2009 VT 38


Mann v.  Adventure Quest, Inc. (2007-443)
 
2009 VT 38
 
[Filed 24-Apr-2009]
 
NOTICE:  This opinion is
subject to motions for reargument under V.R.A.P. 40
as well as formal revision before publication in the Vermont Reports. 
Readers are requested to notify the Reporter of Decisions, Vermont Supreme
Court, 109
  State Street, Montpelier, Vermont05609-0801
of any errors in order that corrections may be made before this opinion goes to
press.

 
 

2009 VT 38

 

No. 2007-443

 

Scott Mann and the Estate of
  Nathan LaBrecque


Supreme Court


 


 


 


On Appeal from


     v.


Windsor Superior Court


 


 


 


 


Adventure Quest, Inc., d/b/a The
  Academy at Adventure Quest, and Peter Drutchal,
  a/k/a Peter Kennedy, a/k/a Peter Drutchal-Kennedy


September Term, 2008


 


 


     and
 
Virginia Surety Company, Inc.
 
    v.
 
Adventure Quest, Inc., Peter Drutchal,
  Scott Mann, and the
Estate of Nathan LaBrecque
 


 


Theresa
  S. DiMauro, J.


 

Charles L. Powell, White River
Junction, for Plaintiff-Appellant Mann.
 
Frank H. Olmstead of DesMeules,
Olmsted & Ostler, Norwich, for Plaintiff-Appellant 
  Estate of LaBrecque.
 
Samuel Hoar, Jr. of Dinse, Knapp
& McAndrew, P.C., Burlington, for Plaintiff/Intervenor-
  Appellee.
 
 
PRESENT:  Reiber, C.J.,
Dooley, Johnson, Skoglund and Burgess, JJ.
 
 
¶ 1.            
DOOLEY, J.  Plaintiffs Scott Mann and the Estate of Nathan LaBrecque appeal from the Windsor Superior Court’s grant of
summary judgment to intervenor-insurer Virginia
Surety Company, determining that insurer would not owe indemnification to
Adventure Quest should it be found liable to plaintiffs for sexual abuse they
experienced while attending Adventure Quest’s school.  On appeal,
plaintiffs argue that insurer was not entitled to summary judgment because the
superior court should not have imputed knowledge of the sexual abuse to
Adventure Quest and because a material fact remained in dispute.  We agree
that a material fact remains in dispute and reverse and remand. 
¶ 2.            
This suit arises out of the conduct of Peter Drutchal,
the executive director of Adventure Quest.  It is undisputed that he
sexually abused both plaintiffs when they were minors and attended Adventure
Quest.  Plaintiffs sued Adventure Quest for negligence and breach of
fiduciary duty.[1] 

¶ 3.            
The superior court determined that the following facts are
undisputed.  Drutchal founded Adventure Quest in
approximately 1989.  At its inception, Adventure Quest’s purpose was to be
an outdoor summertime leadership camp for youth.  In 1996, it became a
school.  At some point in the 1990’s, Drutchal
and his wife incorporated Adventure Quest as a nonprofit corporation. 
During the relevant period for this litigation, wife was the president and
treasurer.  Drutchal was initially the secretary
and was a board member.  Others joined the board, and at some point, Drutchal left the board.  Until the fall of 1998,
Adventure Quest’s office was located in, and the corporate records were kept
at, Drutchal’s residence.  
¶ 4.            
  At all relevant times, Drutchal
was the executive director of Adventure Quest and the only full-time,
year-round employee.  During the summers, Adventure Quest had additional
part-time employees, who reported to Drutchal.
  
¶ 5.            
Adventure Quest had liability coverage with insurer for the relevant
time.  For the period June 12, 1994 to June 12, 1996, the policy included
a “sexual abuse endorsement” that provided coverage for sexual abuse
claims.  This endorsement had an exclusion from the policy’s general
provisions as to who was insured.  This exclusion provided:
 
