United Teachers Associates Insurance v. MacKeen & Bailey Inc. ( 1996 )

UNITED STATES COURT OF APPEALS
For the Fifth Circuit
No. 94-50503
UNITED TEACHERS ASSOCIATION INSURANCE COMPANY,
Plaintiff-Counter-Defendant-
Appellee-Cross-Appellant,
VERSUS
MACKEEN & BAILEY, INC. and W. DUNCAN MACKEEN,
Defendants-Counter-Plaintiffs-
Third-Party Plaintiffs-
Appellants-Cross-Appellees,
VERSUS
THE WHIDBEE CORP., HOYT W. WHIDBEE, JR.,
AND DAVID M. MORGAN,
Third-Party Defendants-
Appellees-Cross-Appellants.
Appeal from the United States District Court
for the Western District of Texas
October 10, 1996
Before LAY,* DUHÉ and DeMOSS, Circuit Judges.
DeMOSS, Circuit Judge:
An insurance company filed this suit for breach of fiduciary
duties against its actuary. We hold that the actuary, because of
*
Circuit Judge of the Eighth Circuit, sitting by designation.
the particular facts of his relationship with the company, was a
fiduciary, and that he breached his fiduciary duties to the
company. We hold, however, that the district court erred in
applying the usurpation of corporate opportunity doctrine to a
corporate fiduciary other than an officer, director or major
shareholder, and reverse and render the recovery based on that
theory. Otherwise, we generally affirm the findings and awards of
the district court.
FACTS
David Morgan and Hoyt Whidbee bought United Teacher Associates
Insurance Company (“UTAIC”) in 1981.1 In 1984, Duncan MacKeen2 was
hired to provide actuarial services for UTAIC. MacKeen suggested
that UTAIC purchase blocks of business3 from other insurance
companies which he believed possessed blocks of business with
redundant reserves.4 MacKeen convinced UTAIC that certain
1
The factual summary is drawn from the district court’s
findings of fact, United Teacher’s Associates v. MacKeen & Bailey,
847 F. Supp. 521, 525-29 (W.D. Tex. 1994), which we review for
clear error. Silmon v. Can Do II, Inc., 89 F.3d 280, 282 (5th Cir.
1996).
2
Duncan MacKeen was a partner in the actuarial firm of
MacKeen & Bailey, Inc. (“MacKeen & Bailey”), a defendant in this
action.
3
Groups of similar insurance policies owned by an insurance
company are known a “blocks of business.”
4
Insurance companies maintain funds to be used to pay claims,
both current and future. These funds are known as “reserves.” The
level of reserves are determined by a combination of factors,
including state insurance regulations. Reserve requirements can
vary depending on the type of insurance policy, location of
insureds, and other conditions. Actuaries use mathematical means
2
insurance companies were using excessively conservative methods in
calculating reserve levels, and that he could properly calculate
the levels and eliminate the redundant reserves, which would free
capital for use in other profit-making activities. At first Morgan
was skeptical of this plan because he could “not understand how
MacKeen could pull profits out of thin air by simply recalculating
the reserves.” MacKeen, 847 F. Supp. at 526.
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.
Between 1986 and 1989 UTAIC made several successful
acquisitions and reaped substantial profits. Morgan became
dissatisfied, however, that MacKeen was risking none of his own
capital, but was still receiving one-third of the profits. In
to generate reliable predictions regarding claims, losses premiums,
and other information in order to determine the appropriate level
of reserves. Different insurance companies and actuaries use
different methods in calculating reserve requirements. Some use a
more conservative approach which keeps reserve levels high relative
to predicted claims, while others are more aggressive, keeping
reserves as low as possible. Reserves that are in excess of the
amounts actually necessary to pay known and anticipated claims are
called “reserve redundancies.” When an insurance company purchases
a block of policies from another company it ordinarily acquires the
reserves attached to that block of policies. If the acquired block
of policies contains redundant reserves, the acquiring company can
recalculate the reserves. The amount of redundant reserves then
can be moved from the reserve category (which is a liability for
accounting purposes), to the surplus category (an asset).
