.2d 687, 690 (Wis. 1949) (noting in
dicta that ―[i]t is a well established rule that when a principal puts an agent in a position
that enables the agent, while apparently acting within his authority, to commit a fraud,
the principal should stand the loss‖ (citing Restatement of Agency § 261)); see also Mattice
v. Equitable Life Assurance Soc. of U.S., 270 Wis. 504, 509, 71 N.W.2d 262, 265 (Wis.
1955) (citing with approval Ripon Knitting Works and Motor Castings Co., quoting
Restatement of Agency §§ 261 and 262, and noting in dicta that ―[a]s general rules of the
law of agency they are correct‖3).
Then, in 1978, the Wisconsin Supreme Court arguably reversed course when it
decided Candee v. Egan, 84 Wis. 2d 348, 267 N.W.2d 890 (Wis. 1978). In that case, a
plaintiff, whose sporting goods store was seized by a receiver on behalf of the plaintiff‘s
creditors, sued the receiver‘s employer for the receiver‘s alleged acts of wasting the assets
of the store. Writing for the court, Justice Callow rejected the plaintiff‘s tort claim to the
3

Section 261 states: ―A principal who puts an agent in a position that enables the agent,
while apparently acting within his authority, to commit a fraud upon third persons is
subject to liability to such third persons for the fraud.‖ Section 262 states: ―A person
who otherwise would be liable to another for the misrepresentations of one apparently
acting for him, under the rule stated in sec. 261, is not relieved from liability by the fact
that the apparent agent acts entirely for his own purposes, unless the other has notice of
this.‖
11

extent that it was based on the doctrine of apparent authority, holding that ―concepts of
apparent authority are used to bind the principal contractually. Corporate liability in
tort, as alleged in this case, must be predicated on a theory of respondeat superior.‖ Id.
at 369.
Only a few months later, in another opinion authored by Justice Callow, the
Wisconsin Supreme Court seemed to change its mind again, without addressing the
contradictory language in Candee. In Hollingsworth v. American Finance Corp., 86 Wis.2d
172, 271 N.W.2d 872 (1978), the Court allowed a usury claim against a finance
company under the Wisconsin Consumer Act after that company‘s agent stole loan
repayments made by a debtor. Id. at 183-84. In that case, the court cited Motor Castings
Co., 254 Wis. 493, 499, 36 N.W. 2d 687 (1949), and Restatement (Second) of Agency §
262, in holding that a ―principal is bound by [its] agent‘s acts within the scope of []
apparent authority. This rule applies even though the agent commits a fraud or acts
against the principal's interests.‖ Id. at 181 (internal citations omitted).
Since Hollingsworth, the Wisconsin Supreme Court has addressed the question of
apparent authority and tort liability only in the context of deciding whether a hospital
can be liable for the negligence of independent contractor doctors cloaked in the
hospital‘s apparent authority. See Kashishian v. Port, 167 Wis. 2d 24, 481 N.W.2d 277
(Wis. 1992) (apparent authority approved as grounds for imposing liability against
hospital for negligent acts of independent physicians); Pamperin v. Trinity Memorial Hosp.,
144 Wis.2d 188, 423 N.W.2d 848 (Wis. 1988) (same). At the very least, these cases
suggests that if there ever was a categorical bar on applying the apparent authority
12

doctrine to tort liability, it no longer exists. Furthermore, nothing in the cases precludes
an understanding that, rather than establishing a narrow exception to a general
prohibition on using apparent agency in tort cases, they represent an expansion of an
already broadly-applicable doctrine.
With the above-described body of caselaw to draw upon, the court must use its
―own best judgment to estimate how the [Wisconsin] Supreme Court would rule‖ in this
instance. Blood v. VH-1 Music First, 668 F.3d 543, 546 (7th Cir. 2012). The Seventh
Circuit has said that ―district courts are encouraged to dismiss actions based on novel
state law claims . . . . [and] [w]hen confronted with a state law question that could go
either way, the federal courts usually choose the narrower interpretation that restricts
liability.‖

