Court Opinion

ID: 10506
Source: CourtListenerOpinion
Date Created: 2010-04-25 05:54:43+00
Date Added: 2024-06-11T16:46:24.618812
License: Public Domain

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