Filed: Aug. 18, 2005
Latest Update: Feb. 12, 2020
Summary: UNPUBLISHED UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT No. 00-2028 RELIANCE INSURANCE COMPANY, INCORPORATED, a Pennsylvania corporation, Plaintiff - Appellee, and UTICA MUTUAL INSURANCE COMPANY, Third Party Defendant, versus WILLIAM RAY MILLER, II; DONNA MANNINO, Defendants & Third Party Plaintiffs - Appellants, and J. L. HICKMAN & COMPANY, INCORPORATED, a/k/a IFA Insurance Services, Incorporated, a Texas corporation; JOHN L. HICKMAN, Defendants. Appeal from the United States District
Summary: UNPUBLISHED UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT No. 00-2028 RELIANCE INSURANCE COMPANY, INCORPORATED, a Pennsylvania corporation, Plaintiff - Appellee, and UTICA MUTUAL INSURANCE COMPANY, Third Party Defendant, versus WILLIAM RAY MILLER, II; DONNA MANNINO, Defendants & Third Party Plaintiffs - Appellants, and J. L. HICKMAN & COMPANY, INCORPORATED, a/k/a IFA Insurance Services, Incorporated, a Texas corporation; JOHN L. HICKMAN, Defendants. Appeal from the United States District ..
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UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 00-2028
RELIANCE INSURANCE COMPANY, INCORPORATED, a
Pennsylvania corporation,
Plaintiff - Appellee,
and
UTICA MUTUAL INSURANCE COMPANY,
Third Party Defendant,
versus
WILLIAM RAY MILLER, II; DONNA MANNINO,
Defendants & Third Party Plaintiffs - Appellants,
and
J. L. HICKMAN & COMPANY, INCORPORATED, a/k/a
IFA Insurance Services, Incorporated, a Texas
corporation; JOHN L. HICKMAN,
Defendants.
Appeal from the United States District Court for the District of
Maryland, at Baltimore. Marvin J. Garbis, Senior District Judge.
(CA-97-3194-MJG)
No. 04-1843
WILLIAM RAY MILLER; DONNA MANNINO,
Debtors - Appellants,
versus
RELIANCE INSURANCE COMPANY,
Creditor - Appellee.
Appeal from the United States District Court for the District of
Maryland, at Baltimore. William D. Quarles, Jr., District Judge.
(CA-04-216-WDQ; CA-04-255-WDQ; BK-00-6-1758-JS; BK-00-6-3699-JS)
Argued: February 1, 2005 Decided: August 18, 2005
Before MICHAEL and DUNCAN, Circuit Judges, and Robert E. PAYNE,
United States District Judge for the Eastern District of Virginia,
sitting by designation.
Affirmed by unpublished per curiam opinion.
ARGUED: James Russell Schraf, LOGAN RUSSACK, L.L.C., Annapolis,
Maryland, for Appellants. Philip Melton Andrews, KRAMON & GRAHAM,
Baltimore, Maryland, for Appellee. ON BRIEF: Victor I. Weiner,
LIPSHULTZ AND HONE, CHARTERED, Silver Spring, Maryland, for
Appellants. Kathleen A. Birrane, KRAMON & GRAHAM, Baltimore,
Maryland, for Appellee.
Unpublished opinions are not binding precedent in this circuit.
See Local Rule 36(c).
2
PER CURIAM:
William Ray Miller, II and Donna Mannino appeal from the award
of summary judgment against them on a claim of constructive fraud
brought by Reliance Insurance Company, Inc.1 For the reasons set
forth below, we affirm the judgment entered by the district court.
Miller and Mannino also appeal from judgments entered against
them in related adversary proceedings in the bankruptcy court which
were affirmed by the district court.2 We also affirm those
judgments.
I.
Miller and Mannino deny any culpable animus respecting the
facts that gave rise to this litigation, and they dispute the legal
conclusions reached by the district court in granting summary
judgment and in refusing the discharge in bankruptcy. However, the
record discloses that the material facts outlined below are not
genuinely in dispute.
