UNITED STATES COURT OF APPEALS
For the Fifth Circuit
No. 92-9049
KRAL, INC., d/b/a
Ed's Automatic Transmission
Service, ET AL.,
Plaintiffs-Appellants,
VERSUS
SOUTHWESTERN LIFE INSURANCE COMPANY,
Defendant-Appellee.
Appeal from the United States District Court
For the Northern District of Texas
(August 16, 1993)
Before EMILIO M. GARZA, DeMOSS, Circuit Judges, and ZAGEL, District
Judge.*
DeMOSS, Circuit Judge:
I.
This is an appeal of a summary judgment granted in favor of
Southwestern Life Insurance Co. (SWL). Kral sued SWL for breach of
fiduciary duties in violation of 29 U.S.C., § 1109 (a) (1985).
Plaintiffs include: (1) Ed's Automatic Transmission Service
Defined Benefit Plan, a qualified defined benefit plan under the
*
District Judge of the Northern District of Illinois,
sitting by designation.
terms of ERISA (the Kral Plan); (2) Kral, Inc. d/b/a Ed's Automatic
Transmission Service (Kral, Inc.), the Kral Plan's designated plan
administrator; (3) Edwin V. Kral, a Trustee of the Kral Plan and a
Plan participant who owed fiduciary duties to the Kral Plan; and
(4) Calvin Kral, the Kral Plan's other Trustee and a Kral Plan
participant who owed fiduciary duties to the Kral Plan. The
defendant is SWL, which is not a designated fiduciary of the Kral
Plan and has never been designated by a fiduciary named in the Kral
Plan to carry out fiduciary responsibilities.
Plaintiffs contend that SWL is liable to them for breach of
fiduciary duty and for theft of almost $500,000 in pension plan
funds by Robert Joseph Zeigler (Zeigler). Zeigler is the president
and sole shareholder of Administrative Pension Services, Inc. (APS)
which, pursuant to contract acted as the Kral Plan's third-party
administrator. Plaintiffs assert the theory of respondeat superior
to hold SWL liable for Zeigler's allegedly fraudulent conduct.
On May 1, 1983, Zeigler's wife, Peggy became an authorized
soliciting agent for SWL. Apparently Peggy Zeigler was only
authorized to "solicit applications for life insurance, annuities,
and other insurance products offered by [Southwestern] for sale to
the general public." Neither Joseph nor Peggy Zeigler was ever an
authorized recording agent for SWL, and neither ever had the
authority to bind SWL to an insurance or annuity contract.
Moreover, neither of the Zeigler's was authorized to make or modify
any contracts or policies on behalf of SWL.
2
On March 18, 1985, the Kral Plan contracted with Farzaroli &
Davey Pension Services Corporation (Farzaroli), to provide it with
administrative services. At the time, Joseph Zeigler was an
employee of Farzaroli.
In 1985 or 1986, the Kral Plan hired APS as their contract
administrator. APS was directly compensated for the services it
rendered. Zeigler was the president and sole shareholder of APS.
Plaintiffs solicited and received recommendations from Zeigler
concerning investment of their retirement funds. On April 26,
1986, Zeigler used forged SWL Annuity Contracts which he and Ed
Kral executed for $62,000. Simultaneously, Zeigler received a
check for $62,000 from the Kral Plan which he instructed Kral to
make payable to APS. SWL did not authorize APS to receive funds on
its behalf. Neither Zeigler nor APS ever forwarded the contracts
or funds to SWL.
On August 11, 1986, Peggy Zeigler appointed her husband as her
sub-agent, for SWL. SWL approved of Zeigler's appointment only for
the solicitation of applications for insurance to be submitted
through Peggy Zeigler.
From April 1986 to 1988, Plaintiffs contributed approximately
$400,000 of the Kral Plan funds on the representation of Zeigler
that the money would go toward purchasing GIC's from SWL. Each
time that plaintiffs sought to purchase GIC's from SWL, Zeigler had
plaintiff fill out an SWL application form. All checks were made
payable to APS at Zeigler's request.
