In re Hallahan
| Citation | 113 BR 975 |
| Decision Date | 16 April 1990 |
| Docket Number | No. 89-1279.,89-1279. |
| Parties | In re Nelson Grant HALLAHAN, d/b/a Nelson Hallahan and Associates, Debtor. Nelson Grant HALLAHAN, Appellant, v. NIS CORPORATION and Ozark National Life Insurance Company, Appellees. |
| Court | U.S. District Court — Central District of Illinois |
Gary T. Rafool, Nile Williamson, Peoria, Ill., for appellant.
Mark Zelmer, St. Louis, Mo., Bret Babcock, Peoria, Ill., for appellees.
Appellee Ozark National Life Insurance Company (hereinafter Ozark) has at all relevant times been engaged in the business of selling life insurance. Appellee NIS Corporation (hereinafter NIS) is a wholly owned subsidiary of Ozark and is the exclusive selling agent for Ozark.
Appellant Nelson Hallahan began work for Ozark on October 1, 1977 as a sales agent. He became an Ozark manager on July 2, 1981. On that date, all agents for Ozark were offered the option of becoming managers as well as stockholders of NIS. In order to take advantage of this option, the agents were required to enter into a contract with NIS. This contract was explained to the potential managers before any of them signed it.
The relevant part of that contract is a covenant not to solicit, which reads as follows:
If this Contract is terminated by either party for any reason, Agent agrees that he will not, for a period of four (4) years from the date of termination, within the county or counties in which Company is located or doing business at the time of termination or within the immediate adjoining counties: . . . (iii) Directly or indirectly, for himself or on behalf of any other person or firm, induce or attempt to induce any policyholder of any Insurance Company to cancel, surrender, apply for a policy loan under or to discontinue the payments or premiums on any policy issued by such Insurance Company.
Appellant Hallahan signed the agency contract. As a manager, he had access to policyholder listings of the company. The record reflects that on May 20, 1982, Hallahan was sent a policyholder printout for the entire State of Illinois. On March 8, 1983 and June 1, 1983, Appellant received listings of policyholders of other previously terminated sales agents. Policyholder lists were regarded by Ozark as confidential information. Only managers and home office personnel had access to these lists and those persons knew that the lists were not to be disseminated and had to be returned. The policyholder lists received by Hallahan specifically required that the list be returned to the agency department of Ozark.
On December 5, 1983, Hallahan terminated his agency relationship with Ozark and immediately went to work for a competing insurance company, Connecticut Mutual. It is not disputed that Hallahan immediately began to solicit life insurance business from Ozark policyholders with whom he had had personal contact as Ozark's agent. As a result, a relatively significant number of Ozark policies began to lapse. In March of 1984, Hallahan admitted to an Ozark sales agent that he intended to go after Ozark policyholders with the Connecticut Mutual policies. In addition, the record reflects several Ozark policyholders who testified that they were contacted by the Appellant and that he had either blatantly suggested substituting Connecticut Mutual policies for their existing Ozark policies or otherwise suggested a change in the status of the Ozark policy. Specifically, the record indicates that 246 Ozark policyholders replaced their Ozark policies with Connecticut Mutual insurance policies within a short period of time after Hallahan left Ozark's employ; 22 of those policyholders indicated that they let their Ozark policy lapse due to contact with Hallahan.
At trial, Appellees introduced an actuarial expert who testified that the lost profits incurred by the Appellees as a result of 246 terminated policies totalled $208,111.28.
The bankruptcy court granted Appellees' Motion for Summary Judgment, holding that Appellant had willfully breached the covenant not to solicit, 78 B.R. 547. The bankruptcy court also found that this was a non-dischargeable debt under the Bankruptcy Code because of the willful nature of the breach of contract, 99 B.R. 897. The Court awarded damages in the amount of $208,111.28 plus attorneys' fees, pursuant to a stipulation for $43,723.24. In addition, the bankruptcy court ordered stricken the Appellant's jury trial demand, holding that there is neither a statutory nor a constitutional right to a jury trial in a dischargeability case in bankruptcy court.
