United Teacher's Associates v. MacKeen & Bailey

• Decision Date: 08 March 1994
• Docket Number: No. A 93 CA 026 SS.,A 93 CA 026 SS.
• Citation: 847 F. Supp. 521
• Parties: UNITED TEACHER'S ASSOCIATES INSURANCE COMPANY v. MACKEEN & BAILEY, INC., and W. Duncan MacKeen, Individually v. Hoyt W. WHIDBEE, Jr., David M. Morgan, United Teacher's Associates, Inc., and the Whidbee Corporation.
• Court: U.S. District Court — Western District of Texas

847 F. Supp. 521

UNITED TEACHER'S ASSOCIATES INSURANCE COMPANY v. MACKEEN & BAILEY, INC., and W. Duncan MacKeen, Individually v. Hoyt W. WHIDBEE, Jr., David M. Morgan, United Teacher's Associates, Inc., and the Whidbee Corporation.

No. A 93 CA 026 SS.

United States District Court, W.D. Texas, Austin Division.

March 8, 1994.

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Donald R. Taylor, Akin, Gump, Strauss, Hauer & Feld, Joe K. Longley, Longley & Maxwell, David E. Dunham, Nanette K. Beaird, Akin, Gump, Strauss, Hauer & Feld, Austin, TX, for United Teacher's Associates Ins. Co.

Floyd R. Nation, Arnold White & Durkee, Austin, TX, Randolph M. James, McCall & James, Winston-Salem, NC, Jefferson C. McConnaughey, McKenzie, Martin, Taylor & McConnaughey, P.C., Atlanta, GA, for MacKeen & Bailey, Inc. and W. Duncan MacKeen.

SPARKS, District Judge.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

BE IT REMEMBERED that on Monday, the 31st of January, 1994, the parties commenced trial in the above-captioned case. All parties stipulated to a bench trial and were present and represented by counsel for five full days of trial. Having carefully considered the evidence presented at trial along with the oral arguments and written briefs of counsel, the Court enters the following findings of fact and conclusions of law.

Venue and Jurisdiction

On January 13, 1993, the Court acquired jurisdiction over this case when Defendants removed from the District Court of Travis County, Texas, 200th Judicial District. The plaintiff, United Teacher's Associates Insurance Company (hereinafter "UTAIC"), is a corporation organized and existing under the laws of the State of Georgia and having its principal place of business in Austin, Texas. Defendants, corporately and individually, are residents of North Carolina. The amount in controversy in this dispute exceeds $50,000. Hence, Defendant's removal was proper under 28 U.S.C. § 1441(a) as this Court has original diversity jurisdiction under 28 U.S.C. 1332(a). Furthermore, venue is proper under 28 U.S.C. §§ 124(d)(1) and 1391(a) as this action is brought in the Western District of Texas where the plaintiff has its principal place of business.

Findings of Fact

In 1981, after receiving a personal loan of $3 million, David Morgan (through his corporation UTA, Inc.) acquired American Consumers Insurance Company and renamed it United Teacher Associates Insurance Company. Upon founding UTAIC, Morgan hired Hoyt Whidbee to serve as the company's president. Whidbee, who had also guaranteed the $3 million loan, obtained 10% ownership of UTAIC as part of his agreement with Morgan. UTA, Inc. held the remaining 90%.

In 1984, Whidbee retained Duncan MacKeen to provide actuarial services for UTAIC. Soon after he was retained, MacKeen suggested to Morgan and Whidbee that they, in their capacity as UTAIC, begin purchasing blocks of business from other insurance companies. MacKeen believed certain insurance companies possessed blocks of business with overstated (or redundant) reserves. He convinced Morgan and Whidbee that after purchasing these blocks of business, he could recalculate the reserves and transfer them to the capital/surplus side of UTAIC's balance sheet. This recalculation and transfer would generate tremendous profits for UTAIC (or, in reality, for Morgan, Whidbee, and MacKeen). Morgan was at first skeptical. He did not understand how MacKeen could pull profits out of thin air by simply recalculating the reserves.¹ In addition, Morgan and Whidbee knew of the potential conflicts of interest these acquisitions would present to MacKeen. A 1986 letter from Peat Marwick informed them of the potential conflicts involved in MacKeen's performance of actuarial services and self interests. Nevertheless, Morgan, Whidbee, and MacKeen entered into an oral agreement whereby the three would receive equal shares of whatever profits UTAIC realized from these acquisitions. Under this arrangement, Whidbee and Morgan (through UTAIC) provided 100% of the capital to finance the acquisitions while MacKeen provided his time and actuarial expertise to locate blocks of business with overstated reserves and recalculate them after UTAIC's acquisition. In addition, MacKeen was to pay his own out-of-pocket expenses related to these acquisitions.

