United States District Court, E.D. New York
March 22, 2004.
BOARD OF EDUCATION OF THE PLAINEDGE UNION FREE SCHOOL DISTRICT, Plaintiff, -against- CONNECTICUT GENERAL LIFE INSURANCE COMPANY, Defendant; CONNECTICUT GENERAL LIFE INSURANCE COMPANY, Plaintiff, -against- GENE GRASSO, Defendant; GENE GRASSO, Plaintiff, -against- BOARD OF EDUCATION OF THE PLAINEDGE UNION FREE SCHOOL DISTRICT, Defendant
The opinion of the court was delivered by: DENIS HURLEY, District Judge Page 2
MEMORANDUM AND ORDER
Plaintiff Board of Education of the Plainedge Union Free School
District commenced this action seeking to void 31 insurance policy loan
agreements on the theory that the loan agreements were signed by an
individual who was not authorized to enter into that transaction.
Defendant Connecticut General Life Insurance Company has since, with
leave of the Court, impleaded a third-party defendant: the purportedly
unauthorized individual. The Board of Education of the Plainedge Union
Free School District and the Connecticut General Life Insurance Company
have filed cross-motions for summary judgment. For the reasons discussed
infra, the Court grants the Connecticut General Life Insurance
Company's motion and denies the Board of Education of the Plainedge Union
Free School District's motion.
In evaluating a summary judgment motion, the Court "is required to draw
all factual inferences in favor of, and take all factual assertions in
the light most favorable to, the party opposing summary judgment."
Rule v. Brine. Inc.. 85 F.3d 1002, 1011 (2d Cir. 1996). The
Court has considered these requirements while evaluating the undisputed
facts in the
context of the each of the cross-motions for summary judgment. All
of the facts set out below were derived from the exhibits identified in
the parties' Local Civil Rule 56.1 statements of undisputed facts.
Between 1991 and 1993, pursuant to a retirement incentive plan, the
Plainedge Union Free School District ("District") purchased 31 individual
life insurance policies from Connecticut General Life Insurance Company
("Defendant"). These policies, known as either "Individual Flexible
Premium Adjustable Life Insurance" policies or as "Universal Life
Insurance" policies, insured the lives of "eligible school employees." By
paying the premiums for these policies, the District hoped that certain
teachers would be encouraged to retire early. The policies paid out a set
amount of money to the retiring teachers and their beneficiaries. Any
benefits that surpassed those set amounts would be paid to the District,
thereby providing a collateral monetary benefit to the District.
The policies also have a "cash value" that is derived from the amount
of premiums paid and the interest earned (less insurance charges and
expenses). Due to this feature, the policy owner may take out a portion
of the accumulated cash value in the form of a "policy loan." The
interest on a policy loan may be paid annually or not at all. All unpaid
interest is added to the policy loan amount and likewise will accumulate
interest. When the policy matures and must be paid out, either through
death or some other operation, the outstanding policy loan and interest
are deducted from the proceeds of that policy. According to the evidence,
former Assistant Superintendent for Business Gene Grasso ("Grasso")
the set up of this incentive.*fn1 On April 18, 1991, the District
approved the Grasso-negotiated retirement incentive plan by issuing a
resolution. The memorandum of agreement that was accepted by the
resolution expressly states that "the District shall own the policy,
including any accumulated cash value." Plaintiff's Ex. A2 at 2.
In June 1991 agents of Defendant including Frank Capodacqua
("Capodacqua") went to visit each of the twenty-four retiring
teachers that were availing themselves of these policies. After
interviewing those teachers and after preparing the appropriate forms,
Capodacqua sought to complete the application process for these
individual teachers. This required a signature from the District. When
Capodacqua sought out a District representative, he was told by District
employees that Grasso would sign the forms. When Grasso signed those
twenty-four individual forms, he also provided Capodacqua with checks
that were intended to make advance payment on any premiums owed on
temporary life insurance agreements. When the policies issued for those
retiring teachers, Capodacqua met again with Grasso. At that time, Grasso
provided Capodacqua with checks covering the balance of the premiums owed
for that year: $163,200.00. Grasso provided Capodacqua with policy
receipts, which were signed by Grasso, indicating that the District had
received the policies.
