United States District Court, W.D. Pennsylvania
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For BANCROFT LIFE & CASUALTY ICC, LTD., a Saint Lucia corporation headquartered at Trou Garnier Financial Centre, Point Seraphine, Saint Lucia, West Indies, Plaintiff, Counter Defendant: Christopher Kip Schwartz, LEAD ATTORNEY, Schwartz & Associates PLLC, Washington, DC; Jordan M. Webster, LEAD ATTORNEY, Buchanan Ingersoll & Rooney, Pittsburgh, PA.
For ERWIN LO, M.D., SUE JIN YU, M.D., husband and wife and Texas residents, Defendants, Counter Claimants: Joseph Friedman, Lauren D. Rushak, Thorp, Reed & Armstrong, Pittsburgh, PA; Samuel A. Hornak, Thorp Reed & Armstrong LLP, Pittsburgh, PA.
Arthur J. Schwab, United States District Judge.
In its simplest form, this breach of contract case and declaratory judgment action was brought by Plaintiff, Bancroft Life & Casualty, ICC, Ltd. (" Bancroft" ), against two individual Defendants, Drs. Lo and Yu. Bancroft seeks damages for the breach and declarations that the individual Defendants defaulted on personal Guarantee Agreements related to loans which Bancroft made to SJYEL Ventures, LP (" SJYEL Ventures" ), a corporate entity which the individual Defendants essentially own.
However, Defendants contend that this case is not that simple. Defendants explain that they had a relationship with Bancroft -- which began sometime in 2002 or 2003 -- through SJYEL Ventures which was a participant in " the Bancroft Program" which -- again, in its simplest form -- enables companies to obtain, inter alia, offshore business risk insurance through Bancroft. Defendants further explain that they entered into several agreements from 2003 to 2010 with Bancroft -- at times on their own behalf, and at other times, in their capacity as representatives of SJYEL Ventures. The individual Defendants, through their Answer, Affirmative Defenses, and Counterclaims to Bancroft's Complaint, essentially contend that the personal Guarantee Agreements at issue in Bancroft's case-in-chief are derivative (or inextricably related) to other agreements between Bancroft and Defendants and/or SJYEL Ventures, and submit that the Guarantee Agreements must be viewed in the totality of " the Bancroft Program" and its related documentation.
More specifically, Defendants' Counterclaims allege, among other things, that the individual Defendants were defrauded by Bancroft into participating in " the Bancroft Program" on SJYEL Ventures' behalf and/or signing the personal Guarantee Agreements. Defendants claim that participation in " the Bancroft Program" was a prerequisite to obtaining business risk insurance for SJYEL Ventures through Bancroft, and that their participation in " the Bancroft Program," as individuals as well as through SJYEL Ventures, caused them to enter into various agreements over several years. Defendants conclude that the alleged fraud, the breach of a fiduciary duty, and the misrepresentations perpetrated by Bancroft induced them to participate in " the Bancroft Program" and/or enter into various agreements, and thereby renders some, if not all, of the contracts illegal, unenforceable, and/or entitles them to declaratory judgment, rescission of the contracts, and/or damages.
Currently, before the Court is Bancroft's Motion for Partial Summary Judgment on some of Defendants' Counterclaims and Affirmative Defenses.  Doc. no. 120. Defendants filed a Response to the Motion for Partial Summary Judgment (doc. no. 133), and Bancroft filed a Reply Brief. Doc. no. 147. The issues are now ripe for adjudication.
I. STANDARD OF REVIEW
Summary judgment may be granted if, drawing all inferences in favor of the non-moving
party, " the movant shows that there is no genuine issue as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a).
A fact is " material" if proof of its existence or non-existence might affect the outcome of the suit under applicable law. Anderson v. Liberty Lobby Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202, (1986). " Facts that could alter the outcome are material facts." Charlton v. Paramus Bd. of Educ., 25 F.3d 194, 197 (3d Cir. 1994). Disputes must be both (1) material, meaning concerning facts that will affect the outcome of the issue under substantive law, and (2) genuine, meaning the evidence must be such that a reasonable jury could return a verdict for the nonmoving party. Anderson, 477 U.S. at 248.
A party moving for summary judgment has the initial burden of supporting its assertion that fact(s) cannot be genuinely disputed by citing to particular parts of materials in the record -- i.e., depositions, documents, affidavits, stipulations, or other materials -- or by showing that: (1) the materials cited by the non-moving party do not establish the presence of a genuine dispute, or (2) that the non-moving party cannot produce admissible evidence to support its fact(s). Fed.R.Civ.P. 56(c)(1).
