Bach v. Curry

• Decision Date: 07 February 1968
• Citation: 66 Cal.Rptr. 220,258 Cal.App.2d 676
• Court: California Court of Appeals Court of Appeals
• Parties: Karl BACH, Plaintiff and Appellant, v. Forrest J. CURRY and the Penn Mutual Life Insurance Company, a corporation, Defendants and Respondents. Maurice H. EDELSTEIN, Plaintiff and Appellant, v. Forrest J. CURRY and the Penn Mutual Life Insurance Company, a corporation, Defendants and Respondents. Civ. 23760, 24341.

Page 220

66 Cal.Rptr. 220

258 Cal.App.2d 676

Karl BACH, Plaintiff and Appellant, v. Forrest J. CURRY and the Penn Mutual Life Insurance Company, a corporation, Defendants and Respondents.

Maurice H. EDELSTEIN, Plaintiff and Appellant, v. Forrest J. CURRY and the Penn Mutual Life Insurance Company, a corporation, Defendants and Respondents.

Civ. 23760, 24341.

Court of Appeal, First District, Division 1, California.

Feb. 7, 1968.

Hearing Denied March 28, 1968.

Sidney Rudy, Wayne H. White, Richard N. Rapoport, Harold J. Siegel, San Francisco, for appellants.

Arthur R. Albrecht, David Mark Balabanian, McCutchen, Doyle, Brown & Enersen, San Francisco, for respondents.

MOLINARI, Presiding Justice.

Plaintiff Karl Bach appeals from a judgment dismissing his action with prejudice, pursuant to a previous order sustaining without leave to amend general demurrers to the third and fourth causes of action of plaintiff's first amended complaint. ¹ Plaintiff Maurice Edelstein likewise appeals from a judgment of dismissal of his third cause of action, entered pursuant to a general demurrer that was sustained without leave to amend. ² Forrest J. Curry and Penn Mutual Life Insurance Company (hereinafter, 'Curry' and 'Penn') are defendants in each action. Plaintiff Edelstein's third cause of action is virtually identical to plaintiff Bach's third cause of action, and the parties have consolidated the cases and briefed them together. Hereinafter when we refer to 'plaintiff' it shall have reference to both Bach and Edelstein.

Nature of the Case

Plaintiff is a life insurance salesman employed by Curry, who is a general agent for Penn. Under paragraph (2)(c) of his contract of employment, plaintiff is entitled to certain 'service fees' so long as the contract remains in force. Plaintiff contends that his right to service fees does not terminate on cessation of his employment, and prays for a declaration to this effect. Specifically, he alleges that paragraph (2)(c) is an unenforceable forfeiture and an illegal restraint of trade. The questions raised on this appeal are whether the court was correct in sustaining general demurrers to plaintiff's first amended complaint and whether the court abused its discretion in refusing plaintiff leave to amend. ³ We have concluded that neither of plaintiff's contentions has merit.

The Record

Plaintiff and Curry entered into a written contract on July 1, 1944, under which Curry, the general agent for Penn, employed plaintiff to solicit buyers of life insurance policies and annuities underwritten by Penn. The contract, approved by Penn who guaranteed payment of the compensation under it, allows plaintiff two kinds of compensation: commissions and 'service fees.' Commissions are calculated as percentages of the first, second, and third-year policy premiums paid on insurance sold by plaintiff. Service fees are defined in paragraph (2)(c), which reads as follows: 'Service Fees (c) In addition to all other compensation which you are entitled to receive in accordance with the foregoing provisions of this contract, you shall be paid service fees at the rates provided in the schedule set forth below, * * * based upon all fourth and subsequent policy year premiums paid in cash to continue in force policies written and placed in force by you with Company, So long as this contract remains in force, (emphasis added) Provided that you present to General Agent satisfactory evidence that service has been rendered by you. And you hereby agree that General Agent and/or Company shall determine what shall constitute satisfactory evidence of service in each case. In the absence of such satisfactory evidence of service, no service fee shall be payable to you.'

