Corrado v. Life Investors Insurance Co. of America

United States Court of Appeals
For the Eighth Circuit
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No. 16-3949
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Charleen Corrado, Individually and as the Executrix of the Estate of John M
Corrado; Federal City Region, Inc.
lllllllllllllllllllll Plaintiffs - Appellants
v.
Life Investors Insurance Company of America; Seth Miller; Patrick Melchert;
Kevin Crist; Frank Neeland, Jr.; Mark Thiel; Andrew Martin
lllllllllllllllllllll Defendants - Appellees
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Appeal from United States District Court
for the Northern District of Iowa - Cedar Rapids
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Submitted: October 18, 2017
Filed: January 2, 2018
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Before WOLLMAN, BEAM, and SHEPHERD, Circuit Judges.
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SHEPHERD, Circuit Judge.
In this most recent installment of the litigious history of the Life Investors
Owners Participation Trust, Charleen Corrado and Federal City Region, Inc. (“FCR”)
brought suit against a number of defendants associated with the Trust, alleging
breaches of fiduciary duties and conversion. The district court1 granted summary
judgment to the defendants, and Corrado and FCR appeal. We affirm.
I. Background
As recounted in our previous opinion, John Corrado and FCR2 became
associated with Life Investors Insurance Company of America (“Life Investors”) in
1977.3 Corrado sold Life Investors’s insurance policies on a commission basis, and,
as a result, Corrado and FCR were able to maintain accounts in a pension plan
established by Life Investors—the Life Investors Owners Participation Trust (the
“Trust”).
In 2008, John Corrado4 and FCR filed a lawsuit in the District of Maryland
against Life Investors, the Life Investors Owners Participation Trust and Plan, and
its trustees—John Cleavenger, Kevin Crist, Mike Kirby, Frank Kneeland, William
Kuennen, R. Joe Smith, and Mark Thiel.5 In that suit, Corrado and FCR alleged six
counts: the first three alleged that the Trustees breached their fiduciary duties; Count
IV alleged that Life Investors knowingly participated in the breaches alleged in
1
The Honorable Edward J. McManus, United States District Judge for the
Northern District of Iowa, now deceased.
2
FCR was created by John Corrado to market Life Investors’s policies, and it
is a participant beneficiary of the Trust.
3
Their original association was actually with Bankers Union Life Assurance
Company—Life Investors’s predecessor—but we refer solely to Life Investors
because that party was acting at all times relevant to this case.
4
Shortly after he filed that lawsuit, John Corrado died. His widow, Charleen
Corrado, was substituted as a party due to her role as personal representative for his
estate.
5
We refer to these individual defendants as the “Trustees.”
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Counts I through III; Count V alleged that the Trustees failed to provide appropriate
documentation to participants; and Count VI alleged that the Trustees unjustifiably
refused to allow Corrado to withdraw the money in his account. The Maryland court
granted summary judgment to the defendants, and Corrado did not appeal that ruling.
Life Investors advanced money to the Trustees to pay for the legal expenses related
to the defense of this action.
During the pendency of the Maryland suit, Life Investors filed a lawsuit against
Corrado and FCR in the District of Iowa, alleging that Corrado had breached a
settlement agreement between the parties. After the district court granted summary
judgment to Life Investors in that case, this court reversed and remanded based on the
district court’s misapplication of Iowa law. See Life Inv’rs Ins. Co. of Am. v. Fed.
City Region, Inc., 687 F.3d 1117 (8th Cir. 2012). After remand, the district court
again entered summary judgment in favor of Life Investors, and we affirmed. See
Life Inv’rs Ins. Co. of Am. v. Corrado, 804 F.3d 908 (8th Cir. 2015). The final
outcome of the Iowa litigation was a $1.3 million judgment in favor of Life Investors
against both Corrado and FCR, which FCR satisfied by assigning sufficient funds
from its Trust account to Life Investors.
