Opinion ID: 2995219
Heading Depth: 1
Heading Rank: 2

Heading: registered products

Text: Pacific Mutual reminds Producers that registered products can only be sold by properly licensed Registered Representatives, registered with a NASD member Broker-Dealer that has a Selling Agreement in effect. Compensation to the Producer for registered insurance products will then be in accordance with the compensation agreement and schedules between the Broker-Dealer and the Producer currently in effect. Pacific Mutual has not and can not grant authority to sell registered products by Producers that do not have the proper SEC, NASD, and state insurance licenses. R.26, Ex. 110 at 6. Mr. Much and Mr. Marien also entered into subproducer contracts with CICI on July 1, 1989, that appointed them agents of CICI and subproducers of Pacific Mutual. The plaintiffs had determined that, for tax purposes, CICI, as opposed to them individually, should receive the commissions and pay the business expenses. Mr. Much testified that Mr. Marien and he signed the subproducer agreements because they were told that the agreements were required to shift the commissions. They thought the subproducer agreements were standard operating procedure when individual producers desired to assign their commissions to a corporation. In November 1989, Mr. Much received a compensation schedule that covered the PSE product. Pursuant to that schedule, Pacific Mutual, in its capacity as PEN’s paymaster, would make payment directly to the producer on the condition that the registered representative was affiliated with MSC and that the service agreement among MSC, Pacific Mutual, and PEN remained in effect. That agreement also indicated that nothing in this provision is to relieve MSC of its overriding obligation to compensate registered representatives or is intended to relieve PEN’s obligation to compensate MSC. R.91 at 14. This compensation schedule was in effect at the time the plaintiffs executed the producer contract. According to Mr. Much, he did not believe that the various compensation schedules applied to him because he had made an agreement with Kolasny that set up a completely different rate of compensation. This belief was buttressed by the fact that the plaintiffs were always paid at the rates Kolasny quoted. Beginning in mid-1999, the plaintiffs sold 206 PSE policies to senior executives at FCB. Mr. Much testified that they had to do just about everything to complete these sales: arrange for physicals, conduct interviews, fly to the East and West coasts regularly for a week at a time, and keep track of the policy’s delivery. Id. at 16. The plaintiffs received their first commission on the PSE policies in January 1990, described by Mr. Much as very, very sizable. Id. at 17. They were paid by PEN acting as MSC’s paymaster pursuant to the paymaster agreement. The plaintiffs continued to receive commissions and renewal commissions from the PSE policies from 1989 to 1992. In March 1992, however, each of the policyholders under the FCB program directed that a new registered representative be appointed to service their PSE policies. After this change, MSC no longer paid Mr. Much and Mr. Marien renewal commissions on the PSE programs. Pacific Mutual, through PEN, has continued to pay renewal commissions to MSC, who instead pays the commissions to the new registered representatives servicing the FCB program. B. District Court Proceedings 1. The plaintiffs filed a complaint against Pacific Mutual in December 1994, claiming that Pacific Mutual was contractually obligated to pay them renewal commissions on the FCB policies even though they had ceased servicing those policies. Specifically, the plaintiffs argued that they had a vested right to commissions enforceable against Pacific Mutual based upon the CICI producer contract and an oral agreement with Kolasny pursuant to which the plaintiffs’ commissions on the PSE policies were to be vested. Pacific Mutual, in contrast, argued that the plaintiffs have no claim against it. Specifically, (1) the producer contract did not obligate Pacific Mutual to pay any commissions for PSE policies; (2) that contract barred the alleged oral agreement with Kolasny; (3) CICI was legally barred from receiving the commissions; (4) the contracts barred the plaintiffs’ direct claims against Pacific Mutual; and (5) the plaintiffs’ remedy was to sue MSC under their contract with MSC. 2. After a bench trial, the district court found in favor of the plaintiffs. The court concluded that Kolasny, acting under apparent authority from Pacific Mutual, entered into a contract with the plaintiffs to pay renewal commissions and trails on the PSE policies the plaintiffs sold to FCB. The court first noted that two possible contractual bases existed for the plaintiffs’ claim: Kolasny’s oral promises and the Pacific Mutual producer contract. The court accepted Pacific Mutual’s argument that the producer contract provided that any oral promises were superceded and not binding, pointing to language in part IV of the producer contract. The court also pointed out, however, that part III.A.2 of the contract gave Pacific Mutual the right to set the compensation on plans not included in the Compensation Schedules which are now or may hereafter be issued by Pacific Mutual. R.91 at 23. This language, the court concluded, permitted Pacific Mutual to set rates for plans outside of Pacific Mutual’s compensation schedules via extracontractual means. Turning to the extracontractual means at issue, the district court determined that Kolasny’s oral dealings with the plaintiffs formed a contract. The court found that Kolasny had either actual or apparent authority to form a contract. It also found credible Mr. Much’s testimony that Kolasny and the plaintiffs agreed to compensation rates, including the vesting of renewal commissions and trails, when the contract was made. Thus, the court concluded, if the agreement between Kolasny and Plaintiffs as to compensation is valid despite its oral nature, [Pacific Mutual] is liable for breaching that agreement. Id. at 25. To assess the validity of the oral contract, the court analyzed two contractual clauses in the producer contract. The first, part III.A.2, indicated to the court that (1) Pacific Mutual retained the right to set compensation in forms other than written compensation schedules; (2) written changes were required in only one circumstance--when Pacific Mutual changed (as opposed to set) compensation on a plan; and (3) no agreement was necessary to set compensation--in fact, Pacific Mutual could unilaterally change compensation with written notice. The second clause, part IV.1, explained that no oral promises or representations shall be binding nor shall this contract be modified except by agreement in writing, executed on behalf of [Pacific Mutual] by a duly authorized officer. Id. at 26. The district court noted that this requirement of a writing conflicted with part III.A.2 which created an extracontractual means of setting compensation. By reserving to Pacific Mutual the right to set compensation in ways other than in a written agreement, the court found, part III.A.2 established a compensation structure outside the general parameters of the producer contract. This structure was, by its very terms, not limited to the means of written agreements to alter the contractual relationship. Id. Thus, the court concluded, Pacific Mutual could (and, in this case, did) use other means to set compensation, including the oral Kolasny agreement. Finally, the district court rejected Pacific Mutual’s arguments that the plaintiffs should have sued MSC. There was no evidence of a contract between the plaintiffs and MSC under which MSC was responsible for paying the plaintiffs. The forms signed by the plaintiffs dealt only with NASD licensing matters. Moreover, the court noted that the payments through MSC were in name only. MSC never held the commission funds, did not calculate the commissions, and did not write the checks. MSC received no payment for being the broker-dealer. MSC simply acted as a shell, the court concluded, to satisfy the formal requirements of the SEC and NASD.