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11/18/97 LINDA S. KAISER v. WESTERN STATES

November 18, 1997

LINDA S. KAISER, INSURANCE COMMISSIONER OF THE COMMONWEALTH OF PENNSYLVANIA AS STATUTORY LIQUIDATOR OF NATIONAL AMERICAN LIFE INSURANCE COMPANY OF PENNSYLVANIA; (IN LIQUIDATION), PLAINTIFF
v.
WESTERN STATES ADMINISTRATORS, DEFENDANT



Before: Honorable James R. Kelley, Judge, Honorable Jim Flaherty, Judge, Honorable Silvestri Silvestri, Senior Judge. Opinion BY Judge Flaherty.

The opinion of the court was delivered by: Flaherty

BY JUDGE FLAHERTY

FILED: November 18, 1997

This matter concerns a motion for judgment on the pleadings in this court's original jurisdiction. On August 28, 1996, Linda Kaiser, Insurance Commissioner for the Commonwealth, as statutory liquidator (Liquidator) of National American Life Insurance Company of Pennsylvania (NALICO), filed a Complaint against Western States Administrators (WSA) alleging breach of contract arising out of WSA's nonpayment of two Notes executed by WSA and NALICO in 1988. On April 14, 1997, after the close of the pleadings, the Liquidator filed this motion for judgment on the pleadings.

In October 1986 WSA, through its subsidiary, Western Sierra Life Insurance Company, purchased NALICO to increase its ability to do business in states like Pennsylvania where WSA was not licensed to underwrite insurance coverage. WSA borrowed the funds used to purchase NALICO from the Bank of America (Bank). On January 23, 1988, WSA and NALICO executed a note (Note I) whereby WSA promised to pay the principal sum to NALICO plus interest at the rate of ten (10) percent per year. The terms of Note I provided that interest would begin to accrue on January 26, 1988; the accumulated interest for the first year would be added to the "inter-company account" but all interest thereafter would be paid monthly beginning February 1, 1989; all unpaid principal and all accrued but unpaid interest was due and payable six months after the final payment date of the purchase note to the Bank; the final payment date of the purchase note to the Bank was on or before December 31, 1994; and in the event of default, WSA agreed to pay all costs, expenses and attorneys fees incurred by NALICO in connection with the enforcement of Note I. WSA failed to make payment under the terms of Note I.

On June 28, 1988, WSA and NALICO executed Note II wherein WSA promised to pay NALICO the principal amount of $1,500,000.00 plus interest accruing from January 1, 1988 at the rate of ten (10) percent per year. Note II contained a proviso that the principal and the unpaid accrued interest, associated with Note I as part of a rescission agreement, became part of and was to be included in Note II and was due and payable at the earliest on July 31, 1994 but not later than December 31, 1994. WSA was to pay all expenses incurred in the enforcement of Note II which contained other provisions identical to Note I. WSA failed to make payment of all outstanding sums due under Note II.

By order dated May 24, 1996, Liquidator was appointed by this Court. Under her power to institute suits on behalf of NALICO and to collect debts owed to NALICO, the Liquidator instituted this suit by filing a complaint against WSA in this Court. The two Notes were attached as exhibits and made a part thereof. The Liquidator alleges that WSA failed to make payment according to the terms of Notes I and II by the due dates. Liquidator further alleges that, on May 18, 1995, NALICO made formal demand for payment of the aggregate amounts due under Notes I and II and that a copy of the demand letter was attached as Exhibit C. Liquidator finally alleges that NALICO has fully complied with its obligations and that WSA breached its obligations under Notes I and II by failing to make payments thereunder when due and, as a result, NALICO has sustained damages.

WSA filed an original Answer and New Matter admitting that both Note I and Note II were executed, that WSA failed to make payment in accordance with the terms of the Notes and, in paragraphs 21, 23, and 28, admitted that NALICO complied with its contractual obligations under the Notes but, in paragraph 21, WSA also incorporated its entire New Matter. In its New Matter, WSA asserted affirmative defenses of estoppel, collateral estoppel, and that the Liquidator and the Pennsylvania Insurance Department (Department) caused the default through alleged tortious interference with a business relationship from 1990 until NALICO went into dissolution.

