United States Court of Appeals Fifth Circuit F I L E D IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT June 25, 2003 _________________ Charles R. Fulbruge III No. 02-60320 Clerk
ALVA PEDEN; RICHARD L. PEDEN TRUST, by and through its agent, ALVA PEDEN,
Plaintiffs - Appellants,
v.
RANDALL PETERSON, Individually and as Agent for Western Reserve Life Assurance Company of Ohio; WORLD MARKETING ALLIANCE; WESTERN RESERVE LIFE ASSURANCE COMPANY OF OHIO,
Defendants - Appellees.
Appeal from the United States District Court for the Southern District of Mississippi 3:01-CV-149
Before WIENER, BENAVIDES, and DENNIS Circuit Judges.
BENAVIDES, Circuit Judge:*
Appellants here present an interlocutory challenge to the
the district court’s order compelling arbitration pursuant to the
Federal Arbitration Act, 9 U.S.C. § 2. We reverse, finding that
the agreement that contains the arbitration clause is an
agreement separate from the one under which Appellants seek
* Pursuant to 5TH CIR. R. 47.5, the Court has determined that this opinion should not be published and is not precedent except under the limited circumstances set forth in 5TH CIR. R. 47.5.4. relief, and consequently Appellants are not bound to arbitrate
their claims.
I.
The controversy in this appeal arises from
Plaintiffs-Appellants' action to reform the terms of an insurance
contract to conform with what Appellants contend was the
understanding of the contracting parties. In 1989, Richard Peden,
the decedent in this life insurance action, established an
insurance trust (the Trust) for the benefit of his wife and
children. To fund the Trust the decedent purchased a
$1,000,000.00 life insurance policy from Manulife Insurance
Company (Manulife Policy). The decedent was sold the million
dollar policy by his brother, Bobby Peden, who was licenced to
sell non-variable insurance policies in Mississippi. The
beneficiary of the Manulife Policy was the Trust, and the
beneficiaries of the Trust were and are Peden's children and his
second wife, Plaintiff-Appellant Alva Peden.
In 1996, upon his brother Bobby Peden's advice, the decedent
decided to replace the Manulife Policy with a variable insurance
policy. Bobby Peden was himself not licenced to sell variable
insurance policies, so he referred his brother to variable
insurance agent Randall Peterson.
At the time of the transaction in question Defendant-
Appellee Peterson was licenced as an insurance agent under
Mississippi law, and he held an agent appointment from Defendant-
2 Appellee Western Reserve Life Insurance Company of Ohio (Western
Reserve). Peterson was also licenced to sell securities, and he
was a registered representative of World Marketing Alliance
Securities (WMA Securities), which is a company separate from but
affiliated with Defendant-Appellee World Marketing Alliance
(WMA).1
A. The Purchase Meeting
Appellants contend that the purchase of the Western Reserve
Policy was negotiated between Bobby Peden and Peterson.
Appellants assert that Bobby told Peterson that Richard Peden
wished to purchase a variable insurance policy to fund the Trust
and specifically to replace the Manulife million dollar policy.
Appellants contend that Bobby arranged the purchase meeting
between Richard Peden and Peterson in Gulfport, Mississippi, and
that Bobby was present at the purchase meeting. Bobby avers that
Peterson sold Richard a Western Reserve policy with a death
benefit of $1,000,000.00 and that the Trust was identified as the
sole beneficiary.
B. The Securities Agreement and the Insurance Agreement
In purchasing his variable insurance policy, the decedent
purportedly filled out two separate applications: one application
for a variable insurance policy, and one application for a
1 WMA Securities is not a party to this appeal, but it is one of WMA's registered broker-dealer affiliates.
3 securities brokerage account.2 The insurance application
(hereinafter Insurance Agreement) is a six-page document
captioned:
Application for Life Insurance Western Reserve Live Assurance Co. of Ohio
The contract indicates that the broker-dealer is WMA, and that
the owner of the policy is Richard Peden. The agreement itself
includes medical information concerning Richard Peden, identifies
Alva Peden as the sole beneficiary, and lists the death benefit
as $412,000.00. It is signed by the decedent as applicant and
by Randall Peterson as "witness (registered representative)" of
WMA.
