McCullough v. Scarbrough, Medlin & Assocs., Inc.

• Decision Date: 20 June 2014
• Docket Number: No. 05–11–01303–CV.,05–11–01303–CV.
• Citation: 435 S.W.3d 871
• Court: Texas Court of Appeals
• Parties: Robert L. McCULLOUGH and Julia T. McCullough, Appellants v. SCARBROUGH, MEDLIN & ASSOCIATES, INC. and Scarbrough, Medlin & Associates Financial Services, Inc., Appellees.

435 S.W.3d 871

Robert L. McCULLOUGH and Julia T. McCullough, Appellants

v.SCARBROUGH, MEDLIN & ASSOCIATES, INC. and Scarbrough, Medlin & Associates Financial Services, Inc., Appellees.

No. 05–11–01303–CV.

Court of Appeals of Texas, Dallas.

June 20, 2014.

Kathryn L. Schilling, Dallas, for Appellants.

Brian Patrick Shaw, Leland Curtis DeLaGarza, Dallas, for Appellees.

Before Justices FITZGERALD, LEWIS, and BROWN.¹

OPINION

Opinion by Justice BROWN.

Robert L. McCullough ² and Julia T. McCullough appeal from the trial's judgment rendered on a jury verdict in favor of Scarbrough, Medlin & Associates, Inc. and Scarbrough, Medlin & Associates Financial Services, Inc. (collectively, SMA) on SMA's claims for breach of contract, breach of fiduciary duty, fraud, and civil theft against McCullough and their equitable claim of money had and received against both McCullough and his wife, Julia McCullough. We reverse that portion of the trial court's judgment awarding SMA statutory damages and attorneys' fees and render judgment SMA cannot recover those amounts. We affirm the trial court's judgment in all other respects.

I. BACKGROUND

A. SMA's business and McCullough's employment at SMA

Scarbrough, Medlin & Associates, Inc. is a commercial insurance agency. The firm is owned by brothers Don and Rod Medlin, who are the only principals of the firm. Don Medlin is the firm's president, and because he testified on behalf of SMA at trial, we will refer to him as “Medlin.”

In November 1998, the Medlins hired McCullough to create a financial services division of the firm and serve as the division's president. Financial services encompassed employee benefit and retirement plans, and the addition of the division expanded the firm's business beyond selling commercial property and casualty insurance. Although the financial services division lost money the first few years, it developed into a viable part of the firm, at which time the Medlins formed Scarbrough, Medlin & Associates Financial Services, Inc. for the purpose of putting the division into a separate corporate entity. That entity was incorporated in 2005 but remains a shell corporation.

McCullough's responsibilities as president of the financial services division included running the division, hiring employees, managing and overseeing the products sold, sales training, and development of the support staff. As compensation, McCullough received a salary plus one third of the division's profits at the end of the year as a bonus. McCullough also received other benefits, including use of a corporate American Express card, a car allowance, and reimbursement for his expenses.

SMA generates income either by charging a fee to the client for negotiating the premiums for the client's insurance program or collecting a commission from the insurance carriers based on the insurance products sold to SMA's clients. The amount of the commission ranges from five to fifteen percent depending on the line of coverage sold. For most of the products sold by SMA, the commissions earned were to be paid by the insurance carrier to SMA, not to the individual agent who sold the insurance. For any insurance product that involved the sale of securities, like 401(k) and retirement plans, however, the commission could be received only by one who holds a Series 7 license. Because McCullough held a Series 7 license, Medlin knew that commissions for those products would be paid to McCullough directly. In turn, McCullough would pass on the commissions to SMA.

B. Problems with accounting for financial services commissions

In 2006, Medlin learned that SMA was receiving commission-based income from the sale of financial services products by personal checks from McCullough and not by payments from the insurance carriers. That is, McCullough changed the payment instructions with various carriers and directed those carriers to pay him the commissions earned (as opposed to paying SMA) not only for Series 7 products but also for other financial services products. The commission statements would go to McCullough's home address. After McCullough received the commission check from the carrier, he would either endorse the check to SMA or deposit the money into his personal bank account and issue a personal check to SMA. He also received electronic fund transfers of commission payments from the insurance carriers into his personal bank account. SMA did not give McCullough permission to handle financial services commissions in this manner, and excluding the products that required a Series 7 license, Medlin could think of no valid business reason for this practice. Medlin also was concerned because the practice affected the accuracy of SMA's financial information for tax-reporting purposes and the firm's cash flow. With this practice, SMA did not have access to its cash until SMA received the payment from McCullough, yet SMA paid all expenses that accompanied running the financial services division.

