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Windsor Securities, Inc. v. Hartford Life Ins. Co.

filed: February 22, 1993.

WINDSOR SECURITIES, INC., DR. PAUL PRUSKY, WALTER G. ARADER
v.
HARTFORD LIFE INSURANCE COMPANY HARTFORD LIFE INSURANCE COMPANY, APPELLANT IN 92-1082 WINDSOR SECURITIES, INC. AND WALTER G. ARADER, APPELLANTS IN 92-1098



On Appeal from the United States District Court for the Eastern District of Pennsylvania. (D.C. Civil Action No. 90-03687).

Before: Stapleton, Scirica and Nygaard, Circuit Judges.

Author: Scirica

Opinion OF THE COURT

SCIRICA, Circuit Judge.

In this diversity case involving market timing,*fn1 the sponsor

of a mutual fund, Hartford Life Insurance Company, imposed restrictions on investors' ability to effect transfers among fund sub-accounts through third party agents. Plaintiff Windsor Securities, Inc., an investment advisor to Hartford investors, alleged that Hartford's restrictions resulted in tortious interference with its existing contracts. Plaintiff Walter Arader, an investor, alleged that Hartford's imposition of restrictions constituted breach of contract. The district court granted summary judgment to Windsor on the tortious interference with contract claim and to Arader on the breach of contract claim. We will reverse the district court's order on the tort claim and affirm its final judgment on the contract claim.

I.

FACTS AND PROCEDURAL HISTORY

A.

In the early 1980s, Hartford offered for sale under the trade name "Director"*fn2 an Individual Flexible Premium Variable Annuity Contract. Under its terms the contract owner paid a premium to Hartford which was placed into an account ("Separate Account Two") until the annuity or death benefit was paid or the contract canceled by its owner.

The contract gave each contract owner the right to have premium payments and accumulated earnings placed in seven different sub-accounts of Separate Account Two and to determine the percentage of accumulated earnings and premium payments allocated to each sub-account. Contract owners had the right to "reallocate amounts held in the Sub-Accounts at any time." These sub-accounts were invested in certain mutual funds sponsored by Hartford.*fn3 Management of the funds was overseen by a board of directors, a majority of which were outside directors.*fn4

In 1986, Paul Prusky, an investment advisor and broker, as well as president and sole shareholder of Windsor Securities, Inc., purchased a contract in his own name. Prusky claimed to have been seeking a variable annuity contract which would allow him to make unlimited transfers among sub-accounts on behalf of his clients. Such flexibility was important to his market timing investment strategy. After managing his own contract for six months, Prusky solicited his clients to purchase Hartford contracts which he then managed under investment management agreements.

Between June 1987 and March 1989, Prusky managed forty-one contracts on behalf of thirty-five clients pursuant to investment management agreements. Each client's contract application included a form letter to Hartford signed by the purchaser stating that "Prusky or other authorized Windsor Securities personnel" had the contract owner's power of attorney to transfer funds on the contract owner's behalf. The letters also stated that "monies may be moved into any such sub-account available . . . as often as Windsor Securities, Inc. deems necessary." Hartford did not object to these letters.

In September 1988, Walter Arader, a Prusky client, purchased three contracts on Prusky's recommendation and executed an investment management agreement with Windsor.

Between June 1987 and May 1990, Prusky managed his clients' contract accounts by telephoning transfer instructions to Hartford and trading on average twice a week. Hartford honored Prusky's trading instructions on behalf of his clients during this period. By the end of May 1990, Hartford had 18,887 contracts in force and Windsor managed contracts on behalf of 45 contract owners.

Beginning in 1988, Hartford and its independent fund advisor, Wellington Management Company, began to observe a negative impact caused by market timing activity: increased trading and transaction costs, disruption of planned investment strategies, forced and unplanned portfolio turnover, lost opportunity costs, and large asset swings in a fund's asset base that adversely affected Hartford's ability to provide maximal investment return to all contract owners.

Hartford monitored market timing activity in 1988 and 1989. In meetings from late 1989 into early 1990, the funds' board of directors was apprised of the adverse effects of market timing upon the funds' performance. On April 24, 1990, the funds' board determined that market timing harmed contract owners as a whole and adopted a resolution directing Hartford to ameliorate the negative impact of market timing on the funds' performance.

