Opinion
NOT FOR PUBLICATION
Argued and Submitted at Pasadena, California: November 17, 2010
Appeal from the United States Bankruptcy Court for the Central District of California. Bk. No. SA 05-18024-RK, Adv. No. SA 06-01005-RK. Hon. Robert N. Kwan, Bankruptcy Judge, Presiding.
Joseph W. Creed of Creed & Elliott, LLP argued for Appellant Essam Ayad.
Lily Chow of Chow & Freisleban, Inc. argued for Appellee Farmers New World Life Insurance Company.
Before: KIRSCHER, LYNCH, and PAPPAS, Bankruptcy Judges.
This disposition is not appropriate for publication. Although it may be cited for whatever persuasive value it may have (see Fed. R. App. P. 32.1), it has no precedential value. See 9th Cir. BAP Rule 8013-1.
Debtor-Appellant, Essam Ayad (" Ayad"), appeals a judgment from the bankruptcy court determining that his debt to Creditor-Appellee, Farmers New World Life Insurance Company (" FNWL"), was nondischargeable under 11 U.S.C. § 523(a)(2)(A) and that FNWL was not liable to Ayad on his counterclaims for breach of contract and unjust enrichment. We AFFIRM.
Unless otherwise indicated, all chapter, section and rule references are to the Bankruptcy Code, 11 U.S.C. § § 101 et. seq. and to the Federal Rules of Bankruptcy Procedure, Rules 1001 et. seq. as enacted and promulgated before the effective date of The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. 109-8, 119 Stat. 23.
I. FACTUAL AND PROCEDURAL BACKGROUND
A. Factual Background.
In February 1997, Ayad entered into an Agent Appointment Agreement (" AAA") to be an insurance agent for FNWL, Farmers Insurance Exchange, Truck Insurance Exchange, and Mid Century Insurance Company (collectively " the Companies"). FNWL is a life insurance company authorized by the California Department of Insurance (" DOI") to sell life insurance policies in California. In the AAA, the Companies agreed to pay Ayad commissions for policies sold, and Ayad agreed to sell insurance and " to submit every request or application for insurance for the classes and lines underwritten by the Companies and eligible in accordance with their published Rules and Manuals." Upon breach of the AAA, the nonbreaching party could terminate it on thirty (30) days written notice, or the Companies could terminate it for enumerated reasons including embezzlement or willful misrepresentation.
Ayad sold life insurance policies for FNWL known as Flexible Universal Life Insurance Policies (" FULI"). FULIs have an investment feature component which allows the applicant, with the agent's guidance, to choose the amount of monthly premiums so long as the premiums exceed the monthly cost of the insurance policy. FULIs are designed to allow policyholders to accumulate savings by placing the excess monthly premium sums (i.e., the amounts above the monthly policy cost) in an interest-bearing " accumulation account" for the policyholders' benefit. All of the life insurance applications submitted by Ayad to FNWL at issue in this case were for FULIs.
As a FNWL agent, Ayad was eligible to receive advanced commissions for life insurance policies sold, which he could elect to receive by checking off a box on the Agent's Report page of the policy application. The Agent's Report is a form in which Ayad as the soliciting agent had to make representations in response to questions asking if he knew " of any factor not indicated in this Application which would affect the insurability of the Proposed Insured(s), " or whether " [t]o the best of [his] knowledge, is the insurance being purchased to replace or reduce current coverage in this or any other company." Ayad received advanced commissions after he submitted a potential insureds' application for insurance but before the policy was approved by FNWL's underwriting department and issued. Advanced commissions on FULI policies was 2/3 (i.e., eight months) of the first year's commissions for the policy, which constituted 50% of the first annual premium.
In order to qualify for the advanced commissions, Ayad had to submit policies that designated the Bank Check Plan (" BCP") as the method of premium payment. Under the BCP, the monthly policy premiums were to be automatically deducted from a bank account designated by the applicant on a Bank Authorization Form, which Ayad submitted with the life insurance application to FNWL.
If an application did not result in the issuance of a policy by FNWL, then the advanced commissions paid to Ayad were debited or " charged back" against his account for a given month. For issued policies that did not continue for eight months after issuance, or if the policy fell off the BCP during the eight months after issuance, the pro-rated unearned advanced commission was also charged back. If a charge back occurred in a month in which Ayad's account had sufficient funds to reimburse FNWL for the advanced commission paid, the funds were deemed recovered by FNWL; if Ayad's account lacked sufficient funds for reimbursement to FNWL, the funds were considered unrecovered and owed by Ayad.
FNWL agents were also entitled to quarterly life performance bonuses. Agents could qualify for bonuses at three levels, which were based upon the number of policy applications submitted, the amount of policy premiums, and the commission level. The same " charge back" scheme also applied to performance bonuses.
After investigating what FNWL thought were suspicious circumstances on multiple applications, FNWL terminated Ayad on July 20, 2001, by way of letter which stated that the AAA was being terminated for reasons (1) and (5): " Embezzlement of monies belonging to the Companies" and " Willfull [sic] misrepresentation that is material to the operation of the Agency." In the event of termination, the AAA provided that FNWL would pay Ayad a certain sum based on a formulaic calculation (a " Contract Value"), unless the termination was for embezzlement. FNWL paid Ayad a Contract Value of $13,519, which was credited to the amount he owed in charge backs to FNWL.
In May 2003, FNWL filed suit against Ayad in California state court asserting causes of action for breach of fiduciary duty and fraud. That action was stayed once Ayad filed a voluntary chapter 7 petition on October 6, 2005.