Insolia v. Philip Morris Inc., 216 F.3d 596, 607 (7th Cir. 2000) (citations

omitted). These admonishments notwithstanding, the court‘s best reading of the cases
decided under Wisconsin law is that the doctrine of apparent authority applies to tort
claims in general and to plaintiff‘s claims here in particular.
The reasons for this holding are three-fold. First, as outlined above, the majority
of available Wisconsin cases either hold or suggest that apparent authority can be used in
tort claims. The Candee decision stands as a notable outlier, but its holding does not
appear the result of a thorough examination of the law. Indeed, the Candee decision does
not cite any caselaw in support of its holding on this point, nor has a Wisconsin court
since cited Candee for this proposition. Second, although not dispositive, at least one postCandee federal court decision applying Wisconsin common law has characterized (albeit
in dicta) the apparent authority doctrine as applicable to tort claims. Heritage Christian
13

Sch., Inc. v. ING N. Am. Ins. Corp. 851 F. Supp. 2d 1154, 1159 (E.D. Wis. 2012) (noting
in dicta that ―apparent authority does make [insurance companies] liable for the [their
agent and her husbands‘] common-law fraud even though the fraud did not benefit [the
companies] and the [agent and husband] were on a frolic of their own, since the fraud
was committed through use of the apparent authority in which ING and Security Life
had cloaked the[m].‖). Third, it seems the better rule of law to expansively apply a legal
doctrine that no less august an authority than the United States Supreme Court has
called good policy: ―It is . . . for the ultimate interest of persons employing agents, as
well as for the benefit of the public, that persons dealing with agents should be able to
rely upon apparently true statements by agents who are purporting to act and are
apparently acting in the interests of the principal.‖

Am. Soc’y of Mech. Eng’rs, Inc. v.

Hydrolevel Corp., 456 U.S. 556, 567 (1982) (quoting Restatement § 262, cmt a, and
noting that the ―apparent authority theory has long been the settled rule in the federal
system‖).
ii.

Apparent Agency Doctrine Applied to the Allegations in the
Complaint

For liability to attach under the doctrine of apparent authority, ―three elements
must be present: (1) acts by the agent or principal justifying belief in the agency; (2)
knowledge thereof by the party sought to be held; (3) reliance thereon by the plaintiff,
consistent with ordinary care and prudence.‖ Pamperin v. Trinity Memorial Hosp., 144
Wis.2d 188, 203, 423 N.W.2d 848, 853-54 (Wis. 1988) (internal quotation marks
omitted). These three elements were all present when Manson fraudulently overbilled

14

plaintiffs. The third element was not present when Manson converted the rebate and
credit checks mailed by Travelers.
a. Premium Overbilling Scheme
Plaintiffs allege that ―[t]hrough Travelers‘ agency billing practice, Manson acted as
Travelers‘ authorized billing agent in collecting premiums‖ (Am. Compl. at ¶ 24);
enumerate Manson‘s billing activities, which the court will infer for this motion were all
carried out with Travelers‘ approval (id. at ¶ 37-38); allege that ―plaintiffs had knowledge
of specific acts, by Manson and/or Travelers, that justifie[d] their conclusion that
Manson was acting as an agent for Travelers‖ (id. at ¶ 38); and allege that ―plaintiffs
relied on the agency relationship‖ (id. at ¶ 39). On these contentions, all of which are
plausible, it appears that the three conditions for apparent agency liability are met.
Still, Travelers has two objections.

The first objection is that the allegations

contain no facts suggesting that the appearance of agency can be traceable to Travelers,
which never directly contacted plaintiffs to announce that an agency relationship existed
between itself and Manson.

While it is true that a ―principal is only liable for that

appearance of authority caused by himself,‖ Amplicon, Inc. v. Marshfield Clinic, 786 F.
Supp. 1469, 1476 (W.D. Wis. 1992) (emphasis omitted), Travelers is mistaken in
arguing that this means a principal must affirmatively indicate to third parties that an
agency relationship exists. Even where the agent is the only one to make an explicit
claim of an agency relationship, the principal can be liable so long as ―the principal had
knowledge of [the agent‘s] acts and acquiesced in them.‖ Pamperin, 144 Wis. 2d at 203.

15

Although the complaint does not state in so many words that Manson held itself
out to plaintiffs as Travelers‘ sales and billing agent, the inference can be made from the
allegations that ―Manson operated as an authorized agent for Travelers and sold
Travelers insurance products‖ and then ―collected premiums, for Travelers, from
plaintiffs and the class.‖4 (Am. Compl. ¶¶ 20, 37.)

