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Mallalieu-Golder Insurance Agency, Inc. v. Executive Risk Indemnity

August 9, 2006

MALLALIEU-GOLDER INSURANCE AGENCY, INC., PLAINTIFF,
v.
EXECUTIVE RISK INDEMNITY, INC., AND PREMIUM FINANCE TRUST INVESTORS FUND, DEFENDANTS.



The opinion of the court was delivered by: Judge McClure

MEMORANDUM

BACKGROUND

This is an action whereby plaintiff Mallalieu-Golder Insurance Agency, Inc. ("MG") seeks a declaratory judgment that Executive Risk Indemnity, Inc. ("Executive Risk") has an obligation to defend and indemnify MG under an insurance agents and insurance brokers professional liability policy, Policy No. 501-178510-99 (the "Policy"), with respect to a number of class action lawsuits brought by various investors in the Lycoming County Court of Common Pleas against MG and the Premium Finance Trust ("PFT"), a mysterious entity that held itself out as a wholly-owned subsidiary of MG. More than one year ago, we denied Executive Risk's motion for judgment on the pleadings. (Rec. Doc. No. 42.) Now before the court is Executive Risk's motion for summary judgment. The motion is fully briefed and ripe for our consideration.*fn1 We explain our decision to grant the motion below.

DISCUSSION

I. Applicable Law

1. Summary Judgment Standard

A district court may properly grant a motion for summary judgment "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c). The plain language of the rule "mandates the entry of summary judgment, after adequate time for discovery and upon motion, against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986).

At the summary judgment stage, "the judge's function is not himself to weigh the evidence and determine the truth of the matter but to determine whether there is a genuine issue for trial." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249 (1986). A genuine issue of material fact is one that may reasonably be resolved in favor of either party. Id. "The inquiry is whether the evidence presents a sufficient disagreement to require submission to the jury or whether it is so one sided that one party must, as a matter of law, prevail over the other." Id. In determining whether there is a disputed issue of material fact, the court will draw all reasonable inferences and any ambiguities in favor of the nonmoving party. Am. Flint Glass Workers Union v. Beaumont Glass Co., 62 F.3d 574, 578(3d Cir. 1995) (citation omitted).

The party opposing a motion for summary judgment "must do more than simply show that there is some metaphysical doubt as to the material facts." Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). The nonmoving party "has the duty to set forth specific facts showing that a genuine issue of material fact exists and that a reasonable factfinder could rule in its favor." Ridgewood Bd. Of Educ. v. N.E. ex rel. M.E., 173 F.3d 238, 252 (3d Cir. 1999) (citations omitted); see also Fed. R. Civ. P. 56(e). "Speculation and conclusory allegations do not satisfy this duty." Ridgewood Bd. Of Educ., 173 F.3d at 252 (citation omitted). Furthermore, the "mere existence of a scintilla of evidence in support of the [nonmoving party's] position will be insufficient." Anderson, 477 U.S. at 252.

2. Pennsylvania Law Applies

Jurisdiction in this case rests on the diversity of the parties. 28 U.S.C. § 1332(a)(1). A federal court sitting in diversity must apply the substantive law of the state in which it sits, Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78 (1938), including its choice of law rules, Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941). There is no dispute that Pennsylvania law applies.

The United States Court of Appeals for the Third Circuit set forth a summary of the general rules Pennsylvania courts have applied in construing insurance policies in Jacobs Constructors, Inc. v. NPS Energy Servs., Inc., 264 F.3d 365, 375-76 (3d Cir. 2001). We repeat that discussion here.

First, the court must "ascertain the intent of the parties as manifested by the language of the policy." Standard Venetian Blind Co. v. Am. Empire Ins. Co., 469 A.2d 563, 566 (Pa. 1983). In doing so, an insurance policy must be read as a whole and its terms, when unambiguous, must be construed according to their plain and ordinary meaning. See Pa. Mfrs.' Ass'n Ins. Co. v. Aetna Cas. & Sur. Ins. Co., 233 A.2d 548, 551 (Pa. 1967); see also Koval v. Liberty Mut. Ins. Co., 531 A.2d 487, 489 (Pa. Super. Ct. 1987). Where a provision is ambiguous, it must be construed in favor of the insured. See Standard Venetian Blind Co., 469 A.2d at 566. A provision is ambiguous if reasonable persons, after considering the context of the entire policy, would honestly differ as to its meaning. See Lucker Mfg. v. Home Ins. Co., 23 F.3d 808, 814 (3d Cir. 1994). However, the court should read the policy to avoid ambiguities and not torture the language so as to create them. See St. Paul Fire & Marine Ins. Co. v. United States Fire Ins. Co., 655 F.2d 521, 524 (3d Cir. 1981).

