Todd W. Much, Charles A. Marien, Iii v. Pacific Mutual Life Insurance Company, a California corporation

In the
United States Court of Appeals
For the Seventh Circuit
No. 99-2762
TODD W. MUCH, CHARLES A. MARIEN, III
and CERTIFIED INSURANCE CONSULTANTS,
INCORPORATED, an Illinois corporation,
Plaintiffs-Appellees,
v.
PACIFIC MUTUAL LIFE INSURANCE COMPANY,
a California corporation,
Defendant-Appellant.
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 94 C 7621--David H. Coar, Judge.
ARGUED SEPTEMBER 14, 2000--DECIDED September 12, 2001
Before CUDAHY, EASTERBROOK and RIPPLE,
Circuit Judges.
RIPPLE, Circuit Judge. Todd W. Much and
Charles A. Marien, III (collectively "the
plaintiffs") and their wholly owned
corporation, Certified Insurance
Consultants, Inc. ("CICI"), brought a
breach-of-contract action against Pacific
Mutual Life Insurance Co. ("Pacific
Mutual"), seeking renewal commissions for
the sale of variable life insurance
policies. Following a bench trial, the
district court entered judgment for the
plaintiffs. For the reasons set forth in
the following opinion, we reverse the
judgment of the district court.
I
BACKGROUND
A. Facts
1.
Mr. Much and Mr. Marien are licensed to
sell life insurance in Illinois and are
licensed with the Securities and Exchange
Commission ("SEC") and the National
Association of Securities Dealers
("NASD") to sell securities. Mr. Much

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owns all of CICI’s shares, and both Mr.
Much and Mr. Marien work for CICI.
Pacific Mutual issued a variable life
insurance product termed "Pacific Select
Exec." ("PSE") beginning in 1988.
Variable life insurance is a permanent
form of insurance in which the cash value
is based on the performance of an
underlying pool of securities. To sell
variable life insurance products, an
individual must be a NASD-registered
representative of a broker-dealer
licensed with both the SEC and the NASD.
Pacific Mutual itself was not registered
as a broker-dealer with either the SEC or
the NASD. Pacific Equities Network
("PEN"), a subsidiary of Pacific Mutual,
was properly registered as a broker-
dealer, and, therefore, Pacific Mutual
paid PEN to act as the principal
underwriter of the PSE policies.
Pacific Mutual and PEN had a selling
agreement with Mutual Service Corporation
("MSC"), a wholly owned subsidiary of PEN
and a wholly owned indirect subsidiary of
Pacific Mutual. Under the agreement, PSE
was sold by NASD-registered
representatives of MSC. Pursuant to
another agreement among the three
entities, Pacific Mutual and PEN acted as
"paymaster" for MSC; at MSC’s direction,
they sent commission checks directly to
the MSC-registered representative selling
the policies.
More specifically, the flow of
commission dollars generally worked as
follows. The insured or policyholder
first paid premiums to Pacific Mutual.
Pacific Mutual then sent the gross
commission dollars to PEN, who paid the
broker-dealer, who then paid the
registered representative. When the
broker-dealer was MSC and the registered
representative at issue a producer or
subproducer of Pacific Mutual, the
process changed somewhat, as per the
service agreement among the three
entities. In that case, the commission
dollars did not physically flow to MSC.
PEN instead paid the money directly to
the registered representative on MSC’s
behalf, although the money belonged to
MSC and the payments were entered in
MSC’s books and records. For those
registered representatives of MSC who
were also Pacific Mutual agents, this

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arrangement allowed them to receive a
higher percentage of commission, because
MSC did not retain a percentage of the
commission dollars for itself, and to
obtain their commission monies more
quickly.
As further background, a given insurance
policy can generate various forms of
commission. First, commissions are earned
in the first year the policy is in
effect. These commissions are percentages
of the target premium, an actuarially
determined amount of thousands of
insurance policies on which commissions
are paid. This commission has two parts,
a base amount and a bonus. Second,
commissions are earned on premiums paid
in year two and beyond in the amount of
two percent of all renewal commissions.
Third, continuing commissions known as
"trails" are paid annually starting in
the tenth year the policy is in effect,
based on the net asset value of the
policy.
2.
In February 1989, the firm Foote, Cone
& Belding ("FCB") contacted Mr. Much
about purchasing variable life insurance
policies, valued at approximately $1
million apiece, for its executives. Mr.
Much and Mr. Marien met with Gene
Kolasny, Pacific Mutual’s branch manager
in Chicago, to discuss the possibility of
Pacific Mutual’s supplying the insurance
policies to Mr. Much and Mr. Marien.
Kolasny met multiple times with the
plaintiffs; Mr. Much, in fact, testified
that Mr. Marien and he met with Kolasny
four or five times.
In these conversations, Kolasny and the
plaintiffs discussed the commissions that
the plaintiffs would receive. Kolasny
testified at trial that he told the
plaintiffs that their commissions would
be eighty-five percent of the target
premium in the first year of a given
policy and two percent of renewal
premiums in subsequent years. Mr. Much
testified that Kolasny told him that the
commissions would consist of eighty-five
percent of the first-year commissions,
two percent of renewal commissions, and
trails based on net asset value.
Kolasny admitted at trial that Mr. Much
and he may have discussed vesting during
these initial contract talks, but he does