3
1989, Morgan, Whidbee and MacKeen ended their oral profit sharing
arrangement and MacKeen & Bailey began receiving a $12,500 monthly
retainer fee from UTAIC pursuant to a written retainer agreement
which specified Texas law as controlling between the parties.
In mid-1991, another insurance company, National Foundation
Life (“National”), began experiencing regulatory pressure because
its capital was deemed too low. National estimated that an
increase of its capital and surplus to $6 million would appease the
insurance regulators. To achieve this goal, National decided to
sell selected blocks of business. National began soliciting bids
for these blocks in July 1991. UTAIC was a prospective purchaser
and requested MacKeen to do an audit of National’s insurance block.
After examining a particular block known as the “Heart/Cancer
Block,” MacKeen advised Morgan and Whidbee that its reserves were
between 50% and 75% redundant and that the block would be
profitable at a purchase price of up to $18 million. In late
August, Whidbee offered National $13 million for the Heart/Cancer
Block. Negotiations between UTAIC and National stalled, but
National did not sell the block to another company.
In January 1992, Whidbee and MacKeen went to National
headquarters to re-evaluate the reserves. While they were at
National, Whidbee gave permission for National to talk with MacKeen
about retaining him to assess National’s rate increases. MacKeen
agreed to provide actuarial services for National. On January 22,
4
1992, following the visit to National, UTAIC offered National $10
million for the block.
On January 27, 1992, MacKeen began evaluating the reserves in
the Heart/Cancer Block on behalf of National. UTAIC was still
under the impression that MacKeen was merely providing rate
increase calculations for National, and MacKeen did not notify
UTAIC that he was, instead, recalculating the reserves. Several
counter-offers were made by each side during the next several
weeks. On February 13, 1992, MacKeen submitted to National his
recalculation of the reserves in the Heart/Cancer Block which
created an additional $7.8 million in capital and surplus for
National. After this recalculation, negotiations ceased between
UTAIC and National for sale of the block.
On March 1, 1992, MacKeen signed statutory filings as actuary
for both UTAIC and National. Approximately two weeks later, on
March 13, 1992, MacKeen began purchasing stock shares in Westbridge
Capital Corporation, the parent company of National. At this time,
the market was not aware of the $7.8 million increase in capital
and surplus and its impact on Westbridge Capital’s stock value. On
March 31, National made public the data which showed the $7.8
million increase. After the publication Westbridge Capital’s stock
value rose to $8.25 per share. MacKeen testified that he purchased
46,300 shares of stock at the average price of $3.50 per share. By
the summer of 1992, he had become the owner of a significant volume
of stock in National’s parent company.
5
In March 1992, MacKeen told Whidbee that he had helped
National to reduce its reserve redundancy. He also told Whidbee
that he had bought numerous shares of Westbridge Capital stock.
Upset by this news, Whidbee immediately called Morgan, who wanted
to fire MacKeen immediately. After further reflection, however,
Morgan and Whidbee decided that it would be wiser to keep MacKeen
on retainer, as he was critical to several pending transactions.
In May 1992, UTAIC considered the purchase of a Medicare
supplement block of business owned by the American Integrity
Insurance Company. After visiting the company, MacKeen told
Whidbee that the block of business was worthless. MacKeen then
contacted John Scott, the individual who brokered the unsuccessful
UTAIC/National deal MacKeen told Scott that National might be
interested in the American Integrity block of business. MacKeen
and Scott had an arrangement, unbeknownst to UTAIC or National,
whereby MacKeen would receive a commission from Scott if National
purchased the American Integrity block of business. If, however,
UTAIC purchased the block, MacKeen would not receive a commission.
In August 1992, MacKeen examined the American Integrity block
again, this time for National. He told the company that it was a
good buy and, in September, National purchased the block from
American Integrity, with Scott brokering the deal. In October
1992, Scott gave MacKeen a $30,000 commission for brokering the
transaction.