John L. Hickman & Company, Inc. (“Hickman, Inc.”) was a Texas
corporation with a branch office in Maryland. Hickman, Inc. traded
as IFA Insurances Services (“IFA”). The Chief Executive Officer
1
That appeal is No. 00-2028. The appeal was stayed pending
resolution of related cases in the bankruptcy court.
2
That appeal is No. 04-1843. Reliance originally filed
separate adversary actions against Miller and Mannino, but those
cases were consolidated by the bankruptcy court and the district
court.
3
and sole shareholder of Hickman, Inc. was John L. Hickman. Miller
and Mannino were employed by Hickman, Inc. as insurance agents.
Miller began working for Hickman, Inc. in September 1992 and
continued working there until March 31, 1997, serving as the
company’s Executive Vice-President and Chief Operating Officer in
the Maryland office. Mannino began working for Hickman, Inc. in
early 1994 and continued working there until March 31, 1997.
Mannino was, at various times, Hickman, Inc.’s Assistant Vice-
President, office manager, and customer service representative. At
all relevant times, Miller and Mannino were licensed resident
insurance agents in Maryland, and thus were subject to Maryland’s
insurance laws and regulations. Hickman, Inc. ceased operations in
Maryland on March 31, 1997.
It was the business of Hickman, Inc. to sell insurance
coverage and then to place that coverage with one or more insurers.
As part of the conduct of its regular business operations, Hickman,
Inc. engaged in a financial scheme which Hickman devised and in
which Miller and Mannino knowingly participated. The litigation
which prompted these appeals arose as a consequence of that
financial scheme and its ultimate failure.
Under the scheme, when Hickman, Inc. placed coverage with an
insurer, it requested, as a matter of course, the insurer to agree
to an installment payment plan (preferably interest-free) by which
the insured would remit monthly premium payments through Hickman,
4
Inc. At the same time, the scheme called for Hickman, Inc. to
arrange for the insured to finance the premium through an unrelated
financing entity. However, under the scheme, the insured was not
informed of the availability of an interest-free installment
premium payment plan and the insurer was not informed that the
entire premium was being financed.
Under the scheme, Hickman, Inc. arranged the premium financing
pursuant to which the insured borrowed the entire premium which
then was deposited with Hickman, Inc., which, in turn, remitted the
monthly premium payments to the insurer. Although the borrowed
funds initially were deposited into Hickman, Inc.’s premium trust
account, it was the usual practice to remove funds from that
account and to deposit them into other Hickman, Inc. or IFA
accounts. Then, those funds were used to pay the debts of Hickman,
Inc., salaries and bonuses to officers and employees of Hickman,
Inc., including Miller and Mannino, and monthly installments on
policy premiums other than the one for which the premium financing
had been obtained in the first instance. In sum, not long after
the proceeds of premium policy financing were deposited into
Hickman, Inc.’s trust account, they were co-mingled with other
Hickman Inc. funds and used for purposes other than paying the
premiums for which the loan was made, all of which purposes were
beneficial to Hickman, Inc., its officers and employees.
5
Miller’s principal responsibility in the Maryland office was
to sell insurance and, in connection with placing the coverage that
he sold, Miller often applied for the premium financing.
Mannino’s responsibility included acting as a customer service
representative on Miller’s accounts. Miller and Mannino routinely
were requested to wire funds from the premium trust accounts to
other Hickman, Inc. or IFA accounts. Mannino often filled out
premium financing application sheets and sent them to the finance
company and, in return, received the quotes given by the insurers.
She often supplied this figure to Miller and, after the financing
arrangement was concluded, Mannino processed the agreement.
Mannino’s responsibility included receiving checks from the
insured, putting them into the trust account, and paying out
installments to the insured from the operating accounts. The
record established that this so-called “double-financing” policy
was a regular practice of Hickman, Inc. with which Miller and
Mannino were intimately familiar and in which they knowingly
participated. This scheme was in effect at the time of the
insurance transaction which is the subject of this litigation.