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not remember any specific conversations.
Vesting of commissions permits an agent
to receive renewal commissions on
policies that the agent instituted even
after the policy owner has terminated the
agent. Mr. Much, in contrast, testified
as to four different conversations that
he had with Kolasny or Evelyn Grant,
another Pacific Mutual employee, in which
he was assured that his commissions would
be vested.
3.
To receive commissions on the PSE
policies, the plaintiffs needed to become
registered representatives of a broker-
dealer that had a PSE selling agreement
in force. According to Mr. Much, Kolasny
told the plaintiffs in May or June 1989
that, if they used MSC as their conduit,
Kolasny and the Chicago office could
participate, be paid, and receive credit
for the deal. Further, the plaintiffs
would be paid a higher rate of commission
if they used MSC. Kolasny did not
disclose in these discussions that he was
a principal with MSC.
The plaintiffs completed the necessary
forms to become registered
representatives of MSC. Mr. Much
testified that "it didn’t make any
difference to us" and that Mr. Marien and
he assumed that what Kolasny told them
regarding the necessity of registering
with MSC was correct. R.91 at 11. Mr.
Much further testified that he viewed the
forms more as a licensing requirement for
NASD than as an agreement with MSC.
Mr. Much also completed a set of MSC
registration materials, signed on June
13, 1989, and received a MSC compliance
manual, which he reviewed.
4.
On July 1, 1989, CICI entered into a
producer contract with Pacific Mutual.
Under its terms, Pacific Mutual agreed to
pay CICI compensation for policies sold
at the rates set forth in the
compensation schedules in effect on the
application date of the policies. The
contract specifically provided that:
Subject to the conditions of this
contract [Pacific] shall pay [CICI] . . .
compensation on policies procured under

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this contract at the rates set forth in
the Compensation Schedules in effect on
the application date of the policies to
which they relate.
. . .
[CICI] shall be solely responsible for
compensating its employees, agents and
brokers by commission or otherwise.
. . .
No oral promises or representations shall
be binding nor shall this contract be
modified except by agreement in writing,
executed on behalf of [Pacific Mutual] by
a duly authorized officer.
R.26, Ex.2 at 1-2. The contract also
contained an integration clause, which
indicated as follows:
This contract supercedes all previous
contracts and agreements between [CICI]
and [Pacific Mutual] made for the
procurement of insurance products.
Id. at 2.
Kolasny testified that the producer
contract applied only to nonvariable life
insurance sales. Although he said that he
would typically inform agents that the
contract applies only to nonvariable
policies, Kolasny could not recall a con
versation where he told Mr. Much and/or
Mr. Marien that the contract did not
apply to variable life insurance, such as
the PSE at issue here.
The compensation schedule in effect at
the time CICI entered into the producer
contract with Pacific Mutual, and at the
time the PSE policies were sold, made no
provision for commissions on PSE policies
but emphasized that the policies could
only be sold by properly registered
representatives. The schedule provided:
V. REGISTERED PRODUCTS
Pacific Mutual reminds Producers that
registered products can only be sold by
properly licensed Registered
Representatives, registered with a NASD
member Broker-Dealer that has a Selling
Agreement in effect. Compensation to the
Producer for registered insurance
products will then be in accordance with

