Ed Dewitte Ins. Agency, Inc. v. Fin. Assocs. Midwest, Inc.

Decision Date21 September 2018
Docket NumberNo. 115,126,115,126
Parties ED DEWITTE INSURANCE AGENCY, INC., et al., Appellants, v. FINANCIAL ASSOCIATES MIDWEST, INC., et al., Appellees.
CourtKansas Supreme Court

Michael L. Blumenthal, of Seyferth Blumenthal & Harris LLC, of Kansas City, Missouri, argued the cause, and Kevin J. Karpin and Walter M. Brown, of the same firm, were with him on the briefs for appellants.

Sarah E. Warner, of Thompson Warner, P.A., of Lawrence, argued the cause, and William S. Robbins, Jr., W. Terrence Kilroy, and Christopher L. Johnson, of Polsinelli PC, of Kansas City, Missouri, were with her on the briefs for appellees.

The opinion of the court was delivered by Stegall, J.:

This case is about the statute of frauds, codified in Kansas at K.S.A. 33-101 et seq. As its name suggests, the statute was designed to prevent fraud by requiring parties to reduce certain oral agreements to writing. The writing requirement applies to any agreement that cannot be performed within one year. But common law has long excepted from this requirement any oral agreement in which one of the parties has fully performed his or her part of the agreement. In statute-of-frauds' terminology, the exception "removes" the agreement from the statute and allows the performing party to enforce the agreement in a court of law.

In this case, three individuals ask us to enforce their oral agreement with their former employer. They contend they have fully performed their end of the bargain by working for him for over 20 years and are owed the compensation they bargained for. The Court of Appeals concluded that to satisfy the full-performance exception, these individuals had to fully perform their part of the agreement and the only thing left to be done was for the former employer to pay. Because the former employer's duty to pay depended on the actions of third parties, the panel ruled in favor of the former employer. Now before this court, the question is whether the Court of Appeals erroneously construed the full-performance exception.

This appeal presents us with an opportunity to explore the rich history of the statute of frauds and the full-performance exception. We do so, and, in the end, we adopt the rule set forth in Restatement (Second) of Contracts § 130 (1981), holding that full performance by one party alone is sufficient to remove the agreement from the statute. As a result, we reverse the Court of Appeals and district court and remand this case to the district court for further proceedings consistent with this opinion.

FACTUAL AND PROCEDURAL BACKGROUND

In 1976, Charles Stumpf founded Financial Associates Midwest, Inc. (Financial Associates), a health insurance brokerage that used a network of independent agents to sell health insurance policies. Financial Associates (later known as Canopy) hired Barbara Meador as an area manager in 1982. Three years later, Financial Associates hired Leonard Filley as an in-house salesman, and he became an area manager a few months later. Edward DeWitte was hired as an area manager in 1988. For ease of reference, we refer to Meador, Filley, and DeWitte collectively as the "area managers."

Rather than selling or producing insurance policies themselves, the area managers mainly recruited, oversaw, and trained other agents. Stumpf assigned new agents to the area managers, who supervised the new agents, answered questions, and provided administrative support.

Each area manager signed an identical area-manager contract. The agreement provided that the area managers were paid by commissions and renewal commissions on premiums paid on policies secured by them and their sub-agents. The renewal commissions were "vested," meaning that following the termination of their contracts, the area managers (or their surviving spouses) continued to receive renewal commissions until the monthly amount due dropped below $100. The area managers were hired for an indefinite period. In all three instances, the area managers worked for Financial Associates for over 20 years.

In the early 1990s, Financial Associates began doing business with Blue Cross and Blue Shield of Kansas City (Blue Cross). In 1994, Financial Associates became one of Blue Cross' "Blue Chip" agencies. This meant Blue Cross paid Financial Associates an administrative service fee—called an "override"—to help subsidize a portion of Financial Associates' administrative expenses. The override represented 2% of all Blue Cross premiums on policies that had been sold by Financial Associates. It was governed by an Administrative Services Agreement between Blue Cross and Financial Associates. The override encompassed yearly policies and renewals that could not have been renewed within one year.