Section II – WHO IS AN INSURED shall not include any person or entity that
personally participated in committing any sexual abuse, sexual molestation,
sexual exploitation, or sexual injury, or who failed to take action to prevent
recurrence after having personal knowledge of any sexual abuse, sexual
molestation, sexual exploitation, or sexual injury.  
In the spring of 1994, Drutchal completed Adventure Quest’s application materials
for the insurance policy.  He answered “no” in response to the question
“[h]ave you ever had an incident which resulted in an
allegation of sexual abuse?” 
¶ 6.            
Drutchal’s sexual abuse of plaintiffs began
before, and continued during and after the insurance policy periods at issue
here.  For a period of years, Drutchal and
plaintiffs kept the abuse secret from others; it did not come to light until
approximately 2001.  Drutchal’s sexual abuse
occurred in the course of school activities, while Drutchal
was acting in his capacity as coach and chaperone.  Drutchal’s
acts of sexual abuse were for his own purposes; the abuse was not done within
the scope of his duties or authority as executive director, nor was it done in
the best interests of Adventure Quest.     
¶ 7.            
Insurer intervened in the case and sought a declaration that it was not
required to indemnify Adventure Quest for any judgment obtained against it by
plaintiffs.  Insurer moved for summary judgment arguing that: (1) the
terms of the exclusion disqualified Adventure Quest from coverage because it
“personally participated” in committing the sexual abuse and it “failed to take
action to prevent recurrence after having personal knowledge” of the abuse; and
(2) even if it was insured under the endorsement, Adventure Quest made
knowingly false statements in its policy application materials that preclude
coverage.[2]
 Plaintiffs also moved for summary judgment, seeking a declaration that
Adventure Quest is covered by the policy and insurer owes Adventure Quest a
duty of indemnification in the event it is found liable to plaintiffs.  
¶ 8.            
The superior court concluded that Adventure Quest is not disqualified
from coverage on the ground that it personally participated in the abuse. 
However, the court granted summary judgment to insurer because Drutchal’s knowledge of his own misconduct must be imputed
to Adventure Quest, so that it can be said to have had “personal knowledge” of
the abuse and to have “failed to take any action to prevent recurrence,”
thereby precluding coverage under the exclusion quoted above.  In reaching
this conclusion, the court applied the “sole representative” doctrine.  
¶ 9.            
On appeal, plaintiffs argue that the superior court erred because: (1)
the sole-representative doctrine is not the law in Vermont; (2) even if the
sole-representative doctrine is the law in Vermont, the doctrine is
inapplicable in this case because it does not apply to information obtained
outside the course and scope of an employee’s duties; and (3) even if the
sole-representative doctrine is the law in Vermont and does apply to
information obtained outside the course and scope of an employee’s duties,
summary judgment is not appropriate because there is a genuine issue of
material fact—whether Drutchal was in fact Adventure
Quest’s sole representative.  Insurer argues that the sole-representative
doctrine is applicable and was correctly applied in this case.  In the
alternative, insurer argues that summary judgment is appropriate because for
plaintiffs to have a cause of action, Adventure Quest must have known of the
abuse, and if Adventure Quest knew of the abuse, there would be no insurance
coverage.    
¶ 10.        
We review summary judgment decisions de novo, applying the same standard
of review as that applied by the trial court.  Peerless Ins. Co. v.
Frederick, 2004 VT 126, ¶ 10, 177 Vt.
441, 869 A.2d 112.  Summary judgment is appropriate where there is no
genuine issue of material fact and the moving party is entitled to judgment as
a matter of law.  Id.
 In applying this standard, we give the nonmoving party the benefit of all
reasonable doubts and inferences.  Id.
¶ 11.        
The parties and the superior court have looked at this case as one
determined by agency law, with the decision turning on whether Drutchal’s knowledge that he was sexually abusing
plaintiffs should be imputed to Adventure Quest.  Under agency law, the
starting point is the general rule that any notice or knowledge received by an
officer or agent authorized to receive the same is imputed to the corporation
itself.  McGann v. Capital Sav. Bank & Trust, 117 Vt. 179, 183, 89 A.2d 123,
126 (1952); see also Roberts v. W. H. Hughes Co., 86 Vt. 76, 87, 83 A.
807, 812 (1912) (holding that notice to the president was notice to the
corporation); accord Porter v. Bank of Rutland, 19 Vt. 410, 425 (1847), disapproved
on other grounds, O’Brien v. Holden, 104 Vt. 338, 349, 160 A. 192,
196 (1932).  We have also recognized an exception to the rule—notice or
knowledge received by the agent outside the scope of the agent’s authority is
not imputed to the principal.  Estate of Sawyer v. Crowell, 151 Vt. 287, 292, 559 A.2d
687, 691 (1989).  At least in a case like this, these rules are consistent
with those of the Restatement (Third) of Agency § 5.02(1) (2006) (notice to an
agent is notice to a principal if “the agent has actual or apparent authority