Life Investors then sent an email to the Trustees informing them of its desire
to be reimbursed for the costs advanced in defense of the Maryland lawsuit. This
result, Life Investors explained, was authorized by Trust § 11.9, which states as
follows:
The Trustees shall have a lien upon the Trust Assets for any costs and
attorneys’ fees, in the event of any suit or proceeding regarding the Trust
to which the Trustees, or any of them, may be parties or a party. If any
Participant or beneficiary brings legal action against the Trustees, or any
of them, the result of which shall be adverse to the party bringing the
suit, or if any disputes arise with respect to the person or persons to
whom delivery or payment of any property shall be made by the
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Trustees, the cost to the Trustees of defending the suit shall be charged,
to the extent possible, directly to the account of the Participant whose
interest is in issue, and only the excess, if any, shall be included in the
expenses of the Trust.
The Trustees unanimously voted to enforce § 11.9, and they deducted
$431,925.49—the cost of the defense in the Maryland litigation—from the Trust
accounts of Corrado and FCR. In turn, the Trustees paid this money to Life Investors
as reimbursement of money advanced in defending the Trustees in the Maryland
action.
In July of 2014, Corrado and FCR brought the instant lawsuit in the District of
Iowa against the Trustees and Life Investors, alleging that the Trustees’ actions in
deducting the funds from Corrado’s and FCR’s Trust accounts constituted breaches
of fiduciary duties and conversion. After discovery, both parties moved for summary
judgment, and the district court granted summary judgment to the defendants.
Corrado and FCR now appeal this ruling.
II. Analysis
The appellants raise two primary issues. First, whether the district court
correctly concluded that Trust § 11.9 authorized the Trustees to deduct funds from the
appellants’ Trust accounts to reimburse Life Investors for the money it advanced to
pay for the defense in the Maryland litigation. And second, whether the district court
erroneously concluded that the Trustees did not breach their fiduciary duties when
they (1) transferred the appellants’ funds to Life Investors, (2) allegedly deprived the
appellants of a vested interest in Trust assets, or (3) failed to provide notice prior to
transferring the funds. In addition, the appellants contend that the district court
overlooked a dispute of material fact as to the reasonableness of the attorney’s fees
deducted from their Trust accounts, and they argue that Life Investors committed the
tort of conversion. Exercising de novo review, see Gilkerson v. Neb. Colocation
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Ctrs., LLC, 859 F.3d 1115, 1118 (8th Cir. 2017), we address each argument in turn
and affirm the grant of summary judgment to the appellees.
A.
The appellants attack the applicability of Trust § 11.9 by arguing that the
Maryland lawsuit was not a suit against the Trustees and that the Trustees were not
charged for the defense in that case. The appellants further argue that a different
section of the Trust precludes the use of Trust funds to pay for the defense because
defense costs were advanced by Life Investors. We disagree.
“On acceptance of a trust, the trustee shall administer the trust according to the
terms of the trust and according to this trust code, except to the extent the terms of the
trust provide otherwise.” Iowa Code § 633A.4201(1). Indeed, “[t]he terms of a trust
shall always control and take precedence over any section of this trust code to the
contrary.” Id. § 633A.1105. In Iowa, “interpretation of a trust is guided by the intent
of the testator.” In re Steinberg Family Living Tr., 894 N.W.2d 463, 468 (Iowa
2017). And Iowa courts “determine intent based on the language of the trust itself,
utilizing the ordinary and usual meaning of the words included.” Id.The plain language of Trust § 11.9 describes two situations in which the Trust
permits the Trustees to charge the account of a participant or beneficiary: (1) when
“any Participant or beneficiary brings legal action against the Trustees, or any of
them, the result of which shall be adverse to the party bringing the suit,” and (2) “if
any dispute shall arise with respect to the person or persons to whom delivery or
payment of any property shall be made by the Trustees.”