Appellant appealed, raising three alleged errors by the bankruptcy court. First, Appellant argues that the bankruptcy court committed reversible error when it granted Appellees' Motion for Summary Judgment on the issue of liability. Second, the bankruptcy court erred in finding that the judgment was non-dischargeable and in ascertaining the amount of damages. Finally, Appellant argues that the bankruptcy court committed error in striking its demand for a jury trial.
The case below actually involved two separate proceedings. The first was an action filed by the Appellees against the Appellant in the United States District Court for the Western District of Missouri. In that action, Appellees sought an injunction preventing Appellant from selling Connecticut Mutual policies or any other policies to Ozark policyholders. This action has been dismissed without prejudice.
The second proceeding was an action brought by Appellees against the Appellant in the Bankruptcy Court for the Central District of Illinois. This adversary proceeding alleged that Appellant breached the covenant not to solicit and intentionally interfered with Appellees' business relationships. Appellees previously had filed a Motion in this Court to withdraw the adversary proceeding from the bankruptcy court and transfer the adversary proceedings to the Missouri District Court. That motion was denied in 1985.
Following the bankruptcy court's grant of summary judgment in favor of the Appellees, the case proceeded to a bench trial on the issue of damages. On the basis of the evidence submitted at trial, the bankruptcy court entered its damage award.
In reviewing the decision of the bankruptcy court, this Court is to affirm factual findings of the bankruptcy court unless they are clearly erroneous, giving due regard to the trial court's opportunity to judge the credibility of the witnesses. As to those issues which present legal questions, the Court's review is de novo.
In his decision granting the Appellees' Motion for Summary Judgment on liability, the bankruptcy court stated that the issue was whether the covenant not to solicit was valid; if it was, it had clearly been violated. The court looked at Missouri law1 to determine whether the covenant was reasonably restricted in time and space. The Appellant argues that the covenant not to solicit is unreasonable as to both elements.
Appellant contends that the time limitation of four years contained in the covenant at issue here is unreasonable because Missouri courts have never approved a non-compete clause which was longer than three years (except in the case of physicians). Appellee cites two Missouri cases upholding covenants not to solicit, one of which covered a period of five years and the other a period of four. Fred A.H. Garlich's Agency Co. v. Anderson, 226 S.W. 978 (Mo.App.1920) (five years) and Alldredge v. Twenty-Five-Thirty-Two Broadway Corp., 509 S.W.2d 744 (Mo.App. 1974) (). Thus, Appellant's argument that a four-year period is unreasonable on its face was properly rejected by the bankruptcy court.
Furthermore, a period of four years in the factual circumstances presented here is not unreasonable. Given the length of time an insurance policy is ordinarily in effect and given the apparently necessary personal relationship between an agent and policyholders, the four year period of time serves to protect the legitimate interest which NIS and Ozark had in their customers.
Appellant also argues that the geographic scope of this particular covenant is not reasonably necessary for the legitimate proprietary interest of NIS. The non-compete clause in this case contains a limitation to counties in which Appellees were doing business and the adjoining counties. Appellant argues that since his license to sell insurance was limited to the State of Illinois, the breadth of the geographic protection was unreasonable.
Missouri courts have upheld covenants not to solicit business which have no geographic limit. See, e.g., Mills v. Murray, 472 S.W.2d 6 at 12 (Mo.App.1971); Sigma Chemical Co. v. Harris, 605 F.Supp. 1253 (E.D.Mo.1985).
In addition, the appropriate analysis in determining the reasonableness of the geographic scope is to look at the needs of the employer in protecting its business. Missouri cases recognize that an employer's interest in its customers may properly be protected by a covenant not to solicit where an employee has more than nominal contact with those customers. In Mills v. Murray, 472 S.W.2d 6 (Mo.App.1971), the court found that:
Such a restriction we find reasonably necessary to protect the employer which hired and paid the employee to solicit clients and then, by the necessities of the business, was required to stand aloof while a relationship of confidence developed between the employee and the customers of the business, thus enhancing the risk that the employee could entice them away when he left.
In this case, it is clear that Hallahan had such direct personal contact with the customers of NIS and Ozark, that he had the opportunity to develop a personal relationship of trust and confidence with them. In addition, he had access to confidential customer lists of other customers of the company. While Hallahan worked for Ozark, he was paid to develop the good will of the...
To continue reading
Request your trial