Middlesex Insurance v. Mann

Citations: 124 Cal. App. 3d 558; 177 Cal. Rptr. 495; 1981 Cal. App. LEXIS 2244Docket: Civ. 23782

Court: California Court of Appeal; October 14, 1981; California; State Appellate Court

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Middlesex Insurance Company appeals a judgment favoring Josephine A. Mann, executrix of Logan P. Mann's estate, in a case concerning claims of breach of fiduciary duty, accounting, and constructive trust. Middlesex, a Massachusetts corporation licensed in California, operated through its managing agent, Commercial National Security Service, Inc. (CNSS). Multiple Insurance Service, a California corporation, was contracted to sell Middlesex's insurance policies, collecting premiums and remitting the balance after deducting commissions. 

Logan P. Mann was the president and sole shareholder of Multiple until May 7, 1973, when he sold his stock to Cefaratti of California, Inc. for $175,000 and an additional $600,000 for a non-compete agreement. Mann remained as vice president and CEO, with control over funds and signing authority on the trust account. Following the sale, Multiple merged with Cefaratti of California, operating under the Multiple name, while expenses from both companies were handled through Multiple’s accounts. Discrepancies arose as funds from the trust account were increasingly transferred to cover operating expenses, leading Mann to express concerns to Cefaratti about excessive spending and the need for his approval on expenditures over $1,000 as stipulated in their agreement.

On December 18, 1973, Mann and Cefaratti modified their purchase and sale agreement, significantly reducing the stock purchase consideration, eliminating a non-compete clause, and allowing all payments to count towards the stock purchase. The requirement for Mann's approval on expenses over $1,000 was also removed. Middlesex ceased issuing policies in California on December 31, 1973, but maintained existing policies. Multiple continued collecting premiums and selling policies for National Indemnity Company while Mann remained the sole signatory on the trust account until January 17, 1974. However, starting late 1973, premiums collected in California were redirected to Arizona at Mann's direction, where they were deposited into a Cefaratti Insurance Agency account and used to cover expenses for both corporations. After January 1974, Multiple stopped payments to Middlesex despite continuing to collect some premiums on its policies. Mann resigned from Multiple around November 18, 1974. In September 1974, Cefaratti acknowledged to Middlesex's general counsel a debt of approximately $1 million, which he claimed was used to pay Mann and cover other expenses, leading to an agreement for an audit. The audit revealed a total debt of $1.128 million, resulting in a promissory note executed by Cefaratti, Multiple, and Cefaratti Insurance Agency in favor of Middlesex, but no payments were made. Middlesex subsequently filed a lawsuit against Cefaratti, Mann, Multiple, and the Insurance Agency for recovery under the promissory note and for breach of fiduciary duty. Cefaratti, Multiple, and the Insurance Agency agreed to judgment for the note amount, while the case proceeded to trial against Mann for breach of fiduciary duty. Although both parties initially waived a jury trial, Mann later requested one, which was granted. The trial court refused to give special jury instructions regarding Mann's alleged fiduciary duty, determining the evidence did not support such a claim. Instead, the court sought an advisory verdict from the jury on whether Mann had misappropriated premium funds, to which the jury responded negatively, and the court accepted this verdict.

Logan P. Mann was not found to have improperly used any premium funds from Middlesex, nor did he incur liability for any failure by others to remit funds to CNSS or Middlesex. The court concluded that Mann acted in good faith when receiving salary, expense reimbursements, and payments from the sale of his stock in Multiple, thereby ruling that he was not a constructive trustee of Middlesex. As a result, judgment was entered in Mann's favor.

On appeal, Middlesex contended that it was entitled to a jury trial regarding its claim against Mann for breach of fiduciary duty. It argued that the trial court's refusal to submit this claim to a jury was a reversible error, asserting that there was sufficient evidence for a jury to consider their position. The executrix countered that Middlesex waived its right to a jury trial by not timely requesting one and claimed the breach of fiduciary duty was an equitable issue, not warranting a jury trial. Additionally, she maintained that the evidence supported the court's determination that Mann did not breach any fiduciary obligation.

The appellate court found that while Middlesex had not timely requested a jury trial, this did not constitute a permanent waiver of that right. Since a jury trial had commenced with both parties participating, it could not be dismissed without giving all parties the opportunity to continue with a jury trial. The court concluded that there was substantial evidence to support Middlesex's claim of fiduciary duty, which warranted jury consideration, leading to the decision to reverse the judgment.

The executrix's argument that the breach of fiduciary duty claim was fundamentally equitable and therefore not subject to a jury trial is rejected, as she did not object during the trial and had previously requested a jury trial for this claim. Consequently, she cannot contest the appropriateness of the jury trial on appeal. If there was evidence supporting a breach of fiduciary duty claim, the trial court erred by not providing requested jury instructions, which is a right of each party to ensure all theories supported by the pleadings and evidence are presented to the jury. The executrix's claim that any error was nonprejudicial due to the jury's advisory verdict is invalid, as the jury's findings on other matters did not resolve the breach of fiduciary duty claim, particularly since the jury lacked proper instructions about fiduciary obligations. The trial court incorrectly determined that no fiduciary duty existed between Mann and Middlesex, which impacted the case's outcome.