Because of UTAIC's limited capital, the corporation could only acquire failing blocks of business, often at a neutral or negative net value. If a block of business continued to be unprofitable after UTAIC acquired it, paying off the losses could potentially cripple the company. To avoid this downside risk to UTAIC, the three men initially agreed to create a re-insurance corporation in Arizona to be named Alpha Re, Inc. Due to financing complications, Alpha Re never materialized. UTAIC began making acquisitions in 1986 despite the failure of Alpha Re.

*The Retainer Agreement

Between 1986 and 1989, UTAIC made several successful acquisitions and reaped enormous profits. Pursuant to the profit-sharing arrangement, UTAIC distributed dividends from these acquisitions to Morgan and Whidbee personally and to MacKeen & Bailey, Inc. In late 1987, David Morgan began expressing his disapproval of the profit-sharing arrangement. He did not believe MacKeen & Bailey should continue to receive 1/3 of the profits when MacKeen had no capital at risk or potential personal debt. In an attempt to phase out the 1/3 profit-sharing arrangement, Morgan and MacKeen orally agreed that MacKeen & Bailey, Inc. would begin receiving a $12,500 monthly retainer fee in January of 1988. On May 29, of 1989, Morgan, Whidbee, and MacKeen formally ended their 1/3 profit-sharing arrangement and memorialized the payment of monthly retainer fees by signing a document entitled, "Retainer Agreement." Though MacKeen signed this agreement with some reservations, he acted with complete knowledge of his corporation's rights and obligations under the agreement. He was also aware that the agreement included a provision releasing any claims he or MacKeen & Bailey, Inc. had against UTAIC.

The Retainer Agreement names seven of the blocks of business (hereinafter "the Incentive Blocks") that MacKeen had helped to acquire and designates that MacKeen & Bailey, Inc. is to receive monthly disbursements based on the financial performance of these blocks. Again, prior to the agreement, UTAIC (or Morgan) had determined the amount of these disbursements to be $12,500. The agreement simply sanctions the continuation of these disbursements subject to annual adjustment. Assuming the Incentive Blocks continue to generate profits, the agreement allows the payments to continue until December 1, 1998. Though not expressed in the agreement, Morgan and Whidbee also continued to receive monthly disbursements of $12,500 in accordance with the performance of the Incentive Blocks. The agreement additionally relegates MacKeen to payment on an hourly basis for his actuarial services, including services rendered for any future acquisitions. Finally, all parties to the agreement understood that MacKeen could subsequently provide actuarial services for clients other than UTAIC.

Of the $1,810,293 MacKeen & Bailey, Inc. received from MacKeen's work for UTAIC, $750,000 is attributable to the $12,500 monthly retainer fee disbursements. UTAIC continued to pay these monthly disbursements through December of 1992, when it filed this lawsuit. Morgan and Whidbee, however, continued to collect their monthly disbursements through October of 1993.

*The Proposed Acquisition of the Heart/Cancer Block

In the summer of 1991, National Foundation Life (hereinafter, "NFL"), a Ft. Worth based life insurance company, began experiencing regulatory pressure from the Insurance Department for the State of Delaware (the state of NFL's incorporation). NFL estimated that an increase of its capital and surplus to at least $6 million would appease the insurance regulators. NFL believed it could achieve this goal by selling selected blocks of business and began soliciting bids for these blocks in July of 1991.

On July 25, 1991, Hoyt Whidbee and Duncan MacKeen visited NFL's Ft. Worth headquarters to evaluate the Heart/Cancer Block as a possible acquisition. In David Morgan's mind, one of the sweetest aspects of the deal was the acquisition of 150,000 additional policies that he could personally broker to prospective purchasers. After appraising the block, MacKeen advised Morgan and Whidbee that the reserves were between fifty and seventy-five percent redundant and that the block would be a profitable acquisition at a purchase price of up to $18 million. About a month after the trip to Ft. Worth, on August 30, 1991, Whidbee sent a letter to James Thigpen, President and Chief Operating Officer at NFL, expressing UTAIC's intention to offer NFL $13 million for the Heart/Cancer Block. The letter states the offer would expire if NFL did not accept prior to September 12, 1991. September 12 passed without an acceptance from NFL and negotiations were suspended for several months.

On December 5, 1991, James Thigpen visited UTAIC's headquarters and succeeded in rekindling negotiations for the sale of the Heart/Cancer Block. In January of 1992, a rumor began to circulate that the reserves in the Heart/Cancer Block had been reduced by $2.5 million. Wary of this rumor, Whidbee and MacKeen returned to NFL headquarters to re-evaluate the reserves. While they were at NFL, Thigpen received Whidbee's permission to talk with MacKeen about retaining him to assess NFL's rate increases. Consequently, MacKeen preliminarily agreed to provide actuarial services for NFL.

Following the visit to NFL, Whidbee consulted MacKeen and reviewed his re-evaluation of the reserves in the Heart/Cancer Block. Again, MacKeen's figures indicated UTAIC should purchase the block as they showed the reserves were still overstated. Whidbee sent another letter of intent to Thigpen on January...