During the summer of 1996, Miller requested Reliance to quote
commercial coverage for Gunther’s Leasing Transport, Inc.
(“Gunther’s”). Reliance offered to provide the requested coverage
for a quoted premium price of $1,050,000. In accord with the
ususal practice, Miller requested Reliance to provide installment
6
payment terms and Reliance agreed to an interest-free premium
installment plan under which Gunther was to make a payment of
$210,000 at the beginning of the coverage to be followed eight
consecutive monthly payments of $105,000. As envisioned by the
standard scheme, Miller passed the premium quote ($1,050,000) along
to Gunther’s without disclosing that Reliance also had agreed to an
interest-free installment plan and, instead, misrepresented to
Gunther’s that the entire premium was due at the inception of
coverage. Thereafter, Gunther’s agreed to purchase the coverage
from Reliance, and, pursuant to standard practice, Miller and
Mannino arranged for the financing of the premium through INAC Corp
(“INAC”), a premium financing company.
Although both Miller and Mannino were aware that the Gunther’s
premium would be financed by INAC, neither Miller nor Mannino
informed Reliance of that fact. Miller accepted Reliance’s
quotation on behalf of Gunther’s with the installment plan in
place. Reliance then issued the insurance coverage to Gunther’s,
and Gunther’s entered a commercial finance agreement with INAC, the
net proceeds of the premium loan being deposited in Hickman, Inc.’s
premium trust account, an account over which Miller and Mannino
both had actual control.
However, neither Hickman, Miller, nor Mannino remitted the
proceeds of the financed premium to Reliance. Instead, Mannino, in
accord with the scheme, sent Reliance the premium down payment of
7
$210,000. The remainder of the financed premium was then
transferred from the premium trust account to other Hickman, Inc.
trust accounts and was used to pay salaries and bonuses to Hickman,
Miller, and Mannino and to pay the debts and obligations of
Hickman, Inc. including the payment of premiums paid to other
insurance carriers.
The record establishes that, by September 1996, the premiums
generated by the scheme were insufficient to replace premiums that
had been diverted from the premium trust accounts to Hickman Inc.
accounts. However, the large infusion provided by the financing of
the Gunther’s premium permitted Hickman, Miller, and Mannino to
cover premiums owed to other carriers and to otherwise finance
Hickman Inc.’s operations, including the payment of their own
salaries and commissions.
On October 21, 1996, INAC sent to Reliance a form letter that
referred to a premium financing arrangement as to the Gunther’s
policy, advising that the premium had been paid to Hickman Inc.
That letter also queried Reliance as to whether the policy had been
written in installments and two other ensuing inquiries to the same
effect were submitted to Reliance, the last one on November 1,
1996. In response to those letters, an employee of Reliance
communicated with Mannino about the INAC inquiries. Mannino
claimed to recall little about the substance of the conversation,
but she acknowledged that she did not disclose the truth about the
8
financing of the premium, claiming, instead, that she was unaware
if there was an installment plan, and that the insured had not
given Hickman, Inc. an option on how to pay the premium.
Hickman, Inc. made the monthly installment payments of
$105,000 to Reliance in November and December 1996 and in January
1997. However, by February 1997, Hickman, Inc. was out of funds
and no further payments were made. JA 268-69. At the end of March
1997, the Maryland office of Hickman, Inc. was closed, leaving a
balance of $472,500 owing to Reliance on the Gunther’s policy.
II.
Thereafter, Reliance instituted this action against Hickman,
Inc., Hickman, Miller, and Mannino. The Complaint contained six
counts. Hickman, Inc. was a defendant in each count and was the
only defendant in two counts, but Hickman, Inc. never answered the
Complaint, and default judgment was entered against it in the
amount of $472,500 with interest and costs.3 Reliance moved for
summary judgment on Count III, a constructive fraud claim against
Hickman, Inc., Miller, and Mannino. The district court, Judge
Garbis presiding, granted Reliance’s motion for summary judgment,
finding: (a) that all three defendants had a fiduciary duty to
Reliance under an implied agency relationship and under Maryland’s
3
Counts I and VI were eliminated from the case with the entry
of default judgment against Hickman, Inc., leaving Counts II, III,
IV, and V for resolution.
