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May 23, 2001


The opinion of the court was delivered by: Yohn, J.

Memorandum and Order

Plaintiff Hudson United Bank ("Hudson") is the successor by merger to Regent National Bank ("Regent"). Defendant Progressive ("Progressive") issued a bond to insure Regent against certain types of losses. Hudson sues Progressive for payment under the bond, alleging that the circumstances surrounding Regent's losses in its automobile insurance premium finance business ("IPF business") trigger Progressive's bond obligation. Progressive, arguing that the facts alleged do not trigger its bond obligations, moves for dismissal under Fed.R.Civ.P. 12(b)(6). When reviewed in the light most favorable to Hudson, the facts alleged in the complaint adequately state a cause of action. Progressive's motion will therefore be denied.

I. Standard of Review

Pending before the court is a motion to dismiss for failure to state claim upon which relief can be granted under Rule 12(b)(6). The purpose of a Rule 12(b)(6) motion is to test the legal sufficiency of the complaint. See Holder v. City of Allentown, 987 F.2d 188, 194 (3d Cir. 1993). In deciding a motion to dismiss, the court must "accept as true all allegations in the complaint and all reasonable inferences that can be drawn from them after construing them in the light most favorable to the [plaintiff]." Consequently, at this stage of the litigation, "a court may dismiss a complaint only if it is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations." Hishon v. King & Spalding, 467 U.S. 69, 73 (1984). In deciding a motion to dismiss, a court may also consider exhibits attached to the complaint. Pension Benefit Guar. Corp. v. White Consol. Indus., Inc., 998 F.2d 1192, 1196 (3d Cir. 1993).

II. Background

Under the Regent — K-C agreement, K-C was to establish and maintain a computer system that would generate the data and reports needed by Regent in these key tasks. Id. at ¶ 15. K-C was also to enter account information into the computer and transmit the data to Regent's pre-existing computers. Id. at ¶¶ 18, 21, 23. Regent acquired an ownership interest in this computer system. Id. at ¶ 16. K-C, as recompense for its services, was to receive a transaction-based servicing fee and a separate fee equal to 50% of profits. Id. at ¶ 20.

Regent alleges that K-C, by representing that the IPF business was profitable, concealed the true state of the IPF business from Regent and induced Regent to continue its IPF business. Id. at ¶ 22. In particular, K-C used the computer system it had devised to transmit incomplete, inaccurate, and misleading data to Regent. Id. at ¶ 23. The data prevented Regent from properly tracking and addressing delinquencies and prevented Regent from properly tracking profits and losses on individual transactions. Id. at ¶¶ 27, 28. As a result of the inaccurate data, Regent allegedly incurred $3,919,430.00 in collateral deterioration and overpaid K-C $889,089.00 based on non-existent profits. Id. at ¶ 37(c).

On or around October 7, 1997, Regent submitted a Proof of Loss statement to Progressive and sought coverage under the bond. Id. at ¶ 38. On June 18, 1999, Progressive denied coverage and declined to make payment on the bond. Id. at ¶ 39. On July 12, 2000, following substantial discussion between the parties, Progressive reaffirmed its denial and declination. Id. Hudson, Regent's successor by merger, initiated suit against Progressive.

III. Discussion

Hudson alleges two separate causes of action: liability under the Computer Systems Rider to the bond or, in the alternative, liability under the Fidelity Insuring Agreement of the bond. Compl. at 12, 14. Progressive seeks dismissal of the complaint in its entirety. Def. Mem. at 5, 7, 9. With respect to both causes of action, Progressive argues that the facts alleged in Hudson's complaint do not establish the elements that trigger Progressive's obligation to make bond payments. Id.

First, Progressive claims that the exclusion provision of the bond excludes application of the Computer Systems Rider to the facts presented by Hudson. Def. Mem. at 5. Hudson does not dispute that the exclusion applies to the rider. Moreover, the language of the bond itself does not limit the reach of the exclusion to only the body of the bond, and the language of the rider does not modify or abrogate the exclusion. Cf. Rorer Group, Inc. v. INA, 655 A.2d 123, 125 (Pa.Super.Ct. 1995) (finding that exclusions apply unless endorsement specifically modifies or abrogates them). Accordingly, the court reads the exclusion to apply to the rider.

The relevant exclusion provision of the bond excludes coverage for:

loss resulting directly or indirectly from the complete or partial nonpayment of, or default upon, any Loan or transaction involving the Insured as a lender or borrower, or extension of credit, including the purchase, discounting or other acquisition of false or genuine accounts, invoices, notes, agreements or Evidences of Debt, where such Loan, transaction or extension was procured in good faith or through ...

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