Kral, Inc. v. Southwestern Life Ins. Co.

• Court: Court of Appeals for the Fifth Circuit
• Decided: August 16, 1993
• Docket: 92-9049
• Status: Published

Opinion

UNITED STATES COURT OF APPEALS For the Fifth Circuit

No. 92-9049

KRAL, INC., d/b/a Ed's Automatic Transmission Service, ET AL.,

Plaintiffs-Appellants,

VERSUS

SOUTHWESTERN LIFE INSURANCE COMPANY,

Defendant-Appellee.

Appeal from the United States District Court For the Northern District of Texas (August 16, 1993)

Before EMILIO M. GARZA, DeMOSS, Circuit Judges, and ZAGEL, District

Judge.*

DeMOSS, Circuit Judge:

I.

This is an appeal of a summary judgment granted in favor of

Southwestern Life Insurance Co. (SWL). Kral sued SWL for breach of

fiduciary duties in violation of 29 U.S.C., § 1109 (a) (1985).

Plaintiffs include: (1) Ed's Automatic Transmission Service

Defined Benefit Plan, a qualified defined benefit plan under the

* District Judge of the Northern District of Illinois, sitting by designation. terms of ERISA (the Kral Plan); (2) Kral, Inc. d/b/a Ed's Automatic

Transmission Service (Kral, Inc.), the Kral Plan's designated plan

administrator; (3) Edwin V. Kral, a Trustee of the Kral Plan and a

Plan participant who owed fiduciary duties to the Kral Plan; and

(4) Calvin Kral, the Kral Plan's other Trustee and a Kral Plan

participant who owed fiduciary duties to the Kral Plan. The

defendant is SWL, which is not a designated fiduciary of the Kral

Plan and has never been designated by a fiduciary named in the Kral

Plan to carry out fiduciary responsibilities.

Plaintiffs contend that SWL is liable to them for breach of

fiduciary duty and for theft of almost $500,000 in pension plan

funds by Robert Joseph Zeigler (Zeigler). Zeigler is the president

and sole shareholder of Administrative Pension Services, Inc. (APS)

which, pursuant to contract acted as the Kral Plan's third-party

administrator. Plaintiffs assert the theory of respondeat superior

to hold SWL liable for Zeigler's allegedly fraudulent conduct.

On May 1, 1983, Zeigler's wife, Peggy became an authorized

soliciting agent for SWL. Apparently Peggy Zeigler was only

authorized to "solicit applications for life insurance, annuities,

and other insurance products offered by [Southwestern] for sale to

the general public." Neither Joseph nor Peggy Zeigler was ever an

authorized recording agent for SWL, and neither ever had the

authority to bind SWL to an insurance or annuity contract.

Moreover, neither of the Zeigler's was authorized to make or modify

any contracts or policies on behalf of SWL.

2 On March 18, 1985, the Kral Plan contracted with Farzaroli &

Davey Pension Services Corporation (Farzaroli), to provide it with

administrative services. At the time, Joseph Zeigler was an

employee of Farzaroli.

In 1985 or 1986, the Kral Plan hired APS as their contract

administrator. APS was directly compensated for the services it

rendered. Zeigler was the president and sole shareholder of APS.

Plaintiffs solicited and received recommendations from Zeigler

concerning investment of their retirement funds. On April 26,

1986, Zeigler used forged SWL Annuity Contracts which he and Ed

Kral executed for $62,000. Simultaneously, Zeigler received a

check for $62,000 from the Kral Plan which he instructed Kral to

make payable to APS. SWL did not authorize APS to receive funds on

its behalf. Neither Zeigler nor APS ever forwarded the contracts

or funds to SWL.

On August 11, 1986, Peggy Zeigler appointed her husband as her

sub-agent, for SWL. SWL approved of Zeigler's appointment only for

the solicitation of applications for insurance to be submitted

through Peggy Zeigler.

From April 1986 to 1988, Plaintiffs contributed approximately

$400,000 of the Kral Plan funds on the representation of Zeigler

that the money would go toward purchasing GIC's from SWL. Each

time that plaintiffs sought to purchase GIC's from SWL, Zeigler had

plaintiff fill out an SWL application form. All checks were made

payable to APS at Zeigler's request.

