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Novinger Group, Inc. v. Hartford Life & Annuity Insurance Co.

December 23, 2008


The opinion of the court was delivered by: Christopher C. Conner United States District Judge

(Judge Conner)


This is a diversity action sounding in negligence, securities fraud, and breach of contract, filed by plaintiffs the Novinger Group, Inc., James David Novinger, and Patrick D. Hospodavis (collectively "plaintiffs"). Plaintiffs contend that defendant Hartford Life and Annuity Insurance Company*fn1 ("Hartford") breached the terms of several life insurance policies and failed to fulfill its duty to supervise an agent licensed to sell such policies. Additionally, the Novinger Group, Inc. ("Novinger Group") alleges that Hartford violated Rule 10b-5 of the federal securities law, see 17 C.F.R. § 240.10b-5. Presently before the court is Hartford's motion for summary judgment on all claims. (Doc. 59.) For the reasons that follow, the motion will be granted.

I. Statement of Facts*fn2

Novinger Group is a privately held Pennsylvania corporation, with an employment roll of over 350 and an annual revenue in excess of $60 million. (See Doc. 1 ¶ 1; Doc. 61, Ex. B at 12; Doc. 63 ¶ 2.) Plaintiff James David Novinger ("James") owns a predominant share of the company and is the acting president and chief executive officer. (Doc. 61, Ex. B at 11-12.) Plaintiff Patrick Hospodavis ("Hospodavis") is Novinger Group's chief financial officer. (Doc. 61, Ex. A at 11.) Hartford is an insurance company organized under the laws of Connecticut. (Doc. 63 ¶ 3.) Plaintiffs' claims are premised upon alleged wrongdoing committed by Hartford's agent, Richard Harper ("Harper"), who is not a party to this action. (See Doc. 61, Ex. B at 97-98, 101, 106; Ex. D at 109-10; Doc. 71, Ex. C at 130.)

A. The December 2001 Sale

The dispute in this case primarily centers upon the sale of eight variable life insurance policies*fn3 by Hartford to Novinger Group in December 2001. Four months prior to this sale, in August 2001, top executives at Novinger Group were approached by Harper, a Wachovia Securities ("Wachovia") employee licensed to sell Hartford insurance policies through Wachovia. (Doc. 63 ¶ 6; Doc. 73 at 1.) Plaintiffs expressed interest to Harper in purchasing long-term investment plans for Novinger Group's top executives. (See Doc. 63 ¶¶ 6-7.) Harper offered to structure a set of lucrative deferred compensation policies*fn4 based upon the purchase and retention of variable life insurance through Hartford. (Doc. 63 ¶ 8; Doc. 73 at 1.) Essentially, Harper proposed an investment vehicle that required each Novinger Group executive to invest in a life insurance policy containing several sub-accounts, each of which were composed of market-centric mutual funds. (Id.)

Harper met with the plaintiffs again on September 11, 2001, in order to describe the proposed insurance policies in more detail. (See Doc. 61, Ex. A at 31-32; Ex. C ¶¶ 13-14, 16; Doc. 72, Ex. P at 28-32; Doc. 73, Ex. B.) By way of a series of Powerpoint illustrations, Harper outlined the mechanics of the policies. (See Doc. 73, Ex. B.) Harper explained that each Novinger Group policyholder would be required to purchase variable life insurance through Hartford, (see Doc. 61, Ex. A at 37; Ex. D at 23; Doc. 63 ¶ 8), and that the ultimate value of an individual's policy was subject to the performance of the various stock investments comprising the policy's sub-accounts. (Doc. 63 ¶ 8.)

Between September 11, 2001, and December 5, 2001, James, Hospodavis, and Frank Kruse ("Kruse"), another high-ranking Novinger Group executive, participated in at least three more meetings with Harper, each time discussing the specifics of the proposed DC policies. (See Doc. 61, Ex B at 42; Ex. C ¶¶ 17, 20; Doc. 63 ¶ 7.) At some of these meetings, Harper presented illustrations depicting projected financial growth based upon variable rates of market return. (See Doc. 61, Ex. B at 54, 99, 112-13; Doc. 63 ¶ 8; Doc. 71, Ex. C at 139.) Prior to their purchase of the Hartford plans in early December, plaintiffs understood that the ultimate value of the policies was market-based and thus not guaranteed. (Doc. 61, Ex. A at 54; Ex. D at 29; Doc. 63 ¶ 8.)