B. The Administrative and Adversary Proceedings.
FNWL filed its nondischargeability complaint against Ayad under sections 523(a)(2)(A) and (a)(4) on January 3, 2006. FNWL alleged that Ayad fraudulently incurred a debt of $234,974.45, which represented unrecovered charge backs of sales commissions and bonuses advanced by FNWL to Ayad. FNWL alleged that 33 life insurance applications completed and submitted by Ayad between March 2000 and June 2001, which all designated the BCP as the monthly payment method and requested advance commissions, contained inaccurate, incomplete, and/or falsified information and induced FNWL to pay Ayad commissions and bonuses to which he was not entitled. In its investigation of Ayad, FNWL concluded that 20 of the 33 life insurance applications were submitted on behalf of applicants who either did not exist, or who did not intend to purchase life insurance policies. None of these applications resulted in issued policies (the " 20 non-issued applications") and 10 of them resulted in unrecovered advanced commissions and bonuses totaling $115,705. FNWL further concluded that the other 13 life insurance applications, while resulting in issued policies, lapsed within 12 months (the " 13 lapsed policies") and resulted in unrecovered advanced commissions and bonuses totaling $119,269.45. Ayad counterclaimed for breach of contract and unjust enrichment, seeking approximately $8 million in damages for what he asserted was a wrongful termination by FNWL.
Meanwhile, FNWL had reported Ayad's agency termination to the DOI as mandated by California law. See Cal. Ins. Code § § 1704 and 1707. At the DOI's request, FNWL prepared and submitted an investigation file regarding the 20 non-issued applications. The DOI also issued subpoenas on FNWL to produce other documents and witnesses, to which FNWL complied. The DOI then drafted and filed a complaint against Ayad in February 2007, seeking to revoke his agency license and alleging causes of action for fraud, negligence, and breach of contract. A hearing was held on February 28, March 1 and 2, and May 22, 23 and 24, 2007, before an administrative law judge (" ALJ"). FNWL did not appear at the hearing but, over the objection of Ayad's counsel, FNWL's counsel was allowed to observe the proceedings. The ALJ issued a 36-page Proposed Decision (" ALJ Decision") in October 2007, determining that Ayad's conduct was not fraudulent but negligent with respect to three of the 20 non-issued applications. The ALJ ordered Ayad's agency license revoked, but stayed the revocation subject to a 15-day suspension and restricted license for two years.
Just prior to the nondischargeability trial, FNWL filed a motion in limine to preclude Ayad's request for judicial notice of the ALJ's Decision (which had been subsequently adopted by the California Insurance Commissioner), for which the bankruptcy court heard oral argument and ordered further briefing from the parties. Ayad opposed FNWL's motion, contending that issue preclusion applied to the ALJ's Decision because the parties were in privity, the same witnesses testified to the same facts, the same issue of fraud had already been litigated and determined, and FNWL had an opportunity to litigate the fraud issue.
The bankruptcy court held a five-day trial on the nondischargeability action in early 2008. FNWL conceded on the first day that it was unable to prove embezzlement, so it withdrew its section 523(a)(4) nondischargeability claim. Ayad, along with several witnesses from FNWL, testified. At the close of trial on February 29, 2008, the bankruptcy court ordered the parties to submit closing arguments in written briefs. After the last brief was filed on June 27, 2008, the court took the matter under submission. On April 15, 2009, the court entered an order granting Ayad's ex-parte application to add the ALJ's Decision as a trial exhibit " for identification purposes only."
On July 2, 2009, the bankruptcy court entered its memorandum decision on the nondischargeability action (" July 2 Memorandum"). It granted FNWL's motion in limine to exclude the ALJ's Decision. It also found in favor of FNWL under section 523(a)(2)(A), but determined that FNWL was unable to prove $12,000 of its damages; thus, Ayad's debt to FNWL in the amount of $222,974.45 was nondischargeable. The bankruptcy court further denied Ayad's counterclaims for breach of contract and unjust enrichment because FNWL justifiably terminated Ayad immediately for cause based on willful misrepresentation, as provided in the AAA. However, it determined that the Contract Value due to Ayad was $28,335.91 (not the $13,519 admitted by FNWL) based on a three-month notice period which the court believed FNWL was to give Ayad under the AAA since he was not terminated for embezzlement. This amount was to be credited against the unrecovered charge backs to the extent that such amount had not already been credited.
Before a judgment was entered, FNWL filed a motion to amend the bankruptcy court's findings in its July 2 Memorandum, contending that the Contract Value of $13,519 was the proper amount, not $28,335.91. Ayad opposed. The bankruptcy court held a hearing on the matter on September 29, 2009, and issued an order on March 2, 2010, granting FNWL's motion.
A judgment consistent with the bankruptcy court's July 2 Memorandum, but reflecting the amended $13,519 Contract Value, was entered on March 2, 2010. Ayad timely appealed.
II. JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. § § 157(b)(2)(I) and 1334. We have jurisdiction under 28 U.S.C. § 158.
III. ISSUES
1. Did the bankruptcy court err when it determined that the ALJ's Decision could not be given preclusive effect?
2. Did the bankruptcy court err in some of its findings of fact to conclude that Ayad's conduct was fraudulent?
IV. STANDARD OF REVIEW
We review de novo the preclusive effect of a judgment; whether issue preclusion applies is a mixed question of law and fact in which the legal questions predominate. The Alary Corp. v. Sims (In re Associated Vintage Group, Inc.), 283 B.R. 549, 554 (9th Cir. BAP 2002).
We review the bankruptcy court's findings of fact for clear error. Hansen v. Moore (In re Hansen), 368 B.R. 868, 874-75 (9th Cir. BAP 2007). Whether a creditor relied upon false statements is a question of fact reviewed for clear error. Candland v. Ins. Co. of N. Am. (In re Candland), 90 F.3d 1466, 1469 (9th Cir. 1996). The clearly erroneous standard also applies to findings of intent to defraud, to findings that the fraud proximately caused the alleged damages, and to materiality. Id . (internal citations omitted). Clear error exists when, on the entire evidence, the reviewing court is left with the definite and firm conviction that a mistake has been committed. We give findings of fact based on credibility particular deference. Anderson v. Bessemer City, 470 U.S. 564, 573-75, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985); Rule 8013.