3 On October 29, 1990, Zeigler plead guilty to one count of

misapplication of fiduciary property of the value of $10,000 or

more, a second degree felony in Texas State court, pursuant to a

plea bargain agreement. On May 13, 1991, the Plaintiffs obtained

in the United States Bankruptcy Court for the Northern District of

Texas a judgment against Peggy and Zeigler for $500,000. Kral also

filed this suit against SWL to enforce rights under an employee

benefit plan on December 14, 1990 in the United States District

Court for the Northern District of Texas.

On Feb 21, 1992, SWL filed a motion for summary judgment. The

District Court found that there were no genuine issues of material

fact on any of the three elements of vicarious liability under

ERISA and granted SWL's motion. On appeal, plaintiffs allege that

the district court erred in awarding defendant SWL summary judgment

on the grounds that SWL was not vicariously liable for Zeigler's

breach of fiduciary duty.

We AFFIRM.

II.

Because plaintiffs admit that SWL itself was not a fiduciary

under ERISA, in order to recover from SWL, they must establish

SWL's vicarious liability under the common law doctrine of

respondeat superior. American Federation of Unions v. Equitable

Life Assur. Soc., 841 F.2d 658, 665 (5th Cir. 1988). The district

court, however, awarded a summary judgment in favor of SWL that

there was no vicarious liability. Therefore, in order to set aside

this summary judgment on appeal, the plaintiffs must show that a

4 genuine fact issue exists as to each of the following three common

law elements of vicarious liability:

1. Zeigler was a fiduciary within the meaning of ERISA as to the Kral Plan;

2. Zeigler breached his fiduciary duty to plaintiffs while acting in the course and scope of his employment with SWL; and

3. SWL actively and knowingly participated in Zeigler's breach of fiduciary duty to plaintiffs.

American Federation, 841 F.2d 658, 665 (5th Cir. 1988).

The district court found that several facts are undisputed:

1. Zeigler defrauded plaintiffs out of over $450,000;

2. Zeigler is to be considered a fiduciary under ERISA;

3. Zeigler applied to the Texas State Board of Insured for authorization to solicit for applications for SWL and was licensed by the State of Texas to be SWL's agent; and

4. SWL never received any of the funds plaintiffs gave Zeigler for the purpose of buying GIC's, issued by SWL.

Clearly, the first element that Zeigler is a fiduciary under

ERISA as to the Kral Plan is met under the undisputed facts. The

issues on appeal are whether plaintiffs have presented fact issues

on the second and third elements of vicarious liability. For the

reasons herein stated, we find that the plaintiffs failed to raise

the requisite fact issues on the second and third elements.

III. Did Zeigler Breach His Fiduciary Duty While Acting In The Course And Scope Of His SWL Agency?

Plaintiffs must demonstrate that Zeigler was acting within the

scope of his authority as an SWL agent when he breached his

fiduciary duties. The district court held that the plaintiffs did

not produce any evidence showing that Zeigler was an agent of SWL

5 when he breached the fiduciary duties to the plaintiffs, and that

plaintiffs did not rebut SWL's assertion that when the breach

occurred, Zeigler was acting outside the scope and authority of his

agency relationship with SWL.

Plaintiffs argue that they raised a fact issue that Zeigler

acted within the scope of his SWL agency by claiming that SWL

clothed him with apparent authority to sell the GIC's and collect

money.

Apparent authority is present when a principal clothes its

agent with the semblance of authority such that a reasonably

prudent person having knowledge of the business involved would be

justified in believing that the agent has the power the person

assumes that he has. Migerobe, Inc. v. Certina USA, Inc., 924 F.2d

1330, 1336 (5th Cir. 1991). Plaintiffs contend that Zeigler was

SWL's licensed agent during the time he executed the fraudulent

scheme (in fact he was Peggy's sub-agent). Plaintiffs argue that

SWL clothed Zeigler with apparent authority when it provided him

with blank policy and application forms with SWL's name on them,

thereby putting him in a position to defraud plaintiffs.