In contrast, the application for the securities brokerage
account (hereinafter the Securities Agreement), is a single page
document that is captioned, "WMA SECURITIES, INC. (WMAS) NEW
ACCOUNT APPLICATION.” The Securities Agreement indicates that the
decedent authorized an investment to be made on his behalf in the
“Freedom Equity Fund”. The agreement indicates that the fund
investment is to be derived from a source described merely as
“[v]ariable life”. It is this document that contains the
2 Appellants contest the validity of the decedent’s signature upon the Securities Agreement as well as other aspects of the contract’s formation. However, we need not pass upon the validity of the Security Agreement as our inquiry here is limited to whether Appellants are compelled to arbitrate their claims pursuant to the Insurance Agreement. To the extent this opinion suggests that the Securities Agreement was properly executed and is binding upon the decedent, we would be clear that we have not passed upon that question.
4 arbitration provision under which Appellees sought arbitration.
It states in pertinent part:
I [Richard Peden] ... agree that ... any controversy arising out of my ... accounts, the transactions with WMA [Securities], ... or related to this agreement or breach thereof, shall be settled by arbitration in accordance with the rules then in effect of the National Association of Securities Dealers, Inc. (NASD).
The arbitration provision further provides that “[a]rbitration is
final and binding on the parties (i.e. you [Richard Peden] and
WMA [Securities]).” Randall Peterson signed the Security
Agreement on behalf of WMA Securities.
C. Post-purchase Events
Following the meeting at which the decedent purchased the
Western Reserve variable insurance policy, the decedent and his
wife began paying premiums to Western Reserve and ceased paying
premiums on the Manulife policy. Appellees contend that on
October 1, 1996, Richard Peden signed a single page "Amendment of
Application" changing the death benefit of the Western Reserve
policy from $413,000.00 to $380,000.00.
Subsequent to the decedent's purchase of the Western Reserve
policy, Western Reserve contacted Manulife to have the cash value
of the Manulife policy transferred to Western Reserve under the
theory that the Western Reserve policy was a replacement policy
for the Manulife policy. Manulife, however, refused the transfer
5 because the owner of the Western Reserve policy, according to
Western Reserve, was the decedent Richard Peden, and the owner of
the Manulife policy was the Trust. Therefore, according to
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United States Court of Appeals Fifth Circuit F I L E D IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT June 25, 2003 _________________ Charles R. Fulbruge III No. 02-60320 Clerk
ALVA PEDEN; RICHARD L. PEDEN TRUST, by and through its agent, ALVA PEDEN,
Plaintiffs - Appellants,
v.
RANDALL PETERSON, Individually and as Agent for Western Reserve Life Assurance Company of Ohio; WORLD MARKETING ALLIANCE; WESTERN RESERVE LIFE ASSURANCE COMPANY OF OHIO,
Defendants - Appellees.
Appeal from the United States District Court for the Southern District of Mississippi 3:01-CV-149
Before WIENER, BENAVIDES, and DENNIS Circuit Judges.
BENAVIDES, Circuit Judge:*
Appellants here present an interlocutory challenge to the
the district court’s order compelling arbitration pursuant to the
Federal Arbitration Act, 9 U.S.C. § 2. We reverse, finding that
the agreement that contains the arbitration clause is an
agreement separate from the one under which Appellants seek
* Pursuant to 5TH CIR. R. 47.5, the Court has determined that this opinion should not be published and is not precedent except under the limited circumstances set forth in 5TH CIR. R. 47.5.4. relief, and consequently Appellants are not bound to arbitrate
their claims.
I.
The controversy in this appeal arises from
Plaintiffs-Appellants' action to reform the terms of an insurance
contract to conform with what Appellants contend was the
understanding of the contracting parties. In 1989, Richard Peden,
the decedent in this life insurance action, established an
insurance trust (the Trust) for the benefit of his wife and
children. To fund the Trust the decedent purchased a
$1,000,000.00 life insurance policy from Manulife Insurance
Company (Manulife Policy). The decedent was sold the million
dollar policy by his brother, Bobby Peden, who was licenced to
sell non-variable insurance policies in Mississippi. The
beneficiary of the Manulife Policy was the Trust, and the
beneficiaries of the Trust were and are Peden's children and his
second wife, Plaintiff-Appellant Alva Peden.
