Osman v. Karlen and Associates

Decision Date05 March 2008
Docket NumberNo. 24517.,24517.
PartiesJames B. OSMAN, Plaintiff and Appellee, v. KARLEN AND ASSOCIATES and Dean Karlen, Defendants. and Gary Peterson, Defendant and Appellant.
CourtSouth Dakota Supreme Court

Robert L. Spears of Spears Law Office, P.C., Watertown, South Dakota, Attorneys for appellee.

Kimberly Dorsett of Richards, Oliver & Dorsett Aberdeen, South Dakota, Attorneys for appellant.

SABERS, Justice.

[¶ 1.] James Osman sued Dean Karlen, Karlen & Associates, Inc., and Gary Peterson alleging breach of contract and retaliatory discharge. After a bench trial, the circuit court found against Peterson on the breach of contract claim. The circuit court dismissed the retaliatory discharge claim and directed a verdict in favor of Karlen and Karlen & Associates, Inc. on the breach of contract claim. Peterson appeals.

FACTS

[¶ 2.] Karlen is an insurance agent in Aberdeen, South Dakota. He formed Karlen & Associates, a South Dakota corporation doing business in South Dakota, to sell DakotaCare policies. Karlen is the President and only employee of this corporation. Karlen rents office space to five individual agents who work out of his office as independent contractors. These agents selling DakotaCare policies assign their commissions to Karlen & Associates, which pays the agents their commissions. Agents at Karlen & Associates now sell other lines of insurance, in addition to DakotaCare policies. It is unclear whether these commission checks are assigned to Karlen & Associates or if the checks go directly to the agents.

[¶ 3.] Karlen also is the general agent for Security Financial Life (n/k/a Assurity) insurance products. Karlen recruits and trains agents to work with him, but they are actually independent agents that contract directly with Security Financial. Karlen receives a 10% override from the new agent's sales of Security Financial products. Security Financial pays the commissions from sales of its products directly to the independent agents and not to Karlen & Associates.

[¶ 4.] Karlen owns an office building in Aberdeen, with office space for up to five independent agents. If the agents are at club level,1 then the agent pays no additional money for rent or office supplies. If the agents are not at club level, then $200 per month was deducted from the agent's commission assigned to Karlen & Associates.

[¶ 5.] Osman was an insurance agent who worked out of Karlen's office building from 1990 to December 31, 1999. In January of 2000, Osman became a detached agent and worked out of his home. Peterson started working out of the office in 1996.

[¶ 6.] Karlen drafted an "Agency Administrative Policy Manual" that sets forth some requirements of agents associated with his office. Each agent received the manual upon hire. The manual covered such items as when to be in the office, when to answer correspondence, how many appointments to schedule per day, and when to turn in activity sheets. The manual also contains broad policy statements, such as "This Agency is a joint team effort. By doing more than your share, you will receive more than average success." It required brokerage business to be placed through the general agent, Karlen.

[¶ 7.] The relevant section for this case provides:

9. Active [Full-Time (Club Level)]2 agents' policyholders are protected to the extent that they are not to be used by another agent as a prospecting list. The policyholder and his/her immediate family up to age 16 are protected. However, should another agent call on them by mistake, or not knowing they are a policyholder and create some interest by the prospect, then both the original agent and the agent who created the need or interest should hold the interview and split the case.

The manual also explains the division of brokerage commissions. Generally, there is a 90/10, 80/20 or 50/50 split of commissions between the agent and Karlen & Associates, depending on the type of sale and the experience of the agent.3

[¶ 8.] In 1991, Osman sold Dennis Hellwig a life insurance policy. A year later he sold Dennis' wife, Cherie, and Dennis' sons insurance policies. In 1994 or 1995, Osman sold the Hellwigs an executive bonus plan, which is a retirement plan. Over the years he received commissions from these policies and continued to service the policies when needed.

[¶ 9.] On or around June 10, 2006, Osman went to the Hellwig's business4 to change beneficiaries on the retirement plan Osman previously sold to the Hellwigs. There, he discovered Peterson was in the process of selling the Hellwigs a GEAR program.5 Osman asked Karlen to enforce the policy manual, which Osman alleged required Peterson and Karlen to let Osman assist in the sale of the GEAR program and split the commission.