V. DISCUSSION
A. The Bankruptcy Court Did Not Err When It Determined That The ALJ's Decision Could Not Be Afforded Preclusive Effect.
Issue preclusion, also referred to by some courts as collateral estoppel, provides that once an issue of ultimate fact has been determined by a valid and final judgment, that issue cannot be litigated again between the same parties in any future lawsuit. Ashe v. Swenson, 397 U.S. 436, 443, 90 S.Ct. 1189, 25 L.Ed.2d 469 (1970). Issue preclusion applies in dischargeability actions. Grogan v. Garner, 498 U.S. 279, 284 n.11, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). Both federal and California law recognize that administrative decisions can be afforded preclusive effect. United States v. Utah Constr. and Mining Co., 384 U.S. 394, 421-22, 86 S.Ct. 1545, 16 L.Ed.2d 642, 176 Ct. Cl. 1391 (1966); Goldsmith v. Harck (In re Harck), 70 B.R. 118, 120-21 (9th Cir. BAP 1987); Pac. Lumber Co. v. State Water Res. Control Bd., 37 Cal.4th 921, 944, 38 Cal.Rptr.3d 220, 126 P.3d 1040 (2006) (citing People v. Sims, 32 Cal.3d 468, 479, 186 Cal.Rptr. 77, 651 P.2d 321 (1982)).
For issue preclusion to apply to the ALJ's Decision, Ayad had to establish the following elements: (1) identity of the parties or their privies; (2) identity of issues; (3) the parties had an adequate opportunity to litigate the issues in the administrative proceeding; (4) the issues to be precluded were actually litigated and determined in the administrative proceeding; and (5) the findings on the issues to be precluded were necessary to the administrative decision. Pantex Towing Corp. v. Glidewell, 763 F.2d 1241, 1245 (11th Cir. 1985); Harck, 70 B.R. at 120-21.
Although the bankruptcy court acknowledged that issue preclusion may apply to administrative decisions, it concluded that it did not apply to the DOI proceeding because: (1) the DOI's licensure proceeding was not between the same parties or privies because FNWL was not a party or in privity with the DOI; (2) FNWL did not have an adequate opportunity to litigate the issues in the DOI proceeding; and (3) the DOI proceeding involved a different standard of proof - clear and convincing as opposed to preponderance of the evidence.
While Ayad conceded at trial that FNWL was not a party to the DOI proceeding, he contends that FNWL and the DOI were in privity and the bankruptcy court erred in concluding otherwise. Specifically, Ayad argues that since Harck, which the bankruptcy court relied upon, California courts have expanded the definition of privity in MCA Records v. Charly Records, Ltd. to include " a relationship between the party to be estopped and the unsuccessful party in the prior litigation which is 'sufficiently close' so as to justify application of the doctrine of collateral estoppel." 865 F.Supp. 649, 654 (C.D. Cal. 1994)(quoting Clemmer v. Hartford Ins. Co., 22 Cal.3d 865, 875, 151 Cal.Rptr. 285, 587 P.2d 1098 (1978)). Ayad further contends that California courts have extended issue preclusion to cover nonparties to the prior litigation of an issue when the nonparty has a direct financial or proprietary interest in and controls the conduct of a lawsuit, and the nonparty expects to be bound by the decision in the prior action. We disagree with Ayad's assertion that MCA Records " expanded" the definition of privity since Harck. MCA Records, decided after Harck in 1994, merely restated California privity law that had been in effect prior to Harck. Therefore, the Harck court considered the same privity law as did the court in MCA Records. We do, however, agree with Ayad's recitation of California law on privity.
Ayad argues that privity exists between FNWL and the DOI for several reasons. First, FNWL's counsel represented the DOI's witness, Merrill Jessup (" Jessup"), Ayad's former supervisor, during his deposition. Second, FNWL's counsel was present for almost every session of the administrative hearings and, during a majority of the breaks, FNWL's counsel conferred with counsel for the DOI. Third, FNWL appeared to be the sole source of the DOI's information used to prosecute its case, and the DOI's counsel admitted that no independent investigation was needed since it relied on FNWL's investigation. Fourth, both parties had the same interest in trying to prove Ayad committed fraud, notwithstanding that the outcomes of the two proceedings were different - revocation of Ayad's license versus recovery of an otherwise dischargeable debt. Finally, because FNWL played such a pivotal role in the DOI proceeding, it knew or should have known it would be bound by the ALJ's decision.
Ayad fails to establish privity between FNWL and the DOI. Although FNWL's counsel represented Jessup at his deposition, was present at many of the hearings and spoke with the DOI's counsel on breaks, and provided much of the evidence for the DOI's case against Ayad, Ayad fails to establish that FNWL controlled or had " power to suggest courses of action" in the DOI's proceeding. MCA Records, 865 F.Supp. at 657. California law required FNWL to report Ayad's termination to the DOI, and FNWL was required to cooperate with the DOI by providing witnesses and documentation for the DOI's case. Cooperation is not the same as control. United States v. Bhatia, 545 F.3d 757, 760 (9th Cir. 2008). Further, that fruits from FNWL's investigation may have aided the DOI in its licensure action against Ayad does not rise to the level of a mutuality of interests necessary to preclude FNWL's nondischargeability action against him. Id . While FNWL may have taken an interest in the DOI proceeding against Ayad because it had to report him, FNWL had no financial or proprietary interest in it; FNWL had terminated Ayad's agency six years prior and was suing him in state court for its damages. Further, as the bankruptcy court noted, a private life insurance company like FNWL could not be considered a privy of a public entity such as the DOI.
