Peden v. Peterson

United States Court of Appeals
Fifth Circuit
F I L E D
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT June 25, 2003
_________________
Charles R. Fulbruge III
No. 02-60320 Clerk

ALVA PEDEN; RICHARD L. PEDEN TRUST,
by and through its agent, ALVA PEDEN,

Plaintiffs - Appellants,

v.

RANDALL PETERSON, Individually and
as Agent for Western Reserve Life
Assurance Company of Ohio; WORLD
MARKETING ALLIANCE; WESTERN RESERVE
LIFE ASSURANCE COMPANY OF OHIO,

Defendants - Appellees.

Appeal from the United States District Court
for the Southern District of Mississippi
3:01-CV-149

Before WIENER, BENAVIDES, and DENNIS Circuit Judges.

BENAVIDES, Circuit Judge:*

Appellants here present an interlocutory challenge to the

the district court’s order compelling arbitration pursuant to the

Federal Arbitration Act, 9 U.S.C. § 2. We reverse, finding that

the agreement that contains the arbitration clause is an

agreement separate from the one under which Appellants seek

*
Pursuant to 5TH CIR. R. 47.5, the Court has determined
that this opinion should not be published and is not precedent
except under the limited circumstances set forth in 5TH CIR. R.
47.5.4.
relief, and consequently Appellants are not bound to arbitrate

their claims.

I.

The controversy in this appeal arises from

Plaintiffs-Appellants' action to reform the terms of an insurance

contract to conform with what Appellants contend was the

understanding of the contracting parties. In 1989, Richard Peden,

the decedent in this life insurance action, established an

insurance trust (the Trust) for the benefit of his wife and

children. To fund the Trust the decedent purchased a

$1,000,000.00 life insurance policy from Manulife Insurance

Company (Manulife Policy). The decedent was sold the million

dollar policy by his brother, Bobby Peden, who was licenced to

sell non-variable insurance policies in Mississippi. The

beneficiary of the Manulife Policy was the Trust, and the

beneficiaries of the Trust were and are Peden's children and his

second wife, Plaintiff-Appellant Alva Peden.

In 1996, upon his brother Bobby Peden's advice, the decedent

decided to replace the Manulife Policy with a variable insurance

policy. Bobby Peden was himself not licenced to sell variable

insurance policies, so he referred his brother to variable

insurance agent Randall Peterson.

At the time of the transaction in question Defendant-

Appellee Peterson was licenced as an insurance agent under

Mississippi law, and he held an agent appointment from Defendant-

2
Appellee Western Reserve Life Insurance Company of Ohio (Western

Reserve). Peterson was also licenced to sell securities, and he

was a registered representative of World Marketing Alliance

Securities (WMA Securities), which is a company separate from but

affiliated with Defendant-Appellee World Marketing Alliance

(WMA).1

A. The Purchase Meeting

Appellants contend that the purchase of the Western Reserve

Policy was negotiated between Bobby Peden and Peterson.

Appellants assert that Bobby told Peterson that Richard Peden

wished to purchase a variable insurance policy to fund the Trust

and specifically to replace the Manulife million dollar policy.

Appellants contend that Bobby arranged the purchase meeting

between Richard Peden and Peterson in Gulfport, Mississippi, and

that Bobby was present at the purchase meeting. Bobby avers that

Peterson sold Richard a Western Reserve policy with a death

benefit of $1,000,000.00 and that the Trust was identified as the

sole beneficiary.

B. The Securities Agreement and the Insurance Agreement

In purchasing his variable insurance policy, the decedent

purportedly filled out two separate applications: one application

for a variable insurance policy, and one application for a

1
WMA Securities is not a party to this appeal, but it is one
of WMA's registered broker-dealer affiliates.

3
securities brokerage account.2 The insurance application

(hereinafter Insurance Agreement) is a six-page document

captioned:

Application for Life Insurance
Western Reserve Live Assurance Co. of Ohio

The contract indicates that the broker-dealer is WMA, and that

the owner of the policy is Richard Peden. The agreement itself

includes medical information concerning Richard Peden, identifies

Alva Peden as the sole beneficiary, and lists the death benefit

as $412,000.00. It is signed by the decedent as applicant and

by Randall Peterson as "witness (registered representative)" of

WMA.

In contrast, the application for the securities brokerage

account (hereinafter the Securities Agreement), is a single page

document that is captioned, "WMA SECURITIES, INC. (WMAS) NEW

ACCOUNT APPLICATION.” The Securities Agreement indicates that the

decedent authorized an investment to be made on his behalf in the

“Freedom Equity Fund”. The agreement indicates that the fund

investment is to be derived from a source described merely as

“[v]ariable life”. It is this document that contains the

2
Appellants contest the validity of the decedent’s
signature upon the Securities Agreement as well as other aspects
of the contract’s formation. However, we need not pass upon the
validity of the Security Agreement as our inquiry here is limited
to whether Appellants are compelled to arbitrate their claims
pursuant to the Insurance Agreement. To the extent this opinion
suggests that the Securities Agreement was properly executed and
is binding upon the decedent, we would be clear that we have not
passed upon that question.

