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Ario v. American Patriot Insurance Agency

September 7, 2007

JOEL ARIO,*FN1 ACTING INSURANCE COMMISSIONER FOR THE COMMONWEALTH OF PENNSYLVANIA, ACTING IN HIS OFFICIAL CAPACITY AS STATUTORY LIQUIDATOR OF LEGION INSURANCE COMPANY AND VILLANOVA INSURANCE COMPANY, PLAINTIFF,
v.
AMERICAN PATRIOT INSURANCE AGENCY, INC., A WISCONSIN CORPORATION, AND LYSA JO SARAN, AN INDIVIDUAL, DEFENDANTS.



The opinion of the court was delivered by: James F. Holderman, Chief Judge

MEMORANDUM OPINION AND ORDER

On August 22, 2005, in the early stages of this litigation, this court denied Plaintiff's Motion to Strike Certain Affirmative Defenses (Dkt. No. 17), in part because the parties had not had an adequate opportunity to develop the evidentiary record. (See 8/22/05 Order, Dkt. No. 51 at 2). Now pending before the court, after a substantial period for discovery, is Plaintiff's Motion for Summary Judgment on Defendants' Affirmative Defenses. (Dkt. No. 159). For the reasons set forth in detail below, Plaintiff's Motion for Summary Judgment is granted in part and denied in part. Summary judgment is granted in favor of the Plaintiff on Defendants' Fourth Affirmative Defense (Offset) and Ninth Affirmative Defense (Rescission). Summary Judgment is denied on Defendants' Second Affirmative Defense (Unclean Hands), Seventh Affirmative Defense (Estoppel - Fraud), Eighth Affirmative Defense (Estoppel - Negligent Misrepresentation), and Tenth Affirmative Defense (Estoppel - 2000 Program Year), as well as Defendants' Third Affirmative Defense (Failure to Comply with Contractual Obligations).

BACKGROUND

Plaintiff Joel Ario, Acting Insurance Commissioner for the Commonwealth of Pennsylvania, brings this lawsuit in his official capacity as the Statutory Liquidator ("Liquidator") for Legion Insurance Company and Villanova Insurance Company (collectively "Legion") to recover premiums allegedly owed by defendant American Patriot Insurance Agency, Inc. ("American Patriot")*fn2 under a Limited Agency Agreement in effect from 1997 to 2001. See generally Article V of the Pennsylvania Insurance Department Act of 1921, 40 Pa. Stat. §§ 221.1-221.63.

Under the Limited Agency Agreement, American Patriot sold Legion workers' compensation insurance policies and collected premiums on Legion's behalf in exchange for a commission based on a percentage of the premiums collected. The Limited Agency Agreement was part of the Roofers' Advantage Program (the "Program") offered through Legion and its affiliates. In addition to the Limited Agency Agreement, the Program consisted of a number of different contracts between various affiliated companies and individuals.

For example, the Third Party Administrator Agreement was a contract between Legion and Cunningham-Lindsey Claims Management, Inc. ("Cunningham-Lindsey"), under which Cunningham-Lindsey handled and paid claims on behalf of Legion. Another company, Mutual Indemnity (Bermuda), Ltd. ("Mutual Indemnity"), acted as reinsurer of the Program. The relationship between Legion and Mutual Indemnity was governed by a contract known as the Reinsurance Treaty. Additionally, as part of the initial set-up of the Program in 1997, a Shareholder Agreement was signed between Mutual Holdings (Bermuda), Ltd. ("Mutual Holdings") and the "shareholder" party.*fn3 Pursuant to the Shareholder Agreement, the shareholder was obligated to indemnify Mutual Indemnity for certain losses on the Program, but the shareholder also obtained a right to certain underwriting dividends if the Program was profitable. An April 20, 2000 Letter Agreement (also known as the Aggregate Stop Loss Buyout Agreement) allegedly capped the shareholder's liability under the Shareholder Agreement. Marketing services for the Program were provided by Commonwealth Risk Services, L.P. ("Commonwealth Risk"), which provided American Patriot with a Program Proposal for each upcoming Program year. Finally, Mutual Risk Management, Ltd. ("Mutual Risk") was the parent company of Commonwealth Risk, Legion Insurance Company, Villanova Insurance Company, and Mutual Indemnity.

In their respective Answers, defendants Lysa Saran ("Saran") and American Patriot (collectively "Defendants") have set forth numerous affirmative defenses that they allege preclude enforcement of the Limited Agency Agreement. (See Dkt. No. 10, Dkt. No. 54). In Plaintiff's Motion for Summary Judgment currently before the court, the Liquidator asserts that seven of these affirmative defenses*fn4 "cannot be legally valid defenses in this action regardless of any other facts or disputes in this case." (Dkt. No. 161 at 4).

LEGAL STANDARD

Pursuant to Rule 56(c) of the Federal Rules of Civil Procedure, summary judgment is proper "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show 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). When ruling on a motion for summary judgment, the court must view all evidence in the light most favorable to the non-moving party. Abdullahi v. City of Madison, 423 F.3d 763, 773 (7th Cir. 2005) (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986)). The court does not make credibility determinations or weigh conflicting evidence. Abdullahi, 423 F.3d at 773. However, summary judgment must be granted in favor of the moving party if there are no genuine issues as to any material fact, such that the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c); see also Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986).*fn5

CHOICE OF LAW

The court's subject matter jurisdiction over this lawsuit is based upon the diversity of the parties' citizenship and the amount in controversy under 28 U.S.C. § 1332. The Liquidator's claims are all based upon state law. Generally, where the parties have not identified a conflict of law affecting the issues of the case, a court sitting in diversity will apply the substantive law of the forum state. Sphere Drake Ins. Ltd. v. Am. Gen. Life Ins. Co., 376 F.3d 664, 671 (7th Cir. 2004). In this case, while the parties disagree whether Illinois or Pennsylvania law governs certain issues, the parties have not identified any conflict of law that is relevant to the court's final analysis of the Liquidator's Motion for Summary Judgment. The court therefore applies Illinois law in the analysis that follows.