to receive the notification”).[3]
¶ 12.        
The exception for information received outside of the scope of the
agent’s authority is often stated in terms of the adversity of the agent’s
interest.  When an agent’s interests in the subject matter are so adverse
as to practically destroy the agency relationship, there is no imputation of
knowledge to the principal.  This is the adverse-interest exception. 
3 W. Fletcher, Fletcher Cyclopedia of the Law of Private Corporations §
819, at 104-08 (2002); see Restatement (Third) of Agency § 5.04 (notice is not
imputed “if the agent acts adversely to the principal in a transaction or
matter, intending to act solely for the agent’s own purposes or those of
another person”).  Whether viewed in relation to the scope of authority or
the adversity of interests, these exceptions are generally the same because of
the agent’s duty of loyalty to the principal.  An agent breaches a duty of
loyalty if the agent uses the agency “for the benefit of the agent
himself.”  John A. Westlund, Inc. v. O’Bryan
Constr. Co., 123 Vt. 301, 308, 187 A.2d 507, 513 (1963); see also In re
Estate of Kurrelmeyer, 2006 VT 19, ¶ 17, 179 Vt.
359, 895 A.2d 207 (agent’s duty of loyalty prohibits agent from using agency
for own benefit).  The agent must “subordinate the agent’s interests to
those of the principal and place the principal’s interests first as to matters
connected with the agency relationship.”  Restatement (Third) of Agency §
8.01 cmt. b.  
¶ 13.        
It is clear that Drutchal acted inconsistently
with his duty of loyalty to Adventure Quest in this case.  The sexual
assaults on a customer of Adventure Quest, if discovered, could destroy
Adventure Quest’s ability to function.  We think it is also clear that Drutchal acted adversely to Adventure Quest even though his
intent was not to injure Adventure Quest, but instead to satisfy his own sexual
desires.  See id. § 5.04 cmt. c. (noting
that in many cases, the determination of whether the agent acted adversely can
be made based on the motive of the agent); Restatement (Second) of Agency §
282(1) (1959) (principal is not bound by knowledge of the agent if “the agent
secretly is acting adversely to the principal and entirely for his own or
another’s purposes”).   
¶ 14.        
A number of jurisdictions have recognized an exception to the adverse
interest exception: when an adverse agent is the sole representative of the
principal, the principal may once again be charged with the agent’s
knowledge.  This is the sole-representative doctrine.  Fletcher, supra
§ 827, at 139.  Although Adventure Quest urges that we not adopt this
doctrine, we can find no jurisdiction that has refused to adopt it, at least in
modern times.  See generally Annotation, Sole Actor Doctrine where
Officer or Agent of Corporation Acting Adversely to Its Sole Representative in
the Transaction, 111 A.L.R. 665 (1937 and Supp. 2009) (noting that the
“exception has been frequently applied” and that a “great weight of authority
supports the . . . doctrine”).  The commonly stated rationale for the rule
is that with respect to a sole representative “there is no one to whom to
impart his or her knowledge and no one from whom he or she may conceal
it.”  Fletcher, supra § 827.10, at 143.  In general, this is
another way of stating that the agent is de facto the principal.  See Official
Comm. of the Unsecured Creditors of Color Tile, Inc. v. Coopers & Lybrand,
LLP, 322 F.3d 147, 165 (2d Cir. 2003) (when agent is the sole representative,
“principal and agent are one and the same”).  We adopt the
sole-representative doctrine as applied in the following discussion.
¶ 15.        
The sole-representative doctrine is typically applied in two different
scenarios. See Fletcher, supra § 827; First Nat’l Bank of Cicero v. Lewco Sec. Corp., 860 F.2d 1407, 1418 (7th Cir.
1988).  First, it is applied when an agent controls and dominates the
corporation.  See Grassmueck v. Am.
Shorthorn Ass’n, 402 F.3d 833, 841 (8th Cir.
2005) (“The central inquiry in the sole actor context is whether the agent
committing fraud is also the principal that should have been informed.”); Official
Comm. of the Unsecured Creditors of Color Tile, Inc., 322 F.3d at 165
(applying sole-representative doctrine to impute knowledge from members of the
board of directors to the corporation because the “principal and agent are one
and the same” as these persons dominated and controlled the corporation); Phoenix
Sav. & Loan, Inc., v. AetnaCas. &  Sur. Co., 381 F.2d 245, 250 (4th
Cir. 1967) (stating that corporate officers’ knowledge could be imputed to the
corporation only if the undisputed facts showed the officers actually
controlled the corporation); Waslow v.
Grant Thornton L.L.P. (In re Jack Greenberg, Inc.), 212 B.R. 76, 87 (Bankr. E.D. Pa. 1997) (refusing to apply
sole-representative doctrine where court could not conclude that the
vice-president and significant shareholder was the sole actor because there was
no allegation that he was the sole shareholder, or that he dominated or
controlled the corporation); FDIC v. Nat’l Surety Corp., 281 N.W.2d 816,
821 (Iowa 1979) (refusing to apply sole-representative doctrine when the court
found “no basis for holding that the board of directors of the bank abdicated
its responsibility to [the bank president] or that it was entirely subject to
his control”); Demoulas v. Demoulas, 703 N.E.2d 1149, 1171-72 (Mass. 1998)
