Much v. Pacific Mutual Life Insurance

• Citation: 266 F.3d 637
• Decision Date: 12 September 2001
• Docket Number: No. 99-2762,99-2762
• Parties: (7th Cir. 2001) TODD W. MUCH, CHARLES A. MARIEN, III and CERTIFIED INSURANCE CONSULTANTS, INCORPORATED, an Illinois corporation, Plaintiffs-Appellees, v. PACIFIC MUTUAL LIFE INSURANCE COMPANY, a California corporation, Defendant-Appellant
• Court: U.S. Court of Appeals — Seventh Circuit

Page 637

266 F.3d 637 (7th Cir. 2001)

TODD W. MUCH, CHARLES A. MARIEN, III and CERTIFIED INSURANCE CONSULTANTS, INCORPORATED, an Illinois corporation, Plaintiffs-Appellees, v. PACIFIC MUTUAL LIFE INSURANCE COMPANY, a California corporation, Defendant-Appellant.

No. 99-2762

In the United States Court of Appeals For the Seventh Circuit

ARGUED SEPTEMBER 14, 2000

DECIDED September 12, 2001

Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 94 C 7621--David H. Coar, Judge.

Before CUDAHY, EASTERBROOK and RIPPLE, Circuit Judges.

RIPPLE, Circuit Judge.

Todd W. Much and Charles A. Marien, III (collectively "the plaintiffs") and their wholly owned corporation, Certified Insurance Consultants, Inc. ("CICI"), brought a breach-of-contract action against Pacific Mutual Life Insurance Co. ("Pacific Mutual"), seeking renewal commissions for the sale of variable life insurance policies. Following a bench trial, the district court entered judgment for the plaintiffs. For the reasons set forth in the following opinion, we reverse the judgment of the district court.

I BACKGROUND

A. Facts

1.

Mr. Much and Mr. Marien are licensed to sell life insurance in Illinois and are licensed with the Securities and Exchange Commission ("SEC") and the National Association of Securities Dealers ("NASD") to sell securities. Mr. Much owns all of CICI's shares, and both Mr. Much and Mr. Marien work for CICI.

Pacific Mutual issued a variable life insurance product termed "Pacific Select Exec." ("PSE") beginning in 1988. Variable life insurance is a permanent form of insurance in which the cash value is based on the performance of an underlying pool of securities. To sell variable life insurance products, an individual must be a NASD-registered representative of a broker-dealer licensed with both the SEC and the NASD.

Pacific Mutual itself was not registered as a broker-dealer with either the SEC or the NASD. Pacific Equities Network ("PEN"), a subsidiary of Pacific Mutual, was properly registered as a broker- dealer, and, therefore, Pacific Mutual paid PEN to act as the principal underwriter of the PSE policies.

Pacific Mutual and PEN had a selling agreement with Mutual Service Corporation ("MSC"), a wholly owned subsidiary of PEN and a wholly owned indirect subsidiary of Pacific Mutual. Under the agreement, PSE was sold by NASD-registered representatives of MSC. Pursuant to another agreement among the three entities, Pacific Mutual and PEN acted as "paymaster" for MSC; at MSC's direction, they sent commission checks directly to the MSC-registered representative selling the policies.

More specifically, the flow of commission dollars generally worked as follows. The insured or policyholder first paid premiums to Pacific Mutual. Pacific Mutual then sent the gross commission dollars to PEN, who paid the broker-dealer, who then paid the registered representative. When the broker-dealer was MSC and the registered representative at issue a producer or subproducer of Pacific Mutual, the process changed somewhat, as per the service agreement among the three entities. In that case, the commission dollars did not physically flow to MSC. PEN instead paid the money directly to the registered representative on MSC's behalf, although the money belonged to MSC and the payments were entered in MSC's books and records. For those registered representatives of MSC who were also Pacific Mutual agents, this arrangement allowed them to receive a higher percentage of commission, because MSC did not retain a percentage of the commission dollars for itself, and to obtain their commission monies more quickly.

As further background, a given insurance policy can generate various forms of commission. First, commissions are earned in the first year the policy is in effect. These commissions are percentages of the target premium, an actuarially determined amount of thousands of insurance policies on which commissions are paid. This commission has two parts, a base amount and a bonus. Second, commissions are earned on premiums paid in year two and beyond in the amount of two percent of all renewal commissions. Third, continuing commissions known as "trails" are paid annually starting in the tenth year the policy is in effect, based on the net asset value of the policy.

2.

