IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
ELEANOR KATHLEEN AUSEMUS,
CASE NO. 91-40561-7
EMPLOYERS MUTUAL CASUALTY COMPANIES,
ELEANOR KATHLEEN AUSEMUS,
ADV. NO. 91-7338
MEMORANDUM OF DECISION
This proceeding is before the Court on (1) the debtor's renewed motion to dismiss; and (2) the
motion of Employers Mutual Casualty Companies (Employers) for summary judgment on the
dischargeability, under 11 U.S.C.A. §523(a)(4), of a debt arising out of the debtor's failure to
remit to it insurance premiums allegedly held in trust for Employers. The debtor appears by
counsel Dan E. Turner and Phillip L. Turner. Employers appears by counsel Linda S. Parks and
Dennis V. Leary. The Court has reviewed the relevant pleadings and is now ready to rule.
Employers and Upland Mutual Insurance (Upland) had originally filed a joint complaint against the debtor under 11 U.S.C.A. §523(a)(4) and (6). The debtor responded by filing a motion to dismiss for misjoinder of parties and failure to state a claim. A short time later, Upland filed a motion to have its claim against the debtor voluntarily dismissed without prejudice. In denying the debtor's motion to dismiss for improper joinder, the Court noted that Federal Rule of Bankruptcy Procedure 7021 incorporates Federal Rule of Civil Procedure 21, which states that "[m]isjoinder of parties is not ground for dismissal of an action," and concluded that the debtor's motion to dismiss was "clearly frivolous." The Court then granted Upland's motion and dismissed its claim. The debtor has now filed a "Renewed Motion to Dismiss" alleging that the Court dismissed the entire proceeding by dismissing Upland's claim.
The parties' pleadings have rendered resolution of Employers' summary judgment motion more difficult than was necessary. The first paragraph of Employers' asserted facts states that, "Ausemus entered into an Agency-Company Agreement with Employers," and cites a supporting affidavit. The pertinent paragraph of the affidavit reads: "Attached to this Affidavit as Exhibit A is a copy of a contract in the form Ausemus Insurance Agency, Inc., entered with Employers Mutual Company." Thus, Employers' evidence actually indicates its contract was with Ausemus Insurance Agency, Inc. (AIAI), not the debtor personally. In response to these assertions, the debtor declared that she "denies paragraph 1 . . . due to the fact that Exhibit A is an unexecuted copy of an Agency-Company Agreement and does not bare [sic] any signatures of Ausemus Insurance Agency, Inc.," leaving uncontested the questions whether AIAI did enter into some agreement with Employers, and if so, whether it was in the form of Exhibit A. However, in her renewed motion to dismiss and brief in support, the debtor conceded she acted in the capacity of an officer of AIAI under a contract with Employers. As will be explained later, all that is necessary for this decision is that Employers had some written contract with AIAI similar to Exhibit A. The debtor's response is inadequate to make this a genuine issue of material fact.
The crux of Employers' claim is the assertion a number of insurance policies were either sold or renewed through AIAI, the premiums were paid to either AIAI or the debtor, and the debtor failed to remit the money to Employers. For some of the sales and renewals, Employers's statement of facts says that AIAI collected the premiums and for others, the statement says that the debtor herself collected the premiums. Although she conceded in response to requests for admissions that all the premiums were either received or collected, the debtor's brief denies all Employers' assertions that the premiums were collected. The Court can only assume the debtor is quibbling over questions that ultimately, as explained below, have no effect on this decision, namely whether the money was actively "collected" or merely passively received, and whether she personally or AIAI collected or received it. More importantly, she has admitted that she personally handled all the relevant sales and renewals for AIAI and was personally responsible for remitting the premiums to Employers.
In paragraph 14 of its statement of facts, Employers claims the total net amount of premiums it is
owed is $14,965.89. In her response, in paragraph number 14, the debtor states she admits
paragraph 7 of Employers' facts; however, since the first 13 paragraphs had responded to
Employers' paragraphs 1 to 13 and the debtor has otherwise not responded to Employers'
paragraph 14, the Court concludes the debtor has admitted Employers' paragraph 14.