6
PROCEDURAL BACKGROUND
UTAIC filed suit against MacKeen and his actuarial firm,
MacKeen & Bailey, Inc., in Texas state district court. The case
was removed to federal court under diversity jurisdiction. UTAIC
alleged that MacKeen’s conduct with respect to the Heart/Cancer
Block and American Integrity transactions constituted breaches of
fiduciary duties, tortious interference with prospective business
and contractual relationships, and fraud. UTAIC also alleged that
MacKeen breached or repudiated the retainer agreement and that
UTAIC had no obligation to continue retainer disbursements.
MacKeen counterclaimed, alleging that UTAIC’s failure to pay the
$12,500 monthly retainer fee after December 1992 was a breach of
the retainer agreement, a breach of UTAIC’s duty of good faith and
fair dealing, and fraud.
Following a bench trial, the district court found for UTAIC on
its claims regarding the Heart/Cancer Block. Specifically, the
district court found that a fiduciary relationship existed between
MacKeen and UTAIC, which MacKeen breached by recalculating the
block for National. The district court found, however, that the
confidential relationship ended in March 1992 when Whidbee learned
of MacKeen’s actions, prior to the American Integrity transaction.
Therefore, the district court found that MacKeen did not breach a
fiduciary duty to UTAIC in his dealings with the American Integrity
purchase. The district court found that the losses to UTAIC for
the Heart/Cancer Block were $240,000 and found MacKeen and MacKeen
& Bailey jointly and severally liable for this amount. The
7
district court also ordered MacKeen to personally pay UTAIC
$219,925, the amount he profited from the Westbridge Capital stock
purchases. The district court further found MacKeen and MacKeen &
Bailey jointly and severally liable to UTAIC for $250,000 in
exemplary damages.5
Finally, the district court found that UTAIC breached the
retainer agreement by not paying the monthly retainer from January
through October 1993. Thus, MacKeen & Bailey was awarded $125,000.
MacKeen and MacKeen & Bailey appeal the judgment of the
district court, and UTAIC filed a contingent cross-appeal.
DISCUSSION
Breach of Fiduciary Relationship
Whether a Fiduciary Relationship Existed
Under Texas law, certain relationships are fiduciary as a
matter of law. For example, attorney/client, principal/agent, and
partners. Lee v. Wal-Mart Store, Inc., 943 F.2d 554, 558 n.7 (5th
Cir. 1991); Texas Bank & Trust Co. v. Moore, 595 S.W.2d 502, 507
(Tex. 1980). Outside these specific relationships, Texas courts
5
The district court held that because MacKeen breached his
fiduciary duty, “it is implicit that he committed constructive
fraud and violated his duty of good faith and fair dealing.”
MacKeen, 847 F. Supp. at 534. Therefore, the district court did
not address those claims separately. The district court also found
that MacKeen did not commit actual fraud, tortious interference, or
breach the retainer agreement. UTAIC does not appeal these
findings.
The district court dismissed MacKeen’s and MacKeen & Bailey’s
counterclaims for breach of duty of good faith and fair dealing and
fraud. This dismissal is not appealed.
8
determine whether a fiduciary relationship exists on a case by case
basis. Thigpen v. Locke, 363 S.W.2d 247, 253 (Tex. 1962). A
fiduciary relationship “exists in all cases in which influence has
been acquired and abused, in which confidence has been reposed and
betrayed. . . .” Moore, 595 S.W.2d at 507. “It exists where a
special confidence is reposed in another who in equity and good
conscience is bound to act in good faith and with due regard to the
interests of the one reposing confidence.” Id. If the extent,
nature and duration of the relationship is such that one party has
become “accustomed to being guided by the judgment or advice of the
other, or is justified in placing confidence in the belief that
such party would act in its interest,” then a confidential
relationship exists. Thompson v. Vinson & Elkins, 859 S.W.2d 617,
624 (Tex. App.--Houston [1st Dist.] 1993, no writ). The Texas
Supreme Court has made clear, however, that “mere subjective trust
alone is not enough to transform arms length dealing into a
fiduciary relationship . . . businessmen generally trust one
another and their dealings are frequently characterized by
cordiality.” Thigpen, 363 S.W.2d at 253.