9
insurance regulations; and (b) that the defendants had breached
their fiduciary duties by not disclosing to Reliance the “double-
financing” scheme, by co-mingling premium payments with the funds
of Hickman, Inc., and by remitting to Reliance the premium payments
received in trust for it.4 Thereupon, the district court entered
judgment in favor of Reliance in the amount of $472,500 plus pre-
judgment interest from June 1, 1997 plus post-judgment interest and
costs. Miller and Mannino appealed from the award of summary
judgment on Count III. While that appeal was pending, Miller and
Mannino filed for Chapter 7 bankruptcy protection, and thus the
appeal was stayed pending resolution of the bankruptcy proceedings.
The bankruptcy court refused to discharge the debts created by
the judgment entered on Count III, and the district court, Judge
Quarles presiding, affirmed that decision. The discharge ability
issue was then appealed to this Court where it was consolidated
with the appeal respecting the award of summary judgment on Count
III.
4
Hickman, Miller, and Mannino had moved for summary judgment
on all counts against them, Counts II through V. For the same
reasons that resulted in an award of summary judgment to Reliance
on Count III, the district court denied the defendants’ motions for
summary judgment on Counts II, IV, and V. Neither side moved for
summary judgment on Count VI. Subsequently, Reliance chose not to
proceed on Counts II, IV, V, and VI, and those claims were
dismissed without prejudice to being reopened in the event that the
summary judgment in Reliance’s favor on Count III was reversed.
10
III.
Before proceeding to the merits of the appeals, it is
appropriate to note that the scheme involved here, Miller’s
involvement in it, and a determination that, by participating in
the scheme, Miller had violated his fiduciary duties to a similarly
situated insurer, was the subject of the decision of the Court of
Appeals of Maryland in Insurance Co. of North America v. Miller,
765 A.2d 587 (Md. 2001) (the “IFA Action”). The IFA Action
involved the operation of the scheme outlined above, but there the
scheme was applied to the placing of other insurance coverage for
Gunther’s.
On facts virtually identical to those in this record, the
Court of Appeals held that:
[Miller] was an agent of IFA for the purpose of
collecting and forwarding premiums, which imposed upon
him a fiduciary duty to IFA, which he breached by failing
to forward to IFA he relevant premiums and/or by not
notifying IFA, or timely sharing with IFA his knowledge,
the premiums at issue were being improperly diverted.
Additionally, [Miller] breached his fiduciary duty to IFA
when he actively participated in obtaining premium
financing for an insurance premium of an IFA insured, and
used the funds to return to another premium financing
company monies due it on a completely unrelated
transaction, instead of causing the funds to be remitted
directly to IFA for the premium due it. We also hold
that [Miller’s] actions in the double financing scheme,
at a minimum, could constitute negligence.
Insurance Co. of North America v. Miller, 765 A.2d at 588-89.5
5
In the IFA Action, Miller admitted that he was an agent for
IFA in collecting and remitting premiums for IFA. That difference
is not of significance because, as explained previously, the facts
in this record show that, under Maryland law, Miller was an agent
for collecting and remitting premiums for Reliance.
11
After that judgment, Miller filed for Chapter 7 bankruptcy
protection wherein he sought to have the judgment debt in the INA
Action discharged in bankruptcy. The bankruptcy court held that
the debt was nondischargeable under 11 U.S.C. § 523(a)(2)(A),
(a)(4) and (a)(6). The district court affirmed that judgment.
Miller v. CIGNA Insurance Co., 311 B.R. 57 (D. Md. 2004). In an
unpublished opinion, we affirmed that decision, relying on the
reasoning of the district court, which denied the discharge
“[b]ecause Miller misappropriated money that he held in a fiduciary
capacity for Cigna [INA].” Miller v. CIGNA Insurance Co., 117 Fed.
