The defendant, Lequire, was a treasurer of the Patriot Insurance Agency. With Lequire’s help the owner of that agency, Rick Renzi, formed the Spirit Insurance Company. Pursuant to the Agreement, Patriot collected insurance premium payments from policyholders insured by Spirit and made monthly payments to Spirit.
Patriot routinely failed to pay the premiums over to Spirit on a timely basis. Instead, Lequire, over a two-year period, transferred the premium funds to Renzi’s personal account. The Latter used the transferred funds to pay for personal expenditures. In all, Lequire transferred over $750,000 to him at a time when Patriot had less in its bank accounts than it owed Spirit.
The US Court of Appeals reversed the judgment of the district court and remanded the case for an entry of a judgment of acquittal on all counts.
Although a trustee is always a fiduciary, a fiduciary is not always a trustee. No trust relationship exists under Arizona law, when an insurance agent is allowed by contract to commingle funds in a single account and has the duty to pay over premiums to the insurance company regardless of whether the premiums have actually been collected, as a matter of law. It is a debtor-creditor relationship.
Unless there are previous decisions or legislative enactments Arizona courts generally follow the Restatement (Third) of Trusts § 5k which defines the relationship as a debt rather than a trust if interest is due on unremitted amounts.
Whether there existed a fiduciary relationship of trust between an insurance company and an insurance agency.
In the course of evaluation of the case on merits the US Court of Appeals reviewed the decision of the Arizona Supreme Court who extensively referred to the Chicago Fire decision. The appellate court admitted the rule of the authority that as a matter of law there is no trust when the insurance agent is obligated to pay the premiums which are commingled, regardless of how much was collected. Therefore, it denied the disputed acts to be considered embezzlement.
“It is true that money can be converted despite commingling if the funds can be identified, segregated, and an obligation to treat it in a specific manner can be established. However, the key to the Chicago Fire decision was the confluence of both the right to commingle and the debtor’s obligation to the creditor regardless of whether premiums had been collected. It was the combination of these two factors that destroys any idea of a trust”.
Thus, the appellate court concluded that “under long-standing Arizona law, the contract between the agency and the company, which permitted agency commingling, required monthly agency payments whether premiums were collected or not, and created a right to interest on late payments, created a creditor-debtor relationship, not a trust”.