Pursuant to the board resolution, Hartford instituted restrictions calculated to protect the investments of all contract owners. These restrictions required that any third party desiring to effect transfers among sub-accounts on behalf of multiple contract owners, whose aggregate values exceeded $2 million, sign a "Third Party Transfer Services Agreement" ("TPTSA") and obtain a power of attorney from each contract owner in a form acceptable to Hartford. The TPTSA restricted the ability of third parties to transfer funds among the sub-accounts on behalf of contract owners by placing a $5 million cap on the total amount which a third party agent could transfer on behalf of his clients in any given day. The TPTSA also gave Hartford the right to impose additional restrictions upon thirty days prior written notice.

On May 11, 1990, Hartford sent Prusky a letter explaining the restrictions would become effective June 1, 1990. The letter made clear that after June 1, Hartford would no longer accept instructions from any person or firm that had not executed a TPTSA and power of attorney. Prusky (and hence Windsor) refused to accede. On May 14, 1990, Hartford advised Arader of the need for a TPTSA. Arader refused to execute the limited power of attorney or to instruct Prusky to execute the TPTSA.

B.

Plaintiffs Windsor, Arader, and Prusky sued defendant Hartford in the United States District Court of the Eastern District of Pennsylvania. Windsor alleged Hartford's restrictions tortiously interfered with its management contracts. Prusky made the same claim. Arader claimed the restrictions breached his contract with Hartford.

After the district court denied plaintiffs' motion for a preliminary injunction, all parties moved for summary judgment. In a Memorandum and Order the district court granted summary judgment for plaintiffs Windsor and Arader, and for defendant Hartford on all claims by Prusky.

Subsequently, the district court found that Windsor and Arader failed to mitigate damages. Windsor's award was reduced by one-third, and Arader's award was eliminated entirely. The court entered judgment in favor of Windsor against Hartford in the amount of $265,490 and in favor of Hartford against Arader. These cross-appeals followed.

Hartford appeals the order granting summary judgment of liability and the court's final judgment in favor of Windsor. Windsor and Arader cross-appeal the district court's determinations regarding mitigation.*fn5

II.

JURISDICTION AND STANDARD OF REVIEW

A.

The district court had jurisdiction under 28 U.S.C. § 1332(a) (1988). We have jurisdiction under 28 U.S.C. § 1291 (1988). The parties agree that Pennsylvania law controls the resolution of this dispute.

B.

Our standard of review of the district court's entry of summary judgment is plenary. American Medical Imaging Corp. v. St. Paul Fire & Marine Ins. Co., 949 F.2d 690, 692 (3d Cir. 1991). Summary judgment may be granted only if there exists no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c). Summary judgment may not be granted, however, where there is disagreement over the inferences that can be reasonably drawn from the facts even if the facts are undisputed. Nathanson v. Medical College of Pa., 926 F.2d 1368, 1380 (3d Cir. 1991) (citing Gans v. Mundy, 762 F.2d 338, 340 (3d Cir.), cert. denied, 474 U.S. 1010, 88 L. Ed. 2d 467, 106 S. Ct. 537 (1985)).

III.

THE TORTIOUS INTERFERENCE CLAIM

A.

The district court granted summary judgment to Windsor on its claim that Hartford's restrictions tortiously interfered with its existing contracts. Relying on Adler, Barish, Daniels, Levin & Creskoff v. Epstein, 482 Pa. 416, 393 A.2d 1175 (1978), cert. denied, 442 U.S. 907, 61 L. Ed. 2d 272, 99 S. Ct. 2817 (1979), the district court held the Pennsylvania Supreme Court would apply § 766A of the Restatement (Second) of Torts and found that Hartford's imposition of the restrictions intentionally and improperly made "Windsor's performance of services for its clients more expensive and/or more burdensome." Section 766A provides:

One who intentionally and improperly interferes with the performance of a contract (except a contract to marry) between another and a third person, by preventing the other from performing the contract or causing his performance to be more expensive or burdensome, is ...


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