The Maryland suit triggered the first Trust provision, which permits the
Trustees to charge the legal fees to the account of a participant. The appellants are
participants who brought, and lost, a legal action against the Trustees. The
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appellants’ first contention—that the Maryland lawsuit was not against the
Trustees—is belied by that case’s operative complaint. In paragraphs 12 through 18
of that complaint—which identified who he was suing—John Corrado identified the
individual Trustees of the Trust, and, in paragraph 19, he collectively defined all of
those individual Trustees as the “Defendant Trustees.” As stated above, Corrado
pursued six theories of relief. Counts I through III alleged that the Defendant
Trustees breached their fiduciary duties in different ways; Count IV alleged that Life
Investors knowingly participated in and benefitted from those breaches; Count V
alleged that the Defendant Trustees failed to provide documentation to participants
in violation of ERISA; and Count VI alleged that the Defendant Trustees unjustifiably
refused Corrado’s withdrawal requests. Therefore, because five of the six counts
were asserted directly against the Trustees and the action was decided in their favor,
the express terms of Trust § 11.9 direct that “the cost to the Trustees of defending the
suit shall be charged, to the extent possible, directly to the account[s] of” the
appellants.
The appellants next assert that § 11.9 is inapplicable because, as a factual
matter, there was no cost to the Trustees for defending the Maryland suit because Life
Investors advanced the costs of the Trustees’ defense. As evidentiary support, the
appellants quote the appellees’ statement of fact “that no Trust assets were used to
pay attorney [sic] fees while [the Maryland Case] was ongoing,” Appellants’ Br. 28
(alteration in original) (internal quotation marks omitted), and the affidavit of Julie
Willingham, in which she stated that “no distribution has been made or requested
from Group Annuity Contract Y74552 to pay any costs or fees associated with this
Maryland lawsuit,” Appellants’ App. 35-36.6 These statements, while accurate, are
irrelevant to the present case. Indeed, had the Trustees used Trust funds to pay for
6
Willingham’s affadavit is dated June 24, 2010, and the Maryland litigation
was not terminated until that court granted summary judgment to the defendants on
March 11, 2011.
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the defense during the pendency of the lawsuit, they arguably would have violated
Trust § 11.9, which sets as a condition precedent to charging the participants’
accounts that the ultimate outcome of the litigation is “adverse to the party bringing
the suit.” Therefore, the litigation must be at an end prior to the Trustees using Trust
funds to pay the cost of their defense.
Further, we find that the Trustees did indeed incur “cost” in the form of
attorney’s fees in defending the Maryland action unsuccessfully brought by Corrado
and FCR. That Life Investors advanced attorney’s fees incurred by the Trustees is of
no moment. The Trustees were entitled to a defense in the Maryland action, and
regardless of whether those fees were advanced by Life Investors or another party or
initially paid by the Trustees themselves, the Trustees may charge such sums to the
appellants’ accounts.
Relatedly, the appellants assert that Trust § 11.10 expressly precludes the
Trustees from paying attorney’s fees out of Trust assets when Life Investors initially
pays them. Section 11.10 reads as follows:
To the extent not paid by the Participating Companies, the Trustees shall
have the power to pay from the Trust Assets all reasonable and
necessary expenses, taxes and charges, and fees for counsel incurred in
connection with the administration or operation of the Trust. The
Trustees hereunder shall serve without compensation for their services.
The appellees counter by noting that the limitation in § 11.10—“[t]o the extent not
paid by the Participating Companies”—is not found in § 11.9, and § 11.9 is the only
section of the Trust that expressly concerns litigation against the Trustees. Under the
plain language of the Trust, § 11.9 is both the only section concerning litigation
against a trustee and the only section concerning litigation against a trustee instituted
by a beneficiary or participant. Moreover, given that the expense of defending the
Maryland suit arose because of the appellants’ actions, it follows that the appellants
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should bear that expense rather than the other beneficiaries. See George Gleason
Bogert, et al., The Law Of Trusts And Trustees § 802 (“If an act of one of the
beneficiaries gave rise to the necessity for the expenditure, or he will obtain the sole
or principal benefit from it, the trustee may reasonably place the burden of the
expense upon him.”).
Under Iowa law, the terms of the Trust are controlling. Iowa Code Ann.