From December 5 through December 20, 2001, plaintiffs purchased and signed the paperwork for eight Hartford variable life insurance policies. (See Doc. 63 ¶¶ 9-10; Doc. 71, Exs. I-N.) All of the policies were prepared and signed by Harper. (See Doc. 71, Exs. I-N.) By signing each policy, Harper certified that he provided prospectuses and certain financial growth illustrations to the individual policyholder; that he explained that certain policy elements were not guaranteed; and that he had made no statements inconsistent with the financial growth illustrations that he attested to providing. (See, e.g., id. at Ex. I, p. 8.) Correspondingly, each policyholder acknowledged that his policy's non-guaranteed elements were subject to market fluctuation, that the market projections illustrated in the policy documents did not represent a guarantee of future growth, and that the ultimate value of the variable life insurance policy was dependent upon the market success of its specific sub-accounts. (Doc. 63 ¶ 14.)

In early January 2002, plaintiffs received executed copies of their Hartford variable life insurance policies. (Doc. 61, Ex. H; Doc. 63 ¶ 21.) It is undisputed that the finalized policy documents delivered by Hartford accurately lists all charges and fees, as well as the annual premiums that each policyholder is required to pay. (See Doc. 63 ¶¶ 22-23.) Furthermore, plaintiffs admit that they did not review the policies at the time of delivery, nor did they do so during the ten-day post-delivery "grace period"*fn5 provided in the contracts. (Id. ¶¶ 23, 25.)

B. The April 2002 Sale

On April 15, 2002, Hartford sold plaintiffs a $6,000,000 Buy-Sell Policy*fn6 on the life of James. (Doc. 63 ¶ 37; Doc. 71, Ex. H.) This sale was the product of several months of discussion, beginning in October 2001, between Harper, James, Kruse, and Novinger Group's attorneys. (Doc. 63 ¶¶ 31-32.) James initially approached Harper because he was seeking to develop an investment vehicle that would enable him to sell his ownership share in Novinger Group to Kruse, who James had selected to succeed him as company president. (See Doc. 61, Ex. B at 71; Ex. C ¶ 25; Ex. D at 78-80.) In order to purchase James's shares, Kruse needed to raise $2 million in approximately five years' time. (See Doc. 61, Ex. D at 79.) Under the terms of the agreement propounded by Harper, Novinger Group would purchase a Hartford variable life insurance policy-composed of potentially high-return market-based sub-accounts-on the life of James. (See Doc. 63 ¶ 34-36, 38.) In advance of the final sale in April 2002, Harper provided plaintiffs with a hypothetical illustration of financial growth based upon variable rates of return, (see id. ¶ 35), and indicated that Kruse could potentially withdraw $2 million from the account in five years, (see Doc. 61, Ex. D at 78-79; Doc. 63 ¶ 35). Plaintiffs admit that prior to purchasing the policy, they understood that its value would vary based on the value of its sub-accounts. (Doc. 63 ¶ 35.)

The Buy-Sell Policy was finalized and signed on April 25, 2002. (Id. ¶ 44). It is undisputed that the costs and charges reflected in the executed policy were consistent with the April illustration presented by Harper prior to finalization. (Id. ¶¶ 42, 45.) Moreover, plaintiffs concede that they did not examine the policy at the time it was signed, nor did they do so within the twenty days in which a signatory had a right to rescind. (Id. ¶¶ 41, 47.)

C. The March 2003 Arbitration

By the fall of 2002, plaintiffs had become concerned about the financial performance of the Hartford policies. (Id. ¶ 50.) On November 1, 2002, after speaking with an outside insurance expert, Hospodavis sent a letter to Harper requesting an explanation of the variable life insurance policies' historic rate of return. (Doc. 71, Ex. C at 118-20.) Shortly thereafter, plaintiffs' counsel, Neil Yahn ("Yahn"), telephoned Harper to complain about both the variable life policies and the Buy-Sell Policy. (Doc. ¶ 51.) Before their conversation ended, Yahn threatened to "bury" Harper in litigation. (Id.; see also Doc. 61, Ex. C ¶ 30.)