For its part, Travelers not only

acquiesced in plaintiffs‘ belief in just such an agency relationship, it actively took
advantage of that belief by using Manson as its intermediary.

(Id. at ¶¶ 37-39.)

Travelers‘ approval of Manson‘s actions distinguishes the alleged facts from the cases
Travelers cites, where the defendant principals either did not know about or did not
acquiesce in the purported agent‘s unilateral representations about its authority. See, e.g.,
Holmes v. Allstate Corp., No. 11 Civ. 1543, 2012 WL 627238 (S.D.N.Y. Jan. 27, 2012)
(defendant did not know about or acquiesce in agent‘s claims that he had authority to
make promises regarding how the plaintiffs‘ money would be spent or invested).
Travelers‘ second objection is that even if plaintiffs were aware that Manson
claimed to be selling and maintaining Travelers insurance policies as a licensed agent,
plaintiffs plead no concrete facts from which to infer that they actually relied on this
claimed agency relationship.

On the contrary, the complaint expressly states the

necessary fact: ―plaintiffs relied on the agency relationship between Manson and
Travelers.‖ (Am. Compl. ¶ 39.)

Even if one calls this a mere legal conclusion, it is

certainly plausible enough in light of all the other facts alleged in the complaint. See

4

If, contrary to this inference, Manson in fact never held itself out as a Travelers agent
and none of the plaintiffs knew they were purchasing a Travelers‘ insurance policy,
Travelers is welcome to move for summary judgment on apparent agency liability.
16

Engel v. Buchan, 710 F.3d 698, 709 (7th Cir. 2013) (noting that ―legal conclusions can
provide the framework of a complaint‖ so long as they are ―supported by factual
allegations,‖ (quoting Ashcroft v. Iqbal, 556 U.S. 662, 679)). The supporting facts are
there: plaintiffs actually purchased Travelers insurance policies from Manson (Am.
Compl. at ¶ 20); and they proceeded to pay premiums for Travelers‘ insurance to
Manson (id. at ¶¶ 37-39), even when the premium invoices were (unbeknownst to them)
inflated (id. at ¶ 44). This behavior would be inexplicable unless plaintiffs were relying
on the apparent agency relationship.
b. Rebate/Credit Conversion Scheme
Unlike the premium add-on scheme discussed above, liability for Manson‘s credit
and rebate conversion scheme is not possible using the apparent agency doctrine unless
there is some nexus between plaintiffs‘ reliance on the agency relationship and the tort
that was committed. Although often left implicit in descriptions of the apparent agency
doctrine, essential to the doctrine‘s application in the tort setting is that it ―gives rise to
tort liability [only] where the injury would not have occurred but for the injured party‘s
justifiable reliance on the apparent agency.‖ Rice v. Panchal, 65 F.3d 637, 645 (7th Cir.
1995) (quoting Illinois state law); see also Restatement (Second) of Agency § 265(1) (―A
master or other principal is subject to liability for torts which result from reliance upon, or
belief in, statements or other conduct within an agent's apparent authority.‖ (emphasis
added)). Courts faced with a claim of apparent agency in a tort suit must therefore ask
whether there is a causal nexus between a plaintiff‘s reliance on the appearance of agency
and the harm done by the apparent agent.
17

When the tort is fraud or misrepresentation, there is no difficulty in finding the
causal nexus between the appearance of agency and the tort because the plaintiff‘s
reliance upon the appearance of agency is necessary to the commission of the tort. See,
e.g., Am. Soc’y of Mech. Eng’rs, 456 U.S. at 566 (―Under an apparent authority theory,
‗[l]iability is based upon the fact that the agent‘s position facilitates the consummation of
the fraud, in that from the point of view of the third person the transaction seems regular
on its face and the agent appears to be acting in the ordinary course of the business
confided to him.‘‖ (quoting Restatement (Second) of Agency § 261, cmt. a)); see also
Restatement (Second) of Agency § 266. To a lesser extent, the same may be true for
proving reliance, which causes a plaintiff to place him- or herself under the special care of
a purported agent, as in cases of medical negligence. See Pamperin, 144 Wis. 2d. at 203;
see also Restatement (Second) of Agency § 267.
There is no such causal nexus in this case between plaintiffs‘ reliance on Manson‘s
apparent agency and the acts at the center of Manson‘s credit and rebate conversion
scheme.