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arbitration provision under which Appellees sought arbitration.

It states in pertinent part:

I [Richard Peden] ... agree that ... any
controversy arising out of my ... accounts,
the transactions with WMA [Securities], ...
or related to this agreement or breach
thereof, shall be settled by arbitration in
accordance with the rules then in effect of
the National Association of Securities
Dealers, Inc. (NASD).

The arbitration provision further provides that “[a]rbitration is

final and binding on the parties (i.e. you [Richard Peden] and

WMA [Securities]).” Randall Peterson signed the Security

Agreement on behalf of WMA Securities.

C. Post-purchase Events

Following the meeting at which the decedent purchased the

Western Reserve variable insurance policy, the decedent and his

wife began paying premiums to Western Reserve and ceased paying

premiums on the Manulife policy. Appellees contend that on

October 1, 1996, Richard Peden signed a single page "Amendment of

Application" changing the death benefit of the Western Reserve

policy from $413,000.00 to $380,000.00.

Subsequent to the decedent's purchase of the Western Reserve

policy, Western Reserve contacted Manulife to have the cash value

of the Manulife policy transferred to Western Reserve under the

theory that the Western Reserve policy was a replacement policy

for the Manulife policy. Manulife, however, refused the transfer

5
because the owner of the Western Reserve policy, according to

Western Reserve, was the decedent Richard Peden, and the owner of

the Manulife policy was the Trust. Therefore, according to

Manulife, a replacement transfer of cash value was not

permissible.

Appellants contend that Western Reserve then contacted

Randall Peterson and informed Peterson that the Western Reserve

policy reflected an error in ownership, that the correct owner

was the Trust, and instructed Peterson to amend the policy to

reflect the Trust as the owner. On March 5, 1997, Peterson

responded in writing to Western Reserve, stating that he had

contacted "policyholder services" and instructed them to change

the beneficiary and owner of the Western Reserve policy to the

Trust. Peterson also contacted Bobby Peden and assured him that

the owner of the Policy has been changed to the Trust. However,

the owner of the Western Reserve policy was never changed to

reflect the Trust as owner. Consequently, the Manulife policy

subsequently lapsed once the cash value had been completely

depleted to cover the delinquent premiums.

On August 16, 1998, Richard Peden died. Western Reserve

contacted Alva Peden and offered her a check for $380,000.00.

Alva declined the remittance.

D. Procedural History

On January 31, 2001, Plaintiffs-Appellants Alva Peden and

6
the Trust instigated this action in state court seeking to reform

the Western Reserve policy to reflect the Trust as the

beneficiary and the death benefit in the amount of $1,000,000.00.

Plaintiffs-Appellants also sought punative damages for gross

negligence and bad faith.

Defendant-Appellee Western Reserve removed the action to

federal court and filed a motion to compel arbitration which was

joined by Defendants-Appellees Randall Peterson and World

Marketing Alliance. The district court granted Western Reserve's

motion to compel arbitration, and Appellants here present an

interlocutory challenge to that ruling.

II.

The question before this Court is whether the district court

properly granted Appellees' motion to compel arbitration, and

this Court reviews that decision de novo.3 Fleetwood

Enterprises, Inc. v. Gaskamp, 280 F.3d 1069, 1073 (5th Cir.

2002). In deciding whether to compel arbitration pursuant to 9

U.S.C. § 2, the court considers: (1) whether there is a valid

3
As an initial matter, the district court correctly found
that the Federal Arbitration Act (FAA), 9 U.S.C. § 2, applies to
the agreement in question here. The FAA provides that an
arbitration agreement covered by the Act shall be, "valid,
irrevocable, and enforceable, save upon such grounds as exist at
law or in equity for the revocation of any contract." 9 U.S.C. §
2. Arbitration agreements which govern contracts implicating
interstate commerce are covered by the FAA. Here, Appellants do
not contest the applicability of the FAA.

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agreement to arbitrate between the parties, and (2) whether the

dispute at hand falls within the perimeters of that agreement.

Id. Here, we find that the contract that Appellants seek to

reform does not contain a binding agreement to arbitrate between

the parties to this appeal. Consequently, Appellants are not

bound to arbitrate their claims.4

The question of whether a valid arbitration agreement exists

between the parties to this appeal is governed by state law, and

here Mississippi provides the controlling law. Fleetwood

Enterprises, 280 F.3d at 1074. In Mississippi, it is well-settled

that the unambiguous and plain language of an insurance policy is

construed and enforced as written. Mississippi Farm Bureau Cas.