Ayad also fails to establish that FNWL had any right or opportunity to litigate in the DOI proceeding or to explain how the bankruptcy court erred in concluding that FNWL had no such opportunity. In fact, FNWL presented evidence that it had no right to participate in the DOI proceeding as it was conducted entirely by counsel for the DOI, it had no right to call, examine or cross-examine any witness, and it did not participate in discovery or the determination of strategy or the presentation of evidence or witnesses at the hearing.
Finally, although Ayad argued at trial that burdens of proof are irrelevant in the court's analysis of whether issue preclusion applies, Ayad did not address this issue on appeal. We agree with the bankruptcy court that differences in burdens of proof in cases precludes issue preclusion. Durosko v. Lewis, 882 F.2d 357, 361 (9th Cir. 1989). To give preclusive effect to the ALJ's Decision, which applied a clear and convincing standard, to a nondischargeability action that requires a lower standard of preponderance, would have been inappropriate. Grogan, 498 U.S. at 291.
We also reject Ayad's argument that the bankruptcy court erred by failing to give any weight to the ALJ's finding that Ayad did not commit fraud with respect to the 20 non-issued applications, but found him only to be negligent in his handling of three of them. The DOI's case against Ayad did not involve the same evidence as FNWL's case against him; the 13 lapsed policies were not before the ALJ because the DOI did not subpoena the information regarding those policies. Notwithstanding that fact, the bankruptcy court was not required to give any deference to the ALJ's findings due to the different burdens of proof.
Accordingly, issue preclusion did not apply to the ALJ's Decision in FNWL's nondischargeability action against Ayad, and the bankruptcy court did not err when it granted FNWL's motion in limine to exclude it.
B. The Bankruptcy Court Did Not Clearly Err In Its Findings of Fact Under Section 523(a)(2)(A).
Ayad contends on appeal that some of the bankruptcy court's findings are not supported by the record, and thus the court erred when it determined that Ayad's debt to FNWL was nondischargeable under section 523(a)(2)(A).
1. Elements of Section 523(a)(2)(A).
To prevail on a claim under section 523(a)(2)(A), a creditor must demonstrate five elements: (1) misrepresentation, fraudulent omission or deceptive conduct by the debtor; (2) knowledge of the falsity or deceptiveness of his statement or conduct; (3) an intent to deceive; (4) justifiable reliance by the creditor on the debtor's statement or conduct; and (5) damage to the creditor proximately caused by its reliance on the debtor's statement or conduct. Oney v. Wienberg (In re Wienberg), 410 B.R. 19, 35 (9th Cir. BAP 2009)(citing Turtle Rock Meadows Homeowners Ass'n v. Slyman (In re Slyman), 234 F.3d 1081, 1085 (9th Cir. 2000)). A debtor's silence or omission of a material fact can constitute a false representation which is actionable under section 523(a)(2)(A). Citibank (South Dakota), N.A. v. Eashai (In re Eashai), 87 F.3d 1082, 1088-89 (9th Cir. 1996). However, in order to find liability for fraud based upon omission or silence, there must also be a duty to disclose. Id . " The creditor bears the burden of proof to establish all five of these elements by a preponderance of the evidence." Wienberg, 10 B.R. at 35 (citing Slyman, 234 F.3d at 1085).
2. Analysis
a. First Element: Ayad's False Representations to FNWL.
FNWL asserted that Ayad made numerous false representations or omissions in order to induce FNWL to advance Ayad commissions and bonuses through submission of life insurance applications under the guise of the BCP. Specifically, FNWL contended that as agent: (1) Ayad failed to report to FNWL that multiple applications were submitted with the same persons signing Bank Authorization Forms and designating the same bank accounts which Ayad knew were not being used to pay premiums under the BCP as they were designated to do, even for the signors' own policies; (2) Ayad failed to report to FNWL that the applications contained incorrect, incomplete and/or false information regarding the applicants' information that could affect their insurability; (3) Ayad failed to report that multiple applications were submitted on behalf of the same applicants, in the same time frame, with the same designated beneficiaries, and designating the same third-party bank accounts for the BCP; and (4) Ayad made false statements on his Agent's Reports regarding the accuracy of the information on the applications.
The evidence at trial showed the following. First, Ayad submitted duplicate life insurance policy applications for several individuals. Ayad submitted an application for Said Halaka in March 2000, and a second one for him in December 2000. FNWL declined the first application for diabetes and substance abuse. The second application contained changes in Said's personal information such as his birth date (10 years younger), height (4" taller), a different social security number, and Ayad checked " No" to the question of whether the proposed insured had any application for life insurance declined. Ayad also checked " No" on his Agent's Report to the question of whether he knew of any factor not indicated in the application that would affect Said's insurability. Said's case is what triggered FNWL's suspicions about Ayad's possible fraudulent activity.
Ayad also submitted duplicate life insurance policy applications for Kamal and Samir Gwanny. For these men, Ayad submitted one application for each in September 2000, and one for each a month later in October 2000. Both Kamal's and Samir's applications listed their occupations as " wood cabinet sales." Kamal's first application reflected his annual income as $58,000 and the second stated it was $158,000; Samir's first application reflected his annual income as $60,000 and the second stated it was $168,000. Ayad provided no explanation of the income disparity on either Kamal's or Samir's second application as FNWL required. Even though the first applications were pending, Ayad checked " No" on both of the second applications to the question asking if there were any applications pending on the life of the applicant. The face amounts of Kamal's policies were $400,000 and $500,000, and the premium deposits were $2,100 and $3,400; the face amounts of Samir's policies were $400,000 and $600,000, and the premium deposits were $2,220 and $3,260. FNWL issued no policies because both men failed to comply with FNWL's medical information requests, but Ayad received advanced commissions and bonuses of $8,400 and $13,600 for Kamal's applications and $8,800 and $12,500 for Samir's, all of which FNWL recovered.
