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KAISER v. STEWART

May 21, 1997

LINDA S. KAISER, et al.
v.
ALLEN W. STEWART, et al.



The opinion of the court was delivered by: BARTLE

 Bartle, J.

 May 21, 1997

 This is a civil action under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961 et seq., with several pendent state law claims. It involves an alleged scheme to siphon off the assets of two Pennsylvania insurance companies. Presently before the court are motions of the defendants under Rule 12(b)(6) of the Federal Rules of Civil Procedure to dismiss the amended complaint for failure to state a claim upon which relief can be granted. We accept all well-pleaded facts of the complaint as true for purposes of these motions. Oshiver v. Levin, Fishbein, Sedran & Berman, 38 F.3d 1380, 1391 (3d Cir. 1994).

 The plaintiff is Linda Kaiser, the Pennsylvania Insurance Commissioner, acting as the Liquidator of Summit National Life Insurance Company ("SNLIC") and Equitable Beneficial Life Insurance Company ("Equitable"). She seeks treble damages arising out of their financial ruin. The defendants are nine individuals, one law firm, two trusts, nine corporations, one other business partnership, as well as unnamed Doe and Roe defendants. According to the amended complaint, defendant Allen W. Stewart ("Stewart"), a lawyer, was the mastermind and coordinator of the scheme to loot SNLIC and Equitable, both of which he owned and/or controlled. *fn1" He is currently the subject of a related RICO criminal prosecution in this district. United States v. Stewart, 955 F. Supp. 385.

 I

 The introductory paragraph of the lengthy amended complaint summarizes the relevant facts as follows:

 
In a span of less than five years, the defendants, through various acts of malfeasance, misfeasance and nonfeasance, systematically siphoned assets from and mismanaged the affairs of SNLIC and [Equitable], turning what were financially healthy insurance companies into companies with millions of dollars in deficits and leaving in their wake overburdened insurance guaranty funds and, most tragically, uncovered claims.

 The facts as set forth in the amended complaint are as follows. Prior to Stewart's purchase of SNLIC, it maintained a surplus of $ 38 million. Through a series of complex transactions in 1988, Stewart acquired SNLIC, then domesticated in Ohio, with the use of its own funds. With this purchase, Stewart "removed $ 78 million in liquid assets from SNLIC." The Ohio Insurance Commissioner disapproved some of the transactions surrounding the purchase of SNLIC. As a result, in exchange for Ohio's agreement not to take further action, Stewart redomesticated SNLIC to Pennsylvania, obtaining the approval of the Insurance Commissioner of the Commonwealth under "false pretenses." Based on misrepresentations, Stewart and his associates convinced the Pennsylvania regulators "to allow SNLIC to issue a $ 30 million extraordinary dividend" after its redomestication.

 Equitable, in its original corporate form, was purchased by Stewart in 1976. Again, through a complicated series of steps the company was divested of its assets, receiving little or no consideration in return. The defendants then participated in various acts in order to conceal the fraud and insolvency of SNLIC and Equitable from the insurance regulators and the policyholders. According to the Liquidator, defendants manipulated the financial records at year end to make both companies appear solvent. For example, Stewart and his associates executed a worthless mortgage in favor of SNLIC. SNLIC also performed services for Equitable in exchange for notes with little or no value, which were listed as assets on SNLIC's books. Affiliated Holdings, Ltd. and Tartan Holdings, Ltd., two other entities owned and/or controlled by Stewart but not named as defendants, borrowed money from SNLIC and then defaulted on a $ 3 million note given as collateral. A fraudulent reinsurance agreement, disapproved by the California Department of Insurance, was nonetheless entered into between Summit and Alabama Reassurance. This transaction caused a false surplus of $ 15 million on SNLIC's balance sheet.

 The amended complaint also alleges specific instances when defendants improperly utilized SNLIC and Equitable funds. The defendants diverted funds from SNLIC to Cathedral Life Insurance Company, another Stewart entity, which then improperly disposed of such funds. Specifically, Stewart siphoned $ 2.075 million from SNLIC to pay the mortgage on his California home. SNLIC was made to pay large, improper dividends totalling at least $ 8.4 million. The defendants caused SNLIC and Equitable to purchase other companies at overvalued prices and then to pay dividends, improper under Pennsylvania law, of over $ 1.6 million. Finally, Equitable paid service fees to Erin Group Administrators, a co-defendant, for services not performed, or in the alternative at rates significantly higher than the industry average. Throughout the relevant period, Stewart and his associates made false representations to state regulators, utilizing the United States mail and wires.

 Stewart sold Summit and Equitable in 1993 for no consideration. In 1994, the companies were placed into liquidation in Pennsylvania.

 The Liquidator sets forth twelve causes of action in her amended complaint against these various defendants. Counts 1 through 5 assert RICO violations under 18 U.S.C. §§ 1962(b), (c), and (d). Pursuant to § 1962(b) it is illegal for "any person through a pattern of racketeering activity ... to acquire or maintain, directly or indirectly, any interest in or control of any enterprise which is engaged in, or the activities of which affect, interstate or foreign commerce." 18 U.S.C. § 1962(b). An enterprise is broadly defined to include "any individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact although not a legal entity." 18 U.S.C. § 1961(4). The enterprise here is SNLIC and "in the alternative," Equitable. The Liquidator alleges that acts of mail and wire fraud, specified in Exhibit F to the amended complaint, constituted racketeering activity. A pattern of racketeering activity arises when at least two acts of racketeering are committed within ten years of each other. 18 U.S.C. § 1961(5).

 Section 1962(c) prohibits a person "employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly in the conduct of such enterprise's affairs through a pattern of racketeering activity." 18 U.S.C. § ...


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