DISCUSSION AND CONCLUSIONS
As indicated above, the debtor's renewed motion to dismiss asserts that by dismissing Upland's claim, the Court also dismissed Employers' claim against the debtor. Apparently, the debtor's counsel believes the Court had to sever the creditors' improper joint complaint into two separate cases, and the Court's purported error in granting Upland's dismissal motion instead of severing the two creditors' claims magically created a windfall for the debtor through the forfeiture of Employers' claim. Even though the Court relied on the first sentence of FRCP 21 in denying the debtor's original motion, her renewed motion overlooks the second sentence of that rule, which reads: "Parties may be dropped or added by order of the court on motion of any party or of its own initiative at any stage of the action and on such terms as are just." This sentence makes clear the Court was not required to sever the claims and acted properly in dismissing only Upland's claim. No reasonable view of just terms for dropping a party from an action could support a ruling that Employers' claim has been dismissed.
Employers argues that the debtor's obligation to it is nondischargeable because: (1) a fiduciary relationship is created when an insurance agent agrees to collect and remit insurance premiums for an insurer; and (2) an insurance agent's failure to remit collected insurance premiums to the insurer constitutes a defalcation. Thus, the debt to Employers should be excepted from discharge under 11 U.S.C.A. §523(a)(4). That subsection provides that a debt "for fraud or defalcation while acting in a fiduciary capacity, embezzlement or larceny" is not dischargeable. The Bankruptcy Code does not define the term "fiduciary capacity." However, many courts have addressed the circumstances under which a fiduciary status exists for dischargeability purposes, indicating that a definition such as "any relationship involving confidence, trust and good faith" is too broad under this subsection. E.g., In re Angelle, 610 F.2d 1335, 1338-39 (5th Cir. 1980). Instead, the term "fiduciary capacity" is limited to relationships arising out of pre-existing express or technical trusts. In re Romero, 535 F.2d 618, 621 (10th Cir. 1976); In re Talcott, 29 B.R. 874, 878 (Bankr. D. Kan. 1983). It does not cover either trusts implied by the law from contracts or constructive trusts. Romero, 535 F.2d at 621.
In conjunction with this narrow definition, state law is an important factor in determining when a technical or express trust exists. In re Weiner, 95 B.R. 204 (Bankr. D. Kan. 1989) (citing In re Black, 787 F.2d 503, 506 (10th Cir. 1986). A state statute defining a relationship as a trust will establish the fiduciary capacity required under §523(a)(4). In re Romero, 535 F.2d 618 (10th Cir. 1976); In re Talcott, 29 B.R. 874 (Bankr. D. Kan. 1983). The court in Talcott was unable to find a fiduciary relationship because there was no Kansas statute defining a floor plan financing arrangement as a trust. However, in Romero, where a New Mexico statute provided that a contractor could have his license suspended for diverting funds received for completion of specific contracts, the Circuit held that the statute created a fiduciary duty between the contractor and building owner and affirmed the bankruptcy court's determination of nondischargeability under §523(a)(4).
In the present case, Employers asserts that, under K.S.A. 40-247 (Ensley 1986)(1) and case law, a fiduciary duty exists between an insurance company and an agent who collects and remits premiums on behalf of the insurance company. At the relevant time, the statute provided that:
An insurance agent or broker who acts in negotiating or renewing or continuing a contract of insurance by an insurance company lawfully doing business in this state, and who receives any money or substitute for money as a premium for such contract from the insured, whether he shall be entitled to an interest in same or otherwise, shall be deemed to hold such premium in trust for the company making the contract. (Emphasis added).
The debtor has effectively conceded she acted for AIAI in negotiating or renewing the insurance policies involved here and, at least on its behalf, received premiums paid for the policies. Her only defense to personal liability under this statute rests on the implicit assumption that the "insurance agent" involved was the corporation AIAI, and not her personally. In many situations, an individual acting only as an agent for a corporation is not personally liable for acts done on the corporation's behalf. However, another Kansas statute destroys the debtor's proferred defense.