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the compensation agreement and schedules
between the Broker-Dealer and the
Producer currently in effect. Pacific
Mutual has not and can not grant
authority to sell registered products by
Producers that do not have the proper
SEC, NASD, and state insurance licenses.
R.26, Ex. 110 at 6.
Mr. Much and Mr. Marien also entered
into subproducer contracts with CICI on
July 1, 1989, that appointed them agents
of CICI and subproducers of Pacific
Mutual. The plaintiffs had determined
that, for tax purposes, CICI, as opposed
to them individually, should receive the
commissions and pay the business
expenses. Mr. Much testified that Mr.
Marien and he signed the subproducer
agreements because they were told that
the agreements were required to shift the
commissions. They thought the subproducer
agreements were standard operating
procedure when individual producers
desired to assign their commissions to a
corporation.
In November 1989, Mr. Much received a
compensation schedule that covered the
PSE product. Pursuant to that schedule,
Pacific Mutual, in its capacity as PEN’s
paymaster, would make payment directly to
the producer on the condition that the
registered representative was affiliated
with MSC and that the service agreement
among MSC, Pacific Mutual, and PEN
remained in effect. That agreement also
indicated that "nothing in this provision
is to relieve MSC of its overriding
obligation to compensate registered
representatives or is intended to relieve
PEN’s obligation to compensate MSC." R.91
at 14. This compensation schedule was in
effect at the time the plaintiffs
executed the producer contract.
According to Mr. Much, he did not
believe that the various compensation
schedules applied to him because he had
made an agreement with Kolasny that set
up a completely different rate of
compensation. This belief was buttressed
by the fact that the plaintiffs were
always paid at the rates Kolasny quoted.
Beginning in mid-1999, the plaintiffs
sold 206 PSE policies to senior
executives at FCB. Mr. Much testified
that they "had to do just about

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everything" to complete these sales:
arrange for physicals, conduct
interviews, fly to the East and West
coasts regularly for a week at a time,
and keep track of the policy’s delivery.
Id. at 16.
The plaintiffs received their first
commission on the PSE policies in January
1990, described by Mr. Much as "very,
very sizable." Id. at 17. They were paid
by PEN acting as MSC’s paymaster pursuant
to the paymaster agreement. The
plaintiffs continued to receive
commissions and renewal commissions from
the PSE policies from 1989 to 1992.
In March 1992, however, each of the
policyholders under the FCB program
directed that a new registered
representative be appointed to service
their PSE policies. After this change,
MSC no longer paid Mr. Much and Mr.
Marien renewal commissions on the PSE
programs. Pacific Mutual, through PEN,
has continued to pay renewal commissions
to MSC, who instead pays the commissions
to the new registered representatives
servicing the FCB program.
B. District Court Proceedings
1.
The plaintiffs filed a complaint against
Pacific Mutual in December 1994, claiming
that Pacific Mutual was contractually
obligated to pay them renewal commissions
on the FCB policies even though they had
ceased servicing those policies.
Specifically, the plaintiffs argued that
they had a vested right to commissions
enforceable against Pacific Mutual based
upon the CICI producer contract and an
oral agreement with Kolasny pursuant to
which the plaintiffs’ commissions on the
PSE policies were to be vested.
Pacific Mutual, in contrast, argued that
the plaintiffs have no claim against it.
Specifically, (1) the producer contract
did not obligate Pacific Mutual to pay
any commissions for PSE policies; (2)
that contract barred the alleged oral
agreement with Kolasny; (3) CICI was
legally barred from receiving the
commissions; (4) the contracts barred the
plaintiffs’ direct claims against Pacific
Mutual; and (5) the plaintiffs’ remedy
was to sue MSC under their contract with

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MSC.
2.
After a bench trial, the district court
found in favor of the plaintiffs. The
court concluded that Kolasny, acting
under apparent authority from Pacific
Mutual, entered into a contract with the
plaintiffs to pay renewal commissions and
trails on the PSE policies the plaintiffs
sold to FCB.
The court first noted that two possible
contractual bases existed for the
plaintiffs’ claim: Kolasny’s oral
promises and the Pacific Mutual producer
contract. The court accepted Pacific
Mutual’s argument that the producer
contract provided that any oral promises
were superceded and not binding, pointing
to language in part IV of the producer
contract. The court also pointed out,
however, that part III.A.2 of the
contract gave Pacific Mutual the right to
"set the compensation on plans not
included in the Compensation Schedules
which are now or may hereafter be issued
by" Pacific Mutual. R.91 at 23. This
language, the court concluded, permitted
Pacific Mutual to set rates for plans
outside of Pacific Mutual’s compensation
schedules via extracontractual means.
Turning to the extracontractual means at
issue, the district court determined that
Kolasny’s oral dealings with the
plaintiffs formed a contract. The court
found that Kolasny had either actual or
apparent authority to form a contract. It
also found credible Mr. Much’s testimony
that Kolasny and the plaintiffs agreed to
compensation rates, including the vesting
of renewal commissions and trails, when
the contract was made. Thus, the court
concluded, "if the agreement between
Kolasny and Plaintiffs as to compensation
is valid despite its oral nature,
[Pacific Mutual] is liable for breaching
that agreement." Id. at 25.
To assess the validity of the oral
contract, the court analyzed two
contractual clauses in the producer
contract. The first, part III.A.2,
indicated to the court that (1) Pacific
Mutual retained the right to set
compensation in forms other than written
compensation schedules; (2) written
changes were required in only one
circumstance--when Pacific Mutual changed