When applying state law, a federal court "must apply the law of the state as it believes the highest court of the state would apply it if the issue were presently before that tribunal." State Farm Mut. Auto. Ins. Co. v. Pate, 275 F.3d 666, 669 (7th Cir. 2001) (citing Erie R.R. v. Tompkins, 304 U.S. 64 (1938)). If "the highest court in the state has not spoken" on a question of law, the federal court looks to decisions of the intermediate appellate courts in that state for persuasive guidance in predicting how the state's highest court would decide a question of law. Abstract & Title Guar. Co., Inc. v. Chicago Ins. Co., 489 F.3d 808, 811 (7th Cir. 2007).

ANALYSIS

For the most part, the Liquidator's argument in support of his Motion for Summary Judgment on Defendants' Affirmative Defenses centers on the question of whether Defendants are entitled to the remedies Defendants have alleged. The Liquidator contends that the answer to this question must be "No," arguing that rescission of the contract is impossible and set-off is barred. Furthermore, "[b]ecause the damages, rights and claims on which defendants' affirmative defenses are based belong solely to the nonparty Hendricks and not to American Patriot, as a matter of law, they cannot be legally valid defenses in this action regardless of any other facts or disputes in this case." (Dkt. No. 161-2 at 3-4). In other words, it is the Liquidator's position that "even if [Defendants] could prove the fraud which they allege," Defendants cannot satisfy the legal requirements of the affirmative defenses they have plead. (Dkt. No. 161-2 at 8).

On the other hand, Defendants argue that their affirmative defenses go to the validity of the contract and the fairness of enforcing the Limited Agency Agreement against them. Defendants note that they are "not seek[ing] to recover damages in connection with [their] affirmative defenses." (Dkt. No. 214 at 7). Instead, Defendants' goal is "to bar the Liquidator from seeking recovery against it under the Limited Agency Agreement." (Id.). Defendants ask the court to avoid "an overly restrictive view" of its own equitable powers, and to grant Defendants relief through rescission of the contract, setoff against debts owed to the Liquidator, or any other equitable relief such that "regardless of the legal label used . . . the Liquidator may not enforce the contract against Defendants." (Dkt. No. 190 at 17, 19).

1. Fraud Defenses

As discussed above, the question before the court is whether the undisputed facts support the Liquidator's position as a matter of law. For purposes of this motion only, the Liquidator has chosen not to dispute Defendants' allegations of fraud. Therefore, the court begins its analysis with a description of Defendants' allegations, as set forth in their affirmative defenses, having accepted as true the fraud alleged by Defendants.

A. The Fraudulent and Negligent Misrepresentations

Three of the affirmative defenses set forth by Defendants (unclean hands, estoppel -- fraud, and estoppel -- 2000 program year) seek direct equitable relief due to fraudulent misrepresentations made by Legion Insurance Company, Villanova Insurance Company, Mutual Risk, Commonwealth Risk, and Mutual Indemnity (collectively, the "Mutual Entities") while marketing and operating the Roofers' Advantage Program. In the alternative, Defendants also contend that the Mutual Entities' misrepresentations were negligently made.*fn6

Specifically, on or about February, 2000, Eric Bossard ("Bossard") (a Legion Vice President) and James Agnew ("Agnew") (a Commonwealth Risk Vice President) made materially false statements to shareholder Diane Hendricks and American Patriot President Lysa Saran for purposes of inducing them to agree to the Year 4 renewal of the Program. Knowing the Program was in serious financial trouble, Bossard and Agnew reassured Diane Hendricks and Lysa Saran that the Program was stable and that any under-reserving troubles with Cunningham- Lindsey had been "resolved." At the same meeting, Agnew falsely indicated that he did not know the extent of the Hendricks' exposure under the Shareholder Agreement.

In a subsequent phone call, after consulting with representatives of the other Mutual Entities, Bossard and Agnew falsely stated that the Shareholder Agreement made Diane and Kenneth Hendricks liable for losses up to Legion's policy limits, knowing this was not true. Bossard and Agnew then convinced the Hendricks that they could cap their (non-existent) liability with respect to the first three years of the Program by purchasing $1 million of (phantom) reinsurance through Mutual Indemnity. David Alexander, the President of Mutual Indemnity, prepared and sent a letter to Lysa Saran on April 20, 2000, falsely memorializing Mutual Indemnity's intent to purchase reinsurance to cover the Hendricks' (non-existent) liability. In reliance on the misrepresentations of Bossard, Agnew, and Alexander, the Hendricks paid $1 million to Mutual Indemnity for purchase of the promised reinsurance. This extra $1 million allowed the Mutual Entities to continue the Program without significantly raising costs, while at the same time the Mutual Entities also amended the Program documents for Year 4 so as to actually expand the Hendricks' liability up to the policy limits. Both American Patriot and the Hendricks relied upon the truth of these false representations in renewing the Program for Year 4.

B. The Parties' Arguments on Summary Judgment

The problem with Defendants' fraud defenses, according to the Liquidator, is that American Patriot cannot prove that it suffered any harm that was proximately caused by the fraud. The Liquidator notes that the Hendricks, as parties to the Shareholder Agreement, purchasers of $1 million of (phantom) reinsurance, and suppliers of letters of credit securing their obligation to Mutual Indemnity, were significantly more likely to have suffered losses due to the fraudulent activities than were American Patriot and Saran. The ...


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