In 1992 Capodacqua again met with Grasso to discuss the policies. At
that time, Grasso informed Capodacqua that five teachers were retiring
that year and would need these
policies. Capodacqua met with each of the retiring teachers and
helped them to complete their applications. Once the applications were
completed he would meet with Grasso. Grasso would sign the applications
on the District's behalf, pay the $34,000.00 in premiums for that year
and sign the policy receipts after receipt of the actual policies. These
same procedures were followed in 1993 and 1994.
During this period, Capodacqua dealt almost exclusively with Grasso.
The only other contact that Capodacqua had with the District was through
Ida Brtalik ("Brtalik"), who was the District treasurer. Brtalik's duties
include management of the District's accounting and assisting Grasso.
In March 1995 Grasso contacted Capodacqua, Defendant's agent. In
response to a request by Grasso, Capodacqua prepared a list explaining
the cash value on all of the policies. See discussion
supra. Capodacqua further advised Grasso that the District
could obtain policy loans totaling $321,007 against the 31 then-existing
policies. Grasso told Capodacqua that the District desired to take out
policy loans for this full amount. Capodacqua did not inquire as to
whether further approval was necessary. After approval of the policy
loans by Defedant, the loan checks were sent directly to the District.
It is undisputed that Grasso personally believed that he had authority
to consummate these policy loans on behalf of the District. See
Defendant's Ex. G at 78, 153. Specifically, Grasso considered the cash
value of the policies to be the liquid assets of the District. As such,
when he consummated these policy loans, Grasso believed that he was
merely "transferring [the assets] . . . from one account to another
account." Id. at 145.
Grasso further believed that the decision on how to free up these
assets for immediate use by the District was made by him without any
input from the District, see id. at 111-112, which he felt was
appropriate because of his position as Assistant Superintendent for
Business and because the handling of the insurance policies "came under
[his] jurisdiction," see id. at 49.
At the time, Brtalik was informed that Grasso had signed for these
policy loans. As treasurer of the District, she noted the receipt of the
resultant checks and deposited those checks in the District's general
fund account. These funds were recorded in the District's "cash book."
These funds were also reflected in the April 1995 Treasurer's Report. On
this Report, the funds were listed as "insurance recoveries." The term
"insurance recoveries" would also embrace surplus funds collected from a
policy that was paid due to death or some other triggering event.
See Defendant's Ex. 6 at 2. However, in the entire eleven years
that Brtalik served as District Treasurer, the funds listed as "insurance
recoveries" in the monthly Treasurer's Report had never exceeded $300.
Brtalik Dep. at 52. In April 1995 the amount of "insurance recoveries"
funds listed in the Treasurer's Report exceeded $320,000. The District
approved this April 1995 Treasurer's Report by resolution. However,
Brtalik had never been questioned by District with regard to the amounts
contained in previous Treasurer's Reports. Nor had Brtalik ever been
denied approval for any previous Treasurer's Report.
In May 1995, after Grasso signed the policy loan applications and those
policy loans were approved by Defendant, Defendant sent 31 letters to the
District one for each
individual policy loan indicating that interest was due on
each of the policy loans. Each May from 1995 until 2001, these letters
were received in the District offices. Similarly, in June 1995, and
annually thereafter, 31 individual letters were sent to the District
offices indicating that the interest had been added to the policy loan
amount. In addition, annual statements were issued for each of the
individual policies. These statements listed the date and amount of the
policy loans, as well as the amount of interest charged.
In December 1997, Richard Jacullo, one of the relevant policy holders,
died. On January 6, 1998, Defendant provided the District with a document
titled "Reconciliation of Policy Proceeds." That document listed the
amount of the proceeds that would be paid to the District. That document
further showed how the amount of the proceeds were reduced by the policy
loan amount. When the proceeds were sent to the District, they were
reduced by the policy loan amount.
