In re Koelfgen
| Decision Date | 18 July 1988 |
| Docket Number | Adv. No. 4-87-71.,Bankruptcy No. 4-87-94 |
| Citation | 87 BR 993 |
| Parties | In re Robert F. KOELFGEN, Debtor. UNITED AMERICAN INSURANCE COMPANY, Plaintiff, v. Robert F. KOELFGEN, Defendant. |
| Court | U.S. Bankruptcy Court — District of Minnesota |
Richard J. Pearson, New Brighton, Minn., for defendant/debtor.
David W. Larson, Minneapolis, Minn., for plaintiff.
FINDINGS OF FACT, CONCLUSIONS OF LAW AND ORDER FOR JUDGMENT
The above-entitled adversary proceeding came on for trial before the undersigned on June 7, 1988. David W. Larson appeared on behalf of United American Insurance Company ("UAI"); Richard J. Pearson appeared on behalf of Richard F. Koelfgen ("debtor"). Plaintiff seeks to have this court declare debtor's debt to it to be non-dischargeable pursuant to 11 U.S.C. § 523(a)(4). This court has jurisdiction pursuant to 28 U.S.C. §§ 157 and 1334, and Local Rule 103(b). This is a core proceeding under 28 U.S.C. § 157(b)(2)(I). Based on the evidence, and all the files, records and proceedings herein, I find and conclude as follows:
FACTS
Defendant, Robert F. Koelfgen, entered into a "Vested Commission Contract" ("the Contract") to act as an independent contractor to sell insurance products for plaintiff, United American Insurance Company. Koelfgen would collect the gross premium from the customer, deduct his commission and remit the net premium to UAI. Koelfgen's contract with UAI provided in part:
1. APPOINTMENT AND RELATIONSHIP. The Agent is hereby appointed a General Agent of the Company and is authorized to solicit in person or through sub-agents contracted by the Agent, applications for insurance in the Company, to forward same to the Company for approval or rejection, and to collect the initial premium payments due on such applications. It is expressly agreed that the relationship of the Agent or sub-agent with the Company shall be that of an Independent Contractor only, and that nothing contained herein shall be construed to create the relationship of employer and employee. The Company may from time to time prescribe rules respecting the requirements of eligibility for applicants of insurance, not interfering with freedom of action of the Agent, or sub-agent, which rules shall be observed and conformed to by said Agent or sub-agent. The general transactions of business will be governed by Company rules which may be changed, altered, or amended from time to time by the Company. (emphasis added)
Koelfgen had authority under the Contract to endorse and deposit premium checks he received from policy applicants into his business bank account. The Contract required Koelfgen to "immediately remit to the company all premiums collected by the agent or sub-agents in excess of the agent's initial commission thereon", thereby retaining his commissions from each policy. Koelfgen opened a bank account in the name of Minnesota Insurance Brokers in which he conducted all of his business transactions as an insurance agent with UAI. His insurance contract did not require Koelfgen to establish a trust account to transact his business with UAI, therefore, Koelfgen did not maintain a business trust account. As a matter of course, Koelfgen would deposit the entire gross premium check in his business account and once a month would remit to UAI the net premiums received for the month minus his commission. Along with the remittance of net premiums Koelfgen would submit a "record of business" which reflected all applicants that were solicited, the premiums collected, and the net premiums due UAI.
After Koelfgen had deducted his commission and sent the premiums to UAI, customers would, at times, cancel their policies. The insureds to whom Koelfgen sold policies had the right to cancel those policies or they often upgraded their coverage. Also, UAI would not always approve insurance coverage for all the applicants. The Contract in this regard stated:
The Agent shall make prompt refund of all money collected on any application on which the Company declines to issue a policy, and on any application on which a policy shall be issued by the Company and not accepted by the applicant. The Company shall at all times have the right to reject applications for insurance without specifying cause. If any premiums shall be refunded by the Company for any reason or cause either before or after termination of this Contract, the Agent shall repay to the Company on demand all commissions previously allowed on that premium.
When an insured cancelled its policy, UAI issued a check for the entire premium to Koelfgen, who in turn delivered this check to the customer. Because Koelfgen already retained part of the premium as a commission he was to return his commission to UAI. UAI held a debit account in Koelfgen's name which represented the charge-back on commissions when an insurance policy would be cancelled. Koelfgen would then be required to clear the debit account with UAI.