Ayad also submitted duplicate life insurance policy applications within one to six months after submitting the first application for at least four other individuals during 2000, for which he received advanced commissions and bonuses, some of which FNWL was unable to recover. These duplicate applications contained similar errors or omissions as the others, such as unexplained significant income disparities (or no income listed whatsoever), and Ayad checked " No" on the second applications to the question asking if any insurance policies were in force on the life of the applicant, even though a policy had been issued upon the first application. Some applications contained Bank Authorization Forms signed by third parties authorizing payment of monthly premiums from the third party's bank account under the BCP. Common to all of them was the fact that few premium payments, if any, were made under the BCP as designated, but rather premiums were paid from Ayad's own accumulation and trust accounts. No policies were issued on any of the second applications due to either the applicant's failure to comply with medical information requests, or the applicant's withdrawal of the application.
Several other false representations and/or omissions by Ayad were also shown. Ayad submitted a life insurance application for Adele Samaha to FNWL in February 2001, with a Bank Authorization Form signed by Soulie Elkarake, listed as her son in the application, for payment of premiums under the BCP. The face amount of the policy was $1,000,000, and the premium deposit was $5,100. No policy was issued because Adele did not timely submit requested medical information. A check drawn on Soulie's account for $4,000 to pay the deposit was returned NSF, and FNWL refunded the balance of the premium deposit of $1,100 for the portion that was actually paid. Ayad received an advanced commission and bonus of $19,097, which FNWL did not recover. Importantly, Ayad did not disclose to FNWL suspicious information about Adele's application; Adele's birth date indicated she was 67, but her son Soulie's age was listed at 69 on his policy applications submitted the year before. Ayad also did not disclose to FNWL that Soulie's bank account designated for payment of premiums in Adele's application under the BCP was the same account that Ayad had requested a month earlier not be used per the BCP to pay the premiums on Soulie's own policy.
Ayad submitted to FNWL a life insurance policy application for Maher Guindi, an acquaintance of Ayad's from when they lived in Egypt as teenagers. Guindi testified that he met with Ayad over dinner. They discussed life insurance but Guindi, a single man with no beneficiaries, told Ayad he was not interested in any life insurance policies. Nevertheless, Ayad's agency submitted to FNWL an application for life insurance for Guindi. The application contained several errors including a misspelled last name (" Guindai"), an incorrect date of birth (making him 10 years older), an incorrect mailing address, incorrect employment and income information, stated that he was a smoker and he is not, and Guindi's signature was forged on various documents included with the application. A Bank Authorization Form was signed by Maher Rophael for automatic drafting of premium payments from his bank account under the BCP and was submitted with Guindi's application. Guindi does not know Maher Rophael. Maher Rophael was also the designated payor for eight other life insurance policy applications submitted by Ayad to FNWL. Ayad received $6,000 in advanced commission for this application, which was recovered through a charge back against his account. FNWL later declined Guindi's application and issued a refund check in Guindi's name (misspelled Guindai). Guindi testified that he had no idea a policy had been issued for him and that he did not endorse the premium refund check of $1,500, which someone cashed and endorsed with a signature very similar to the forged signature on the application (first name in cursive with the last name in print all upper case).
Ayad also submitted to FNWL life insurance policy applications for three Egyptian residents who were only visiting the United States. Non-U.S. citizens are not eligible for life insurance policies with FNWL. The applications indicated that the applicants were U.S. citizens who did not intend to travel outside the United States for more than 30 days within the next two years. These applications, like the others, were for high dollar policy limits ($700,000, $750,000 and $800,000) and had high dollar monthly policy premiums ($2,900, $2,850 and $2,850). Further, the applicants were each married but listed the same residential address in California. Notably, all three applicants had listed annual incomes of at least $120,000, but the applications were accompanied by Bank Authorization Forms authorizing payments from the bank account of a single third-party payor under the BCP. Ayad requested and received from FNWL advanced commissions and bonuses for these applications, which resulted in unrecovered charge backs of approximately $34,000. No policies were issued; two applications were withdrawn and one applicant failed to submit required information.
The evidence further showed that with respect to the 13 lapsed policies, these applicants were either the same applicants, the bank authorization signors, or relatives of the applicants of the 20 non-issued applications. Moreover, FNWL investigators were unable to contact most of the applicants of the 20 non-issued applications because the phone numbers listed for 15 out of 20 were incorrect. The few applicants FNWL investigators did contact were unusually uncooperative. Social security numbers for 13 out of the 20 applicants were incorrect, and several of the married male applicants listed a relative other than his spouse as the beneficiary, but Ayad did not submit the required spouse's acknowledgment either with the application or anytime thereafter.
Finally, and what the bankruptcy court found most compelling, were the suspicious facts surrounding the BCP, the payment method necessary for Ayad to get advanced commissions. In general, although all 33 life insurance applications indicated that the applicant would pay monthly premiums under the BCP through automatic drafts from a designated bank account, the payment history showed that few premiums were paid in this manner. For each application, the initial policy payment was paid by check, and/or the first premium payment due was made by check (some of which were returned NSF), not the BCP. In all cases, soon after the initial policy payment and the first premium payment were made by check, Ayad (or his employees) contacted FNWL and requested that subsequent premium payments, if any were made, be made through Ayad's accumulation or trust accounts at FNWL. FNWL copied Ayad on letters sent to the applicants or policyholders confirming Ayad's requests not to draft monthly premium payments per the BCP.