Also in 1997, outside consultants called the Educators Financial
Resource prepared and submitted an "Appraisal Report for Life Insurance
on Retired Teachers" ("Appraisal Report") for the District. See
Defendant's Ex. I, tab A. The Appraisal Report was submitted to and read
by the District. The Appraisal Report reviewed the effectiveness of the
life insurance plan in encouraging retirement and reducing the overall
burden upon the budget caused by teacher salaries. See
id. at 7. As part of this review, the Report noted that policy
loans had been taken out and summarized the financial effect of these
loans. See id. at 15. In March 1999, the same
consultants, the Educators Finance Resource, prepared an "Asset
Management Plan for the Plainedge Central School District 1999" ("Asset
Plan"). See Defendant's Ex. I, tab A. This Asset
Management Plan also noted the existence of the policy loans. See
id. at 3. The District paid the Educators Finance Resource to
prepare both the Appraisal Report and the Asset Management Plan.
On February 6, 2001, the District initiated this action by filing a
complaint in New York State Supreme Court. In the complaint the District
requested, inter alia, that the Court declare the policy loans to be null
and void. On March 30, 2001, prior to answering the complaint, Defendant
removed the action to this Court. Defendant filed a motion to dismiss the
case on August 1, 2001. After a hearing on the motion, the Court, ruling
from the bench, denied Defendant's motion. Pursuant to a stipulation and
order, signed by the parties and the Court, Defendant did not file an
answer until November 8, 2001. In accordance with the Court's individual
practice rules, on January 25, 2002, Defendant requested a pre-motion
conference regarding a possible motion to implead Grasso. The motion for
leave to implead was subsequently briefed by the parties. On November 6,
2002, the Court granted the motion to implead. The instant cross-motions
for summary judgment were fully briefed and submitted to the Court on
December 17, 2003.
A. Summary Judgment Standard.
The parties have submitted the instant cross-motions under Federal Rule
of Civil Procedure 56. The legal principles employed by the Court when
ruling upon a motion for
summary judgment are well-established It is axiomatic that summary
judgment may be granted only when it is shown "that there is no genuine
issue as to any material fact and that the moving party is entitled to a
judgment as a matter of law." Fed.R.Civ.P. 56(c); see Celotex
Corp. v. Catrett. 477 U.S. 317, 323 (1986); Donahue v. Windsor
Locks Bd. of Fire Comm'rs. 834 F.2d 54, 57 (2d Cir. 1987). To meet
this standard, the moving party bears the initial burden. Adickes v.
S.H. Kress & Co.. 398 U.S. 144, 157 (1970).
The moving party meets this initial burden by proffering evidence
"showing the absence of a genuine issue as to any material fact."
Id. Once the moving party has come forward with support
demonstrating that no genuine issue of material fact remains to be tried,
the non-moving party "must come forward with affidavits, depositions, or
other sworn evidence as permitted by Fed.R.Civ.P. 56, setting forth
specific facts showing that there exists a genuine issue of material
fact." Rule. 85 F.3d at 1011. In reviewing these materials, the
Court "is required to draw all factual inferences in favor of, and take
all factual assertions in the light most favorable to, the party opposing
summary judgment." Id.
B. Apparent Authority.
As mentioned supra, the District initiated this action to
declare the relevant policy loans void and unenforceable. In other words,
the District seeks to void the policy loans, and the concomitant
obligation to repay, while not repaying any of the funds that they have
already received and spent. It appears likely that, at a minimum, such a
situation would give
rise to an equitable remedy. However, because the Court concludes
that apparent authority binds the District to the contract made by Grasso
on their behalf, the Court need not reach those equitable arguments.
"Apparent authority arises from the `written or spoken words or any
other conduct of the principal which, reasonably interpreted, causes [a]
third person to believe that the principal consents to have [an] act done
on [its] behalf by the person purporting to act for him.'" Dinaco,
Inc. v. Time Warner. Inc.. 346 F.3d 64, 69 (2d Cir. 2003) (quoting
Minskoff v. American Exp. Travel Related Services Co. Inc..