In February 1989, the firm Foote, Cone & Belding ("FCB") contacted Mr. Much about purchasing variable life insurance policies, valued at approximately $1 million apiece, for its executives. Mr. Much and Mr. Marien met with Gene Kolasny, Pacific Mutual's branch manager in Chicago, to discuss the possibility of Pacific Mutual's supplying the insurance policies to Mr. Much and Mr. Marien. Kolasny met multiple times with the plaintiffs; Mr. Much, in fact, testified that Mr. Marien and he met with Kolasny four or five times.

In these conversations, Kolasny and the plaintiffs discussed the commissions that the plaintiffs would receive. Kolasny testified at trial that he told the plaintiffs that their commissions would be eighty-five percent of the target premium in the first year of a given policy and two percent of renewal premiums in subsequent years. Mr. Much testified that Kolasny told him that the commissions would consist of eighty-five percent of the first-year commissions, two percent of renewal commissions, and trails based on net asset value.

Kolasny admitted at trial that Mr. Much and he may have discussed vesting during these initial contract talks, but he does not remember any specific conversations. Vesting of commissions permits an agent to receive renewal commissions on policies that the agent instituted even after the policy owner has terminated the agent. Mr. Much, in contrast, testified as to four different conversations that he had with Kolasny or Evelyn Grant, another Pacific Mutual employee, in which he was assured that his commissions would be vested.

3.

To receive commissions on the PSE policies, the plaintiffs needed to become registered representatives of a broker- dealer that had a PSE selling agreement in force. According to Mr. Much, Kolasny told the plaintiffs in May or June 1989 that, if they used MSC as their conduit, Kolasny and the Chicago office could participate, be paid, and receive credit for the deal. Further, the plaintiffs would be paid a higher rate of commission if they used MSC. Kolasny did not disclose in these discussions that he was a principal with MSC.

The plaintiffs completed the necessary forms to become registered representatives of MSC. Mr. Much testified that "it didn't make any difference to us" and that Mr. Marien and he assumed that what Kolasny told them regarding the necessity of registering with MSC was correct. R.91 at 11. Mr. Much further testified that he viewed the forms more as a licensing requirement for NASD than as an agreement with MSC.

Mr. Much also completed a set of MSC registration materials, signed on June 13, 1989, and received a MSC compliance manual, which he reviewed.

4.

On July 1, 1989, CICI entered into a producer contract with Pacific Mutual. Under its terms, Pacific Mutual agreed to pay CICI compensation for policies sold at the rates set forth in the compensation schedules in effect on the application date of the policies. The contract specifically provided that:

Subject to the conditions of this contract [Pacific] shall pay [CICI] . . . compensation on policies procured under this contract at the rates set forth in the Compensation Schedules in effect on the application date of the policies to which they relate.

. . .

[CICI] shall be solely responsible for compensating its employees, agents and brokers by commission or otherwise.

. . .

No oral promises or representations shall be binding nor shall this contract be modified except by agreement in writing, executed on behalf of [Pacific Mutual] by a duly authorized officer.

R.26, Ex.2 at 1-2. The contract also contained an integration clause, which indicated as follows:

This contract supercedes all previous contracts and agreements between [CICI] and [Pacific Mutual] made for the procurement of insurance products.

Id. at 2.

Kolasny testified that the producer contract applied only to nonvariable life insurance sales. Although he said that he would typically inform agents that the contract applies only to nonvariable policies, Kolasny could not recall a conversation where he told Mr. Much and/or Mr. Marien that the contract did not apply to variable life insurance, such as the PSE at issue here.

The compensation schedule in effect at the time CICI entered into the producer contract with Pacific Mutual, and at the time the PSE policies were sold, made no provision for commissions on PSE policies but emphasized that the policies could only be sold by properly registered representatives. The schedule provided:

V. REGISTERED PRODUCTS

Pacific Mutual reminds Producers that registered products can only be sold by properly licensed Registered Representatives, registered with a NASD member Broker Dealer that has a Selling Agreement in effect. Compensation to the Producer for registered insurance products will then be in accordance with the compensation agreement and schedules between the Broker-Dealer and the Producer currently in effect. Pacific Mutual has not and can not grant authority to sell registered products by Producers that do not have the proper SEC, NASD, and state insurance licenses.

R.26, Ex. 110 at 6.

Mr. Much and Mr. Marien also entered into subproducer contracts with CICI on July 1, 1989, that appointed them agents of CICI and subproducers of Pacific Mutual. The plaintiffs had determined that, for tax purposes, CICI, as opposed to them individually, should receive the commissions and pay the business expenses. Mr. Much testified that Mr. Marien and he signed the subproducer agreements because they were told that the agreements were required to shift the commissions. They thought the...