§ 633A.1105. Here, “utilizing the ordinary and usual meaning of the words included”
in the Trust, the current situation is expressly provided for. See In re Steinberg
Family Living Tr., 894 N.W.2d at 468. As such, we are bound by the language of the
Trust to conclude that the “Participant whose interest is in issue,” Trust § 11.9, should
bear the costs of the suit. See Hanrahan v. Kruidenier, 473 N.W.2d 184, 189 (Iowa
1991) (“We agree with the trial court that in equity the [legal] expenses should be
paid from the trust [because the] . . . payments were expressly authorized in the trust
agreement.”); Bogert, et al., supra, § 802 (“The settlor may make provisions as to the
source or sources from which the trustee should pay expenses and these will be
controlling.”).
B.
The appellants next argue that the Trustees breached fiduciary duties when they
(1) transferred the appellants’ funds to Life Investors thereby giving Life Investors
an interest in Trust assets, (2) deprived the appellants of a vested interest in Trust
assets, and (3) failed to provide advance notice prior to transferring the funds.
The first two alleged breaches arise out of Trust § 14.3, which states:
Except as provided in Article VII, no provision of the Plan or Trust shall
either directly or indirectly operate to give the Participating Companies
any interest whatsoever in any funds or property held by the Trustees
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under the terms of this Trust, or to deprive any Participant or beneficiary
of his vested interest in the Trust as it is then constituted, nor shall any
such provision cause any part of the income or corpus of the Trust to be
used for, or diverted to, purposes other than for the exclusive benefit of
the Participants or their beneficiaries.
The success of this argument therefore turns on whether application of § 11.9 in this
case gives Life Investors an “interest” in Trust proceeds and whether the appellants’
interests were “vested” at the time of the transfer.
Section 11.9 does not operate to give Life Investors any interest in Trust assets
or proceeds. An “interest” is “[a] legal share in something; all or part of a legal or
equitable claim to or right in property.” Interest, Black’s Law Dictionary (10th ed.
2014). Under the plain language of Trust § 11.9, the Trustees are given the ability to
charge legal expenses directly to a party who brings an unsuccessful lawsuit against
the Trustees. That the Trustees then take money recovered under § 11.9 and
reimburse Life Investors does not change the result, and the appellants advance no
precedent requiring a different outcome. Trust § 11.9 creates the “interest” in favor
of the Trustees, and nothing in the Trust grants to Life Investors a legal right to, or
interest in, Trust assets.
Next, the appellants were not deprived of their vested interests in Trust assets.
The appellants assert that “when the value of the participant’s accounts becomes
100% vested to him, the participant’s interest in net Trust Assets becomes by law
fixed, settled, and absolute and not subject to being defeated or changed.”
Appellants’ Br. 38. In support of this claim, the appellants point to Trust § 4.2, which
states that the value of a participant’s contributions to the Trust is 100% vested to the
participant. The appellees respond that the appellants’ interests were only 100%
vested with respect to net Trust assets—which are those assets remaining after
accounting for any liabilities of the participants. Once the appellants lost the
Maryland suit, a liability was created as § 11.9 operated to impose a lien on the
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appellants’ accounts in the amount of the attorney’s fees incurred by the Trustees in
defending the action.
The appellees’ interpretation is more true to the plain language of the Trust
because the appellants fail to appreciate the significance of the final clause of Trust
§ 4.2, which limits vesting “subject to the restrictions of Section 8.7.” Section 8.7,
in turn, provides that “no distribution shall be made to a Participant while there
remains any indebtedness . . . of the Participant to a Participating Company.” An
interest is vested only where “the right to its enjoyment, either present or future, is not
subject to the happening of a condition precedent.” Vested Interest, Black’s Law
Dictionary (10th ed. 2014); see also Edworthy v. Iowa Sav. & Loan Ass’n, 86 N.W.
