Lincoln Benefit Life Co. v. Edwards

• Decision Date: 11 September 2000
• Docket Number: Nos. 99-1980,CROSS-APPELLEE,CROSS-APPELLANT,s. 99-1980
• Citation: 243 F.3d 457
• Parties: (8th Cir. 2001) LINCOLN BENEFIT LIFE COMPANY, NEBRASKA DOMESTIC INSURANCE CORPORATION, APPELLANT/, v. ROBERT R. EDWARDS, APPELLEE//2245 Submitted:
• Court: U.S. Court of Appeals — Eighth Circuit

Page 457

243 F.3d 457 (8th Cir. 2001)

LINCOLN BENEFIT LIFE COMPANY, NEBRASKA DOMESTIC INSURANCE CORPORATION, APPELLANT/CROSS-APPELLEE, v. ROBERT R. EDWARDS, APPELLEE/CROSS-APPELLANT.

Nos. 99-1980/2245

UNITED STATES COURT OF APPEALS FOR THE EIGHTH CIRCUIT

Submitted: September 11, 2000

Filed: March 15, 2001

Appeals from the United States District Court for the District of Nebraska. [Copyrighted Material Omitted] Before Beam, Heaney, and John R. Gibson, Circuit Judges.

Per Curiam.

These cross-appeals arise from a dispute between an insurance company and its former agent over amounts due under several contracts. We affirm.

Robert R. Edwards began working for Lincoln Benefit Life ("LBL") in December 1980 as a general agent. LBL agents earned commissions based on a percentage of the first year premium on any new business written. Those responsible for overseeing agents earned "overwriting commissions" on new business written by agents subordinate to them. LBL did not require agents to await a subscriber's entire first year's payment before drawing the commission. Rather, once a new subscriber filed a completed application, underwent any required medical exam, and paid the first month's premium, LBL would advance an agent the entire commission. Should a subscriber later permit a policy to lapse, the agent had to repay the advance.

In 1982, Edwards entered into a "Marketing Director Agreement" ("MDA") with LBL wherein he agreed to meet with, recruit, train and provide support for agents in return for overwriting commissions and bonuses. LBL retained the ultimate right to approve or disapprove of Edwards' hiring selections. Agents subordinate to Edwards submitted insurance applications directly to LBL, which would then process and return them directly to the agent. The MDA's "tie-in" clause prohibited adjustments to any marketing director's commission rate without a corresponding adjustment for all other marketing directors. Under the MDA, Edwards accepted responsibility for any debts incurred by his subordinate agents. The MDA remained in effect until Edwards' termination.

Among Edwards' agent-recruits was Don Clark. Clark defrauded LBL by altering the premium rate reflected on new applications he submitted, thus artificially inflating the premium he could claim as an advance. During this period, LBL frequently waived its own rules governing advances, permitting them without complete applications, medical exams or payment of the first month's premium. As agents submitted applications directly to LBL, Edwards had opportunity to discover neither Clark's malfeasance nor LBL's waivers. LBL subsequently found itself unable to collect Clark's fictitious premiums and held Edwards responsible under the MDA.

LBL first notified Edwards of the irregularities in 1983 when Gene Wraith, LBL vice-president overseeing marketing directors, estimated Edwards' debt at $107,000. LBL did not raise the issue again until February 1985 when Wraith suggested that the two discuss the outstanding debt. No such discussion occurred until March 1986.

In March 1986, Edwards met with LBL officials to discuss his indebtedness. On March 7, 1986, he signed an "Indebtedness Agreement" (the "Agreement") whereby he acknowledged responsibility for $433,100.72 plus interest in subagent debts. LBL attributed the increase in amount between 1983 and 1986 to interest on the debt, but Edwards has never been informed what portion of the various debt statements constituted principal or interest. Edwards agreed to pay off the debt in monthly installments by 1989. Under the Agreement, LBL promised to assist Edwards with his payments by increasing his commission rates. These increased amounts were not to be actually paid to Edwards, but rather were to be retained by LBL and credited against his debt balance. LBL also agreed to assign Edwards additional agents. Wraith assured Edwards that these changes would permit satisfaction of the debt without actual cost to him. Wraith further told Edwards that failure to sign the Agreement would result in his termination. Edwards signed the Agreement because of this threat.

Pursuant to the Agreement, LBL reassigned 110 agents to Edwards, and credited him with increased commissions until 1991. In 1987, the parties entered an addendum to the Indebtedness Agreement by which Edwards would pay LBL $2,755 for 120 months, after which LBL would deem the debt satisfied in full. LBL later suspended these payments. At trial, the parties stipulated that from March 1, 1986, through March 31, 1998, a total of $255,713.77 in "payments [by Edwards] and credits" was applied to the debt. LBL never informed Edwards how much additional money was generated by the increased commissions. By the time litigation began, LBL asserted that Edwards owed it $1,066,596.88.