An insurer's duty to defend arises "whenever the complaint filed by the injured party may potentially come within the policy's coverage." Pacific Indem. Co. v. Linn, 766 F.2d 754, 760 (3d Cir. 1985). If the factual allegations of the complaint, taken as true, state a claim to which the policy potentially applies, the insurer must defend the case until it [can] confine the claim to a recovery that the policy [does] not cover." Cadwallader v. New Amsterdam Cas. Co., 152 A.2d 484, 488 (Pa. 1959). To determine whether a claim may be covered, the court must ascertain the scope of the insurance coverage, and then analyze the allegations in the complaint. See Britamco Underwriters, Inc. v. Grzeskiewicz, 639 A.2d 1208, 1210 (Pa. Super. Ct. 1994).

An insurer's duty to defend is separate and distinct from its duty to indemnify. See Erie Ins. Exch. v. Transamerica Ins. Co., 533 A.2d 1363, 1368 (1987). The duty to defend is broader than a duty to indemnify. The duty to indemnify arises only when the insured is found to be liable for damages covered by the policy. The burden of proving that a particular claim falls within the coverage of a policy is on the insured. See id. at 1366-67.

II. Statement of Facts

2. Introduction

In compliance with Local Rule 56.1, Executive Risk submitted a short and concise statement of material facts, complete with citations to the record, and MG, along with defendant Premium Finance Trust Investors Fund ("PFTIF"),*fn2 filed a joint response*fn3 to this statement of material facts. We draw our statement of facts chiefly from those statements of Executive Risk that were admitted by MG and PFTIF.

MG seeks a declaratory judgment that Executive Risk has an obligation to defend and indemnify MG under an insurance agents and insurance brokers professional liability policy, Policy No. 501-178510-99 (the "Policy"), with respect to a number of class action lawsuits brought by various investors in the Lycoming County Court of Common Pleas against MG and PFT, which held itself out as a wholly-owned subsidiary of MG. To decide the coverage issue, it is necessary to understand the actions of MG and PFT that led to the underlying class action lawsuits.

2. Mallalieu-Golder, and the Creation and Operation of Premium Finance

Trust MG was an insurance agency that sold various insurance policies, including commercial, personal, life and health insurance policies. MG also sold financial products, including fixed and variable annuities and mutual funds. Larry Fiorini was the President and Chief Executive Officer of MG from approximately 1976 until his death in March 2002. David Eakin was the Vice President of MG from 1989 until November 2002, and Dan Smith was the bookkeeper and computer administrator for MG from 1991 until November 2002.

In approximately 1998, Fiorini created PFT for the purpose of financing premiums*fn4 for policies sold by MG.*fn5 There were two types of outside parties involved with PFT: those who financed insurance policy premiums through PFT, and those who invested in promissory notes made by PFT. None of the investors in PFT financed insurance premiums through either PFT or MG; in other words, the two types of outside parties involved with PFT were completely independent of one another.

On one hand, those businesses or individuals who financed insurance premiums through PFT would sign a note with PFT, and money would be transferred from PFT's bank account to MG's bank account. MG would then pay the individual's insurance premium to the insurance company, and the client would make payments on the note, with interest, to PFT.

On the other hand, individuals who invested in PFT essentially loaned PFT a sum of money in return for the promise of PFT to pay back principal plus interest. At the time of Fiorini's death, there were 167 investors in PFT. The promissory notes issued by PFT identified the maker of the note as "Premium Finance Trust, a wholly owned subsidiary of Mallalieu-Golder Insurance Agency Inc." (Rec. Doc. No. 51, Ex. F, at 1.)

In fact, PFT was not a "wholly owned subsidiary" of MG. PFT was neither a separate corporation nor a separate partnership from MG. (Dep. of David Eakin, Rec. Doc. No. 51, Ex. B, at 33.) No legal documents were filed with any local, state, or federal agency regarding the creation of PFT. (Dep. of Eakin, Rec. Doc. No. 51, Ex. B, at 33.) PFT had no employees, no officers, no board of directors, and no trustees. (Dep. of Eakin, Rec. Doc. No. 51, Ex. B, at 73 & 84; Dep. of Dan Smith, Rec. Doc. No. 51, Ex. D, at 34-35.) David Eakin, Vice President of MG, testified that he believed PFT to be a "part of Mallalieu-Golder" (Dep. of Eakin, Rec. Doc. No. 51, Ex. B, at 33), and Dan Smith, bookkeeper of MG, testified that it was his understanding that "Premium Finance Trust was a department of Mallalieu-Golder Insurance Agency" (Dep. of Smith, Rec. Doc. No. 51, Ex. D, at 35 & 40-41).