Plaintiffs‘ reliance was not what enabled Manson to steal their mail -- if

anything, it was Travelers‘ reliance on Manson to forward the mail rather than sending it
directly that put Manson in a position to steal.

Rather than pursue Travelers for

converted rebates and credits under a theory of indirect liability, plaintiffs‘ claim, if any,
is against Travelers directly insofar as these payments were owed them under the
insurance contract.
II. Travelers’ Direct Liability for Negligence in Supervising and Monitoring
Manson (Count 2)

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In Count 2 of their complaint, plaintiffs seek to hold Travelers directly liable for
the tort of negligent supervision, alleging that Tavelers ―had an affirmative duty to
exercise reasonable care with respect to the rights of plaintiffs and the class‖ and ―fail[ed]
to take reasonable steps to supervise, monitor, and/or protect plaintiffs‖ from Manson.
(Am. Compl., dkt. #28, at ¶¶ 62-65.) Travelers argues that this claim must be dismissed
because none of the alleged facts demonstrate that it breached a duty of care. The court
agrees.
The four required elements for a negligent supervision claim under Wisconsin law
are (1) the existence of a duty of care on the part of the supervisor, (2) a breach of that
duty of care, (3) a wrongful act of the supervisee that was a cause of injury to the
plaintiff, and (4) an act or omission of the supervisor that was a cause of the supervisee‘s
wrongful act. See Sigler v. Kobinsky, 2008 WI App 183, ¶ 9, 314 Wis.2d 784, 791, 762
N.W.2d 706, 709 (Wis. Ct. App. 2008).
The dispute between plaintiffs and Travelers centers on the first two prongs of this
test -- whether plaintiffs have pleaded facts showing Travelers failed to exercise
reasonable care by neglecting to audit Manson‘s performance as a billing agent.
[A] duty to use ordinary care is established whenever it is
foreseeable that a person‘s act or failure to act might cause
harm to some other person. The mere possibility of harm is
insufficient to establish negligence. The duty to act or refrain
from acting in a particular case arises from probabilities,
rather than from bare possibilities of injury. Failure to guard
against the bare possibility of injury is not actionable
negligence.
Id. at ¶ 10 (internal citations omitted). In light of this standard, the dispositive question
is whether the agency billing arrangement alleged by plaintiffs amounts to a situation
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that ―a reasonable person would recognize as creating an unreasonable risk of injury or
damage.‖ Behrendt v. Gulf Underwriters Ins. Co., 2009 WI 71, ¶ 52, 318 Wis. 2d 622, 649,
768 N.W.2d 568, 581 (Abrahamson, C.J., concurring) (quoting Wis JI-Civil 1005). Put
another way, the court asks whether agency billing presents a ―bare possibility‖ of injury
or the foreseeable likelihood of injury needed to find negligence.
Examples help to flesh out this distinction. It is ―not reasonably foreseeable that
permitting employees to have unsupervised access to the internet [at work] would
probably result in harm to some person or some thing,‖ such that an employer has a duty
of care to monitor the employee‘s internet usage for illegal acts of employees. Sigler,
2008 WI App at ¶ 10; see also Maypark v. Securitas Sec. Serv’s USA, Inc., 2009 WI App
145, ¶15, 775 N.W.2d 270, 275, 321 Wis.2d 479, 488 (Wis. App. 2009) (same).
Similarly, although a position in the clergy bestows authority that (as we have tragically
learned) can lead to sexual abuse of children, a parishioner has no negligent supervision
claim against an archdiocese absent evidence that the archdiocese knew or should have
known of a guilty priest‘s abusive tendencies. Doe v. Archdiocese of Milwaukee, 2005 WI
123, ¶¶45-46, 284 Wis. 2d 307, 333-34, 700 N.W.2d 180, 192-93 (2005).
The facts of this case follow in the same vein as these examples. The ―agency
billing‖ responsibilities enjoyed by Manson surely created an opportunity to embezzle and
defraud, but absent reason to suspect that Manson had or would abuse the relationship,
Travelers had no duty to audit Mason Insurance‘s books. Plaintiffs cite no negligence
caselaw to the contrary, arguing instead that there was reason to suspect fraud: Travelers
knew that Manson had set up a centralized P.O. box as a collection address for customer
20