The existence of a fiduciary relationship is a question of
fact, Floors Unlimited, Inc. v. Fieldcrest Cannon, Inc., 55 F.3d
181, 188 (5th Cir. 1995), which we review for clear error. Silmon
v. Can Do II, Inc., 89 F.3d 280, 282 (5th Cir. 1996).
The district court found that:
For seven years . . . MacKeen had served as the
only actuary for UTAIC. During that period, Morgan
and Whidbee developed a great deal of trust and
confidence in his work. They risked substantial
9
amounts of capital on the accuracy (or creativity)
of his reserve recalculations and the soundness of
his advice. Whidbee testified he relied primarily
on MacKeen’s spreadsheets when drafting acquisition
offers as he was not an actuary and did not have
the expertise of MacKeen. MacKeen testified that
prior to January of 1992, he had performed reserve
recalculations for UTAIC between 80 and 100 times.
Undoubtedly, the extent, nature, and duration of
MacKeen’s employment with UTAIC created a
confidential relationship between UTAIC, MacKeen,
and MacKeen & Bailey, Inc.
MacKeen, 847 F. Supp. at 530.6 These findings are not clearly
erroneous.7
6
After finding that a fiduciary relationship existed, the
district court went on to say:
Finally and parenthetically, the Court declares that
actuaries, in view of the type of professional services
they provide and the information confided in them, have a
fiduciary relationship with their clients as a matter of
law under the criteria established by the Texas courts.
MacKeen, 847 F. Supp. at 530. We note that this statement by the
district court is dicta because the court had already concluded
that MacKeen was a fiduciary.
We do not share the district court’s view that actuaries are,
as a matter of Texas law, fiduciaries. There is no Texas statute
so stating and there is no decision of the Texas Supreme Court nor
of any Texas Court of Appeals so holding. It is possible, as in
the instant case, that an actuary may become a fiduciary through a
confidential relationship. However, whether such a fiduciary
relationship exists is determined on a case by case basis taking
into consideration the particular facts of the relationship, as
discussed above.
7
As noted above, the district court also found that the
fiduciary relationship ended in March 1992 when Whidbee learned
that MacKeen had recalculated reserves for National. MacKeen, 847
F. Supp. at 533. Therefore, the district court found that no
fiduciary relationship existed during the American Integrity
Transaction. Because UTAIC has not appealed this finding, we do
not review it.
10
Whether MacKeen Breached his Fiduciary Duty
Because we hold that the district court was correct in finding
a fiduciary relationship between MacKeen and UTAIC, we must now
determine whether the district court erred in finding that MacKeen
breached his fiduciary duty to UTAIC. A fiduciary relationship
imposes the duties of "good faith and candor by the fiduciary
toward his principal. This includes the general duty of full
disclosure respecting matters affecting the principal's interests
and a general prohibition against the fiduciary's using the
relationship to benefit his personal interest, except with the full
knowledge and consent of the principal.” Chien v. Chen, 759 S.W.2d
484, 495 (Tex. App.--Austin 1988) (internal quotation and citation
omitted). Likewise, a fiduciary has a duty to “act with candor,
unselfishness, and good faith.” Annesley v. Tricentrol Oil
Trading, Inc., 841 S.W.2d 908, 910 (Tex. App.--Houston [14th Dist.]
1992, writ denied).
As discussed above, National was under extreme regulatory
pressure in January 1992. To raise capital and relieve that
pressure, National had to either sell off the Heart/Cancer Block or
determine its overstated reserves and convert that amount to
capital and surplus. National officials had tried for months to
determine the amount of redundant reserves in the block, but they
had not been able to solve the problem. Because National could not
recalculate the reserves themselves, they were going to have to
sell the block, a less desirable alternative.
