FOP Vicariously Liable for Former President's Fraud

In July 1992, Jonathan J. Felix entered into a pre-incorporation and shareholders’ agreement with Michael J. Borkowski, a licensed insurance agent who owned MBI Financial Services. The two formed a jointly owned entity called the Felbor Corp.

One year earlier, Borkowski had signed a contract with Shaw that gave MBI the designation of “exclusive agent authorized to sell insurance to FOP members.” When Borkowski created Felbor, he agreed to assign all “rights, interest and benefits” of the exclusive marketing agreement with the FOP to Felbor.

Agreeing to the venture with knowledge of the FOP arrangement coming to Felbor, Felix contributed $175,000 to Felbor in July 1992.

But by October of that year, the FOP terminated the MBI-FOP agreement that Felbor now owned. The FOP pulled out of the agreement due to Borkowski’s failure to pay rent to the FOP for its offices, failure to pay postage and failure to pay a solicitation fee of $5 per member, the opinion said.

But perhaps most disturbing, the FOP knew about Borkowski’s defaults prior to signing the July 14, 1992, agreement, said Narick.

“These findings of fact are supported by the testimony of Felix, who testified that Shaw admitted [the reasons for terminating the agreement] in a meeting after Felix received the termination letter.”

Narick said that besides Shaw, there was “substantial evidence” that at least two members of the FOP executive board – Anthony LaSalle and Charles Gabrick – were aware of Borkowski’s unanswered debts when Shaw signed the initial consent. The evidence, Narick said, “include[d] a letter that was sent to those individuals on April 14, 1992,” – a full three months before Shaw signed the exclusive agreement on behalf of the FOP.

“Felix made his … investment of $122,000 in Felbor in reliance on the representation by the FOP that there were no known defaults in the MBI-FOP agreement,” said Narick. “Prior to [Shaw's] signing the consent, the FOP knew that rent was outstanding and that Borkowski was in default.”

In December 1993, Felix sued Borkowski for fraudulent misrepresentation and won a judgment of $122,000, of which he has only recovered $1,000, Narick said.

But in the current suit, Felix blamed the FOP. Felix alleged the organization “intentionally and fraudulently misrepresented facts, which induced Felix to do business with Borkowski.

Fraud Claim

Both the FOP and Shaw argued on appeal that there was insufficient evidence presented at trial to substantiate a claim of “intentional and fraudulent misrepresentation.” The FOP argued in the alternative that it shouldn’t be held responsible for the actions of a former president. Narick found both arguments unpersuasive.

The elements necessary to prove an action for fraud are as follows, Narick said:

* A misrepresentation must occur.

* The misrepresentation, if made innocently, must relate to a matter material to the transaction. If the misrepresentation is made knowingly, a showing of materiality is not required.

* The maker of the representation must intend that the recipient will thereby be induced to act.

* The recipient must justifiably rely upon the misrepresentations.

* The recipient must suffer damages as the proximate result of the misrepresentation.

The FOP and Shaw challenged all four required elements.

There was “substantial evidence” LaSalle and Gabrick were informed in April 1992 Borkowski’s delinquent payments, Narick said. Also, evidence of the consent signed in July of the same year showed a misrepresentation occurred.

Further, “the trial court found the misrepresentation in the consent was both material and knowingly made. Felix testified that he would not have invested his money in Felbor if the consent was not signed [by Shaw and others] or if he knew MBI was in default in the MBI-FOP agreement. Thus, there is substantial support that the misrepresentation was material.”

Narick said there was “substantial evidence to support that the FOP intended to induce Felix to invest his money in MBI,” because the trial court found the FOP would benefit from Felix’s investment – to the tune of a $5-per-month user fee for each name solicited by MBI. Under the deal, the FOP would potentially receive as much as $40,000 per month if MBI solicited just half the total number of its members, according to excerpts of Felix’s testimony.

Narick said Felix was justified in relying on Shaw’s representation of Borkowski, since “individuals invested with [the titles of FOP president and recording secretary] have apparent authority to act for the entity which they serve.

“There is substantial evidence in the record that Felix relied on the apparent authority of Shaw and McCormick in good faith,” he said.

Narick said Felix established damage “as a proximate result of the misrepresentation” when he testified that, “but for the consent, he would not have invested $122,000 to form Felbor.” Since the “essence” of Felbor was to sell insurance to FOP members, when the MBI-FOP agreement was terminated Felbor became obsolete, Narick said.

“As a result, Felix lost his $122,000 investment and only recovered $1,000 from Borkowski. Thus, Felix’s damage as a proximate result of the misrepresentation is $121,000.”

Equal Blame