rebate and credit checks. (Am. Compl., dkt. #28, at ¶47.) This, plaintiffs argue, should
have tipped Travelers off about a ―clear possibility of wrongdoing.‖
In response to this argument, Travelers would have the court take judicial notice
that creating a post office box for centralized collection of mail is not at all unusual in the
context of insurance agency billing practices. The court cannot take judicial notice of
this ―fact,‖ see Fed. R. Evid. 201(b), but judging solely from the allegations, a centralized
post office box does not seem incongruent with the agency billing arrangement described
in the complaint. In fact, it makes perfect sense, given that Manson was tasked with
―collecting premiums from the Plaintiffs and the Class, for Travelers‘ benefit, and
disbursing credits and rebates to the Plaintiffs and the Class,‖ (Am. Compl., dkt. #28, at
¶24). If plaintiffs believe that the creation of a post office box was suspicious, it is their
duty to plead facts making this inference plausible.

III. Travelers’ Indirect Civil Liability for Manson’s Criminal Activity (Count 3)
While Travelers may be liable for Manson‘s torts under an apparent agency
theory, it is not civilly liable for Manson‘s crimes. Count 3 of the Complaint invokes a
right to recover pursuant to Wis. Stat. § 895.446, which provides a civil remedy for harm
arising out of acts that violate Wisconsin criminal statutes – in this case, the crimes of
theft, Wis. Stat. § 943.20(1), and unauthorized use of identifying information, Wis. Stat.
§ 943.201(2), § 943.203(2). Section 895.446(1) states in pertinent part that ―[a]ny
person who suffers damage or loss by reason of intentional conduct . . . that is prohibited

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under [certain criminal statutes] . . . has a cause of action against the person who caused
the damage or loss.‖
According to Travelers, § 895.446 simply makes clear that those who would be
found criminally liable can be made civilly liable for the resulting damages. Travelers
would, therefore, bear no civil liability under this statute because ―a corporation may be
held criminally liable for the acts of an agent or employee when such agent or employee
acts within the scope of his employment in behalf of the corporation.‖ State v. Richard
Knutson, Inc., 196 Wis. 2d 86, 106, 537 N.W.2d 420, 427 (Wis. Ct. App. 1995) (quoting
WIS JI-Criminal 430). Plaintiffs‘ sole response is that Travelers would be criminally liable
if Manson acted within the scope of its agency.

As already discussed, however, the

allegations in the complaint preclude a finding that Manson was acting to benefit
Travelers when it stole from plaintiffs. (See supra § I.A.)

IV. Punitive Damages
Plaintiffs also seek punitive damages from Travelers in connection with their
claims for fraud and conversion (Am. Compl., dkt. #28, at ¶¶ 61, 80), but Travelers is
exempt from such an award under the ―complicity rule‖ for punitive damages. This rule
provides that:
Punitive damages can properly be awarded against a master or
other principal because of an act by an agent if, but only if,
(a) the principal or a managerial agent authorized the doing
and the manner of the act, or (b) the agent was unfit and the
principal or a managerial agent was reckless in employing or
retaining him, or (c) the agent was employed in a managerial
capacity and was acting in the scope of employment, or (d)
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the principal or a managerial agent of the principal ratified or
approved the act.‖
Restatement (Second) of Torts § 909.
While it may be debatable whether Manson was established as a ―managerial
agent‖ for Travelers, the answer to that question does not affect the outcome here. No
liability attaches under the rule because the allegations neither support an inference that
Travelers authorized Manson‘s conduct (parts a & d), nor that Travelers was reckless in
retaining Manson as an agent (part b).

And, as previously discussed, the allegations

actually show that Manson‘s torts were committed outside the scope of its agency (part
c). (See supra § I.A.)
In response, plaintiffs argue that the ―complicity rule‖ is not the law in Wisconsin.
The court disagrees, based on a line of Wisconsin cases including, though not beginning
with, Garcia v. Samson’s Inc., 10 Wis. 2d 515, 103 N.W.2d 565 (Wis. 1960). In Garcia,
the plaintiff sued the employer of three men who had assaulted her and obtained a
favorable jury verdict, including an award of punitive damages. Id. at 517. The trial
court ordered a new trial, partially on grounds that the jury had been improperly
instructed on the question of punitive damages. Id. at 517-18. Affirming the trial court,
the Wisconsin Supreme Court noted that ―no recovery could be had against the
defendant for the tortious act of the employees without proof that the defendant
authorized or ratified the alleged tortious act.‖ Id. at 518.
Ten years later, in affirming the denial of punitive damages in a similar case, the
Wisconsin Supreme Court observed that Garcia ―reaffirmed a well established line of
cases refusing punitive damages in tort against a corporate defendant without proof that
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the defendant authorized or ratified the alleged tortious act of its employee.‖