(imputing knowledge of agent who had 100% control of the corporation as the
sole voting trustee); see also Tolz v. Proskauer Rose, LLP (In re Fuzion
Techs. Group, Inc.), 332 B.R. 225, 239 (Bankr.
S.D. Fla. 2005) (prohibiting imputation under the sole-representative doctrine
“if there was at least one honest officer, director, shareholder, or other
insider who would have taken appropriate action to rectify the
wrongdoing”).  This is the application that is consistent with the
rationale stated above.
¶ 16.        
In this case, the relevant evidence is very sparse, consisting of Drutchal’s deposition and affidavits from persons who were
members of Adventure Quest’s board of directors.  The deposition indicates
that when Adventure Quest was formed as a corporation, there were no members
and Drutchal and his wife were the only directors and
officers, with wife serving as president.  Around the period for which
insurer provided the sexual abuse coverage, the board was expanded and Drutchal left the board.  Although as executive
director Drutchal had no supervisor, under Vermont law, all
corporate powers of a nonprofit corporation are exercised “by or under the
authority of . . . its board [of directors]” and “the affairs of the
corporation [are] managed under the direction” of the board.  11B V.S.A.
§ 8.01(b).[4] 
Drutchal acknowledged that once there was a full
board of directors, “the executive director falls under the board of
directors.”  One affiant indicated that he served on the board from 1994
or 1995 and that the board “dealt with a broad range of issues including fund
raising, admissions, the school, and teachers.”  That affiant said that Drutchal was not a member of the board and that there were
issues for which Drutchal excused himself from board
meetings.  Another affiant indicated he was a member of the board when
“the [b]oard first began taking an active role in
1993 or 1994.”  
¶ 17.        
Insurer bore the burden of showing that the claim against it was
excluded by the policy language.  Agency of Natural Res. v. United
States Fire Ins. Co., 173 Vt.
302, 308, 796 A.2d 476, 480 (2001).  We cannot, however, determine from
this record whether Drutchal controlled and dominated
Adventure Quest.  There are clearly disputed questions of material fact
that prevent the grant of summary judgment.  Although we agree with
insurer that the question of whether Drutchal was the
sole representative of Adventure Quest cannot be determined solely from the
official roles and responsibilities of the actors in the corporation, these
official roles and responsibilities are relevant, and we have virtually no
evidence of the actual governance of Adventure Quest.  The superior court
erred in granting summary judgment to insurer.
¶ 18.        
There is another consideration that supports our conclusion.  The
insurance policy exclusion insurer seeks to apply is invoked only if Adventure
Quest has “personal knowledge of any sexual abuse, sexual molestation, sexual
exploitation, or sexual injury.”  Although we generally view this case as
turning on agency principles, the policy language does not necessarily adopt
these principles.  Thus, insurer argues that “personal knowledge” means
imputed knowledge under agency law, but the use of the word “personal” suggests
a more rigorous standard.  Our duty is to construe the policy as it is written
and not to rewrite it using language we can more easily construe.  See City
of Burlington v. Associated Elec. & Gas Ins. Servs.,
164 Vt. 218, 222, 669 A.2d 1181, 1183 (1995).  
¶ 19.        
The Restatement (Third) of Agency § 5.03 comment (d)(7) addresses the
situation where the substantive law requires personal knowledge to impose
liability, and suggests that we look to the criminal law to define the personal
knowledge that is sufficient to convict a corporation based on the conduct of
its stockholders, directors, officers, or managers.  Although we have not
defined the criminal liability of a corporation for such acts, our decisions on
civil liability suggest a very narrow responsibility.  Thus, in Doe v.
Newberry Bible Church, 2007 VT 72, ¶ 13, 182 Vt. 174, 933 A.2d 196, we held
that a nonprofit corporation which runs a church cannot be liable for the
pastor’s sexual assaults on children attending the church and its school.
 The church situation is similar to that present here, at least on the
current state of the record.  If we imputed the knowledge of the pastor to
the church in such an instance, we would be again opening the door to liability
because the church did not act to prevent the assaults.  Thus, for
consistency in our law, and in implementing the sole-representative standard,
it is important that we not broadly allow imputation of knowledge of misconduct
through a sole-representative doctrine.  We view the very limited language
regarding the requisite knowledge in the insurance policy at issue here as
addressing that concern.  
¶ 20.        
As an alternative to justify the grant of summary judgment, insurer
argues that we must apply the second form of the sole-representative
doctrine—that is, when one person acts as the only agent representing the
principal’s interest in a particular transaction.  See, e.g., Curtis,
Collins & Holbrook Co. v. United States, 262 U.S. 215, 222 (1923).  In
fact, the superior court may have applied this form of the doctrine, as it
noted that Drutchal was Adventure Quest’s “sole