Beginning in 2006 and continuing through 2008, SMA's accounting department tried to reconcile the accounting for financial services commissions. As part of the reconciliation, the department requested bank and commission statements from McCullough and pressed him to provide bank routing numbers so commission payments could be re-wired from McCullough's bank account to SMA's account. McCullough did not provide the requested information; rather, he offered “plausible excuses” for the delay. And despite receiving communications about SMA's concerns over the accounting and commission practices (including SMA's repeated requests for online access to the commissions deposited into McCullough's personal bank account), McCullough continued the practice and added another carrier to the list of carriers that deposited funds into his personal bank account, which SMA learned about in September 2008.

Around that same time, SMA's outside CPA, Robert Wilson, became involved in the process to resolve the financial services accounting issues and met with McCullough at SMA's request on October 31, 2008. During the meeting, Wilson discussed with McCullough SMA's need to obtain financial records from him for the purpose of reconciling SMA's income. Wilson gave McCullough an agenda listing several requests for McCullough's records and information, including requests for McCullough to provide all bank statements from 2006 through October 31, 2008 and access codes to the account in which McCullough deposited commissions related to the sale of securities. Wilson also asked McCullough to change the payment structure for commissions paid by all insurance carriers so that the commission checks would be payable to SMA. Wilson was particularly concerned about the fact that business funds were being deposited into McCullough's joint account with his wife. Wilson asked McCullough to close that account and open a separate business account that both McCullough and SMA could access. McCullough agreed to close the joint account and provide the bank statements. Wilson gave McCullough a deadline of November 15, 2008 to fulfill the requests.

From November 7 through the end of December, Wilson asked McCullough for updates on the requests, emphasizing the need for McCullough to provide the bank statements for the reconciliation. McCullough responded with assurances of “progress” and gave Wilson some partial printouts from bank websites. According to Wilson, he never received the specific documents requested.

In early January 2009, McCullough announced he was leaving SMA. At a subsequent meeting attended by the Medlins, their attorney, McCullough, and his attorney, Medlin learned that McCullough not only was resigning from SMA but also he was taking the financial services division with him, including several of the employees, and selling the business to a competitor, Frost Insurance Agency, Inc. The Medlins considered suing McCullough, but because a lawsuit would necessarily involve joint clients, they decided to negotiate an agreement with McCullough.

C. The Separation Agreement between SMA and McCullough

As a result of the negotiations, SMA and McCullough entered into a letter agreement, dated February 27, 2009 (the “Separation Agreement”). The Separation Agreement terminated McCullough's employment with SMA effective February 28, 2009 and established that all commissions and other revenues associated with products sold by McCullough or the financial services division through the termination date belonged to SMA. The agreement also addressed the sale of the financial services book of business to Frost. Under those provisions, McCullough and SMA agreed to a 50/50 split of all payments received from Frost for the sale. The parties received the first check for $375,000 from Frost the day after the sale, and to finish the sale, Frost paid monthly checks over a period of eighteen months. SMA also agreed to release the financial services employees from any non-compete obligations so that those employees could be employed by Frost.

The Separation Agreement also outlined a mechanism for resolving the accounting dispute over financial services commissions between SMA and McCullough. Specifically, the agreement provided that “SMA's CPA will make a determination of any commissions or other revenues associated with all insurance products sold by McCullough or the financial services division of SMA that have been received by McCullough through the Termination Date and not remitted to SMA.” The agreement refers to the amount of commissions and revenues unremitted by McCullough and due SMA as the “Recovered Premiums.” The Recovered Premiums were to be reduced by any sums SMA owed McCullough for expense reimbursement or the one-third distribution of profits from the sale of insurance products by McCullough or the division. The process of calculating the amount of Recovered Premiums less the amount owed to McCullough is called the “CPA Determination.” Before the...