Ins. Co. v. Britt, 826 So.2d 1261, 1266 (Miss. 2002)(finding that

the court must give effect to a “valid, clear and unambiguous

contract term where there is no statutory or public policy

prohibition nullifying it”; see also, Clarendon Nat. Ins. Co. v.

McAllister, 837 So.2d 779, 780 (Miss.App. 2003)(citing Weeks v.

Mississippi College, 749 So.2d 1082, 1087 (Miss.Ct.App. 1999)).

Here, the plain language of the Insurance Agreement

indicates that the arbitration provision contained in the

4
Appellants challenge both of these factors, arguing that
there is not a valid agreement to arbitrate between the parties
to this appeal, and that, even if there were, Appellants' cause
of action would not fall within the scope of the agreement.
However, because we find the first question to be dispositive, we
need not reach the issue of whether the cause of action falls
within the scope of the agreement.

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Security Agreement is not incorporated into the Insurance

Agreement. The contract states in pertinent part:

This policy, the attached application and any
additional applications at the time of
reinstatement or increase in specified amount
constitute the entire contract.

(emphasis added). Appellants persuasively argue that because the

"attached application" does not contain the securities agreement,

the insurance policy is a separate contract which expressly does

not incorporate the securities agreement.

Although Appellees disagree on this point, they fail to

address the policy language highlighted by Appellants. Instead,

Appellees rely on a general theory that as a variable insurance

policy, the entire product was a security. In support of this

view, Appellants direct the Court to a finding by the National

Association of Securities Dealers (NASD) that the entirety of a

variable insurance policy is subject to NASD regulation because

"the entire product is a security" not just the “Investment

Account” portion of the product. However, Appellee's contention

does not resolve the contract point that Appellants raise. In

purchasing his variable insurance policy, the decedent was,

certainly, also purchasing a security. However, this fact does

not negate the fact that he was also executing two separate

contracts: one contract governing the terms of his security

account with WMA Securities, and one contract governing the terms

9
of the insurance arrangement he was entering into with Western

Reserve.5

Moreover, in Mississippi, parol evidence generally will not

be used to incorporate extrinsic materials where, as here, the

language of the contract itself defines exclusively the "entire

contract." See Noble v. Logan-Dees Chevrolet-Buick, Inc. 293

So.2d 14 (Miss. 1974)(excluding parol evidence where the contract

in question stated "[t]he front and back of this order comprises

the entire agreement pertaining to this purchase and no other

agreement of any kind, verbal understanding or promise

whatsoever, will be recognized.").

Finally, under Mississippi law the construction of the

Insurance Agreement must exclude the Securities Agreement.

Mississippi Code § 83-7-13 provides:

All life insurance companies doing business
in the State of Mississippi shall deliver to
the insured with the policy, certificate, or
contract of insurance in any form a copy of
the insured's application; and in default
thereof, said life insurance company shall
not be permitted in any court of this state
to deny that any of the statements in said
application are true.

This provision requires an insurance company to include in its

5
This point is further supported by the fact that the
parties to the Security Agreement are different from the parties
to the Insurance Agreement. The Securities Agreement expressly
binds only the decedent and WMA Securities, but WMA Securities is
not a party to the Insurance Agreement. Instead, Peterson signed
the Insurance agreement on behalf of WMA, which in turn bound
Western Reserve.

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delivery to the insured the entire insurance contract, including

the application. See National Life & Acc. Ins. Co. v. Prather,

158 So. 881 (Miss. 1934) (interpreting an earlier but similar

version of the Code); see also, Aetna Life Ins. Co. v. McCree,

164 So. 223 (Miss. 1935). Failure to do so generally results in

the insurer forfeiting the right to rely on the undelivered

materials in construction of the contract. Id. Here, it is

undisputed that Western Reserve failed to deliver the Securities

Agreement to the decedent as part of the entire insurance

contract. Thus, under § 83-7-13 and the Mississippi rules

governing the construction of insurance contracts, the failure of

Western Reserve to include the Securities Agreement as part of

the insurance contract it delivered to decedent undermines

Western Reserve's ability to rely on the Securities Agreement as

part of the Insurance Agreement in the course of the litigation

in the instant case.

Thus, we find that the two agreements in question cannot be

construed as a single contract. We have before us two agreements

that bind different parties and are contained in separate

documents. The agreements not only utterly fail to refer to one

another, but in fact the language in the Insurance Agreement

plainly precludes the incorporation of extrinsic materials.

Additionally, Mississippi law concerning the construction of

insurance policies counsels that the Securities Agreement be

11
excluded from our construction of the Insurance Agreement.

Therefore we find that the Securities Agreement and the Insurance

Agreement are two separate and unincorporated contracts.

Consequently, as Appellants’ claims arise under the Insurance

Agreement, there exists no binding agreement to arbitrate those

claims between the parties to this appeal.

III.

For the foregoing reasons we REVERSE the order of the

district court compelling arbitration, and REMAND the case for

proceedings consistent with the renderings of this Court.

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