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(as opposed to set) compensation on a
plan; and (3) no agreement was necessary
to set compensation--in fact, Pacific
Mutual could unilaterally change
compensation with written notice.
The second clause, part IV.1, explained
that no "oral promises or representations
shall be binding nor shall this contract
be modified except by agreement in
writing, executed on behalf of [Pacific
Mutual] by a duly authorized officer."
Id. at 26. The district court noted that
this requirement of a writing conflicted
with part III.A.2 which created an
extracontractual means of setting
compensation. By reserving to Pacific
Mutual the right to set compensation in
ways other than in a written agreement,
the court found, part III.A.2 established
a compensation structure outside the
general parameters of the producer
contract. This structure was, "by its
very terms, not limited to the means of
written agreements to alter the
contractual relationship." Id. Thus, the
court concluded, Pacific Mutual could
(and, in this case, did) use other means
to set compensation, including the oral
Kolasny agreement.
Finally, the district court rejected
Pacific Mutual’s arguments that the
plaintiffs should have sued MSC. There
was no evidence of a contract between the
plaintiffs and MSC under which MSC was
responsible for paying the plaintiffs.
The forms signed by the plaintiffs dealt
only with NASD licensing matters.
Moreover, the court noted that the
payments through MSC were in name only.
MSC never held the commission funds, did
not calculate the commissions, and did
not write the checks. MSC received no
payment for being the broker-dealer. MSC
simply acted as a shell, the court
concluded, to satisfy the formal
requirements of the SEC and NASD.
II
ANALYSIS
A. Standard of Review
Because this case comes to us after a
full bench trial, we review the district
court’s conclusions of law de novo and
its findings of fact for clear error. See
NRC Corp. v. Amoco Oil Co., 205 F.3d

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1007, 1011 (7th Cir. 2000). Federal
jurisdiction is based on diversity of
citizenship; therefore, the substantive
rights of the parties are governed by
state law--in this case, the law of
Illinois. See Erie R.R. Co. v. Tompkins,
304 U.S. 64, 78 (1938); Lexington Ins.
Co. v. Rugg & Knopp, Inc., 165 F.3d 1087,
1090 (7th Cir. 1999). It is our duty to
apply the law that we believe the Supreme
Court of Illinois would apply if the case
were before that tribunal rather than
this court. See Brunswick Leasing Corp.
v. Wis. Cent., Ltd., 136 F.3d 521, 527
(7th Cir. 1998). When the "state supreme
court has not ruled on an issue,
decisions of the state appellate courts
control, unless there are persuasive
indications that the state supreme court
would decide the issue differently."
Lexington, 165 F.3d at 1090.
B. Interpretation of Contract
The parties dispute on appeal what
agreements govern their contractual
relationship and, specifically, the
vesting of commissions. Pacific Mutual
contends that the written producer and
subproducer agreements are the sole
authority, while the plaintiffs argue
that the oral agreement with Kolasny
controls.
We agree with Pacific Mutual that the
written documentation governs the
contractual relationship between the
parties. Our analysis begins "with the
language of the contract itself."
Emergency Med. Care, Inc. v. Marion Mem’l
Hosp., 94 F.3d 1059, 1060-61 (7th Cir.
1996) (interpreting Illinois law). If the
language unambiguously answers the
question at issue, the inquiry is over.
See id. In such a case, the intent of the
parties must be determined solely from
the contract’s plain language, and
extrinsic evidence outside the "four
corners" of the document may not be
considered. See Omnitrus Merging Corp. v.
Ill. Tool Works, Inc., 628 N.E.2d 1165,
1168 (Ill. App. Ct. 1993). Where no
ambiguity exists, construction of the
contract is a question of law. See
Spectramed Inc. v. Gould Inc., 710 N.E.2d
1, 6 (Ill. App. Ct. 1998).
In our view, the producer contract at
issue here is unambiguous. More
precisely, several unambiguous provisions