The contract provides that it may be terminated at will by either Curry or plaintiff. (Par. (3)(d).) The exact language of the provision is: 'And this contract may be terminated at any time voluntarily: (d) By either General Agent or Agent furnishing notice of termination in writing to the other.' In accordance with the foregoing provision, Curry terminated the contract, termination effective November 1, 1962.

A reasonable interpretation of the allegations of plaintiff's third cause of action is as follows: that plaintiff has sold policies of insurance on which service fees would be owing to him after November 1, 1962, if his employment had not terminated on that date; that paragraph (2)(c) was inserted in the contract for the purpose of restraining plaintiff from selling policies issued by other insurance companies; that services required in connection with 'service fees' are nominal; and that paragraph (2)(c) is intended as a deferred compensation device. ⁴

Curry claims that under the terms of paragraph (2)(c) plaintiff's right to service fees on policies sold by him ends on the date of the termination of his employment. Do the facts pleaded in plaintiff's third cause of action entitle him to recover service fees after November 1, 1962?

No. All parties agree that under the language of the contract of employment, plaintiff is entitled to service fees under paragraph (2)(c) only 'so long as this contract remains in force,' i.e., so long as plaintiff's employment with Curry lasts. Since plaintiff's employment ended November 1, 1962, he cannot be entitled to any service fees after that date unless the foregoing condition in paragraph (2)(c) is void. Plaintiff argues that the condition is void, first, as a forfeiture, and second, as an illegal restraint on trade.

Plaintiff has cited no cases, nor do we know of any holding that a condition limiting the right to renewal commissions such as the instant provision in paragraph (2)(c) is a forfeiture or penalty clause. Plaintiff's sole authority, Freedman v. The Rector, 37 Cal.2d 16, 21--23, 230 P.2d 629, 31 A.L.R.2d 1, holds only that in land sale contracts, forfeiture clauses that in effect provide for exemplary damages are unenforceable. Conceding arguendo that the Freedman doctrine applies to insurance agency contracts, it does not follow that paragraph (2)(c) is a penalty clause. The provision does not go into effect upon a default or breach of duty on plaintiff's part. Rather, it merely regulates the respective rights of the parties after termination of employment in accordance with the contract.

Several cases in California and in other jurisdictions have held similar provisions to be valid. (Gilbert v. Equitable Life Ins. Co., 239 Cal.App.2d 895, 899, 49 Cal.Rptr. 187; Powis v. Moore Machinery Co., 72 Cal.App.2d 344, 351--352, 354, 164 P.2d 822; Merrill v. Continental Assurance Co., 200 Cal.App.2d 663, 670--671, 19 Cal.Rptr. 432; Prudential Ins. Co. v. Fromberg, 240 Cal.App.2d 185, 191, 49 Cal.Rptr. 475; Nelles v. MacFarland, 9 Cal.App. 534, 537, 538, 99 P. 980; Insley v. State Mut. Life Assur. Co., 334 Pa. 368, 5 A.2d 544, 548; Andrews v. Public Savings Ins. Co. of America, 80 Ind.App. 537, 141 N.E. 646, 647; Christensen v. Prudential Ins. Co. of America (Mo.App.) 204 S.W.2d 459, 462, 464.) Conditions such as that provided in paragraph (2)(c) are upheld upon the basis that the provision is a reasonable one, under the rationale stated in Prudential Ins. Co. v. Fromberg, suprg, quoting from Insley, as follows: 'Common business prudence dictates that an insurance company should by apt provisions in its contracts with its agents make it financially worthwhile for such agents to continue their allegiance to the company. * * * Inasmuch as many insured persons have a tendency to permit their policies to lapse, sometimes being induced to do this by agents of competing companies, the company must rely on its agent to keep his contacts with the insurance patron he secured and encourage him to maintain the relationship he induced him to enter into. ...