Specifically, Ayad submitted 12 applications for various persons (including Said Halaka) under the BCP with Bank Authorization Forms signed by one individual, Nabih Halaka, authorizing payments to be withdrawn from Nabih's bank account. Ayad received advanced commissions and bonuses for these applications for which FNWL incurred unrecovered charge backs of over $60,000. Ayad submitted these applications during the same time period from March 2000 to January 2001. FNWL either did not issue policies for these applications or, if policies were issued, they all lapsed for nonpayment. If policies had been issued for all applicants, a total of $25,295/month needed to be drawn from Nabih Halaka's bank account under the BCP. His monthly gross income was only $10,000/month - less than one-half of what was needed to support the policies. Three of the applications for which FNWL did not issue policies were submitted by Ayad after July 2001, when he was aware that Nabih's bank account was not being used per the BCP to pay for policy premiums.
Ayad also submitted to FNWL eight applications for various persons under the BCP with Bank Authorization Forms signed by one individual, Maher Rophael, authorizing payments to be withdrawn from his bank account. Ayad received advanced commissions and bonuses for these applications for which FNWL incurred unrecovered charge backs of over $50,000. FNWL did not issue policies on two of them, but did issue policies for the other six, all of which either lapsed for nonpayment or were cancelled at the insured's request. If policies had been issued for all applicants, a total of $11,780/month needed to be drawn from Maher Rophael's bank account under the BCP. His monthly gross income was only $12,500/month. Notably, the evidence showed that applicant Alfred Gwanni designated Maher Rophael's bank account to make the premium payments for Alfred's policy, yet Alfred's bank account was the designated account to pay the premiums for both Kamal and Samir Gwanny (their first and second applications) under the BCP.
In his defense, Ayad contended that he did not knowingly and fraudulently present any false information to FNWL but, as the selling agent, simply did as FNWL required and wrote down what the applicants provided; it was FNWL's underwriting department's responsibility to verify the information and catch any missing or inaccurate items. Ayad admitted that he was sloppy in answering some of the " boilerplate" questions too quickly, but he figured that underwriting would catch any problems, which they did. Out of the 820 applications Ayad submitted during his time at FNWL, he contended that errors on this " tiny minority" hardly constituted knowing and fraudulent false representations. For the 13 lapsed policies, Ayad pointed out that underwriting issued the policies even though they knew the applications contained inaccurate or incomplete information. As for Guindi, Ayad testified that his application was used as a training device for his employees, that someone inadvertently submitted it to FNWL, but that Ayad had contacted an official at FNWL to alert her about the error. Ayad further testified that in Egyptian culture it is not unusual for relatives to pay for one's life insurance premiums or for a married man to name a beneficiary other than his wife.
With respect to the first element, the bankruptcy court rejected Ayad's contention that he was merely a scrivener reporting what the applicants told him and that underwriting would catch any errors or omissions. Jessup, Ayad's former supervisor, testified that agents are not mere salesmen with the ability to write whatever policy they can without regard to FNWL's underwriting requirements. Thus, agent Ayad was responsible for soliciting and reporting factual representations accurately on life insurance applications and his Agent's Report forms. Further, under California law, Ayad had a fiduciary relationship with his principal, FNWL, and owed FNWL fiduciary duties of good faith and loyalty, including a duty to disclose material information to FNWL on policy applications, particularly matters material to risk of the insured.
Specifically, the bankruptcy court found that Ayad, as soliciting agent for FNWL, completed and submitted the subject 33 life insurance applications along with his corresponding Agent's Report, which set forth factual representations about the insurability of the applicants, requested the payment of advanced commissions, and selected the BCP as the method for premium payments. In those documents, Ayad made false representations or omissions by knowingly failing to disclose to FNWL material information that had a bearing on the applicants' insurability and his request for advance commissions, such as failing to report to FNWL that many of the applications contained incorrect, inconsistent, incomplete and/or false information regarding the applicants' personal, financial or medical background, or residency status which could affect the applicants' insurability. Ayad also failed to report that several applications were submitted on behalf of the same applicants, in the same time frame, with the same beneficiaries, and designating the same third-party bank accounts for the BCP.
Particularly regarding the BCP, the bankruptcy court found that Ayad designated on all 33 applications that the BCP would be used when in fact he made sure it was not. The payment history indicated that the BCP was not used to pay the policy premiums, but rather payments were made by check or from Ayad's own accounts. On every policy, Ayad, not the applicant, requested FNWL not to draft the monthly premium payments from the bank accounts designated in the applications, and Ayad received copies of FNWL's letters to policyholders confirming these requests. Thus, Ayad not only knew that the BCP was not being used for payment - material information that if disclosed to FNWL would have prevented Ayad from receiving advanced commissions - but Ayad knowingly manipulated the applications to qualify for advanced commissions and higher bonuses and made sure the BCP was not used. As for Guindi's application, the bankruptcy court rejected Ayad's testimony that it was used as a training device for his staff and submitted in error and found that it was a total fabrication. No one from Ayad's staff or anyone else testified and corroborated Ayad's story about Guindi.
On appeal, Ayad contends that the bankruptcy court erred by attributing representations made by the applicants to Ayad. Specifically, he asserts that the life insurance applications were only missing information such as driver's licences, social security numbers, and dates of birth, and none of these omissions affect whether FNWL will insure an applicant. On the duplicate applications, Ayad contends that FNWL failed to show that he remembered what was listed on the first applications in order for him to question information on the second, and, besides, the time waited between submissions allowed for people's health (i.e., weight) or income to change so Ayad would not question such changes. Ayad also contends that FNWL had no rule about resubmitting applications, and he was not required to announce that an application was being resubmitted.
