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FIRST NATL. BANK OF PENNSYLVANIA v. SEDGWICK JAMES

May 14, 1992

THE FIRST NATIONAL BANK OF PENNSYLVANIA, Plaintiff,
v.
SEDGWICK JAMES OF MINNESOTA, INC., formerly known as and/or successor in interest to FRED S. JAMES & COMPANY OF MINNESOTA, INC.; SEDGWICK JAMES, LTD., formerly known as and/or successor in interest to FRED S. JAMES & CO., INC.; JOSEPH W. STEMAN; MILTON MENDE; J.G. "JACKSON" STACEY; and DANIEL M. MILITZER, Defendants.



The opinion of the court was delivered by: GLENN E. MENCER

 Plaintiff First National Bank ("FNB") has brought this action alleging that defendants participated to various degrees in a scheme to defraud involving the sale of financial guaranty insurance to FNB. The case is before the court presently on FNB's Motion for Partial Summary Judgment on certain of its state law claims; and on the Motion for Partial Judgment on the Pleadings filed by Sedgwick James of Minnesota, Joseph W. Steman, and Daniel M. Militzer (hereinafter referred to collectively as "the James defendants") based on the contention that the facts alleged in the complaint indicate that the RICO count is preempted by the McCarran-Ferguson Act.

 I. STATEMENT OF THE FACTS

 FNB alleges that in 1984 it received a credit application from Great Lakes Properties Corporation for a $ 1,750,000.00 loan to develop property located in Conneaut, Ohio. The FNB loan officer rejected the application because Great Lakes' credit was not sufficiently established to warrant such a sizable loan. As a result of this rejection, Mr. Larry Mako, the president of Great Lakes, met with Mr. Lyle Wheatley, a self-employed commercial loan broker. Wheatley suggested that Mako could probably obtain the loan if his application was backed by a credit enhancement insurance policy, a surety-type arrangement in which the insurer guaranteed payment to the lender if the borrower defaulted. Wheatley suggested the services of the Commonwealth Insurance Group, Inc. Wheatley had earlier visited Commonwealth's offices in Los Angeles and met with Milton Mende, who controlled Commonwealth.

 Armed with this new information, Mako along with Wheatley arranged a second meeting with FNB. Mako explained to the FNB loan officer, Harry McDowell, the broad terms of the proposed arrangement. Mr. McDowell indicated that FNB would reconsider the denial of the loan in light of the new proposed terms.

 Wheatley informed Jackson Stacey at Commonwealth of FNB's refusal. Stacey suggested that FNB might accept the deal if the Commonwealth policy were reinsured by a larger insurance company. He gave Wheatley the telephone number of Joseph Steman, a senior vice president at James of Minnesota. Wheatley contacted Steman, who said during the course of their first conversation that James would provide the reinsurance for Commonwealth. It appears that Steman then forwarded a specimen copy of the letter James of Minnesota typically sent regarding the acquisition of reinsurance for Commonwealth.

 Some time after receiving this information, Mr. McDowell decided to offer the loan to Great Lakes subject to certain conditions. In a commitment letter sent to Mr. Mako on January 9, 1985, Mr. McDowell listed among the conditions of the loan a requirement that the Commonwealth Insurance Group provide a credit enhancement guaranty insurance policy "to be reinsured by the Fred S. James Company through an insurance company acceptable to [FNB]."

 Mr. McDowell claims that he spoke to Mr. Steman at James of Minnesota a number of times following the issuance of the commitment letter. One of the primary issues discussed was a proposed change in the specimen letter in which James stated its commitment to find a reinsurer for the Commonwealth policy. In the specimen letter, James of Minnesota promised to "undertake with responsibility to obtain reinsurance." FNB wanted a stronger commitment and requested that the letter state that James "will obtain" the reinsurance. On February 6, 1985, Steman wrote a letter to FNB which stated that James "will obtain" the reinsurance.