K.S.A. 40-239 (Ensley 1986) and K.S.A. 1992 Supp. 40-239 (amended by 1989 Kan.Sess.Laws, ch. 151, §1, eff. May 1, 1989) define "insurance agent" for purposes of the Kansas insurance statutes. Because the parties have not indicated when AIAI made its contract with Employers, the Court cannot determine which version of the statute would apply here. Each, however, leads to the same result. K.S.A. 40-239 (Ensley 1986) provided:
An insurance agent is hereby defined to be an individual authorized in writing, by any insurance company . . . to negotiate or effect contracts of insurance . . . on behalf of any such insurance company; . . . or any stockholder, officer or agent of a corporation, permitted by law to negotiate or effect such contracts, where said . . . corporation holds a direct agency appointment from any insurance company. All such agents shall thereby become liable to all the duties, requirements, liabilities and penalties as provided in this code.
K.S.A. 1992 Supp. 40-239 provides:
An insurance agent is hereby defined to be an individual, corporation, association, partnership or other legal entity authorized in writing, by any insurance company . . . to negotiate or effect contracts of insurance . . . on behalf of any such insurance company; . . . or any stockholder, officer or agent of a corporation, permitted by law to negotiate or effect such contracts, where such . . . corporation holds a direct agency appointment from any insurance company. All such agents shall thereby become liable to all the duties, requirements, liabilities and penalties as provided in this code.
Under both versions of this statute, the stockholders, officers and agents of a corporation are made personally responsible for the corporation's duties and liabilities under the insurance statutes, despite the existence of the corporation. Using either definition, then, for the words "insurance agent" as used in 40-247, it becomes clear that the agent who receives premiums on behalf of a corporate insurance agency holds them in trust for the insurance company not just on the corporation's behalf but also personally. See In re Whitlock, 449 F.Supp. 1383, 1390 (W.D. Mo. 1978) (reaching same conclusion). Thus, the debtor personally held the premiums for Employers in a fidiciary capacity of the type covered by §523(a)(4).
The second requirement of §523(a)(4) is that while a fiduciary, the debtor committed a defalcation or fraud. Employers contends that the debtor did so by failing to remit to it the insurance premiums she had received or collected. Under §523(a)(4), a "defalcation" includes "the misappropriation of trust funds held in any fiduciary capacity" and the "failure to properly account for such funds." In re Interstate Agency, Inc., 760 F.2d 121, 123-24 (6th Cir. 1985). See also In re Feldman, 85 B.R. 163 (Bankr. S.D. Fla. 1988) (debtor's failure to remit to insurer premiums which debtor had collected and which were owed to insurer constituted defalcation under §523(a)(4)). Consistent with the holdings in Interstate and Feldman, this Court finds that the debtor's failure to remit to Employers the funds she held for it as a fiduciary is sufficient to establish a defalcation. Thus, the debtor's obligation to Employers is not dischargeable, pursuant to 11 U.S.C.A. §523(a)(4).
For these reasons, the Court concludes that the debtor incurred the debt for the unremitted premiums while acting in the required "fiduciary capacity," and commited a defalcation by failing to remit the premiums to Employers. Therefore, the debt owed to Employers by the debtor is nondischargeable under section 523(a)(4) of the Bankruptcy Code.
Accordingly, judgment will be entered on a separate document denying the debtor's renewed
motion to dismiss and granting the plaintiff a nondischargeable judgment for $14,965.89.
Dated at Topeka, Kansas, this _____ day of May, 1993.
JAMES A. PUSATERI
CHIEF BANKRUPTCY JUDGE
1.Although the statute was amended in 1992, the changes in the portion that is pertinent here would have no effect on this decision. See 1992 Kan.Sess.Laws, ch.288, §10, codified at K.S.A. 1992 Supp. 40-247.