Ayad fails to consider representations he made as agent in answering questions in the applications about the potential insured, or his omissions in failing to inform FNWL about erroneous answers from the applicants, and fails to consider the representations and omissions he made in his own Agent's Reports, such as whether he knew of any factors not reflected in the application that would affect the applicant's insurability. Further, as an experienced agent, Ayad cannot reasonably assert that date of birth is not a significant factor an insurer considers in life insurance applications. As for the duplicate applications submitted a few months apart, perhaps a person's weight and income could change during that time period, however a person's height (by 4"), birth date (by 10 years either way), and social security number would not. Moreover, despite Ayad's contention that he did not have to inform FNWL that he was resubmitting an application, FNWL offered evidence that in cases of where a policy has been denied, the second application must be labeled as a " Trial Application, " which Ayad failed to do, and, more significantly, advanced commissions are not available on Trial Applications, yet Ayad does not explain why he checked the box requesting the advance. Finally, Ayad fails to adequately explain why he checked " No" on all of the second applications to the question for the agent of whether there were any applications pending, which would alert FNWL that the second application was a resubmission, or why he checked " No" to the question of whether any life insurance policies were in force on the applicant, which prevents FNWL from the " moral hazard" of over-insuring.
Next, Ayad contends absolutely no evidence exists proving that he knew the designated bank accounts would not be used for the BCP, and that the bankruptcy court made erroneous findings that show nothing about Ayad's knowledge at the time he took the applications. Ayad argues that he had no way to " predict the future" that applicants would not use the BCP; his requests to not draft the monthly premium payment from the bank account and FNWL's confirmation letters to policyholders acknowledging these requests all occurred after the applications were submitted.
Ayad is incorrect. For Nabih Halaka, whose bank account was designated as the payor for 12 applications under the BCP, Ayad knew as of July 2000 (because he made the request), that premium payments were not to be drafted from Nabih's account yet Ayad submitted several subsequent applications under the BCP designating Nabih's same bank account. For Maher Rophael, whose bank account was designated as payor for eight applications under the BCP, Ayad knew by August 2000, that deductions were not to be made from Maher Rophael's account yet Ayad submitted several subsequent applications under the BCP designating this same bank account. Therefore, Ayad knew at the time, at least with respect to those applications, that the BCP was not being used. We also reject Ayad's argument that the bankruptcy court erred in assuming that Ayad knew in advance that the BCP would not be used to pay premiums just because the result was that applicants had difficulty in paying their premiums. Inability to pay is not why the bankruptcy court found that Ayad knew the BCP would not be used to pay premiums. Rather, it was because Ayad, in several cases, submitted subsequent applications designating the same bank account for premium payments that he had just requested not be used for the BCP. A prime example of this is the duplicate applications submitted for Soulie Elkarake. The first application resulted in a policy issued on September 20, 2000. Less than a month later on October 16, 2000, Ayad contacted FNWL and requested that no premium deductions be taken from the designated bank account. However, on that same day, Ayad submitted a second application for Soulie designating this same bank account for monthly premium deductions under the BCP. Further, Soulie's mother's application, submitted shortly thereafter, designated the same bank account for payment under the BCP that Ayad requested not be used to pay Soulie's premiums.
Ayad next contends that FNWL does not preclude one person from signing the Bank Authorization Forms for other family-member applicants and using that person's bank account to pay for multiple policies, and the bankruptcy court erred in using this irrelevant fact to justify its findings. While FNWL concedes that one party can pay for another party's policy premiums, the fact of a one-payer scenario like Nabih Halaka or Maher Rophael for multiple policies was only one fact of many the court relied upon for its findings. Other suspicious facts noted by the bankruptcy court include, inter alia, all of the applications involved high policy limits and large monthly premiums, both parties lacked income to pay the multiple premiums, Ayad immediately requested in all cases after application submission that the BCP not be used for payment of premiums, and Ayad used his personal accounts to pay his clients' premiums.
Next, Ayad asserts that the bankruptcy court erred in speculating how much money would need to be drafted from Nabih Halaka's or Maher Rophael's bank accounts under the BCP in order to service the multiple life insurance policies without considering that their family members would and could have made the appropriate deposits into the designated account. Ayad ignores the fact that he immediately requested in all cases that the BCP not be used as the method of premium payment regardless of who was paying, and he ignores the fact that many of the premiums were never paid, or, if they were, some were returned NSF. Therefore, the family members apparently were not making the appropriate deposits to pay for their premiums as Ayad contends.
Ayad also argues that the bankruptcy court erred when it determined that he failed to notify FNWL of the duplicate applications he filed for Kamal and Samir Gwanny in September and October 2000, and faulted Ayad for failing to recognize and report the suspicious discrepancy in their incomes. Perhaps Ayad would not be expected to recall every detail about his clients' incomes, but he did check " No" on both of the second applications to the question of whether there were any applications pending on the life of the applicant, which he knew was incorrect. It seems unlikely that Ayad would forget that he had just filed applications for both men less than one month prior. As for the other duplicate applications, Ayad continues to argue that his job was to merely write down what the applicants told him, and his checking the wrong box about any pending applications was only sloppy, not fraudulent. The bankruptcy court correctly rejected this because, as an agent for FNWL, Ayad had a duty to disclose to FNWL material information that had a bearing on the applicant's insurability. He also had a duty to answer correctly the questions contained in his Agent's Reports. If Ayad could not recall whether these applicants already had high-dollar, high-premium life insurance policies in place, which is unlikely since he received thousands of dollars in commissions from them, he could have confirmed this information in a matter of seconds.
Finally, Ayad contends that FNWL only learned of Guindi's erroneously submitted application because Ayad contacted FNWL; if he was trying to perpetrate a fraud he would never have informed FNWL about the error. He further argues that, in any event, FNWL recovered the commission paid. First, a FNWL witness testified that FNWL has no record of Ayad notifying it about Guindi's application. Moreover, even if the application was a training device for Ayad's staff and submitted in error, Ayad fails to explain why the $1,500 refund check FNWL sent to Guindi's " supposed" address, that coincidentally belonged to Maher Rophael, a man he did not know, was forged and cashed by someone other than Guindi.
Despite Ayad's many contentions, the record supports the bankruptcy court's finding that Ayad made numerous false representations or omissions, satisfying the first element, and we see no clear error here.
b. Second Element: Ayad Knew at the Time the Representations Were False.
