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07/01/97 CONSTANCE B. FOSTER v. PROGRESS FEDERAL

July 1, 1997

CONSTANCE B. FOSTER, INSURANCE COMMISSIONER OF THE COMMONWEALTH OF PENNSYLVANIA, IN HER CAPACITY AS LIQUIDATOR OF PENNSYLVANIA INDEPENDENT ASSOCIATION, NATIONAL INDEPENDENT BUSINESS ASSOCIATION, NIBA GROUP BENEFITS TRUST, AMERICAN INDEPENDENT BUSINESS ALLIANCE AND AIBA GROUP INSURANCE TRUST A/K/A AIBA GROUP BENEFITS TRUST, PLAINTIFF
v.
PROGRESS FEDERAL SAVINGS AND LOAN, DEFENDANT



Appealed From No. similar ORIGINAL JURISDICTION similar.

Before: Honorable James Gardner Colins, President Judge, Honorable Rochelle S. Friedman, Judge, Honorable Charles A. Lord, Senior Judge. Opinion BY Senior Judge Lord.

The opinion of the court was delivered by: Lord

OPINION BY SENIOR JUDGE LORD

FILED: July 1, 1997

Before us are motions for summary judgment filed by both Plaintiff, the Insurance Commissioner of the Commonwealth of Pennsylvania (Commissioner), in her capacity as statutory liquidator of several purported insurance companies known as AIBA, NIBA and PIBA (collectively, AIBA), *fn1 and Defendant, Progress Federal Savings and Loan Bank (Progress), on a complaint brought in our original jurisdiction pursuant to Section 761(a)(3) of the Judicial Code, 42 Pa. C.S. § 761(a)(3), and Section 504(d) of what is commonly referred to as the Insurance Act, *fn2 40 P.S. § 221.4(d).

FACTS

The parties ask us to decide their respective summary judgment motions based on the following stipulated facts.

Craig B. Sokolow was chief executive officer and majority shareholder of AIBA, which was suspended from doing business in the Commonwealth in May 1989 and eventually placed into liquidation. Approximately nine months before the suspension of AIBA, Sokolow and a corporation he controlled known as STE-VIN Developers, Inc. obtained a $1,834,957 construction loan from Progress to build residences. Progress required that $350,000 be posted as cash collateral for the construction loan. On August 16, 1988, Sokolow in his name pledged to Progress a total of $350,000 in three certificates of deposit. Two checks dated August 16, 1988 were issued to Progress in payment for the certificates. One check was in the amount of $300,000, drawn on Sokolow's personal account at Commonwealth Federal Savings & Loan Bank, and the other was for $50,000, drawn on a NIBA reserve trust account at Progress. The certificates were titled to Sokolow individually, although the address on them was in care of NIBA's business address. *fn3

Subsequently, a branch manager for Progress was advised by NIBA's bookkeeper that NIBA had to change its name. The bookkeeper instructed Progress that as NIBA certificates of deposit matured, they should be redeemed and placed in NIBA's money market account, to be held there until the name change was accomplished. Progress followed those instructions, but mistakenly did so as well as to the Sokolow certificates. In January 1989, Progress redeemed the Sokolow certificates and credited the NIBA money market account with $361,999.05, which was the total amount due on the Sokolow certificates at that time. In March 1989, Progress was informed that NIBA had become AIBA. At the direction of NIBA's bookkeeper, Progress debited the NIBA money market account and issued ten $100,000 certificates of deposit titled to AIBA, which debited amount included the funds that originally comprised the Sokolow certificates.

By order dated May 2, 1989, the Commissioner suspended AIBA from doing any further business as a purported insurance company in the Commonwealth. *fn4 The suspension order "froze" all of AIBA's bank accounts and other financial instruments, prohibiting the disbursement to any person of any portion of AIBA's funds without the prior written approval of the Commissioner. The order was silent as to its effect on Sokolow as an individual and bank accounts and other financial instruments in the name of Sokolow as an individual, and none of Sokolow's personal accounts were ever frozen by the Commissioner.

Several days later, Progress received notice of the suspension order from Arthur Selikoff, Esq., assistant counsel in the Commonwealth's Insurance Department. Progress froze AIBA's accounts. On June 21, 1989, at the request of Selikoff, Sokolow sent a letter to an investigator for the Insurance Department, Samuel Kohlmeyer, stating there were no AIBA, NIBA or PIBA funds in Sokolow's personal account at Commonwealth Federal Savings & Loan Bank, the account on which the $300,000 check used to purchase part of the Sokolow certificates had been drawn.

Sokolow next demanded that Progress release him the Sokolow certificates in the amount of $350,000 plus interest. Progress then discovered that its employees had mistakenly redeemed those certificates and placed them in the name of AIBA. On October 2, 1989, a manager for Progress notified Kohlmeyer by letter that Progress had redeemed the Sokolow certificates and mistakenly placed them in the name of AIBA. Kohlmeyer and Selikoff reviewed documents and were satisfied that the Sokolow certificates had been mistakenly redeemed and placed in the name of AIBA.

On November 9, 1989, Selikoff and Progress' counsel, Cheryl Young, Esq., had a telephone conversation. Young advised Selikoff that Progress intended to correct its mistake and return the Sokolow certificates to Sokolow and sought Selikoff's authorization to do so. Selikoff acknowledged that the suspension order did not apply to Sokolow's personal funds, but neither authorized nor prohibited Progress' intended course of action. After the conversation, without having received prior written authorization from the Commissioner, Progress released to Sokolow the Sokolow certificates in the amount of $350,000 plus interest. Sokolow in turn used that sum on the next day to pay Progress part of $754,134.92, which amount was the principal and interest due on the construction loan.

One month later, Selikoff sent a letter to Young indicating that the payment to Sokolow was unauthorized and that recovery of the amount at issue might be sought. In March 1991, the Commissioner in her capacity as liquidator of AIBA *fn5 filed a complaint against Progress, seeking to recover the amount of $350,000 ...


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