In 1996, upon his brother Bobby Peden's advice, the decedent
decided to replace the Manulife Policy with a variable insurance
policy. Bobby Peden was himself not licenced to sell variable
insurance policies, so he referred his brother to variable
insurance agent Randall Peterson.
At the time of the transaction in question Defendant-
Appellee Peterson was licenced as an insurance agent under
Mississippi law, and he held an agent appointment from Defendant-
2 Appellee Western Reserve Life Insurance Company of Ohio (Western
Reserve). Peterson was also licenced to sell securities, and he
was a registered representative of World Marketing Alliance
Securities (WMA Securities), which is a company separate from but
affiliated with Defendant-Appellee World Marketing Alliance
(WMA).1
A. The Purchase Meeting
Appellants contend that the purchase of the Western Reserve
Policy was negotiated between Bobby Peden and Peterson.
Appellants assert that Bobby told Peterson that Richard Peden
wished to purchase a variable insurance policy to fund the Trust
and specifically to replace the Manulife million dollar policy.
Appellants contend that Bobby arranged the purchase meeting
between Richard Peden and Peterson in Gulfport, Mississippi, and
that Bobby was present at the purchase meeting. Bobby avers that
Peterson sold Richard a Western Reserve policy with a death
benefit of $1,000,000.00 and that the Trust was identified as the
sole beneficiary.
B. The Securities Agreement and the Insurance Agreement
In purchasing his variable insurance policy, the decedent
purportedly filled out two separate applications: one application
for a variable insurance policy, and one application for a
1 WMA Securities is not a party to this appeal, but it is one of WMA's registered broker-dealer affiliates.
3 securities brokerage account.2 The insurance application
(hereinafter Insurance Agreement) is a six-page document
captioned:
Application for Life Insurance Western Reserve Live Assurance Co. of Ohio
The contract indicates that the broker-dealer is WMA, and that
the owner of the policy is Richard Peden. The agreement itself
includes medical information concerning Richard Peden, identifies
Alva Peden as the sole beneficiary, and lists the death benefit
as $412,000.00. It is signed by the decedent as applicant and
by Randall Peterson as "witness (registered representative)" of
WMA.
In contrast, the application for the securities brokerage
account (hereinafter the Securities Agreement), is a single page
document that is captioned, "WMA SECURITIES, INC. (WMAS) NEW
ACCOUNT APPLICATION.” The Securities Agreement indicates that the
decedent authorized an investment to be made on his behalf in the
“Freedom Equity Fund”. The agreement indicates that the fund
investment is to be derived from a source described merely as
“[v]ariable life”. It is this document that contains the
2 Appellants contest the validity of the decedent’s signature upon the Securities Agreement as well as other aspects of the contract’s formation. However, we need not pass upon the validity of the Security Agreement as our inquiry here is limited to whether Appellants are compelled to arbitrate their claims pursuant to the Insurance Agreement. To the extent this opinion suggests that the Securities Agreement was properly executed and is binding upon the decedent, we would be clear that we have not passed upon that question.
4 arbitration provision under which Appellees sought arbitration.
It states in pertinent part:
I [Richard Peden] ... agree that ... any controversy arising out of my ... accounts, the transactions with WMA [Securities], ... or related to this agreement or breach thereof, shall be settled by arbitration in accordance with the rules then in effect of the National Association of Securities Dealers, Inc. (NASD).
The arbitration provision further provides that “[a]rbitration is
final and binding on the parties (i.e. you [Richard Peden] and
WMA [Securities]).” Randall Peterson signed the Security
Agreement on behalf of WMA Securities.
C. Post-purchase Events
Following the meeting at which the decedent purchased the
Western Reserve variable insurance policy, the decedent and his
wife began paying premiums to Western Reserve and ceased paying
premiums on the Manulife policy. Appellees contend that on
October 1, 1996, Richard Peden signed a single page "Amendment of
Application" changing the death benefit of the Western Reserve
policy from $413,000.00 to $380,000.00.