Mid-

Continent Refrigerator Co. v. Straka, 47 Wis. 2d 739, 748-49 (Wis. 1970). Four years after
that, the Court again cited Garcia adopting the complicity rule in Wisconsin. D. R. W.
Corp. v. Cordes, 65 Wis.2d 303, 311 n.11, 222 N.W.2d 671, 676 (Wis. 1974).
Plaintiffs‘ position to the contrary rests entirely upon a single case, Wangen v. Ford
Motor Co., 97 Wis.2d 260, 294 N.W.2d 437 (Wis. 1980), in which the Wisconsin
Supreme Court noted:
There is a continuing debate [in Wisconsin] between
supporters of the ―complicity rule‖ (which imposes liability
for punitive damages on the corporation when a superior
officer ordered, participated in, or ratified the misconduct)
and supporters of the ―vicarious liability rule‖ (which imposes
liability for punitive damages on the corporation for the
misconduct of all employees acting within the general scope
of their employment).
Id. at 291.

Although Wangen is the most recent Wisconsin Supreme Court case to

discuss agency and punitive damages liability, the court does not consider it controlling
law. For one thing, the above-quoted discussion in Wangen is pure dictum. For another,
it fails to mention (let alone distinguish) Garcia, Mid-Continent, D.R.W. or any of the
other earlier cases in a ―well-established line.‖ Finally, in the three decades since its
issuance, Wangen has not been cited for the disputed principle by a single Wisconsin
state court at any level.5 Accordingly, the court finds that Garcia and its progeny have
never been overruled and that the ―complicity rule‖ remains good law in Wisconsin.6

5

Wangen was cited for this principle by a Wisconsin federal court in Schimpf v. Gerald,
Inc., 52 F. Supp. 2d 976, 1002, (E.D. Wis. 1999), but only in dictum.
6
Even if the court were to accept Wangen as controlling, the next step would be for this
court to choose which doctrine — ―complicity‖ or ―vicarious liability‖ — would be
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V. Dismissal With Prejudice
Throughout its motion to dismiss, Travelers has insisted that some or all of
plaintiffs‘ claims should be dismissed with prejudice, on grounds that plaintiffs have
already amended their complaint once after seeing the arguments presented in Travelers‘
initial motion to dismiss. While recognizing Travelers‘ point that plaintiffs have made
(or should have made) every amendment to the pleadings available to defeat Travelers‘
anticipated dismissal arguments, it would be premature to conclude at this point that it
would be futile to dismiss the claims without prejudice. Pursuant to Rule 15(a) of the
Federal Rules of Civil Procedure, the court is instructed to freely give leave to amend
when justice so requires.

With the interests of justice foremost in mind, Travelers‘

motion to dismiss plaintiffs‘ claims with prejudice will be denied at this time.

adopted by the Wisconsin Supreme Court today. In that event, the court would choose
the complicity rule, both because the weight of Wisconsin authority falls in favor of that
rule, and because it appears the better policy. See Restatement (Third) of Agency § 7.03
cmt. e (―The approach outlined in § 909 [the complicity rule] is preferable because it
requires consideration of circumstances relevant to a principal‘s culpability.‖). Moreover,
even if the ―vicarious liability‖ standard prevailed, the allegations in the Complaint
establish Manson was acting outside the scope of its agency.
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ORDER
IT IS ORDERED that defendants St. Paul Fire & Marine Insurance Company‘s
and The Travelers Indemnity Company‘s motion to dismiss plaintiff‘s amended
complaint pursuant to Fed. R. Civ. P. 12(b)(6) (dkt. #31) is GRANTED IN PART AND
DENIED IN PART consistent with the discussion above.

Entered this 25th day of October, 2013.
BY THE COURT:
/s/
___________________________________________
WILLIAM M. CONLEY
District Judge

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