At an impasse with Harper, plaintiffs took their concerns to Wachovia. In January 2003, Yahn sent Wachovia a letter claiming that Harper engaged in unethical and high-pressure sales tactics in order to force the purchase of the Hartford policies upon Novinger Group. (See Doc. 62, Ex. S.) Wachovia denied that Harper engaged in any misconduct. (Id.) Plaintiffs responded to Wachovia's self- absolvatory response by announcing their intention to commence civil suit in Pennsylvania state court. (See id.) The tenor of communications between the parties did not subsequently improve.

On March 13, 2003, plaintiffs initiated arbitration proceedings with the National Association of Broker Dealers ("NASD") against Wachovia, Harper, and Hartford. (Doc. 62, Ex. U.) Plaintiffs' statement of claim alleged that Harper "engaged in deceptive sales techniques using misleading materials and illustrations in the sale of several Hartford Variable Universal Life Insurance Policies." (Id. at 1.) Specifically, five grounds for relief were identified: (1) breach of a duty of good faith; (2) breach of a duty of care of suitability; (3) breach of a duty to supervise; (4) state law insurance fraud; and (5) violations of Rule 10b-5 of the federal securities law. (Id. at 6-11.) By virtue of a general account agreement, plaintiffs were contractually required to seek redress with Wachovia and Harper via arbitration. (See Doc. 62, Ex. S.) Hartford, who was not a party to the general account agreement, opted out of the arbitration on August 20, 2003. (Doc. 62, Ex. T.)

Plaintiffs, Wachovia, and Harper thereafter proceeded to arbitration. Each of the parties were represented by counsel, and both Wachovia and Harper were permitted to submit pre-hearing pleadings answering the allegations contained in plaintiffs' statement of claim. (See Doc. 62, Ex. W.) Additionally, the parties appeared extensively in hearings before the arbitrators. Over the course of eight days in June 2005 and May 2006, seventeen sessions were held before the arbitration panel in Philadelphia, during which evidence and argument were presented.*fn7 (Id. at 4.) Harper alone testified for upwards of twelve hours. (See Doc. 61, Ex. C ¶ 32.) On May 9, 2006, the arbitration panel issued a written award, holding Wachovia liable for the sum of $70,000, but denying all plaintiffs' claims against Harper. (Doc. 62, Ex. W at 3; see also Doc. 63 ¶ 55.) The arbitration award was neither appealed nor submitted to a court for judicial confirmation.

D. Procedural History

On January 24, 2006, plaintiffs commenced this action, alleging (1) breach of implied and express warranties to sell a suitable product, (2) breach of the duty of good faith, (3) violation of the Pennsylvania Unfair Trade Practices and Consumer Protection Law, 73 PA. CONS. STAT. ANN. § 201-1(ii), (4) negligent supervision, (5) violation of Rule 10b-5 of the federal securities law, 17 C.F.R. § 240.10b-5, and (6) violation of Pennsylvania's Insurance Bad Faith statute, 42 PA. CONS. STAT. ANN. § 8371. (Doc. 1.) Pursuant to a motion filed by Hartford on March 28, 2006, (see Doc. 16), the court dismissed plaintiffs' claims asserting a breach of the duty of good faith, violation of the Pennsylvania Unfair Trade Practices and Consumer Protection Law, and violation of the Pennsylvania Insurance Bad Faith statute, (see Doc. 31).

On November 26, 2007, Hartford filed the instant motion for summary judgment. (Doc. 59.) Hartford claims that the statute of limitations lapsed on the negligence and Rule 10b-5 allegations, as well as plaintiffs' assertion that Hartford breached the implied and express warranties of suitability in the December 2001 sale of the variable life insurance policies. (Id. at 19.) Hartford also alleges that collateral estoppel bars plaintiffs from asserting each of their claims. (Id.) Finally, Hartford argues that each ...

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