11
Just as National had resigned itself to selling the block,
MacKeen informed it that he could perform the recalculation.
National asked UTAIC if MacKeen could help it with its rate
increase problem, and UTAIC consented. MacKeen, however, never
performed rate increase work for National; instead, he spent his
time recalculating the redundancies in the Heart/Cancer Block. Two
weeks after being hired by National, MacKeen informed the company
that the block contained $7.8 million in redundant reserves. This
is roughly the same advice MacKeen had previously given UTAIC
regarding the block. With the transfer of $7.8 million to capital
and surplus, National was able to satisfy its regulators without
selling the Heart/Cancer Block to UTAIC.
The district court found that “MacKeen’s actions had the
effect of disclosing to National what he had discovered during due
diligence for UTAIC.” MacKeen, 847 F. Supp. at 532. MacKeen
secretly recalculated National’s reserves so National would not
have to sell the block to UTAIC, to whom he was a fiduciary. As a
result of MacKeen’s actions, UTAIC lost what it would have gained
had it bought the Heart/Cancer Block with the reserves
unrecalculated. Therefore, the district court’s finding that
MacKeen breached his fiduciary duty to UTAIC is not clearly
erroneous.
Corporate Opportunity Doctrine
The district court also found that MacKeen usurped a corporate
opportunity when he recalculated National’s reserves without
notifying UTAIC. We have said that:
12
Texas corporation law applies the ‘corporate
opportunity’ doctrine where a corporation has a
legitimate interest or expectancy in, and the
financial resources to take advantage of, a
particular business opportunity. When a corporate
officer or director diverts a corporate opportunity
to himself, he breaches his fiduciary duty of
loyalty to the corporation.
In re Safety International, Inc., 775 F.2d 660, 662 (5th Cir. 1985)
(internal citations omitted).
Because the district court found that MacKeen usurped a
corporate opportunity, it imposed a constructive trust on him and
his firm for the amounts they benefitted by his actions. In
determining the amount which MacKeen benefitted, the district court
found that the opportunity to purchase the Heart/Cancer Block of
business was worth $240,000 to UTAIC. The court imposed a
constructive trust on MacKeen & Bailey in this amount. The
district court determined that MacKeen personally benefitted
$219,925 from his stock purchases (his 46,300 shares rose $4.75
each, for a total of $219,925). The district court imposed a
constructive trust in this amount on MacKeen personally.
MacKeen contends that the district court erred in applying the
corporate opportunity doctrine because he was not an officer or
director of UTAIC, but rather the company’s fiduciary. The
district court recognized that most corporate opportunity cases
involve officers or directors, but the district court held that the
doctrine “can be used to disgorge interests improperly or
surreptitiously acquired by any fiduciary of the corporation.”
MacKeen, 874 F. Supp. at 537-38.
We believe that under Texas law the usurpation of corporate
13
opportunity doctrine does not apply to all corporate fiduciaries,
but is limited to officers, directors and major shareholders who
are fiduciaries. While it is true that several Texas cases use the
broader term “corporate fiduciary” in discussing the doctrine,8
we have found no Texas cases, nor has UTAIC cited us to any,
applying the corporate opportunity doctrine to any person other
than an officer, director or major shareholder. We certainly have
found no Texas cases standing for the proposition that this
doctrine applies to all corporate fiduciaries. Therefore, the
district court erred in applying the corporate opportunity doctrine
because MacKeen, although a corporate fiduciary, was not an
officer, director or major shareholder. Additionally, we note that
there is no evidence whatsoever in the record that UTAIC ever
considered buying the stock of National’s parent company. Thus, it
is doubtful whether the stock truly was a “corporate opportunity.”