In July 1985, Edwards and LBL also entered a "Continuing Compensation Addendum" ("CCA") under which LBL agreed to continue to pay Edwards commissions following his leaving LBL under specified conditions. The CCA also contained a no-compete clause under which payments ceased if Edwards became a competitor of LBL. LBL has never made any payments under this agreement, and at trial contested only the amount due.

In late 1984 or early 1985, LBL decided to change marketing strategies, away from the marketing director system to a "life brokerage distribution system." This model envisioned brokerage agencies that did not personally solicit business, but rather recruited and managed large numbers of agents. This undertaking would involve marketing campaigns, travel and expertise and would require significant financial resources. The demands expected to be placed on brokerage agents exceeded those placed on marketing directors. LBL ultimately replaced all MDA contracts except Edwards' with "Master Brokerage Agency" ("MBA") contracts. LBL did not alter Edwards' contract for fear of upsetting the terms of the Indebtedness Agreement.

In 1994, Edwards made a formal request for an accounting. Effective March 31, 1995, LBL terminated Edwards' contracts. Following Edwards' termination, LBL filed an action for declaratory judgment in Nebraska state court alleging Edwards owed it $452,558.29 under the various agreements. Edwards removed the action to federal court and counterclaimed. Edwards asserted: (1) LBL breached the MDA "tie-in" clause by paying Weber and Liberda higher rates of commission than Edwards; (2) LBL breached an oral agreement to assign all of its agents in the Dallas-Fort Worth area to Edwards; (3) the 1986 Indebtedness Agreement should be rescinded as induced by fraud and coercion; (4) LBL breached the CCA by not making any payments under it, and; (5) LBL violated an implied covenant of good faith and fair dealing in the CCA.

In 1997, the district court rejected LBL's statute of limitations defense. Lincoln Benefit Life Co. v. Edwards, 966 F. Supp. 911 (D. Neb. 1997). We affirmed. Lincoln Benefit Life Co. v. Edwards, 160 F.3d 415 (8th Cir. 1998).

After a bench trial, the district court rejected LBL's claim that Edwards owed it money. The court found that the MDA made Edwards liable only for his agents' debts accrued within the contract terms. Accordingly, he was not responsible for debts incurred when LBL waived the contractual limitations on advances. The district court ruled for LBL on Edwards' first, second and fifth counter-claims. On Edwards' third claim, the court rescinded the Indebtedness Agreement as induced by fraud and coercion, and awarded Edwards restitution of the $255,713.77 stipulated as paid and credited towards the debt plus pre-and post-judgment interest. The district court refused to award LBL an offset for any amounts it paid or credited to Edwards under the Agreement. On Edwards' fourth claim, the court awarded him $37,325.35 under the CCA.

LBL appeals both the district court's refusal to award it an offset and also the award of prejudgment interest. On cross-appeal, Edwards challenges the dismissal of his first cross-claim, claims entitlement to a larger award under the CCA and reasserts his dismissed tort claim.

LBL's Claims on Appeal

A. Rescission and Offset

The district court found that LBL induced Edwards' signature on the Indebtedness Agreement by fraud and coercion. The court consequently rescinded the Agreement, and ordered LBL to pay Edwards the $255,713.77 stipulated as paid and credited towards the debt. The district court rejected LBL's claim for an offset, ruling "LBL cannot now claim an offset for what was, in effect, the 'bait' LBL dangled to fraudulently induce Edwards to sign the Agreement. Put simply, LBL cannot recoup the costs of its fraudulent scheme." On appeal, LBL argues the court erred by not awarding it an offset for amounts it paid or credited to Edwards under the Agreement.

We review a district court's application of state law de novo. Salve Regina Coll. v. Russell, 499 U.S. 225, 239 (1991); Sioux City Foundry Co. v. South Sioux City, 968 F.2d 777, 779 (8th Cir. 1992). We review a district court's denial of equitable relief for abuse of discretion. Foy v. Klapmeier, 992 F.2d 774, 779 (8th Cir. 1993). We review the district court's findings of fact for clear error. Fed. R. Civ. P. 52.

Nebraska's law of Rescission is clear. This equitable remedy dissolves and renders a written agreement a nullity. Haumont v. Security State Bank, 374 N.W.2d 2, 7 (Neb. 1985). Rescission requires "a judicial effort to place the contractual parties in, as nearly as possible, substantially the same condition which existed when the contract was entered." Kracl v. Loseke, 461 N.W.2d 67, 76 (Neb. 1990). In ordering Rescission, a court must require all parties to return whatever they gained under the rescinded document. Gnuse v. Garrett, 261 N.W. 143, 144 (Neb. 1935).

Under the Agreement, Edwards agreed to make payments to LBL, and LBL agreed to increase Edwards' income by raising his commission rates and assigning him additional agents....