Specifically, WSA's original New Matter alleged several acts by the Department which WSA construed as tortious interference with its business relationship with NALICO and which allegedly caused WSA to default on the Notes. WSA alleged that the Department filed a petition for an Order of Suspension of NALICO with the Liquidator on January 9, 1991 because the Department refused to treat the notes as assets which contributed to the alleged financial instability of NALICO. The Securities Valuation Office, however, recommended to the Department that WSA's notes to NALICO should be treated as bonds and, therefore, assets. WSA therefore alleged further that the Department's continued arbitrary and capricious targeting of NALICO caused it to agree to stipulate to a Supervisory Order, when none was warranted, on the grounds that WSA was committing excess employees and financial resources to combatting the Department. The Supervisory Order was vacated after approximately nine months. WSA averred that it defaulted on the payments of Notes I and II to NALICO because NALICO's reputation was damaged by its voluntary stipulation for an Order of Suspension. WSA also averred the following: that NALICO's damaged reputation caused WSA to suffer a reduction in revenues from NALICO, which WSA had been using to reduce its outstanding loan obligation to Bank of America from $8.5 million to $2.9 million; losses of premiums, which WSA shared with NALICO; and that the defaults and losses stemmed from tortious conduct by the Liquidator and the Department, under the guise of regulatory concern on NALICO's behalf.

The Liquidator filed seven preliminary objections to WSA's original Answer and New Matter. Five of these seven objections were in the nature of a demurrer to WSA's New Matter, which asserted the following affirmative defenses: that the conduct of the Department was the proximate cause of WSA's default and that such conduct cemented the insolvency of NALICO, estoppel, collateral estoppel, and tortious interferences with WSA's business relationship with NALICO. The demurrer was based on the averments asserting that the Commonwealth Court will not examine the correctness of the Liquidator's regulatory actions prior to liquidation when raised by a defendant as part of new matter or as an affirmative defense. WSA then filed an amended Answer and New Matter and added a counterclaim for recoupment of expenses, costs and back profits. In its amended Answer, WSA again admitted that Notes I and II were executed and that WSA failed to make payments under the terms of those Notes. WSA, however, denied paragraph 21 of the Complaint and asserted that, as a result of the tortious conduct previously averred in the original Answer, NALICO failed to comply with all of its obligations. Paragraphs 23 and 28 of the original New Matter which merely stated "Admitted" in response to corresponding paragraphs of the Complaint which alleged that NALICO had "complied with all obligations under the Notes" were changed in the amended New Matter to "Denied" followed by a statement of NALICO's alleged tortious behavior.

The Liquidator responded by filing a reply to WSA's amended Answer which closed the pleadings. On April 14, 1997, the Liquidator filed a motion for judgment on the pleadings which is the matter presently before us. *fn1

The parties in this case raise the following issues: (1) whether the averments in WSA's amended Answer are irreconcilable with the admissions that WSA made in its original Answer, and if so, whether these inconsistencies are without explanation; and (2) whether the Liquidator's averments that NALICO fully complied with its obligations under Notes I and II in paragraphs 21, 23, and 28 of her Complaint are legal Conclusions that may not be deemed admitted for purposes of granting a judgment on the pleadings.

I.

In support of her motion, the Liquidator argues that she is entitled to judgment on the pleadings because WSA admitted in its original Answer that Notes I and II were executed, that WSA failed to make payment under the terms of those Notes and NALICO performed all its obligations under the Notes. The Liquidator maintains that, because these are the only facts that she is required to prove to meet her burden of proof under the applicable substantive law and because WSA has already admitted to them, she is entitled to judgment on the pleadings. Additionally, the Liquidator contends that WSA admitted in its amended Answer that the Notes were executed and that WSA failed to make the required payments, but, this time, WSA denied that NALICO met its obligations. The Liquidator maintains that, although WSA's amended Answer contradicts its ...


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