Appx. 259 (4th Cir. 2004) (citing Miller v. CIGNA Insurance Co.,
311 B.R. 57 (D. Md. 2004)).
IV.
In awarding summary judgment on the constructive fraud count,
the district court held that Miller and Mannino owed to Reliance a
fiduciary duty which “derived from two sources, either of which
alone would be sufficient: (a) the implied agency relationship
between Defendants and Plaintiff and (b) the relevant Maryland
regulations governing insurance agents and brokers.” It is those
determinations that are the focal points of the appeal of this
appeal. We review de novo the award of summary judgment.
12
A. The Existence of Fiduciary Duties
Addressing the fiduciary duty arising from an implied agency
relationship between Miller and Mannino and Reliance, the district
court first explained that, under Maryland law, a broker can serve
as an agent for both the insured (in procuring the insurance) and
for the insurer (for the purposes of the delivering the policy and
collecting the premiums). Neither Miller nor Mannino contest this
basic principle. Applying that settled principle to the facts of
record, the district court held that, notwithstanding the absence
of an express agency agreement, Miller and Mannino were Reliance’s
agents for the purpose of collecting premiums and remitting them to
Reliance. Miller and Manning contend that, on this record, there
were factual issues that had to be submitted to a jury to ascertain
whether Miller and Mannino were the agents of Reliance. We agree
with the district court that the undisputed facts demonstrate that,
under settled Maryland law, Miller and Mannino were the agents of
Reliance for the purpose of collecting premiums from Gunther and
remitting them to Reliance. Accordingly, there was no need to
submit that question to the jury.
As to the fiduciary duty arising under Maryland’s insurance
regulations, the district court relied upon the Code of Maryland
Administrative Regulations (“COMAR”), Title 31, Subtitle 3. In
particular, the district court concluded that, under relevant
Maryland regulations, Miller and Mannino, in their capacity as
13
brokers, had fiduciary duties not to remove monies from premium
trust accounts without the express permission of the insured and
not to mingle premium monies with the funds of Hickman, Inc.
In their statement of issues on appeal, Miller and Mannino did
not challenge that ruling. However, in the substance of their
brief, they assert that the district court erred in holding that
those insurance regulations provided an independent basis for a
fiduciary relationship between Miller and Mannino and Reliance. In
making that argument, Miller and Mannino do not contend that the
district court erred in finding that the Maryland regulations
actually created fiduciary obligations the breach of which
constitute constructive fraud. Instead, they argue that the
regulations distinguish between agents and brokers, by making the
agent a fiduciary only of the insurer and by making the broker a
fiduciary of only the insured.6 The argument misses the point
because it ignores § 10-127 of the Insurance Code which, along with
the definitions set forth in § 10-101(i), makes the broker an agent
of the insurer for purposes of collecting premiums. Md. Code Ann.,
6
Mannino did not make this argument in the district court.
Instead, she simply ignored the regulation contending that she,
individually, could not be impressed with the fiduciary duties to
Reliance because she did not agree to act as Reliance’s agent or
form some contractual relationship with Reliance. Thus, as to
Mannino we need not notice the regulatory argument here. Singleton
v. Wulff, 428 U.S. 106, 120 (1976); Muth v. United States,
1 F.3d
246, 250 (4th Cir. 1993). However, the argument must be considered
because Miller raised it below.
14
[Ins.] § 10-127, § 10-101(i). We find no error in the district
court’s resolution of that issue.7
B. The Issue of Reliance’s Reasonable
Reliance on the Fiduciary Relationship
The second argument presented by Miller and Mannino is that
there was a question of fact for the jury to resolve respecting
whether, in perspective of the communications that Reliance
received from INAC, Reliance reasonably relied on the existence of
the fiduciary relationship. Although this argument was presented
below in context of the summary judgment motion made by Miller and
Mannino on Reliance’s actual fraud count (Count V), it was raised
for the first time on appeal as to the constructive fraud claim.8
Hence, the argument need not be considered.