Repudiation
The district court found that the retainer agreement had been
repudiated due to MacKeen’s improper conduct. The court held that
the contract was discharged in October 1993 and that each party was
free to retain any benefits received from the contract. The
district court declined to return the parties to their pre-
8
See, e.g., International Bankers’ Life Ins. Co. v. Holloway,
368 S.W.2d 567, 576-77 (Tex. 1963) (referring to corporate
fiduciaries); General Dynamics v. Torres, 915 S.W.2d 45, 49 (Tex.
App.--El Paso 1995, writ denied); Thywissen v. Cron, 781 S.W.2d
682, 686 (Tex. App.--Houston [1st Dist.] 1989) (“A corporate
fiduciary cannot usurp corporate opportunities for personal gain.
. . .”); Imperial Group (Texas), Inc. v. Scholnick, 709 S.W.2d 358,
363 (Tex. App.--Tyler 1986, writ ref’d n.r.e.).
14
agreement positions. To do so would have given MacKeen one-third
of the profits UTAIC earned. The district court found that in
light of MacKeen’s actions, “it would be absurd to re-establish
that relationship.” MacKeen, 847 F. Supp. at 543.
We find that the district court did not clearly err in finding
that the contract was repudiated and in discharging all parties
from remaining obligations under the contract. We agree with the
district court that it would be inequitable to allow MacKeen, after
his gross breaches of fiduciary duties, to maintain a one-third
interest in UTAIC’s profits.
Consideration for Modification
UTAIC and MacKeen modified their 1989 oral agreement when they
executed the retainer agreement. Under the oral agreement MacKeen
was to receive one-third of UTAIC’s profits, while under the
retainer agreement MacKeen & Bailey received $12,500 per month from
UTAIC. MacKeen contends that the modification of the contract was
invalid because it was without consideration. We disagree.
MacKeen has pointed us to no evidence showing that it was not
possible that, at some time, the monthly retainer would exceed the
profit-sharing arrangement. The possibility that MacKeen would
receive more income from the retainer agreement provides adequate
consideration for the modification.
CONCLUSION
We hold that the district court did not err in finding that
MacKeen, by his conduct concerning the National acquisition,
15
breached a fiduciary duty he owed to UTAIC.9 The district court
found MacKeen and MacKeen & Bailey jointly and severally liable for
$240,000 for breach of the confidential relationship. In its
cross-appeal, UTAIC contends that the district court erred in this
determination, and argues that the damages should be UTAIC’s lost
profits. The testimony tendered by UTAIC in support of this damage
claim was highly speculative and exceedingly complex and bore
little relationship to “lost profits.” After reviewing the record
we conclude that the district court did not clearly err in its
damages calculation. AFFIRMED.
The district court awarded UTAIC $219,925 from MacKeen
individually for his usurpation of a corporate opportunity.
Because we hold that MacKeen was not an individual who could be
held liable under the corporate opportunity doctrine, we REVERSE
that portion of the district court’s judgment and RENDER judgment
that UTAIC take nothing from MacKeen for usurpation of a corporate
opportunity.
The district court awarded UTAIC $250,000 in exemplary damages
from MacKeen and MacKeen & Bailey jointly and severally. We note
that the district court was reluctant to award exemplary damages to
UTAIC, given the blameworthy conduct of both parties. We certainly
understand the district court’s reticence. We, however, do not
address the propriety of the exemplary damages award because
9
As noted above, UTAIC does not appeal the district court’s
finding that at the time of the American Integrity transaction no
fiduciary duty existed, and thus no fiduciary duty was breached.
Because this finding is not appealed, we do not review it.
16
MacKeen and MacKeen & Bailey did not raise before this Court any
objection to that award, thus waiving any error. AFFIRMED.
Finally, the district court awarded MacKeen and Bailey
$125,000 for UTAIC’s breach of the retainer agreement. UTAIC does
not contest this award and therefore waives any argument that the
district court erred. AFFIRMED.
AFFIRMED in part and REVERSED and RENDERED in part.
17