3
On October 29, 1990, Zeigler plead guilty to one count of
misapplication of fiduciary property of the value of $10,000 or
more, a second degree felony in Texas State court, pursuant to a
plea bargain agreement. On May 13, 1991, the Plaintiffs obtained
in the United States Bankruptcy Court for the Northern District of
Texas a judgment against Peggy and Zeigler for $500,000. Kral also
filed this suit against SWL to enforce rights under an employee
benefit plan on December 14, 1990 in the United States District
Court for the Northern District of Texas.
On Feb 21, 1992, SWL filed a motion for summary judgment. The
District Court found that there were no genuine issues of material
fact on any of the three elements of vicarious liability under
ERISA and granted SWL's motion. On appeal, plaintiffs allege that
the district court erred in awarding defendant SWL summary judgment
on the grounds that SWL was not vicariously liable for Zeigler's
breach of fiduciary duty.
We AFFIRM.
II.
Because plaintiffs admit that SWL itself was not a fiduciary
under ERISA, in order to recover from SWL, they must establish
SWL's vicarious liability under the common law doctrine of
respondeat superior. American Federation of Unions v. Equitable
Life Assur. Soc., 841 F.2d 658, 665 (5th Cir. 1988). The district
court, however, awarded a summary judgment in favor of SWL that
there was no vicarious liability. Therefore, in order to set aside
this summary judgment on appeal, the plaintiffs must show that a
4
genuine fact issue exists as to each of the following three common
law elements of vicarious liability:
1. Zeigler was a fiduciary within the meaning of ERISA
as to the Kral Plan;
2. Zeigler breached his fiduciary duty to plaintiffs
while acting in the course and scope of his employment
with SWL; and
3. SWL actively and knowingly participated in Zeigler's
breach of fiduciary duty to plaintiffs.
American Federation, 841 F.2d 658, 665 (5th Cir. 1988).
The district court found that several facts are undisputed:
1. Zeigler defrauded plaintiffs out of over $450,000;
2. Zeigler is to be considered a fiduciary under ERISA;
3. Zeigler applied to the Texas State Board of Insured for
authorization to solicit for applications for SWL and was
licensed by the State of Texas to be SWL's agent; and
4. SWL never received any of the funds plaintiffs gave
Zeigler for the purpose of buying GIC's, issued by SWL.
Clearly, the first element that Zeigler is a fiduciary under
ERISA as to the Kral Plan is met under the undisputed facts. The
issues on appeal are whether plaintiffs have presented fact issues
on the second and third elements of vicarious liability. For the
reasons herein stated, we find that the plaintiffs failed to raise
the requisite fact issues on the second and third elements.
III.
Did Zeigler Breach His Fiduciary Duty While Acting In The Course
And Scope Of His SWL Agency?
Plaintiffs must demonstrate that Zeigler was acting within the
scope of his authority as an SWL agent when he breached his
fiduciary duties. The district court held that the plaintiffs did
not produce any evidence showing that Zeigler was an agent of SWL
5
when he breached the fiduciary duties to the plaintiffs, and that
plaintiffs did not rebut SWL's assertion that when the breach
occurred, Zeigler was acting outside the scope and authority of his
agency relationship with SWL.
Plaintiffs argue that they raised a fact issue that Zeigler
acted within the scope of his SWL agency by claiming that SWL
clothed him with apparent authority to sell the GIC's and collect
money.
Apparent authority is present when a principal clothes its
agent with the semblance of authority such that a reasonably
prudent person having knowledge of the business involved would be
justified in believing that the agent has the power the person
assumes that he has. Migerobe, Inc. v. Certina USA, Inc., 924 F.2d
1330, 1336 (5th Cir. 1991). Plaintiffs contend that Zeigler was
SWL's licensed agent during the time he executed the fraudulent
scheme (in fact he was Peggy's sub-agent). Plaintiffs argue that
SWL clothed Zeigler with apparent authority when it provided him
with blank policy and application forms with SWL's name on them,
thereby putting him in a position to defraud plaintiffs.