representative for many of its activities, including (1) supervising children
and (2) obtaining insurance.”  The court found that the events in this
case involved supervision of children and purchase of insurance to cover
liability for improper sexual activity with children; thus, the court concluded
“it is only fair to charge Adventure Quest with the knowledge that Peter Drutchal had about his own misconduct with the children, at
least as of the time when he purchased insurance coverage for the
organization.”  The argument, then, is that Drutchal
does not have to control or dominate Adventure Quest as to all its affairs, but
only with respect to the “transaction” involved in the case.  We assume
that we would accept this form of the sole-representative doctrine in the
appropriate case.  This is not an appropriate case.  
¶ 21.        
As the United States Supreme Court noted in Curtis, Collins &
Holbrook Co., “if the company insists on retaining the fruits of that
adventure, it must be charged with the knowledge of the agent through whom the
fruits came.”  Id.
at 224.  The superior court in this case recognized this rationale for the
doctrine, stating that “[i]t is fair to charge a
principal with the knowledge of its agent, if the principal seeks to retain a
benefit that the agent has procured for the principal.”  As one
commentator noted, “the rule merely applies principles of estoppel,
ratification or restitution in cases involving claims to property.”  M.
Dore, Presumed Innocent? Financial Institutions, Professional Malpractice
Claims, and Defenses Based on Management Misconduct, 1995 Colum. Bus. L.
Rev. 127, 165 (1995). The Supreme Judicial Court of Massachusetts summarized
that “where one undertakes to profit by the act of another as agent, he must
adopt that act as a whole and take the bitter with the sweet.  One cannot
take the gains of a fraud without also bearing its burdens.”  Tremont
Trust Co. v. Noyes, 141 N.E. 93, 98 (Mass.
1923).
¶ 22.        
It appears that the superior court used the transaction form of the
sole-representative doctrine with the understanding that the relevant
transaction was the purchase of insurance for Adventure Quest.  At the
same time, the court held that it was not clear that Drutchal
made any material misstatements in the insurance policy application because no
allegations of sexual abuse had resulted from his sexual misconduct. 
Thus, the superior court concluded, there was no fraud on insurer, and Drutchal’s misconduct arose with respect to his supervision
of children, and not his purchase of insurance.  However, the insurance
purchase could have been done by anyone affiliated with Adventure Quest, and
the application would have had the same content whoever prepared it.  In
this case, Adventure Quest is not taking the benefit of a fraud and refusing to
accept its burdens.  Indeed, the “transaction” here, if that word is
applicable, is the contractual relationship between Adventure Quest and
plaintiffs for their enrollment in the school.  The second form of the
sole-representative doctrine does not apply here; the superior court erred in
relying upon it.
¶ 23.        
Finally, in the nature of a cross-appeal, the insurer has urged us to
affirm the grant of summary judgment on a theory not adopted by the superior
court—that plaintiffs can prevail against Adventure Quest in their suit only if
they can show that Adventure Quest actually knew of Drutchal’s
abuse and failed to take action to prevent it.  As a result, insurer
argues that irrespective of imputation, plaintiffs must show Adventure Quest’s
knowledge and knowledge necessarily brings into play the policy exclusion
language discussed above.
¶ 24.        
We reject this argument.  To prevail on a negligence or breach of
fiduciary duty claim, plaintiffs must prove that Adventure Quest knew or should
have known of the abuse.  See Restatement (Second) of Tort §§ 308, 320
(1965) (providing that negligence results only when actor “knows or should
know” of risk).[5] 
Actual knowledge of a particular risk is not a required element.  See Thompson
v. Green Mountain Power Corp., 120 Vt. 478, 483, 144 A.2d 786, 789 (1958)
(“Knowledge essential to the invocation of legal duty need not be actual; it
may be implied, imputed and constructed from the circumstances.”).  
¶ 25.        
As we discussed above, there is no coverage under the insurance policy
if Adventure Quest had “personal knowledge” of the abuse.  See Agency
of Natural Res. 173 Vt.
at 308, 796 A.2d at 480 (policy must be construed according to its terms and
the intent as expressed in the policy language).  Under any ordinary
meaning of the language, the “should have known” threshold for imposing
liability is not the same as “personal knowledge.”  See, e.g., Nemmers v. United States, 795 F.2d 628, 631
(7th Cir. 1986) (defining personal knowledge as actual knowledge and
distinguishing personal knowledge from what should have been known); see also
Black’s Law Dictionary 888 (8th ed. 2004) (defining personal knowledge as
“knowledge gained through first hand observation or experience, as
distinguished from a belief based on what someone else has said”).  Thus,
plaintiffs can pursue a claim against Adventure Quest that does not require
personal knowledge and that insurer would be required to indemnify.  We
reject insurer’s alternative ground for affirming the trial court’s summary
judgment. 
           
