The opinion of the court was delivered by: MUIR
On March 8, 1988, the Plaintiff, McClellan Realty Corporation ("McClellan"), filed its complaint against the Defendants Institutional Investors Trust, Institutional Investors Corporation, Unicorp American Corporation (collectively known as "the IIT Defendants"), and Chicago Title Insurance Company ("Chicago Title"). On May 13, 1988, the IIT Defendants filed a motion to dismiss Counts II, III, and IV of the complaint pursuant to Fed.R.Civ.P. 12(b)(6) or, in the alternative, for summary judgment pursuant to Fed.R.Civ.P. 56. Also on May 13, 1988, Chicago Title filed a motion to dismiss Counts I and V of the complaint or, in the alternative, for summary Judgment. Oral argument on the motions was held in Williamsport on November 8, 1988, and these motions are now ripe for our disposition.
McClellan's complaint is derived from the outcome of prior litigation. Both the prior and current litigation are based upon certain notes and mortgages that were sold for approximately $ 4.2 million by Institutional Investors Trust to Pagnotti Enterprises ("Pagnotti") and then immediately assigned to its subsidiary, McClellan. The original notes and mortgages were part of a transaction in which Institutional Investors Trust lent Blue Coal Corporation, Raymond Colliery Company, Inc., Olyphant Associates and Glen Nan, Inc., $ 8,530,000. Blue Coal Corporation, Raymond Colliery Company, Inc., Olyphant Associates, and Glen Nan, Inc., executed mortgages on their respective lands to secure the loans. Chicago Title issued a "title insurance policy" in the face amount of $ 8,530,000. The purpose of the title insurance policy was to protect Institutional Investors Trust and its successors or assigns against the invalidity or unenforceability of the notes and mortgages. The purchase and sale of the notes and mortgages from Institutional Investors Trust occurred on December 15, 1976, and on December 16, 1976, an involuntary petition in bankruptcy was filed involving Blue Coal Corporation, one of the debtors.
On December 12, 1980, the United States filed an action against McClellan seeking to invalidate the mortgages McClellan acquired from Institutional Investors Trust as fraudulent conveyances. The United States brought its action after this Court granted Judgment in favor of the United States and against Raymond Colliery Company, Inc., and its subsidiaries in the amount of $ 2,795,795.16 plus interest for assessed and unpaid federal income taxes for fiscal years 1966, 1967, 1968, 1969, and 1971. United States v. Gleneagles Investment Co., Inc., 584 F. Supp. 671, 677 (M.D. Pa. 1984) (" Gleneagles III "); United States v. Gleneagles Investment Co., Inc., 565 F. Supp. 556, 560 (M.D. Pa. 1983) (" Gleneagles I "). The United States argued that the mortgages in the hands of McClellan were void because McClellan had knowledge that the mortgages were fraudulent conveyances. Id. at 562. On March 26, 1985, we issued a final order and Judgment setting aside the mortgages and liens as fraudulent conveyances. Paragraph 4 of that order subordinates McClellan's liens to a penultimate position of all creditors.
The United States Court of Appeals for the Third Circuit in United States v. Tabor Court Realty Corp., 803 F.2d 1288 (3d Cir. 1986), cert. denied, 483 U.S. 1005, 107 S. Ct. 3229, 97 L. Ed. 2d 735 (1987) reversed our order insofar as it gave McClellan any rights with respect to the property of Raymond Colliery Company, Inc. Upon remand, we issued our Order No. 2 of December 16, 1986, which provided that
1. The assigned IIT mortgages and other security investments of McClellan as against the Trustee in Bankruptcy are void.
2. McClellan possesses no rights as a creditor with respect to the putative assignment of the IIT mortgages.
McClellan's present complaint contains five counts, with Counts I and V asserted only against Defendant Chicago Title, and Counts II, III, and IV asserted only against the IIT Defendants. We will address McClellan's claims against Chicago Title and the IIT Defendants respectively.
In considering a motion for summary judgment, we must ascertain, on the basis of pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, whether or not there are any genuine issues of material fact, and if none, whether the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56; Peterson v. Lehigh Valley District Council, 676 F.2d 81, 84 (3d Cir. 1982). An issue is genuine only if the evidence is such that a reasonable jury could return a verdict for the nonmoving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S. Ct. 2505, 2510, 91 L. Ed. 2d 202 (1986); Hankins v. Temple University, 829 F.2d 437, 440 (3d Cir. 1987); Equimark Community Finance Co. v. C.I.T. Financial Services Corp., 812 F.2d 141, 144 (3d Cir. 1987). If evidence is merely colorable or not significantly probative, summary Judgment must be granted in favor of the movant. Anderson, 106 S. Ct. at 2511. When the record, taken as a whole, could not lead one to find for the nonmoving party, summary judgment must be entered in favor of the movant. Matsushita Electric Industrial Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 106 S. Ct. 1348, 1356, 89 L. Ed. 2d 538 (1986).
When considering a motion to dismiss, the complaint must be liberally construed and viewed in the light most favorable to the plaintiff. Gomez v. Toledo, 446 U.S. 635, 636 n. 3, 64 L. Ed. 2d 572, 100 S. Ct. 1920 (1980); Jennings v. Shuman, 567 F.2d 1213, 1216 (3d Cir. 1977). The factual allegations contained in the complaint and every deducible inference therefrom must be accepted as true for the purposes of the motion. United States v. Mississippi, 380 U.S. 128, 13 L. Ed. 2d 717, 85 S. Ct. 808 (1965).
In Count I of its complaint, McClellan claims that it is insured under the title insurance policy which Chicago Title issued to IIT and it demands judgment in the full amount of the policy, $ 8,530,000, plus legal fees, expenses, and costs. Chicago Title's insurance policy covers the "owner of the indebtedness secured by the insured mortgage and each successor in ownership of such indebtedness." (Complaint, paras. 7-8). Therefore, by the very terms of the insurance policy cited by McClellan, there must have been a valid underlying indebtedness in existence in order for Chicago Title to be liable under its policy. McClellan can only recover from Chicago Title if the underlying debt insured by Chicago Title is or was a valid one. The first issue that we must address is whether McClellan is collaterally estopped from litigating in this action the question of whether the entire underlying indebtedness is deemed satisfied.
In this diversity action, Pennsylvania law controls application of the doctrine of collateral estoppel. Ranger Insurance Company v. General Accident Fire & Life Assurance Corporation, Ltd., 800 F.2d 329, 330 (3d Cir. 1986); see also Public Service Mutual Insurance Co. v. Cohen, 616 F.2d 704, 707 (3d Cir. 1980). For a prior adjudication ...