[¶ 10.] A couple of days later, Karlen, Osman and Peterson had a meeting regarding the GEAR policy and Osman assisting in the sale. Peterson claimed the sale was already completed and Osman was not needed to help with the sale. Moreover, Peterson would not split the commission for the sale. Osman asked Karlen to "follow the policy" and force Peterson to split the commission. Karlen claimed he did not have the power to force the commission split.

[¶ 11.] Osman did not sell GEAR policies, but went to one seminar about the product. Thereafter, Osman called on the Hellwigs and told them the GEAR policy was not fully approved by the IRS. The Hellwigs called Peterson to ask about Osman's statements and Peterson explained that one section of the GEAR policy has not been fully approved, but the section he sold the Hellwigs was approved. Osman was subsequently fired in November of 2000 by Security Financial.

[¶ 12.] Osman sued Karlen, Karlen & Associates and Peterson. He alleged section nine of the Agency Administrative Policy Manual created an implied contract and the defendants breached the contract by refusing to split the commission on the GEAR policy sale. He also sued Karlen and Karlen & Associates for retaliatory discharge.

[¶ 13.] A bench trial was held on February 22-23, 2007. After Osman presented his case, the defendants moved for a directed verdict. The circuit court granted the motion for a directed verdict on the retaliatory discharge claim finding Osman presented no evidence that termination "for cause" was required. With regard to the breach of contract claim, the circuit court denied the directed verdict motion.

[¶ 14.] At the conclusion of the trial, the circuit court judge found Peterson had breached an implied contract based on section nine of the Agency Administrative Policy Manual. He awarded Osman 40% of the $117,082 commission Peterson earned from the GEAR sale to the Hellwigs. Prejudgment interest amounted to $19,405, for a total judgment of $66,237.80. The circuit court found in favor of Karlen and Karlen & Associates and dismissed all claims. Peterson appeals and raises the following issues:

1. Whether the circuit court erred in denying Peterson a directed verdict for the breach of contract claim.

2. Whether the circuit court erred in finding that the manual created a contract between Osman and Peterson.

3. Whether the circuit court erred when it failed to hold that plaintiff's claims in equity are barred by the doctrine of unclean hands.

4. Whether the circuit court erred in holding that the commission should be split 60/40.

STANDARD OF REVIEW

We review a trial court's consideration of a motion for directed verdict and judgment notwithstanding the verdict under the following standard:

A motion for a directed verdict under SDCL 15-6-50(a) questions the legal sufficiency of the evidence to sustain a verdict against the moving party. Upon such a motion, the trial court must determine whether there is any substantial evidence to sustain the action. The evidence must be accepted which is most favorable to the nonmoving party and the trial court must indulge all legitimate inferences therefrom in his favor. If sufficient evidence exists so that reasonable minds could differ, a directed verdict is not appropriate. The trial court's decisions and rulings on such motions are presumed correct and this Court will not seek reasons to reverse.

Martinmaas v. Engelmann, 2000 SD 85, ¶ 20, 612 N.W.2d 600, 606 (additional citations omitted). "Thus, we apply the abuse of discretion standard when reviewing the trial court's ruling." Id. (citing Bland v. Davison County, 1997 SD 92, ¶ 26, 566 N.W.2d 452, 460 (citing Treib v. Kern, 513 N.W.2d 908, 914 (S.D.1994)).

[¶ 15.] On an appeal from a bench trial:

We review the circuit court's findings of fact under the clearly erroneous standard. Under this standard, we will only reverse when we "are left with a definite and firm conviction that a mistake has been made" after a thorough review of the evidence. We review conclusions of law under the de novo standard without deference to the circuit court.

In applying the clearly erroneous standard, our function is not to decide factual issues de novo. The question is not whether this Court would have made the same findings that the trial court did, but whether on the entire evidence we are left with a definite and firm conviction that a mistake has been committed. This Court is not free to disturb the lower court's findings unless it is satisfied that they are contrary to a clear preponderance of the evidence. Doubts about whether the evidence supports the court's findings of fact are to be resolved in favor of the successful party's "version of the evidence and of all inferences fairly deducible therefrom which are favorable to the court's action."

Fin-Ag, Inc. v. Feldman Bros., 2007 SD 105, ¶ 19, 740 N.W.2d 857, 862-63 (additional citation omitted).

[¶ 16.] 1. Whether the circuit court erred in denying Peterson a directed verdict for the breach of contract claim.

[¶ 17.] At the conclusion of Osman's case, Peterson6 requested a directed verdict regarding both the contract and...

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