98 F.3d 703, 708 (2d Cir. 1996) (internal quotation omitted)); see
also Restatement (Second) of Agency § 27. Defendant maintains
that the conduct of the District, evaluated as a whole, was sufficient to
allow a reasonable person to conclude that Grasso had authority to take
out these policy loans on the District's behalf. The District predictably
disagrees. The Court will address the District's arguments in the order
that they were presented.
First, the District contends that no apparent authority can attach to
municipal corporations. See District's Mem. at 6-7. In support
of this proposition, the District relies upon Genesco. Entertainment
a Div. of Lymutt Industries. Inc. v. Koch, 593 F. Supp. 743, 748
(S.D.N.Y. 1984). That case stated the following:
When acting in its corporate capacity, a
municipality is held as accountable for its
obligations as are individuals and corporations in
the conduct of business. Unlike individuals and
private corporations, however, a municipality's
power to contract is statutorily restricted for
the benefit of the public. Statutory restrictions
on a municipal corporation's power to contract
protect the public from the corrupt or
ill-considered actions of municipal officials. To
allow recovery under a contract which contravenes
restrictions gives vitality to an illegal act
and grants the municipality power which it does
not possess to waive or disregard requirements
which have been properly determined to be in the
interest of the whole. Hence, while a municipal
corporation must honor its authorized commitments,
it is not bound to contracts entered into by
employees outside their authority. It is
established law in New York that where there is a
lack of authority on the part of agents of a
municipal corporation to create a liability,
except by compliance with well-established
regulations, no liability can result unless the
prescribed procedure is complied with and
Id. at 747-748 (internal quotation and footnotes omitted).
The Court has read this case thoroughly. After careful consideration,
the Court concludes that the holding of this case that apparent
authority cannot bind a municipality is limited to those
circumstances where a municipal employee's authority is limited by
statutes or regulations. This interpretation is supported by reference
to the New York cases relied upon in Genesco. See Scarborough
Properties Corporation v. Village of Briarcliff Manor. 278 N.Y. 370,
376 (1938) ("The defendant village has only those powers which the
Legislature has conferred upon villages of the third class, and the
powers so conferred upon the village may be exercised only in the manner
provided by the Village Law, and through the officers authorized by the
statute to act for the village."); Lutzken v. City of
Rochester. 184 N.Y.S.2d 483, 486 (4th Dep't 1959) (quantum meruit
could not be applied where the city charter prohibited authority);
Evans v. City of Johnstown. 410 N.Y.S.2d 199, 205 (N.Y. Sup.
1978) (rule against apparent authority is "not inviolate" and has an
exception where neither public policy nor a statutory restriction are
implicated). The Court's interpretation is further supported by New
York case law interpreting this restriction on apparent authority in
the same manner. See, e.g. Cassella v. City of Schenectady.
120 N.Y.S.2d 436,
440-41 (3d Dep't 1953).
In the instant case, no statute or regulation has been presented to the
Court that would limit or curtail Grasso's authority. Nor has the
District proffered any District bylaw or rule. Therefore, unlike the
purported agent in Genesco, Grasso was not acting beyond his
statutorily limited authority. In such situations, the Court concludes
that the municipality is acting "in its proprietary capacity . . . [and
will be] subject to the same standards and restraints as are applicable
to a private individual or a corporation in the conduct of similar
business." Van Curler Devlop. Corp. v. City of Schenectady,
300 N.Y.S.2d 765, 773 (N.Y. Sup. 1969). For this reason, in the instant
circumstances, apparent authority may still bind the District. See
also November 6, 2002, Order at 6. The Court therefore turns to the
question of whether the undisputed facts establish, for the purposes of
summary judgment, apparent authority.
The Court first notes Grasso's position. Grasso was the Assistant
Superintendent for Business. The District stresses the "assistant" aspect
of this title. However, the undisputed facts indicate that, although
Grasso was an assistant to the District Superintendent, he held the
highest position with regard to the District's financial affairs. This
title, and the related position, indicate to a reasonable observer that
the District entrusted Grasso with the District's financial affairs. The
District stresses that this position conferred no actual authority to
take out the policy loans. However, no aspect of the title itself
communicated any limitations. Thus, the title indicates that Defendant
could reasonably believe that Grasso possessed authority to take out the
relevant policy loans.