Koelfgen testified his business took a dramatic drop in 1986 resulting from a lack of new business and an increase in cancellation of insurance policies due in part to increased competition with health maintenance organizations ("HMO's"). As a direct result Koelfgen incurred a substantial debit balance on his commission return account with UAI. Koelfgen's problems escalated when he attempted to satisfy his commission return account with net premiums due UAI, as well as paying for business expenses out of the business account when Koelfgen did not have sufficient funds.
UAI demanded that Koelfgen bring his return commission account and net premium due to UAI up to date in order to maintain his contract with UAI. Koelfgen sent checks to UAI totalling $9,390.00 that were returned by the bank for nonsufficient funds. Of this amount, $7,390.00 was sent as net premiums collected by Koelfgen on behalf of UAI and $2,000.00 represented payment on the return commission account. UAI claims that including the $2,000.00 Koelfgen attempted to pay on the return commission account, Koelfgen did not repay $4,917.48 of the return commissions which UAI refunded to insurance applicants.
On October 7, 1986, Koelfgen requested that his account with UAI be placed on a "gross premium" basis so he could eliminate further problems with the return commission account while also trying to pay off the debit balance. Thereafter on October 16, 1986, UAI sent Koelfgen a letter accepting his proposal until his return commission account was brought up to date, although his bank authorization to deposit gross premium checks in his business account was suspended.
Failing to bring his UAI accounts up to date, Koelfgen received his contract termination in a certified letter dated October 28, 1986. On November 12, 1986, UAI sent Koelfgen a certified letter indicating Koelfgen owed UAI $12,307.48. This figure was comprised of $7,390.00 in net premiums due UAI as a result of checks returned by Koelfgen's bank marked nonsufficient funds, and $4,917.48 represented the balance of Koelfgen's return commission account.
Koelfgen filed a petition for relief under Chapter 7 of the Bankruptcy Code on January 9, 1987. UAI commenced this adversary proceeding under 11 U.S.C. § 523(a)(4) alleging Koelfgen's debt to UAI is not dischargeable because Koelfgen's debt arose out of a fraud or defalcation while acting in a fiduciary capacity, and embezzlement.
The Bankruptcy Code excepts from discharge any debt "for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny. . . ." 11 U.S.C. § 523(a)(4). Initially plaintiff argues that a fiduciary relationship existed between Koelfgen and UAI.
The threshold requirement under section 523(a)(4) to hold a debt nondischargeable for fraud or defalcation is a finding that the debtor was a fiduciary of the creditor-plaintiff. Clark v. Taylor (In re Taylor), 58 B.R. 849, 852 (Bktcy.E.D. Va.1986). The meaning of "fiduciary capacity" is very limited with respect to section 523(a)(4). Generally, federal law determines who is a fiduciary under section 523(a)(4). Ragsdale v. Haller, 780 F.2d 794, 795 (9th Cir.1986); Angelle v. Reed (In re Angelle), 610 F.2d 1335, 1341 (5th Cir. 1980). However, under limited circumstances, state law may create the requisite fiduciary relationship. Barclays American/Business Credit, Inc. v. Long (In re Long), 774 F.2d 875, 878 (8th Cir.1985). Long recognized that a state law may create fiduciary status in a corporate officer within bankruptcy proceedings, however, the state law classification is not conclusive. See, MacArthur Co. v. Crea (In re Crea), 31 B.R. 239, 244 (Bktcy.D.Minn. 1983). Plaintiff is correct in arguing that under state law a fiduciary relationship may exist between the insurance company and agent, but its argument fails because the contract between Koelfgen and UAI was not an express or technical trust.
The concept of "fiduciary capacity" is limited to express or technical trusts, not those implied by law. Long, 774 F.2d at 878, Crea, 31 B.R. at 244. See Davis v. Aetna Acceptance Co., 293 U.S. 328, 333, 55 S.Ct. 151, 153, 79 L.Ed. 393 (1934). Express or technical trusts are formed by direct and positive acts of both parties manifested by some instrument in writing, whether by deed, will, or otherwise. Morgan v. American Fidelity Fire Ins. Co., 210 F.2d 53, 55, 56 (8th Cir.1954). The fiduciary capacity must have existed before the defalcation giving rise to the claim. Hensel v. Barker (In re Barker), 40 B.R. 356, 359 (Bktcy.D.Minn.1984).
Courts look at the contract between the parties to determine the existence of a fiduciary relationship. A fiduciary relationship is found between an insurance agent and company when the insurance agent enters into a contract with an explicit agreement wherein an express trust relationship is contemplated. Morgan, 210 F.2d at 55 (8th Cir.1954); Union Mutual Life Ins. Co. v. Murphy (In re...
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