Plaintiffs point out that the SWL application forms informed the
customer that "[i]f for any reason Southwestern does not accept
this Application, Southwestern shall return all amounts received
with interest within five business days of the date of receipt in
Southwestern's Home Office." In support of their argument,
plaintiffs cite Weyant v. Acceptance Ins. Co, 917 F.2d 209, 214
6
(5th Cir. 1990).1 Plaintiffs argue that Zeigler was also
authorized by his SWL licensing contract to receive money from
customers, and that a reasonable person would be justified in
concluding that SWL had accepted the application for GIC's when the
money was not returned.2
However, we find the circumstances of this case easily
distinguishable from those in Weyant. At the time Zeigler began
giving investment advice to plaintiffs, his wife, Peggy had not
appointed him as an SWL sub-agent nor was he licensed as an SWL
agent. The scope of Zeigler's express authority, once given, was
limited to soliciting applications for insurance and annuities
through his wife. Under Texas law, a soliciting agent has no
authority to contract on behalf of the insurer. International
Security Life Ins. Co. v. Finck, 496 S.W.2d 544 (Tex. 1973).
Zeigler directed the plaintiffs to make their checks out to APS not
SWL. This direction is inconsistent with a claim of apparent
1
The court in that case found that Southwestern Surplus
Insurance Company's agent, a surplus agent of Acceptance Insurance
Company, had apparent authority to retract a cancellation of one of
Acceptance's polices because:
. . . Acceptance supplied Southwestern with blank policy
forms and extended authority to them to receive and
accept proposals for insurance; to effect, issue,
countersign and deliver policies authorized by
Acceptance; and to collect and receive premiums on behalf
of Acceptance. Most importantly, the agency agreement
between Acceptance and Southwestern explicitly provided
that Southwestern had discretion in determining when to
cancel a policy.
Id. at 214.
2
This argument does not make sense in light of the fact that
all checks were made out to APS at Zeigler's instruction.
7
authority to sell GIC's on behalf of SWL. The plaintiffs never
required that APS, Zeigler's corporation, produce a receipt showing
that the investments had been in fact purchased in the APS "street
name." Additionally, all of Zeigler's actions were through APS,
which had contracted to provide the Plan with investment advice;
and not through SWL. It was Zeigler's role as president of APS
which gave him the ability to carry out his fraudulent scheme, not
his position as soliciting agent of SWL. The Fifth Circuit in
American Federation, 841 F.2d at 665 held that absent active and
knowing participation in the breach of fiduciary duties, a non-
fiduciary cannot be held liable for the conduct of its agent.
In order to succeed on the theory that Zeigler had apparent
authority beyond that of a soliciting agent, plaintiffs must show
that they were "induced to act in good faith upon certain
representations" made by SWL, not Zeigler. See, Wells Fargo
Business Credit v. Ben Kozloff,Inc. 695 F.2d 940, 945, reh'g
denied, 699 F.2d 1163 (5th Cir.), cert. denied, 464 U.S. 818
(1983).3 The only evidence linking Zeigler with SWL is his
possession and use of SWL forms.
There is no evidence in the record that demonstrates that SWL
purposely sent the blank forms to Zeigler or that SWL knew that
Zeigler had gained access to them. The deposition testimony of
Zeigler was that SWL sent Zeigler's wife, Peggy, who was its
general agent, a pack of materials that included rate books and
3
Moreover, authority is not created by the mere statements of
the purported agent. Custom Leasing, Inc. v. Texas Bank and Trust
Co. of Dallas, 516 S.W.2d 138, 144 (Tex. 1974).
8
cards and sample blank forms. This same testimony further
indicated that the blank forms were sent as an "example" and not
for the purpose of selling GIC's to potential customers.
Furthermore, the record reflects that the purported GIC's provided
to Plaintiffs by Zeigler were never signed or authorized by SWL.
After a thorough review of the record, this court affirms the
district court's conclusion that the summary judgment evidence
merely shows that Zeigler was a soliciting agent who had not been
clothed with authority to give investment advice or sell GIC's for
SWL. Likewise, we find that no genuine issue of fact has been
raised that would establish that SWL actively and knowingly
participated in Zeigler's breach of his fiduciary duty. Therefore,
plaintiffs have failed to establish genuine issues of fact on the
necessary elements of vicarious liability.
We AFFIRM.
c:br:opin:92-9049:jm2
9