Reversed and remanded.
 
 

 


 


FOR THE COURT:


 


 


 


 


 


 


 


 


 


 


 


Associate
  Justice

 





[1]  Plaintiffs also sued Drutchal.  However, the insurance coverage dispute
discussed in this opinion relates only to Adventure Quest.  


[2] 
The superior court also granted insurer’s motion for summary judgment with
respect to coverage for Drutchal’s personal
liability.  Plaintiffs do not appeal the superior court’s determination
that Drutchal is not an insured under the
policy.  


[3] 
We have not explicitly adopted provisions of the Restatement (Third) of Agency
in any prior case.  In this case, we have cited it because it is the
latest statement on some of the issues before us.  In fact, it would make
no difference in this case if we referenced Restatement (Second) of Agency,
which we have followed in numerous cases in the past.  See Doe v.
Forrest, 2004 VT 37, ¶ 21, 176 Vt. 476,
853 A.2d 48 (“We have routinely adopted provisions of the Restatement (Second) of
Agency as reflecting the common law of Vermont.”).


[4] 
The current nonprofit corporation law was effective January 1, 1997 and applies
to all preexisting corporations.  See 11B V.S.A. § 17.01.  The
provisions of the prior law, adopted in 1971, are similar.  See 1971, No.
237 (Adj. Sess.), § 17 (“The affairs of a corporation shall be managed by a
board of directors.”).


[5] 
Insurer asserts that plaintiffs’ causes of action can only be maintained under
the cited Restatement sections.  We cite to these sections only to
demonstrate the error of insurer’s argument and not to express any opinion on
the proper characterization of plaintiffs’ claims.  