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in the contract require a ruling in
Pacific Mutual’s favor. First, the
contract contains an integration clause,
which states that "[t]his contract
supercedes all previous contracts and
agreements between [CICI and Pacific
Mutual] made for the procurement of
insurance products." R.26, Ex.2 at 2. The
Illinois Supreme Court has held that when
"parties formally include an integration
clause in their contract, they are
explicitly manifesting their intention to
protect themselves against
misinterpretations which might arise from
extrinsic evidence." Air Safety, Inc. v.
Teachers Realty Corp., 706 N.E.2d 882,
885 (Ill. 1999). An integration clause is
a "clear indication that the parties
desire the contract be interpreted solely
according to the language used in the
final agreement. . . . [The plaintiff]
was free to negotiate a contract omitting
the integration clause. It did not, and
it is bound by its bargain." Id. at 886;
see also Owens v. McDermott, Will &
Emery, 736 N.E.2d 145, 152 (Ill. App. Ct.
2000) (explaining that the presence of an
integration clause is "significant
because it clearly indicates the parties’
desire that the agreement be interpreted
solely according to its own
language")./1
Second, the compensation schedule in
effect at the time CICI entered into the
producer contract with Pacific Mutual,
and at the time the PSE policies were
sold, emphasized that compensation was to
be paid in accordance with the agreement
between the plaintiffs and MSC./2 In
pertinent part, that document states the
following:
Pacific Mutual reminds Producers that
registered products can only be sold by
properly licensed Registered
Representatives, registered with a NASD
member Broker-Dealer that has a Selling
Agreement in effect. Compensation to the
Producer for registered insurance
products will then be in accordance with
the compensation agreement and schedules
between the Broker-Dealer and the
Producer currently in effect. Pacific
Mutual has not and can not grant
authority to sell registered products by
Producers that do not have the proper
SEC, NASD, and state insurance licenses.
R.26, Ex.110 at 6.

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The integration clause states that the
contract is inclusive and that everything
necessary to interpreting it is contained
within that contract and its supporting
documentation (the compensation
schedule). Looking to the compensation
schedule, it provides, as indicated
above, that the plaintiffs’ compensation
is to be in "accordance with the
compensation agreement and schedules
between the Broker-Dealer [MSC] and the
Producer [CICI] currently in effect."
Thus, the contract, which has been
rendered inclusive by the integration
clause, instructs the plaintiffs to look
to their agreement with the broker-
dealer, MSC, for their compensation and
not to their agreement with Pacific
Mutual.
The district court noted that the
contract provides that Pacific Mutual
retained "the right . . . to set the
compensation on plans not included in the
Compensation Schedules which are now or
may hereinafter be issued by [Pacific
Mutual]." R.91 at 23. The court believed
that this language permitted Pacific
Mutual to fix compensation outside the
schedules created by Pacific Mutual and
that Kolasny had the actual or apparent
authority to set compensation in such a
fashion. We find ourselves in respectful
disagreement with the district court on
this issue. Given (1) the explicit
mention in the existing compensation
schedule that compensation for registered
insurance products was to be in
accordance with the compensation
agreement and schedules between the
broker-dealer and the producer "currently
in effect" and (2) the explicit warning
in the same provision that registered
products only can be sold by properly li
censed representatives registered with a
NASD member broker-dealer, the plaintiffs
cannot rely reasonably on the contractual
provision that gives Pacific Mutual
authority to fix compensation schedules
for the plans later issued by Pacific
Mutual. Pacific Mutual simply was not
licensed to sell this sort of plan.
Conclusion
Pacific Mutual is not obligated to pay
the plaintiffs the disputed commissions
on the insurance policies that they
originally sold to the FCB executives.

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Under the unambiguous terms of the
contract, the plaintiffs must look to
their agreement with MSC for the terms of
their compensation. Kolasny’s verbal
commitment on behalf of Pacific Mutual is
not binding on MSC./3
Accordingly, the judgment of the
district court is reversed.
REVERSED
FOOTNOTES
/1 The contract also contains a no-oral-modification
clause, which provides that "[n]o oral promises
or representations shall be binding nor shall
this contract be modified except by agreement in
writing, executed on behalf of [Pacific Mutual]
by a duly authorized officer." R.26, Ex.2 at 2.
Although the terms of a written contract can be
modified by a subsequent oral agreement even
though the contract precludes oral modifications,
see Tadros v. Kuzmak, 660 N.E.2d 162, 170 (Ill.
App. Ct. 1995), the alleged oral agreement in
this case occurred prior to the signing of the
contract.
/2 The contract itself refers the plaintiffs to the
compensation schedule to determine compensation.
The contract states:
Subject to the conditions of this contract,
[Pacific Mutual] shall pay . . . compensation on
policies procured under this contract at the
rates set forth in the Compensation Schedules in
effect on the application date of the policies to
which they relate.
R.26, Ex.2 at 1.
/3 This resolution of the case makes it unnecessary
for us to reach Pacific Mutual’s contention that
recovery is barred by the Statute of Frauds.

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