Subsequent to the decedent's purchase of the Western Reserve
policy, Western Reserve contacted Manulife to have the cash value
of the Manulife policy transferred to Western Reserve under the
theory that the Western Reserve policy was a replacement policy
for the Manulife policy. Manulife, however, refused the transfer
5 because the owner of the Western Reserve policy, according to
Western Reserve, was the decedent Richard Peden, and the owner of
the Manulife policy was the Trust. Therefore, according to
Manulife, a replacement transfer of cash value was not
permissible.
Appellants contend that Western Reserve then contacted
Randall Peterson and informed Peterson that the Western Reserve
policy reflected an error in ownership, that the correct owner
was the Trust, and instructed Peterson to amend the policy to
reflect the Trust as the owner. On March 5, 1997, Peterson
responded in writing to Western Reserve, stating that he had
contacted "policyholder services" and instructed them to change
the beneficiary and owner of the Western Reserve policy to the
Trust. Peterson also contacted Bobby Peden and assured him that
the owner of the Policy has been changed to the Trust. However,
the owner of the Western Reserve policy was never changed to
reflect the Trust as owner. Consequently, the Manulife policy
subsequently lapsed once the cash value had been completely
depleted to cover the delinquent premiums.
On August 16, 1998, Richard Peden died. Western Reserve
contacted Alva Peden and offered her a check for $380,000.00.
Alva declined the remittance.
D. Procedural History
On January 31, 2001, Plaintiffs-Appellants Alva Peden and
6 the Trust instigated this action in state court seeking to reform
the Western Reserve policy to reflect the Trust as the
beneficiary and the death benefit in the amount of $1,000,000.00.
Plaintiffs-Appellants also sought punative damages for gross
negligence and bad faith.
Defendant-Appellee Western Reserve removed the action to
federal court and filed a motion to compel arbitration which was
joined by Defendants-Appellees Randall Peterson and World
Marketing Alliance. The district court granted Western Reserve's
motion to compel arbitration, and Appellants here present an
interlocutory challenge to that ruling.
II.
The question before this Court is whether the district court
properly granted Appellees' motion to compel arbitration, and
this Court reviews that decision de novo.3 Fleetwood
Enterprises, Inc. v. Gaskamp, 280 F.3d 1069, 1073 (5th Cir.
2002). In deciding whether to compel arbitration pursuant to 9
U.S.C. § 2, the court considers: (1) whether there is a valid
3 As an initial matter, the district court correctly found that the Federal Arbitration Act (FAA), 9 U.S.C. § 2, applies to the agreement in question here. The FAA provides that an arbitration agreement covered by the Act shall be, "valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2. Arbitration agreements which govern contracts implicating interstate commerce are covered by the FAA. Here, Appellants do not contest the applicability of the FAA.
7 agreement to arbitrate between the parties, and (2) whether the
dispute at hand falls within the perimeters of that agreement.
Id. Here, we find that the contract that Appellants seek to
reform does not contain a binding agreement to arbitrate between
the parties to this appeal. Consequently, Appellants are not
bound to arbitrate their claims.4
The question of whether a valid arbitration agreement exists
between the parties to this appeal is governed by state law, and
here Mississippi provides the controlling law. Fleetwood
Enterprises, 280 F.3d at 1074. In Mississippi, it is well-settled
that the unambiguous and plain language of an insurance policy is
construed and enforced as written. Mississippi Farm Bureau Cas.
Ins. Co. v. Britt, 826 So.2d 1261, 1266 (Miss. 2002)(finding that
the court must give effect to a “valid, clear and unambiguous
contract term where there is no statutory or public policy
prohibition nullifying it”; see also, Clarendon Nat. Ins. Co. v.
McAllister, 837 So.2d 779, 780 (Miss.App. 2003)(citing Weeks v.
Mississippi College, 749 So.2d 1082, 1087 (Miss.Ct.App. 1999)).
Here, the plain language of the Insurance Agreement
indicates that the arbitration provision contained in the
4 Appellants challenge both of these factors, arguing that there is not a valid agreement to arbitrate between the parties to this appeal, and that, even if there were, Appellants' cause of action would not fall within the scope of the agreement. However, because we find the first question to be dispositive, we need not reach the issue of whether the cause of action falls within the scope of the agreement.