315, 316 (Iowa 1901) (“A vested right is an immediate fixed right of present or future
enjoyment.”). The appellants owed money to the Trustees. Under the plain language
of the Trust, the § 8.7 limitation makes the vesting of the appellants’ interests in their
account funds contingent on satisfying that debt. Cf. In re Lunt, 16 N.W.2d 25, 32
(Iowa 1944) (holding that beneficiary’s interest in trust assets was properly charged
in the amount of a foreclosed debt where the loan was made at the request of that
beneficiary).
Finally, the appellants argue that the Trustees breached a fiduciary duty by
failing to provide notice to the appellants prior to deducting the funds from their
accounts. As their sole Iowa authority for this assertion, the appellants claim that a
“beneficiary is entitled to adequate information regarding the trust, i.e., what the trust
is and how the trustee has dealt with it.” Schildberg v. Schildberg, 461 N.W.2d 186,
191 (Iowa 1990). But, as we read it, this case does not impose a duty on a trustee to
inform a beneficiary of the enforcement of provisions found in the trust document
itself. Cf. Maxa v. John Alden Life Ins. Co., 972 F.2d 980, 986 (8th Cir. 1992)
(“[T]his Court does not construe ERISA or the regulations under it to require that the
appellee had a duty individually to warn, upon their sixty-fifth birthdays, each and all
of the members of the plans which it insured that their benefits would be reduced
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according to the plan’s coordination of benefits provision unless they enrolled in
Medicare.”). Instead, Schildberg is concerned with whether a trustee should be
removed for failing to provide a yearly accounting of the trust. 461 N.W.2d at 190-
91. The appellants possessed a copy of the Trust document, and they instigated the
Maryland lawsuit against the Trustees with knowledge that they would be responsible
for the Trustees’ legal fees if the matter was decided in favor of the Trustees. In the
absence of Iowa authority imposing the additional duty the appellants demand, we
believe the terms of the Trust itself provided sufficient notice.
C.
In their final arguments, the appellants contend that there is an issue of material
fact as to the reasonableness of the attorney’s fees and that Life Investors committed
the tort of conversion.
There is no material dispute as to the reasonableness of the attorney’s fees
because the appellants failed to challenge the fees below. The appellants argue that
they could not include this allegation in their complaint because they did not know
the value of the legal services until January of 2016. But this argument is completely
refuted by their amended complaint—filed on November 23, 2015—in which they
repeatedly assert that the money taken out of their accounts was to reimburse Life
Investors for the money it spent defending the Maryland lawsuit. Therefore, as a
factual matter, the appellants knew that the fees were at least $431,919.00 because
that is the amount that was charged to their accounts. The appellants—as the
plaintiffs in this action—had the burden of challenging the fees if they wished to
pursue that claim. See Fed. R. Civ. P. 8(a)(3) (“A pleading that states a claim for
relief must contain . . . a demand for the relief sought, which may include relief in the
alternative or different types of relief.”). While the appellants’ complaint vehemently
contests the means by which the Trustees acquired the money, nowhere do the
appellants claim that the amount was unreasonable.
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Finally, the appellants claim for conversion fails. “Conversion is the wrongful
control or dominion over another’s property contrary to that person’s possessory right
to the property.” Blackford v. Prairie Meadows Racetrack & Casino, Inc., 778
N.W.2d 184, 188 (Iowa 2010) (internal quotation marks omitted). “The essential
elements of conversion are: 1) ownership by the plaintiff or other possessory right in
the plaintiff greater than that of the defendant; 2) exercise of dominion or control over
chattels by defendant inconsistent with, and in derogation of, plaintiff’s possessory
rights thereto; and 3) damage to plaintiff.” In re Estate of Bearbower, 426 N.W.2d
392, 394 n.1 (Iowa 1988). The appellants’ argument on this point depends entirely
on this court’s finding that their interests were indefeasibly vested at the time the
Trustees acquired the funds. As stated above, however, appellants’ interests were
subject to the terms of § 11.9, so they are unable to prove the first element of their
conversion claim.
III. Conclusion
For the reasons above, we affirm the district court.
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