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NORTHWOOD NURSING & CONVALESCENT HOME, INC. v. CON

October 20, 1995

NORTHWOOD NURSING AND CONVALESCENT HOME, INC. and NURSECARE HEALTH CENTERS, INC.
v.
THE CONTINENTAL INSURANCE COMPANY



The opinion of the court was delivered by: JOYNER

 JOYNER, J.

 Today this Court considers Defendant Continental Insurance Company's Motion for Summary Judgment. Continental is being sued by Nursecare Health Centers, Inc. and its subsidiary, Northwood Nursing and Convalescent Home, Inc., for the coverage they allege they are due under insurance contracts Continental issued to Northwood from October, 1991 through April, 1993. The following facts are uncontested unless otherwise noted.

 Northwood is a nursing home in Pennsylvania. In 1990, Northwood's parent, Nursecare, arranged to sell Northwood to a company called Realty-Vest Financial Corporation. Realty-Vest is owned by Francis Hayman, Jr. To effect the sale, Nursecare transferred its shares in Northwood to Realty-Vest with the understanding that Realty-Vest would obtain financing for the purchase and pay for the stock then. By early 1993, Realty-Vest had still not closed the purchase and Nursecare repossessed Northwood.

 During the three years and two months that Realty-Vest owned Northwood, Hayman was the sole director and President of Northwood. Soon after the purchase, Hayman arranged for Northwood to be covered under the multi-peril package policy he had with Pacific Employers Insurance Company. In October, 1991, Hayman's insurance broker transferred this coverage to Continental (the Policy). According to Plaintiffs, Nursecare and its President, James Hubbert, were unaware of this change until several months later and despite repeated requests, did not receive a complete copy of the Policy until 1994.

 Pursuant to the sale agreements, Nursecare had the right to direct the operations at Northwood and receive monthly financial statements and other reports until closing. In addition, Hubbert, Northwood's former President, was barred from Northwood's premises. Plaintiffs allege that Realty-Vest and Hayman did not cooperate with Nursecare and did not regularly forward financial reports to it. Plaintiffs also allege that the financial information they did receive was often incomplete and unreliable. In 1992, Hubbert sent Nursecare's Controller to Northwood to attempt to obtain financial information, but because of the alleged disarray of the records, a complete review of Northwood's finances was not possible.

 Partially as a result of the above, Hubbert became concerned about Hayman's management of Northwood soon after the purchase. Hubbert confronted Hayman on a number of occasions from 1990 through 1993 to discuss excess payment of management fees, missing petty cash, Northwood's faulty billing procedures and problems with employee insurance benefits. Hubbert testified that he told Hayman that he considered the manner in which Hayman ran Northwood as stealing from Northwood. Hubbert accused Hayman of misappropriating funds and reported these concerns not only to Hayman, but also to Hayman's attorney, Nursecare's Board of Directors and Hubbert's own attorneys.

 Hayman acknowledged that some fees in excess of those agreed upon had been paid out. However, Hayman denied that this was improper, asserted that they were only loans and reassured Hubbert that he would repay the loans at closing. Indeed, Hayman repaid Nursecare over $ 100,000 in August, 1992.

 In early 1993, Nursecare and Hubbert allegedly discovered Hayman and Realty-Vest's gross mismanagement of Northwood for the first time during a tour of the facility. The mismanagement included physical defects so serious that the facility's State license was threatened. As a result of this discovery, Nursecare sought and received State permission to terminate the Stock Purchase Agreement and repossess Northwood. Once on the premises, Plaintiffs allegedly discovered outright fraud and embezzlement by Hayman and Realty-Vest.

 Within two weeks of regaining ownership, Plaintiffs put Continental on notice of the variety of losses they contend are covered under the Policy. These include building and property damage and employee dishonesty losses. Continental contends these are the same issues of which Hubbert complained to Hayman and others as early as 1990.

 STANDARD OF REVIEW

 In considering a motion for summary judgment, a court must consider whether the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, show there is no genuine issue of material fact, and whether the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c). The court must determine whether the evidence is such that a reasonable jury could return a verdict for the non-moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 91 L. Ed. 2d 202, 106 S. Ct. 2505 (1986).

 In making this determination, all of the facts must be viewed in the light most favorable to the non-moving party and all reasonable inferences must be drawn in favor of the non-moving party. Id. at 256. Once the moving party has met the initial burden of demonstrating the absence of a genuine issue of material fact, the non-moving party must establish the existence of each element of its case. J.F. Feeser, Inc. v. Serv-A-Portion, Inc., 909 F.2d 1524, 1531 (3d Cir. 1990), cert. denied, 499 U.S. 921, 113 L. ...


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