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RICHARDSON v. LLOYDS OF LONDON

August 9, 1995

FREDERIC RICHARDSON, THEODORE R. NERING, EMIL J. MOLIN
v.
LLOYDS OF LONDON



The opinion of the court was delivered by: BARTLE

 Bartle, J.

 August 9, 1995

 This action involves a dispute over more than $ 1 million available under a Lloyds of London ("Lloyds") Directors and Officers Liability insurance policy. Plaintiffs Frederic Richardson ("Richardson"), Theodore R. Nering ("Nering"), and Emil J. Molin ("Molin"), former officers and directors of Corporate Life Insurance Company ("CLIC"), seek a declaratory judgment and injunctive relief. They ask this court to compel Lloyds to continue to pay their counsel's fees in connection with the defense of a fraud action that the Pennsylvania Insurance Commissioner as Statutory Liquidator of CLIC ("Commissioner") instituted against them in the Commonwealth Court of Pennsylvania. *fn1" Insurance Comm'r of Pa. v. Molin, No. 2 MD 1995 (Pa. Commw.).

 The court held a preliminary injunction hearing on July 10, 1995. At the hearing, the court permitted the Commissioner to intervene for the purpose of seeking to have this court abstain from adjudicating this action. The motion for a preliminary injunction as well as the Commissioner's motion to abstain are now before the court for decision. For the following reasons, the court will grant the Commissioner's motion to abstain and dismiss the complaint.

 To understand this current action, it is necessary to go back in history several years. For purposes of the Commissioner's motion, the court will accept as true various factual allegations in plaintiffs' complaint. The recited facts also include certain facts established at the preliminary injunction hearing as well as some facts of which the court has taken judicial notice.

 On March 31, 1992, the Commissioner filed a petition in the Commonwealth Court of Pennsylvania, Chronister v. Corporate Life Insurance Company, No. 142 M.D. 1992 (Pa. Commw.), to liquidate CLIC because of alleged insolvency. See 40 Pa. Stat. Ann. § 221.20. In late 1992, while this petition was pending, the Pennsylvania Insurance Department demanded that CLIC raise the number of directors from one to seven in accordance with Pennsylvania law. See 15 Pa. Cons. Stat. Ann. § 3131(b). Richardson, president of CLIC at that time, reported that he could not find people to serve on the board of directors without a Directors and Officers Liability policy in place. Lloyds issued a Directors and Officers insurance policy in January, 1993 to American Homestead, Inc. ("AHI"), a parent of CLIC, for AHI's and CLIC's officers and directors. At this time, CLIC found additional officers and directors, including plaintiffs Nering and Molin. The policy, which cost approximately $ 1.2 million, *fn2" has a limit of liability of $ 1.5 million. The policy covers officers and directors for losses, which are defined as "damages, settlements, and Costs, Charges, and Expenses." Costs, charges, and expenses are defined as "reasonable and necessary legal fees and expenses incurred by the Directors and Officers in the defense of any Claim." Paragraph E of Section IV entitled "Limit of Liability and Retentions" provides that "Costs, Charges and Expenses shall be part of and not in addition to the Limit of Liability as shown under Item C of the Declarations, and such Costs, Charges, and Expenses shall reduce the Limit of Liability as shown under Item C of the Declarations." Thus, unlike garden variety liability insurance policies, it appears that legal fees are counted against the amount available for the payment of claims.

 The Commissioner withdrew the 1992 liquidation petition on March 30, 1993. However, she filed a second liquidation petition on June 4, 1993 in the Commonwealth Court. Maleski v. Corporate Life Ins. Co., No. 175 M.D. 1993 (Pa. Commw.). On February 15, 1994, the Commonwealth Court found CLIC insolvent and ordered its liquidation pursuant to 40 Pa. Stat. Ann. § 221.20. Maleski, No. 175 M.D. 1993. The court appointed the Commissioner as Statutory Liquidator in accordance with Pennsylvania insurance law. See 40 Pa. Stat. Ann. § 221.20(c).

 Over a year later, on June 8, 1995, the Commissioner, as Statutory Liquidator, filed a complaint, consuming some 55 pages, in the Commonwealth Court *fn3" against Richardson, Nering, and Molin. She alleges that they had engaged in intentional, fraudulent, and negligent conduct that caused CLIC "to suffer millions of dollars of losses, leading to its ultimate failure and collapse, all to the detriment of its policyholders, its creditors, and the public." Insurance Comm'r of Pa., P 1. Additionally, the Commissioner asserts in the complaint that "through a series of transactions that concealed Corporate Life's true financial condition, and that benefitted the defendants [Richardson, Nering, and Molin] personally, the defendants [Richardson, Nering, and Molin] were successful in permitting Corporate life to continue operations when Corporate Life was, in fact, insolvent." Insurance Comm'r of Pa., P 18.

 With respect to the Lloyds policy in issue, the Commissioner maintains that its purchase constituted a fraudulent transfer of assets of CLIC in violation of Pennsylvania insurance law. See 40 Pa. Stat. Ann. § 221.29. *fn4" Specifically, her complaint alleges that "defendants [Richardson, Nering, and Molin] caused Corporate Life to purchase this policy solely in an effort to insulate themselves from the personal liability that they knew they were facing by their willful misconduct or gross negligence." Insurance Comm'r of Pa., P 252. The complaint further contends that the "defendants [Richardson, Nering, and Molin] caused Corporate Life to purchase the policy at a time they knew or should have known Corporate Life was insolvent." Insurance Comm'r of Pa., P 253.

 After the commencement of this and several other lawsuits against officers and directors of CLIC, Lloyds began to pay defense counsel out of the funds available under the policy pursuant to an interim funding agreement for defense fees and costs. However, the agreement provided that "any party to this Agreement may, upon thirty (30) days written notice, cancel this Agreement for any reason related to or arising out of that party's rights, remedies, or defenses under the Policy or applicable law." Lloyds notified Richardson's counsel by letter on June 30, 1995 that it was exercising its rights "to cancel [certain] ... funding agreements" because Lloyds was facing competing demands for a limited amount of assets. Lloyds sent this letter following a settlement demand made by another CLIC former officer, Barry Feldman ("Feldman"). In the letter, Lloyds reported Richardson's warning that he would consider any settlement with Feldman to be in bad faith and in violation of his rights under the policy. Feldman's demand, if paid, would consume most if not all of the funds available under the policy. Given this demand as well as competing claims of various former CLIC directors, Lloyds concluded that it had to "request the assistance of the court in determining how the proceeds of the Policy must be disbursed."

 In sum, the plaintiffs seek to have Lloyds continue to pay their counsel fees in defense of the Commissioner's Commonwealth Court action pending against them. Without these monies, they claim they cannot afford to defend that complex action. The Commissioner, on the other hand, wants to recover the amount held by Lloyds for the benefit of the policyholders and creditors of CLIC on the ground that the purchase of the Lloyds policy was a fraudulent transfer under Pennsylvania insurance law. 40 Pa. Stat. Ann. § 221.29. Lloyds, for its part, has advised the court that it is a mere stakeholder and expected to file a complaint of interpleader with the Commonwealth Court. It did so on July 26, 1995. Anglo-American Ins. Co. v. Molin, No. 331 MD 1995 (Pa. Commw.). As part of its interpleader, it asks leave to deposit the money available under the policy into the registry of the court.

 The Commissioner argues that this court should abstain from deciding this federal court action. She contends that we should do so pursuant to Burford v. Sun Oil Co., 319 U.S. 315, 334, 87 L. Ed. 1424, 63 S. Ct. 1098 (1943) because this action is inextricably enmeshed with her liquidation of CLIC and Pennsylvania's regulation of insolvent insurance companies. As the Court of Appeals for the Third Circuit has explained, abstention under Burford is appropriate "where a state creates a complex regulatory scheme, supervised by the state court and central to state interests" if "federal jurisdiction deals primarily with state law issues and will disrupt a state's efforts to establish a coherent policy with respect to a matter of substantial public concern." Lac D'Amiante du Quebec v. American Home Assurance Co., 864 F.2d 1033, 1043 (3d Cir. 1988) (quotation omitted). In a more recent case, the Supreme Court has explained the exact contours of Burford abstention:

 
where timely and adequate state-court review is available, a federal court sitting in equity must decline to interfere with the proceedings or orders of state administrative agencies: (1) when there are difficult questions of state law bearing on policy problems of substantial public import whose importance transcends the result in the case then at bar; or (2) where the exercise of federal review of the question in the case and in similar cases would be ...

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