The Court next considers Grasso's course of conduct with Defendant and
Defendant's agents. It is undisputed that Grasso conducted the
negotiations with Defendant regarding the underlying retirement life
policies. There is no indication that Defendant was ever told that
District approval was needed for these underlying policies. To the
contrary, the evidence indicates that Grasso negotiated the terms of the
policies, coordinated all collateral interactions with the Defendant,
signed all of the policies on behalf of the District, and handled the
disbursement of all premium payments. The District's role was merely to
approve the original deal that Grasso set up. See District's
Ex. E. at 32-33. Nonetheless, the Court notes that there is no indication
within the evidentiary record that this approval role was communicated to
Defendant. Moreover, the Court notes that the District's role with regard
to these policies ceased after approval of the overall plan. As discussed
supra, each individual policy required a separate application
form and a separate approval by a District representative. These
applications, which were solely signed by Grasso, would bind the District
to pay premiums on behalf of the retiring teachers.*fn2 The validity of
these individual policies, and of Grasso's signatures on District's
behalf, are not contested in this or any action. All of these facts
indicate that the District vested a great deal of responsibility in
Grasso for the administration of the relevant policies. This
responsibility included the signing of substantive contracts on the
District's behalf and therefore could reasonably be viewed as more than
The Court next considers Grasso's own beliefs. The proffered evidence
unequivocally establishes that Grasso believed that he had authority to
execute the relevant policy loans. Grasso stated that this belief was
based, in part, upon the broad authority that the District had given him
to plan and administrate the retirement insurance plan. Grasso's
subjective belief does not constitute an act by the District. See
Fennell v. TLB Kent Co.. 865 F.2d 498, 502 (2d Cir. 1989). This
belief does, however, reflect the scope of the authority and
responsibilities granted by the District to Grasso. In part, Grasso's
beliefs flowed from the collateral discretion that the District granted
him with regard to the policies. For that reason, Grasso's belief
Finally, the Court considers the salient features of the policy loan
transactions themselves. The District claims that the nature of these
policy loans render any reliance upon the apparent authority of Grasso
patently unreasonable. The District further argues that Defendant's
failure to make any inquiry into Grasso's actual authority negates any
apparent authority. See District Mem. at 16-18. According to
the District, Defendant had a duty to inquire because of the unique
nature of the policy loan transaction and his own inexperience in dealing
with public entities. Id. at 17. This argument fails to
persuade the Court.
The undisputed facts indicate that the District had never before taken
out a policy loan. However, the undisputed facts also demonstrate that
this type of transaction was
neither novel or unique. On April 18, 1991, the District approved
the retirement insurance incentive plan by resolution. This plan and the
related insurance policies were, in the District's words, "discussed
. . . at length with insurance brokers, legal counsel and unions
representing the three affected collective bargaining groups."
Plaintiff's Mem. at 2. All of the policies that flowed from this plan
were adopted by the District after Grasso signed them on the District's
behalf. The validity of these individual policies are not questioned.
All of these valid policies enunciated the mechanism for performing the
policy loans. This mechanism reflected the cash value of the policies
themselves, a prominent and attractive feature of the plan that was
presented to the District for approval in 1991. See District's
Ex. A2 at 2 ("the District shall own the policy, including any
accumulated cash value"). Thus, the terms and the processes for taking
out these loans were not negotiated anew by Grasso. Instead, Defendant
through its agent Capodacqua merely applied the formulae
and processes that had been reviewed and approved by the District.
Accordingly, rather than representing an entirely new transaction, with
novel processes, these policy loans were aspects of earlier
transactions that were approved by the District. Given that the
District had, through its actions and inactions, ceded all
responsibility for managing that insurance plan to Grasso, the
inclusion of the policy loans within that approved plan is notable.