Conversely, in order to defeat a motion for summary judgment, the non-moving party must support its assertion that fact(s) are genuinely disputed by citing to particular parts of materials in the record, or by showing that: (1) the materials cited by the moving party do not establish the absence of a genuine dispute, or (2) the moving party cannot produce admissible evidence to support its fact(s). Id.
In reviewing a motion for summary judgment, the court " does not make credibility determinations and must view facts and inferences in the light most favorable to the party opposing the motion." Siegel Transfer, Inc. v. Carrier Express, Inc., 54 F.3d 1125, 1127 (3d Cir. 1995).
II. RELEVANT FACTS
The following facts are material, relevant, and not in dispute, unless otherwise indicated. 
The individual Defendants, Drs. Lo and Yu, are medical doctors who live and maintain a medical practice in Texas. ¶ 2.
Sue Ann Ma is a Texas-based CPA and financial planner, who has been a personal friend of the individual Defendants and who, in late 2002, referred the individual Defendants to a Texas attorney, Loren Cook, for the creation of a family limited partnership for asset protection purposes. ¶ ¶ 28, 29, 34. On December 31, 2002, Cook organized SJYEL Ventures (a Texas Limited Partnership) and SJYEL, Inc. (a Texas Corporation). ¶ 35. Drs. Lo and Yu are the sole shareholders of SJYEL, Inc., and SJYEL Inc. is the general partner of SJYEL Ventures. ¶ 36.
Bancroft Property & Casualty, Ltd. was first formed in the British Virgin Islands on May I, 2003; and Bancroft Life & Casualty, ICC, Ltd. (the Plaintiff, " Bancroft" ) was organized on May 1, 2003, was licensed on May 26, 2003, and issued its first " Group Master Policy" on June II, 2003.  ¶ 3. Since 2003, Bancroft offered,
among other things, insurance coverage to members of its Premium Lite Program, hereinafter " the Bancroft Program." ¶ 7. To become a member and thus participate in the Bancroft Program and obtain insurance through Bancroft, an " interested party" was first required to be a member of the Association Benefits Group, Inc. (" ABG" ) -- a Delaware-based " professional association" wholly owned by Bob Barros (through other corporate entities he owns). ¶ ¶ 8-9. Barros is a " director" of Bancroft and has at least some ownership interest in Bancroft. ¶ 9.
In late 2002 or early 2003, Sue Ann Ma, was -- at a minimum -- instrumental, in raising the individual Defendants' awareness of an insurance program known as " Refund Plus" belonging to Boston Life & Annuity, Ltd. -- another offshore insurer. ¶ 37-38. Bancroft claims that the " Refund Plus" plan was also sponsored by ABG. ¶ 38. In late December 2002, or early January 2003, Defendant Lo signed an application for the " Refund Plus" plan and on December 31, 2002, he issued a $100,000.00 check (payable to ABG) for the insurance premium. The check was drawn from Defendant Lo's and Defendant Yu's (his wife) joint personal checking account.  ¶ 39-40. This check was delivered to Cook who, in turn, delivered it to ABG. ¶ 40.
Following this first premium payment made by the individual Defendants, all remaining premium payments made through 2010 were paid by SJYEL Ventures, with one other exception -- a December 30, 2005, premium payment, which was paid by the LoYu Family Partnership, L.P. ¶ 43.
The " Loan Documents" at issue in Bancroft's case-in-chief are comprised of two loan agreements signed by SJYEL Ventures, two Secured Promissory Notes signed by SJYEL Ventures, two Security Agreements signed by SJYEL Ventures, an Agreement for Subordination of Rights to Payment and Set-Off (hereinafter the " Subordination Agreement" ), a Consent to Amendment of Certificate of Insurance, and two agreements for Guarantee of Loan signed by Drs. Lo and Yu in their individual capacity (hereinafter, " the Personal Guarantees" ). ¶ 7, fn. 2.
Any additional relevant facts, controverted or not, will be set forth in the appropriate " Discussion" subsections below.
As an initial matter, Bancroft's Motion for Partial Summary Judgment requests that this Court dismiss five of Defendants' Counterclaims: fraud, illegality, breach of fiduciary duty, conversion, and violation of Pennsylvania's Unfair Trade Practice and Consumer Protection Law 73 P.S. 201-1 et seq. