Opinion ID: 766889
Heading Depth: 2
Heading Rank: 3

Heading: Personal Profit or Advantage

Text: 21 The School Leaders Errors and Omissions Policy issued by National Union to Jarvis contains a policy exclusion as to any claim arising out of 5 the gaining in fact of any personal profit or advantage to which the Insured is not legally entitled. 6 The district court found that [i]n completing the transfer of the $2,000,000 of the plaintiff's funds to Action Funding, Inc., Cosby gained, in fact, a personal profit or advantage. (R. 582, Finding of Fact No. 10). To support its finding, the court below articulated: 22 Despite the plaintiff's contention that Cosby obtained no profit as a result of the $2 million transfer, it seems self-evident that Cosby's actions provided him, ultimately, with a distinct business advantage. It cannot be disputed that the investment of $2 million dollars into the coffers of Action Funding accrued to Cosby's personal advantage by infusing his business with substantial investment capital with which to operate his business. As a factoring business, such capital would enable Action Funding to acquire from other businesses the accounts receivable necessary for it to operate and ultimately profit. The record in the underlying case makes clear, and Cosby himself admitted, that he maintained a forty-nine percent interest in Action Funding, Inc. As an owner of Action Funding, Cosby stood to gain, personally, from any investment of capital into his business. It [is] clear then, that Cosby gained, in fact, an advantage from the transfer of the $2 million to Action Funding, Inc. 23 (R. 597)(emphasis in original)(citation omitted). 24 The district court's finding that Cosby actually gained a personal profit or advantage from the $2 million transfer is not clearly erroneous. First, any time money was loaned to Action Funding, it worked to Cosby's personal advantage, from a business perspective, as he was a 49% owner of Action Funding. Capital investmests would allow the small factoring company to grow and prosper, and also to gain credibility with other companies--companies with which Action Funding could transact business. Consequently, Cosby would become the owner of a successful business. Business success clearly qualifies as a personal advantage. 25 Importantly, Cosby was not personally responsible for the loan repayment. As a 49% owner, Cosby stood to reap the financial benefits from profitable investments, without personal responsibility for borrowed funds. 26 In this case, Cosby breached his fiduciary duties to Jarvis, as the jury in the underlying lawsuit found, and wrongfully gave himself the personal advantage in transferring $2 million of Jarvis' money to a small, highly risky business. One must ask why any corporate officer/trustee would violate his fiduciary duties by transferring a substantial sum of corporate funds to another company--one that he owns--if the transfer was not going to give him a personal advantage. 27 Second, Action Funding was operating at a loss prior to the $2 million transfer. As previously mentioned, it reported a negative net worth on its tax return. By infusing funds into his undercapitalized business, Cosby created a viable opportunity for his business, and therefore himself as well, to make a profit. 28 It also may be noted that by not disclosing to the others at Jarvis his ownership interest in and employee status with Action Funding, Cosby placed himself at a personal advantage. Had he disclosed such information, Cosby very well may not have been able to accomplish what he hoped to do, namely to transfer Jarvis' $2 million to Action Funding. Had Cosby disclosed, the investment opportunity that was to his distinct advantage would have been lost. Therefore, by not revealing his connection with Action Funding to the Jarvis board and finance committee, Cosby placed himself, and Action Funding, at an advantage. 29 One of Jarvis' central arguments in its appellate brief is that Cosby did not gain in fact a personal profit or advantage, as set forth in the language of the policy exclusion at issue. It is Jarvis' contention that Cosby's only benefit received in connection with Action Funding was a monthly salary of $6,000 for a period of sixteen months as a director of Action Funding. Jarvis defends that such a salary does not constitute profit. While Jarvis' argument takes account of Cosby's employee status with Action Funding, it fails to acknowledge the fact that Cosby was also an owner of Action Funding. Employees may not share in profits, if any, but owners certainly do. And it is clear from the records that from the $2 million investment, Cosby expected to make over $360,000 personally as an Action Funding owner and director. Unrealistic or not, his expections fueled his objective to transfer $2 million of Jarvis' endowment funds to Action Funding. 30 Even if it were conceded that Cosby did not gain in fact a personal profit, the policy exclusion at issue contains a second exclusionary term: advantage. Although Cosby may not have gained a balance-sheet profit, Cosby did gain in fact a personal advantage, as the district court correctly concluded and as discussed in the above paragraphs. 31 Jarvis accuses the district court of impermissibly compounding inferences in arriving at the conclusion that Cosby gained a personal advantage from the $2 million transfer. The alleged inferences are: (1) Jarvis' investment in Action Funding 'would enable Action Funding to acquire . . . accounts receivable necessary for it to operate and ultimately profit'; and (2) 'Cosby stood to gain, personally[,] from any investment of capital into his business.' (Pl.'s Br. at 37). Then Jarvis quickly points out that Action Funding operated at a loss rather than a profit and that regardless of what Cosby stood to gain, he received only a salary and in fact lost all the money he personally had invested in Action Funding. 32 Jarvis would have this Court believe that in order to gain an advantage in fact, one necessarily has to make some sort of tangible profit. Such a construction is unreasonable, for it would render the advantage prong of personal profit or advantage meaningless and superfluous. As National Union suggests, the term advantage is broader than the term profit. 7 The former does not mean a balance-sheet profit; rather, it encompasses any gain or benefit, such as an opportunity to make a profit but without responsibility to repay the loan. 33 Furthermore, the district court found that Cosby was not legally entitled to a personal profit or advantage from the $2,000,000 transfer because, in transferring these funds, Cosby breached his duty of loyalty to the plaintiff. (R. 583, Finding of Fact No. 19). The lower court's reasoning was that the jury found, and the record affirms, that the transfer of funds from Jarvis' endowment to Action Funding came about through Cosby's breach of duty of loyalty. (R. 597). The court then cited GNG Gas Systems, Inc. v. Dean, 921 S.W.2d 421 (Tex.App.--Amarillo 1996), for the proposition that when a corporate officer or director diverts assets of the corporation to his own use, he breaches a fiduciary duty of loyalty to the corporation, and the transaction is presumptively fraudulent and void as being against public policy. See id. at 427. On that basis, the court concluded that Cosby clearly was not legally entitled to the funds which his business received as a result of a fraudulent transaction. (R. 597). 34 The district court's finding that Cosby was not legally entitled to a personal profit or advantage from the $2 million transfer is not clearly erroneous. In fact, it is wholly consistent with Texas law. In Kinzbach Tool Co. v. Corbett-Wallace Corp., 138 Tex. 565, 160 S.W.2d 509 (Tex. 1942), the Supreme Court of Texas announced that if [a] fiduciary 'takes any gift, gratuity, or benefit in violation of his duty, or acquires any interest adverse to his principal, without a full disclosure, it is a betrayal of his trust and a breach of confidence, and he must account to his principal for all he has received.' Id. at 574, 160 S.W.2d at 514 (quoting United States v. Carter, 217 U.S. 286, 306, 30 S.Ct. 515, 520 (1910)). This indicates that a fiduciary is not legally entitled to any profit or advantage he gains as a result of a breach of duty or trust. 35 Jarvis contends that the district court's finding is premised on the erroneous view that a breach of the duty of loyalty is an illegal act. . . . (Pl.'s Br. at 39). Jarvis then proceeds by arguing that Cosby's actions were not per se illegal under Texas law. While the district court found that Cosby is not legally entitled to a personal profit or advantage, it never decided that Cosby's breach of the duty of loyalty is an illegal act. 36 Not legally entitled simply is not synonymous with illegal. The two have quite different meanings, with illegal involving a greater degree of misconduct. 8 Jarvis misconstrues the language of the district court's finding and asserts that Cosby's breach of his fiduciary duties was not tantamount to illegality. The policy exclusion clearly states that it precludes coverage for any personal profit or advantage to which the Insured is not legally entitled (emphasis added). 37 Jarvis criticizes the definition of the duty of loyalty provided to the jury in the underlying state court action. The duty of loyalty was defined in the jury charge to mean that the director must act in good faith and must not allow his personal interests to prevail over the interests of the corporation. Jarvis disputes the conjunctive word and, arguing that [the] elements are conjunctive. . . . The district court has therefore in effect held that Cosby's failure to act in good faith is sufficient proof of illegality to preclude coverage. (Pl.'s Br. at 43). 38 As discussed earlier, the district court made no mention, let alone a finding, of illegality in this case. Jarvis' criticism of the jury charge is without merit. As this Court stated in Gearhart Industries, Inc. v. Smith Intern., Inc., 741 F.2d 707 (5th Cir. 1984), [t]he duty of loyalty dictates that a director must act in good faith and must not allow his personal interests to prevail over the interests of the corporation. Id. at 719. The definition in the jury charge, which is essentially verbatim, was not erroneous. 39 Finally, pointing out that the policy insures against wrongful acts, which are defined as any actual or alleged breach of duty . . . , Jarvis then makes a twisted argument. Jarvis argues: (1) insurance contracts should be construed to provide meaning to all terms, including the word any in the above clause; (2) that term any conflicts with the policy exclusion at issue; (3) under Texas law, if a policy contains conflicting provisions, the insuring clause takes precedence over a conflicting exclusionary clause. 40 The frailty of that argument is obvious. Jarvis' construction of the policy and the word any in the insuring clause would render the policy exclusion at issue completely meaningless. In fact, any exclusionary provision would be devoid of meaning or value. There would be no reason for having an Exclusions section in any insurance contract. Interestingly, that would violate the very same rule that Jarvis invokes: insurance contracts should be construed to provide meaning to all terms. 41 For all of the foregoing reasons, the district court's findings with respect to the personal profit or advantage exclusion are not clearly erroneous, and Jarvis' arguments to the contrary are unpersuasive. 42