Middlesex asserts there was evidence that premiums were received and not properly disbursed by Mann, establishing a fiduciary duty. Evidence suggested that premiums were deposited in trust accounts before and after Mann ceased being the sole signatory, with claims that he failed to ensure proper payment to Middlesex. Middlesex argues that Mann's actions, particularly directing funds away while aware of Cefaratti's financial irresponsibility, could imply a breach of fiduciary obligations. The court agrees that substantial evidence exists supporting Middlesex's claims, indicating that if the facts are found as alleged, Mann likely breached his fiduciary duties regarding the premiums.

Middlesex presents three theories to establish Mann’s fiduciary status concerning premiums received by Multiple in California: 

1. Sections 1733 and 1734 of the Insurance Code create fiduciary obligations for insurance agents receiving premium payments.
2. The Knoblock theory holds that managing officers or directors of a corporate trustee are liable to trust beneficiaries if they knowingly allow wrongful use of trust property for corporate purposes (referencing Knoblock v. Waale-Camplan Co. (1956)).
3. A general corporate law principle states that managing officers and directors can be personally liable for misappropriating funds if they participated in or knew of the misappropriation.

The court agrees that Mann's potential breach of fiduciary duty could be argued under two of these theories. However, the third theory, distinct from the second, pertains to corporate liability rather than fiduciary principles and is not included in the pleadings.

Sections 1733 and 1734 stipulate that all funds received by insurance agents as premiums are held in a fiduciary capacity, and misappropriation of these funds constitutes theft. Section 1734 mandates that premiums must be deposited in a separate trustee account within 15 days of receipt. 

Executrix contends that these sections do not provide for civil remedies, citing Swickheimer v. King (1971), which suggested that violations of similar regulatory provisions do not lead to civil liability. The court notes that while Swickheimer indicated responsibility without a civil cause of action, it also recognized exceptions for statutes imposing strict liability with no excuses for violation.

Defendant King is liable under specific sections of the Business and Professions Code that impose strict liability. The statutes in question outline that premium funds received by a licensee are held in a fiduciary capacity and must be transmitted to the insurer or deposited in a trust if not sent within a specified time. While these provisions establish stringent fiduciary obligations, they do not create absolute responsibility. Their purpose is to protect insurers and policyholders from the mishandling of premium payments. 

According to the Restatement Second of Torts, when a statute protects a class without providing a civil remedy, courts may allow a right of action for affected individuals, using existing tort actions or creating analogous causes of action. A civil remedy for damages caused by a licensee's breach of these fiduciary obligations aligns with the legislative intent of sections 1733 and 1734.

The Executrix argues that fiduciary duties rest with Multiple, not Mann, as Mann is merely the named transactor on the license, and Multiple holds the license. Section 1627 clarifies that a license allows specified actions and that a natural person can act under an organizational license as permitted by law. Additionally, section 1656(b) mandates that partnership or corporate license applications include an agreement that only named individuals will conduct insurance transactions.

Prior to May 7, 1973, Multiple withdrew approximately $15,000 to $20,000 monthly from its premium trust account. Following Cefaratti's acquisition of Multiple, withdrawal amounts significantly increased, with notable withdrawals recorded as follows: May 1973 ($20,000), June 1973 ($45,000), July 1973 ($20,000), August 1973 ($50,000), September 1973 ($118,400), October 1973 ($125,000), November 1973 ($75,000), December 1973 ($95,000), and January 1-17, 1974 ($59,500). Middlesex argued Mann was either a subagent or had assumed a confidential relationship with it, but no substantial evidence was found to support Mann's status as Middlesex's subagent or a confidential relationship outside his official roles with Multiple. Section 1734, as amended, mandates that any licensed individual handling fiduciary funds must remit premiums, less commissions, to the insurer or maintain fiduciary funds in a separate trustee account in California, with allowances for prudent commingling of funds for business contingencies. Civil Code section 2230 prohibits a trustee or their agents from engaging in transactions where their interests conflict with those of the beneficiary. Middlesex was entitled to jury consideration on two of its three theories, resulting in a reversal of judgment. The acting justices concurred, and a petition for rehearing was denied on November 4, 1981, with the Supreme Court also denying a hearing on December 23, 1981.

Middlesex argues that there is evidence to support the claim that Mann acted as its subagent or established a confidential relationship with it. However, the court finds insufficient evidence to conclude that Mann was Middlesex's subagent. Furthermore, aside from his role as the named transactor on Multiple's license and his position as a managing officer and director of Multiple, there is no evidence indicating that Mann entered into a confidential relationship with Middlesex. The excerpt also references Section 1734, which applies to individuals licensed to act in specified capacities under Section 1733. It stipulates that if fiduciary funds are received, the individual must either remit premiums, less commissions, to the entitled party or maintain these fiduciary funds in a separate trustee bank account in California.