 The following month, a few days prior to the scheduled March 6 closing date for the loan, Mr. McDowell made a number of calls to Mr. Steman in which he inquired when James was going to obtain the reinsurance. According to the deposition testimony of Mr. McDowell, Mr. Steman first indicated that he was working on obtaining the reinsurance and stated that it would be in place before the loan closed. However, during a subsequent conversation, Mr. Steman told Mr. McDowell that he could not get the reinsurance until after the loan closed and the paperwork was completed. On March 6, 1985, the parties signed the loan agreement.

 Although James had not obtained the reinsurance by this time, the Commonwealth guaranty was effective. Great Lakes paid $ 52,500 to Bribacor, Inc., another Mende-controlled corporation, for the Commonwealth policy. Subsequently, on April 10, 1985, Bribacor sent James of Minnesota a check in the amount of $ 3,975 for its participation in the Great Lakes deal.

 James never obtained the reinsurance. In March, 1986, Jackson Stacey sent a letter to Mr. McDowell stating that Commonwealth no longer employed James as its reinsurance broker and had replaced James with the Boston office of Frank B. Hall & Company. In the letter, Mr. Stacey assures FNB that Commonwealth is strong enough to handle the policy, even though it had been unable to place this particular policy among the other "blocks of reinsurance" that backed their other policies. Mr. McDowell stated in his deposition that he spoke to Mr. Stacey after receiving this letter and that he got the impression from Mr. Stacey that Commonwealth itself would acquire an "investment grade rating from a rating service" in order to meet its obligation to acquire reinsurance from a company rated A

 On February 12, 1987, FNB issued a second loan in the amount of $ 865,000 to Great Lakes. Commonwealth agreed to increase the amount of coverage under its credit enhancement insurance guaranty from $ 1.75 million to $ 3.2 million to secure the loan. In addition, the parties entered into an agreement in which the British Indemnity Group, Inc., yet another Mende-controlled entity, would provide a "cut-through" corporate guaranty. The effect of this "cut-through" endorsement was to permit FNB to seek payments from British Indemnity as well as Commonwealth should Great Lakes default on the loan.

 Soon thereafter, in May of 1987, Great Lakes defaulted on the loans. FNB gave notice of the default to the Geary Steffen Company, the claims notification company that replaced James of Minnesota in 1986. Commonwealth acknowledged receipt of the notice of default. When Great Lakes failed to repay the default, FNB wrote to Commonwealth stating that it was awaiting a response from Commonwealth and British Indemnity regarding its demand for payment. Neither company ever honored the demand for payment.

 In February 1991, Milton Mende along with several other of his fellow officers and employees were indicted by a Grand Jury in the United States District Court for the Central District of California. They were charged with multiple counts of criminal conspiracy, mail fraud, wire fraud, and possession of forged U.S. Government securities. The indictment recites that Commonwealth Insurance Group and British Indemnity Group, along with several other Mende-controlled organizations, were essentially "dummy organizations" that possessed no assets other than the amounts received from their criminal enterprise.

 Although there has been no evidence presented that FNB had any knowledge of the true nature of Commonwealth and British Indemnity, certain individuals within the national organization of the Fred S. James organization did come to learn that these companies were part of a fraud. On October 18, 1985, after FNB made the first loan to Great Lakes but prior to the second loan, Mr. William C. Thomas, President of James of Arkansas, sent a letter to the Chairman of James of Missouri in which he states his concern regarding James of Minnesota's involvement with Commonwealth, although he makes clear that he is not certain that Commonwealth was involved in any wrongdoing. On February 10, 1986, Mr. M. R. Mead issued a file memorandum on "James--Central Region" stationery. He states that "shortly after" the third quarter of 1984 the James organization became aware that Commonwealth was run by Milton Mende, and that Mende was a convicted felon. James ordered that the organization cease all business activity with Commonwealth and Mende at that time. He learned from a confidential source during the fourth quarter of 1985 that Mr. Steman was continuing a relationship with Commonwealth. A James of Minnesota employee conducted an interview with Mr. Steman and an investigation of James' dealings with Commonwealth and concluded that James had no financial involvement. Mr. Mead concludes his memorandum by stating that James had no knowledge that its name was being used and he denies any liability as a result of Mr. Steman's actions.

 II. ANALYSIS

 A. FNB's Motion for Partial Summary ...


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