The record before the court suggests that PFT ultimately became the vehicle through which Fiorini perpetrated what MG and PFTIF identify as a Ponzi scheme. (See Rec. Doc. No. 54, at 4); see generally Cunningham v. Brown, 44 U.S. 424, 425 (1924) (Taft, C.J.) (describing the "remarkable criminal financial career of Charles Ponzi"); United States v. Masten, 170 F.3d 790, 797-98 (7th Cir. 1999) (discussing characteristics of a Ponzi scheme).

While PFT was not a legal entity, it did maintain books, records, and a checking account separate from those of MG. (See Dep. of Eakin, Rec. Doc. No. 51, Ex. B, at 34-36.) Although it is unnecessary here to describe the details of how money flowed between PFT and MG, it is clear that cash generated through the operation of PFT was commingled with MG's general account in order to pay MG's operating expenses. Dan Smith testified at his deposition that while it was his understanding that PFT was initially designed to finance premiums, "the use of the money [generated by PFT] changed." (Dep. of Smith, Rec. Doc. No. 51, Ex. D, at 49.) At some point in time, PFT ceased to finance premiums, and cash generated through the making of promissory notes was transferred from PFT to MG at the direction of Fiorini in order to meet the financial obligations of MG. (See generally Dep. of Smith, Rec. Doc. No. 51, Ex. D, at 46-77.)

3. Uncovering the Fraud and Alerting Investors

When Larry Fiorini unexpectedly died in March 2002, David Eakin undertook a review of the financial state of MG and PFT. He discovered that "the amount of the obligations owed to investors . . . far exceed[ed] the current assets available to repay the same." (Rec. Doc. No. 51, Ex. G.) Eakin testified in his deposition that when he discovered that "PFT was grossly underfunded," he notified the Federal Bureau of Investigation. (Rec. Doc. No. 51, Ex. B, at 88-89.)

On April 10, 2002, Eakin sent a letter to the holders of promissory notes issued by PFT (the "Eakin letter"). (Rec. Doc. No. 51, Ex. G.) Therein, Eakin disavowed any prior knowledge of the financial state of PFT and MG, alerted the investors to the ongoing FBI investigation, and informed investors that neither principal nor interest would be paid until the investigation had concluded and the true financial status of MG and PFT was determined.

4. The Class Action Lawsuits

Three class action suits were brought by various investors in PFT after the mailing of the Eakin letter: the first Marshall action, the Semo action, and the second Marshall action. MG seeks a defense and indemnity from Executive Risk with respect to all three of the class action suits.

The first Marshall action is a suit "to obtain monetary damages from Defendant-Premium Finance Trust and Defendant-Mallalieu-Golder Insurance Agency, Inc. resulting from the Defendants [sic] breach of fiduciary duty and breach of contract regarding the Defendants [sic] failure to make payments out of the Premium Finance Trust." (Complaint, First Marshall Action, Rec. Doc. No. 1, Ex. A, at 1.)

The first Marshall action, brought "on behalf of all persons who were investors in the Defendant-Premium Finance Trust," alleges that "all investors in the Premium Finance Trust are entitled to principal and interest payments pursuant to Promissory Notes" issued by PFT, and maintains "that the Defendants wrongfully and erroneously ceased making payments pursuant to the terms of the Promissory Note between the Defendants and all Class members." (Complaint, First Marshall Action, Rec. Doc. No. 1, Ex. A, at ¶¶ 15, 20-21.) Essentially, the first Marshall action complains that those who invested in promissory notes made by PFT were never paid, or were not paid in full, and the failure to pay constitutes "a breach of the agreement between the parties" and "a breach of fiduciary duty on the part of the Defendants." (Complaint, First Marshall Action, Rec. Doc. No. 1, Ex. A, at ¶¶ 8-9.)

Class plaintiffs in the first Marshall action seek damages equal to the amounts owed the class members pursuant to the terms of the promissory notes, plus interest, plus costs of suit and reasonable attorney fees. Class plaintiffs ...


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