For the second element, the bankruptcy court found that with respect to the 13 lapsed policies the evidence showed a pattern of conduct that when Ayad submitted applications to FNWL he knowingly omitted material information that the BCP would never be used for premium payments. Ayad knew the BCP was not being used because he systematically requested FNWL not to draft the monthly premium payments from the designated bank accounts before any payments were made, and he kept policies in force by having the premiums withdrawn from his own accumulation and trust accounts. As for the 33 life insurance applications in general, the bankruptcy court found that Ayad knew many of them contained incorrect, incomplete and/or false information regarding the applicants' personal, financial and medical background, and residency status that affected the applicants' insurability, and he failed to report these matters to FNWL when he submitted the applications.
Ayad contends that the only representations he made in each application were the checked boxes; all other representations were made by the applicants. Ayad asserts that just because not all premium payments were made by way of the BCP, this does not prove that he knew this information beforehand. We have already addressed and rejected Ayad's contentions about the facts surrounding the BCP. We agree with the bankruptcy court that the evidence clearly showed a pattern of fraudulent conduct. As for the other representations, even if we agreed that Ayad's job as agent was to write down what the applicant told him to without verifying any of the information, he fails to adequately explain why he checked " No" on all 33 applications that the applicant did not already have a life insurance application pending or a life insurance policy in force when several of the parties did, or why he checked " No" on all 33 applications that he knew of no reason affecting the applicant's insurability when certain applicants had been previously denied by FNWL for medical reasons or that three applicants were not even U.S. citizens and ineligible for life insurance. This pattern of conduct goes beyond " sloppy."
Accordingly, the bankruptcy court's finding that Ayad knew the falsity of his representations is supported by the record, and Ayad has failed to show any clear error.
c. Third Element: Ayad Made the Representations With the Intent to Deceive.
For the third element, the bankruptcy court found that as for the 13 lapsed policies Ayad submitted the applications with the intent and purpose to deceive FNWL because he knew that the applicant had to choose the BCP as the payment method in order to qualify him for advanced commissions. Ayad's pattern of submitting applications selecting BCP, then immediately requesting that BCP not be used, and then paying the premiums from his accumulation and trust accounts before any BCP payments would be made indicated an intentional effort to mislead FNWL in order to qualify for advanced commissions. Ayad's deceit was further shown by the depletion of his accumulation and trust accounts, which meant that the issued policies would lapse for nonpayment with Ayad still having received advanced commissions to which he was not entitled. As for the incorrect, incomplete and/or false information on the 33 life insurance applications that Ayad submitted to FNWL, the bankruptcy court found that Ayad had the intent and purpose to deceive FNWL because he stood to gain by collecting advanced commissions on submission of these applications, which would not have been paid if Ayad had informed FNWL of the incorrect, incomplete and/or false information material to insurability.
Ayad contends that he did not make the representations the bankruptcy court attributed to him because he is not charged with having to investigate the facts relayed to him by applicants. However, if he did incorrectly check a box on the form, Ayad asserts it was only because he was busy at the time. We have already rejected these arguments. Moreover, Ayad does not explain away the suspicious circumstances regarding his conduct about the BCP, the bogus application of Guindi and subsequent forged and cashed refund check, and the fact that Ayad knew the three Egyptian applicants were not U.S. citizens yet he submitted their applications anyway, which, of course, designated the BCP as the method of payment.
We believe the record substantially supports the bankruptcy court's finding that Ayad intended to deceive FNWL with his false representations and omissions, thereby satisfying the third element. Accordingly, we see no clear error here.
d. Fourth and Fifth Elements: FNWL Justifiably Relied Upon Ayad's Representations; FNWL's Damages Were Proximately Caused By Its Reliance on Ayad's Representations.
The bankruptcy court found that FNWL justifiably relied on Ayad's representations because Ayad was an experienced agent that had been with FNWL since 1997, he had been a licensed agent since 1989 and possessed a sophisticated level of knowledge about the insurance industry including underwriting requirements, and because he demonstrated that he had the requisite knowledge and training to differentiate between insurable and noninsurable applicants. Hence, FNWL had no reason to suspect any wrongdoing by Ayad. As agent, Ayad had an affirmative duty to disclose information that would disqualify the applicants from being issued a policy by FNWL and Ayad breached this duty by not disclosing what he knew about the applicants. Because FNWL relied on Ayad's fraudulent representations and paid him advanced commissions and bonuses that he was not entitled to as a result, the bankruptcy court found that FNWL sustained nondischargeable damages of $222,974.45. It further found that because FNWL properly terminated Ayad for willful misrepresentation per the AAA, Ayad was not entitled to damages on his counterclaims for breach of contract and unjust enrichment.
All Ayad contends here is that each time he incorrectly checked boxes on the form, FNWL " clearly looked at the two submissions together and was not harmed so even if intent to deceive could be found based on Ayad's sloppy handling of this form, FNWL handled the applications together and was not harmed because of the incorrectly checked box." What Ayad argues here is unclear, particularly what he means by the " two submissions" reviewed by FNWL. Perhaps he is referring to the duplicate applications he submitted and is arguing that FNWL was not harmed by the second submissions. If so, he is incorrect. FNWL's policy was to pay the advanced commissions to agents after submission of the application but prior to the policy being approved by underwriting, which Ayad knew. As a result of the duplicate applications, FNWL was induced to pay Ayad thousands of dollars in commissions and bonuses that it was unable to recover.
In any event, the record supports the bankruptcy court's findings that FNWL justifiably relied on Ayad's false representations or omissions and suffered damages as a proximate result, thus satisfying the fourth and fifth elements. As a result, FNWL properly terminated Ayad under the AAA for willful misrepresentation and he was not entitled to damages for his counterclaims.
VI. CONCLUSION
Based on the foregoing reasons, we AFFIRM.