Also, the District commissioned two financial reports from independent
consultants that discussed these policy loans: the Appraisal Report and
the Asset Management Plan. Although the reports discussed the amount and
financial consequences of the outstanding policy loans, they did not
regard these policy loans as an unusual or extraordinary feature in
the District's asset portfolio. If these policy loans were truly
unique, these reports would likely have reflected that unique character
in their analysis of the liabilities and responsibilities flowing from
those policy loans. These reports also lead the Court to the next set of
facts that weigh against regarding these policy loans as novel and
Through the Appraisal Report and the Asset Management Plan as well as
the April 1995 Treasurer's Report, the District was fully advised of the
amount of these policy loans as well as their source*fn3. In the
relevant Treasurer's Report, the District was presented with an amount of
recovery that was one thousand times greater than usual.
Compare Defendant's Ex. 6 at 2; Brtalik Dep. at 52.
Nonetheless, the District never considered these policy loans significant
or extraordinary enough to intervene or even comment.
The District also argues that the monetary amount of these policy loans
are so large that the transaction was automatically unique and,
therefore, Defendant had an affirmative duty to inquire as to Grasso's
authority. The Court does not agree. The amount of money involved, more
than $320,000, would undoubtedly be considered significant in the lives
of most private individuals. See Fichter Aff. ¶ 6. However,
these policy loans were not executed on behalf of a private individual.
Instead, they were executed on behalf of a large municipal entity. This
is an entity that, during the single month reflected by the April 1995
Treasurer's Report, received fifteen individual types of incoming revenue
four million dollars. See Defendant's Ex. 6 at 2.
Moreover, compared with the total financial responsibilities incurred
under the retirement insurance plan, the amount of the policy loans also
pales in comparison. In a similar vein, the Court notes that, in 1995
alone, it is undisputed that the District voluntarily paid $163,200.00 in
premiums on policies for which Grasso signed the application forms.
Against that backdrop, the total monetary amount of the loans does not
loom so large that it would alter a reasonable person's duty to inquire.
The District next argues that, because Capodacqua did not have
experience in these types of transactions, the District had a higher duty
to inquire as to Grasso's authority. The relative experience of
Capodacqua may provide an explanation as to why he failed to inquire.
However, given the overall context of these transactions and the
continuing dealings with Grasso, the Court cannot conclude that
Capodacqua's duty was different from a hypothetical reasonable
individual. Simply put, the District performed several affirmative acts
that would lead a reasonable person in Capodacqua's position, regardless
of the relative experience, to believe that Grasso was vested with the
appropriate level of authority.
In the instant case, the District repeatedly expressed, through both
affirmative actions and conspicuous inaction, their reliance upon Grasso
in financial matters. This reliance was affirmatively expressed via
appointment of Grasso to a position where he coordinated the District's
finances. The District further evinced this reliance by permitting Grasso
to conduct all negotiations with Defendant for the relevant retirement
insurance plan. After approval of the Grasso plan, the District further
demonstrated its reliance upon
its Assistant Superintendent for Business by permitting him to
handle the administration of this plan. The administration of this plan
involved more than merely ministerial acts. For example, the District
permitted Grasso to determine those employees that were eligible for
insurance and signing their application forms on the District's
behalf-thereby expanding the scope of the District's financial
obligations under the retirement insurance plan. (Each new application
for insurance benefits, when approved by Defendant, increased the
District's financial obligation to make premium payments.) Finally, the
District indicated their reliance upon Grasso by not auditing or reacting
to the various notices that indicated the existence of the policy loans.
In sum, the undisputed evidence indicates that the conduct of the
principal, the District, was reasonably interpreted by Defendant. The
Court concludes that this conduct would reasonably causes a third person
to believe that the principal consented to enter into the relevant policy
loans acting through its apparent agent Grasso. Due to these reasonable
outward expressions of consent and authority, the District is bound to
the terms of the policy loans through the doctrine of apparent authority.
See Dinaco, Inc. v. Time Warner. Inc.. 346 F.3d 64,
69 (2d Cir. 2003)
In light of the foregoing, the Court GRANTS Defendant's motion for
summary judgment. For substantially the same reasons, the Court DENIES
the District's motion for summary judgment. The Court notes that, as
reflected by the caption on this order, there is
now a third-party complaint. The Court, in the context of the
instant order, does not render any decision with regard to the