8 Security Agreement is not incorporated into the Insurance
Agreement. The contract states in pertinent part:
This policy, the attached application and any additional applications at the time of reinstatement or increase in specified amount constitute the entire contract.
(emphasis added). Appellants persuasively argue that because the
"attached application" does not contain the securities agreement,
the insurance policy is a separate contract which expressly does
not incorporate the securities agreement.
Although Appellees disagree on this point, they fail to
address the policy language highlighted by Appellants. Instead,
Appellees rely on a general theory that as a variable insurance
policy, the entire product was a security. In support of this
view, Appellants direct the Court to a finding by the National
Association of Securities Dealers (NASD) that the entirety of a
variable insurance policy is subject to NASD regulation because
"the entire product is a security" not just the “Investment
Account” portion of the product. However, Appellee's contention
does not resolve the contract point that Appellants raise. In
purchasing his variable insurance policy, the decedent was,
certainly, also purchasing a security. However, this fact does
not negate the fact that he was also executing two separate
contracts: one contract governing the terms of his security
account with WMA Securities, and one contract governing the terms
9 of the insurance arrangement he was entering into with Western
Reserve.5
Moreover, in Mississippi, parol evidence generally will not
be used to incorporate extrinsic materials where, as here, the
language of the contract itself defines exclusively the "entire
contract." See Noble v. Logan-Dees Chevrolet-Buick, Inc. 293
So.2d 14 (Miss. 1974)(excluding parol evidence where the contract
in question stated "[t]he front and back of this order comprises
the entire agreement pertaining to this purchase and no other
agreement of any kind, verbal understanding or promise
whatsoever, will be recognized.").
Finally, under Mississippi law the construction of the
Insurance Agreement must exclude the Securities Agreement.
Mississippi Code § 83-7-13 provides:
All life insurance companies doing business in the State of Mississippi shall deliver to the insured with the policy, certificate, or contract of insurance in any form a copy of the insured's application; and in default thereof, said life insurance company shall not be permitted in any court of this state to deny that any of the statements in said application are true.
This provision requires an insurance company to include in its
5 This point is further supported by the fact that the parties to the Security Agreement are different from the parties to the Insurance Agreement. The Securities Agreement expressly binds only the decedent and WMA Securities, but WMA Securities is not a party to the Insurance Agreement. Instead, Peterson signed the Insurance agreement on behalf of WMA, which in turn bound Western Reserve.
10 delivery to the insured the entire insurance contract, including
the application. See National Life & Acc. Ins. Co. v. Prather,
158 So. 881 (Miss. 1934) (interpreting an earlier but similar
version of the Code); see also, Aetna Life Ins. Co. v. McCree,
164 So. 223 (Miss. 1935). Failure to do so generally results in
the insurer forfeiting the right to rely on the undelivered
materials in construction of the contract. Id. Here, it is
undisputed that Western Reserve failed to deliver the Securities
Agreement to the decedent as part of the entire insurance
contract. Thus, under § 83-7-13 and the Mississippi rules
governing the construction of insurance contracts, the failure of
Western Reserve to include the Securities Agreement as part of
the insurance contract it delivered to decedent undermines
Western Reserve's ability to rely on the Securities Agreement as
part of the Insurance Agreement in the course of the litigation
in the instant case.
Thus, we find that the two agreements in question cannot be
construed as a single contract. We have before us two agreements
that bind different parties and are contained in separate
documents. The agreements not only utterly fail to refer to one
another, but in fact the language in the Insurance Agreement
plainly precludes the incorporation of extrinsic materials.
Additionally, Mississippi law concerning the construction of
insurance policies counsels that the Securities Agreement be
11 excluded from our construction of the Insurance Agreement.
Therefore we find that the Securities Agreement and the Insurance
Agreement are two separate and unincorporated contracts.
Consequently, as Appellants’ claims arise under the Insurance
Agreement, there exists no binding agreement to arbitrate those
claims between the parties to this appeal.
III.
For the foregoing reasons we REVERSE the order of the
district court compelling arbitration, and REMAND the case for
proceedings consistent with the renderings of this Court.