In the mid-1990s, Stumpf orally agreed with the area managers that in exchange for their work, Stumpf would pay them half the override—1% of the Blue Cross policy premiums sold by Financial Associates. Stumpf and the area managers also orally agreed that the 1% override payment would occur both during their employment and after their employment ended, "until the policies they had signed were no longer renewed." For nearly 20 years, the area managers regularly received the 1% override payment.

In December 2011, Stumpf sold Financial Associates to Blue Cross. The next year, Blue Cross offered the area managers new employment terms. These terms required the area managers to relinquish their rights to the 1% override payment. Meador and DeWitte refused and were terminated. Filley also declined the new terms, though he had retired shortly before Blue Cross offered the new terms. Blue Cross stopped paying Financial Associates the 2% override when it purchased Financial Associates. And Blue Cross later stopped paying the 1% override to the area managers.

The area managers demanded that Financial Associates continue to pay the 1% override, but it refused. When their employment ended, the area managers were receiving between $12,000 and $20,000 each month from the 1% override payments.

The area managers then filed a petition against Blue Cross and Financial Associates, advancing many claims, including breach of contract and a breach of covenant of good faith and fair dealing. The parties conducted several depositions and filed competing motions for summary judgment.

The district court entered summary judgment in favor of Blue Cross and Financial Associates. First, it found the area managers could not prevail under the breach of contract claim because the area-manager contracts did not govern the payment of the 1% override payment. The district court also denied the area managers' good faith and fair dealing claims because it found they were at-will employees.

Next, the district court considered whether the oral agreement to pay the 1% override was unenforceable under the statute of frauds. The district court first found the oral agreement could not have been performed within one year because the purchase or renewal of policies occurs annually. This meant, according to the court, that the 1% override represents over one year's worth of work. The court then held the full-performance exception to the statute of frauds did not apply because the calculation of the 1% override was contingent on the renewal of policies not guaranteed to occur. The district court also denied the area managers' remaining claims.

Among the several claims the area managers advanced on appeal, they argued that the statute of frauds does not render the oral agreement between them and Stumpf unenforceable.

In a published opinion, the Court of Appeals affirmed. Ed DeWitte Ins. Agency v. Financial Assocs. Midwest, 53 Kan. App. 2d 238, 388 P.3d 156 (2016). The panel ultimately adopted New York law, holding that "when a party to an oral agreement has fully performed but the other party's obligation to pay remains contingent on the actions of independent third parties, the full-performance exception does not apply to take the oral agreement out of the statute of frauds." 53 Kan. App. 2d at 253-54, 388 P.3d 156. According to the Court of Appeals, this meant the area managers could not prevail because Blue Cross and Financial Associates' obligation to pay was contingent on the policyholders' decision to renew. The Court of Appeals denied the remaining claims and affirmed. 53 Kan. App. 2d at 257, 388 P.3d 156.

The area managers petitioned for review solely on the statute of frauds question, and we granted review. Jurisdiction is proper. See K.S.A. 60-2101(b) ("[A]ny decision of the court of appeals shall be subject to review by the supreme court[.]").

ANALYSIS

The area managers argue the Court of Appeals erroneously construed the full-performance exception by holding that it requires something more than full performance by one party. On the other hand, Blue Cross and Financial Associates argue that we should discard the full-performance exception entirely because it is not mentioned in K.S.A. 33-106. If we retain the exception, they contend the panel properly adopted New York caselaw and held the exception does not apply when the "obligation to pay remains contingent on the actions of independent third parties." 53 Kan. App. 2d at 254, 388 P.3d 156.

At the outset, we consider Blue Cross and Financial Associates' statutory plain language argument but are persuaded the Legislature has acquiesced to the common law full-performance exception. It has not once tried to abrogate the full-performance exception despite our repeated recitation of the exception for nearly the entirety of our statehood. Next, we explore the historical underpinnings of the statute of frauds and the full-performance exception. Doing so persuades us that the rule articulated in Restatement (Second) of Contracts § 130 is correct. Accordingly, we hold that full performance by one party is sufficient, standing alone, to remove the agreement from the statute.

Standards of Review

The district court granted Blue Cross and Financial Associates' motion for summary...

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