Plaintiffs point out that the SWL application forms informed the

customer that "[i]f for any reason Southwestern does not accept

this Application, Southwestern shall return all amounts received

with interest within five business days of the date of receipt in

Southwestern's Home Office." In support of their argument,

plaintiffs cite Weyant v. Acceptance Ins. Co, 917 F.2d 209, 214

6 (5th Cir. 1990).1 Plaintiffs argue that Zeigler was also

authorized by his SWL licensing contract to receive money from

customers, and that a reasonable person would be justified in

concluding that SWL had accepted the application for GIC's when the

money was not returned.2

However, we find the circumstances of this case easily

distinguishable from those in Weyant. At the time Zeigler began

giving investment advice to plaintiffs, his wife, Peggy had not

appointed him as an SWL sub-agent nor was he licensed as an SWL

agent. The scope of Zeigler's express authority, once given, was

limited to soliciting applications for insurance and annuities

through his wife. Under Texas law, a soliciting agent has no

authority to contract on behalf of the insurer. International

Security Life Ins. Co. v. Finck, 496 S.W.2d 544 (Tex. 1973).

Zeigler directed the plaintiffs to make their checks out to APS not

SWL. This direction is inconsistent with a claim of apparent

1 The court in that case found that Southwestern Surplus Insurance Company's agent, a surplus agent of Acceptance Insurance Company, had apparent authority to retract a cancellation of one of Acceptance's polices because: . . . Acceptance supplied Southwestern with blank policy forms and extended authority to them to receive and accept proposals for insurance; to effect, issue, countersign and deliver policies authorized by Acceptance; and to collect and receive premiums on behalf of Acceptance. Most importantly, the agency agreement between Acceptance and Southwestern explicitly provided that Southwestern had discretion in determining when to cancel a policy. Id. at 214.

2 This argument does not make sense in light of the fact that all checks were made out to APS at Zeigler's instruction.

7 authority to sell GIC's on behalf of SWL. The plaintiffs never

required that APS, Zeigler's corporation, produce a receipt showing

that the investments had been in fact purchased in the APS "street

name." Additionally, all of Zeigler's actions were through APS,

which had contracted to provide the Plan with investment advice;

and not through SWL. It was Zeigler's role as president of APS

which gave him the ability to carry out his fraudulent scheme, not

his position as soliciting agent of SWL. The Fifth Circuit in

American Federation, 841 F.2d at 665 held that absent active and

knowing participation in the breach of fiduciary duties, a non-

fiduciary cannot be held liable for the conduct of its agent.

In order to succeed on the theory that Zeigler had apparent

authority beyond that of a soliciting agent, plaintiffs must show

that they were "induced to act in good faith upon certain

representations" made by SWL, not Zeigler. See, Wells Fargo

Business Credit v. Ben Kozloff,Inc. 695 F.2d 940, 945, reh'g

denied, 699 F.2d 1163 (5th Cir.), cert. denied, 464 U.S. 818

(1983).3 The only evidence linking Zeigler with SWL is his

possession and use of SWL forms.

There is no evidence in the record that demonstrates that SWL

purposely sent the blank forms to Zeigler or that SWL knew that

Zeigler had gained access to them. The deposition testimony of

Zeigler was that SWL sent Zeigler's wife, Peggy, who was its

general agent, a pack of materials that included rate books and

3 Moreover, authority is not created by the mere statements of the purported agent. Custom Leasing, Inc. v. Texas Bank and Trust Co. of Dallas, 516 S.W.2d 138, 144 (Tex. 1974).

8 cards and sample blank forms. This same testimony further

indicated that the blank forms were sent as an "example" and not

for the purpose of selling GIC's to potential customers.

Furthermore, the record reflects that the purported GIC's provided

to Plaintiffs by Zeigler were never signed or authorized by SWL.

After a thorough review of the record, this court affirms the

district court's conclusion that the summary judgment evidence

merely shows that Zeigler was a soliciting agent who had not been

clothed with authority to give investment advice or sell GIC's for

SWL. Likewise, we find that no genuine issue of fact has been

raised that would establish that SWL actively and knowingly

participated in Zeigler's breach of his fiduciary duty. Therefore,

plaintiffs have failed to establish genuine issues of fact on the

necessary elements of vicarious liability.

c:br:opin:92-9049:jm2 9