7
Miller and Mannino do not challenge the findings of the
district court that, if there is a fiduciary duty, the conduct at
issue here breached it.
8
Miller and Mannino acknowledge that no Maryland decision has
subscribed to the novel position that they urge us to take.
Instead, they cite decisions, from other jurisdictions, that
address reliance on a misrepresentation of fact as an element of a
constructive fraud claim. Those decisions do not support the
contention, made here by Miller and Mannino, that the principal’s
reliance on the fiduciary’s proper discharge of fiduciary duties is
an element of a claim for constructive fraud by a principal against
the agent.
15
V.
After the district court entered summary judgment on the
constructive fraud claim, Miller and Mannino each filed a Chapter
7 proceeding. Reliance filed adversary proceedings in the
bankruptcy court seeking to have declared non-dischargeable the
debts created by the judgment entered by the district court in
favor of Reliance on its constructive fraud claim. The bankruptcy
court held that the debts created by the judgment order were non-
dischargeable, relying on the findings made by the district court
in granting summary judgment. The district court affirmed the
bankruptcy court’s decision. In so doing, the district court
likewise relied on the findings made in the decision granting
summary judgment on the constructive fraud claim and held that
Miller and Mannino were collaterally estopped thereby.
We review the determination of collateral estoppel de novo.
It is somewhat difficult to discern the argument actually being
made by Miller and Mannino on appeal but, given a fair reading, it
appears to be merely that, if the district court’s award of summary
judgment on the constructive fraud claim is reversed, then
collateral estoppel cannot occur. That argument is of no moment
here because, in Part IV, we affirm the judgment of the district
court granting summary judgment. In any event, it quite clear
that, under settled circuit precedent, this is a case for the
application of collateral estoppel. Sedlack v. Braswell Servs.
16
Group, Inc., 134 F.3d 219, 224 (4th Cir. 1998); Ramsay v. INS,
14
F.3d 206, 210 (4th Cir. 1994).
The bankruptcy court determined that the judgment debt was not
dischargeable under 11 U.S.C. §§ 523(a)(2)(A)(4) and (A)(6), and
the district court followed suit. We review de novo decisions on
matters of law, such as this.
The sections of the Bankruptcy Code on which the bankruptcy
court and the district court relied to conclude that the debt was
not dischargeable require proof of a fraudulent misrepresentation
that: (a) induced another to act, or to refrain from acting; and
(b) caused harm to the plaintiff because the plaintiff justifiably
relied on the misrepresentation. In re: Biondo, 180 F.3d 126, 134
(4th Cir. 1999). Both the bankruptcy court and the district court
found that those elements were present. Miller and Mannino contend
that the requisites of the sections of the bankruptcy code on which
the bankruptcy court and the district court relied were not
satisfied. We conclude that it is not necessary to decide that
issue because the judgment debt is non-dischargeable under 11
U.S.C. § 523(a)(4).
Of course, we may affirm a judgment on an alternate ground to
those relied on by the district court so long as that basis is made
out by the record. Skipper v. French, 130 F.3d 603, 610 (4th Cir.
1997). 19 James Wm. Moore, et al., Moore’s Federal Practice
§ 205.05 (3d ed. 2005). Under § 523(a)(4), bankruptcy “does not
17
discharge an individual from any debt . . . for fraud or
defalcation while acting in a fiduciary capacity. . . .” This
record establishes that Miller and Mannino committed constructive
fraud and defalcations while acting in a fiduciary capacity. The
district court, in Miller v. CIGNA Insurance Co., 311 B.R. at 61-
62, based on virtually the same evidence that was presented here,
concluded that a virtually identical debt was not dischargeable
under § 523(a)(4). We, albeit, in an unpublished opinion, affirmed
on the basis of the district court’s opinion. We believe that, on
this record, the same rationale applies here. Therefore, we affirm
the nondischargeablity determination on the basis of § 523(a)(4).
For the foregoing reasons, the judgments of the district court
on appeal in No. 00-2028 and in No. 04-1843 are
AFFIRMED.
18
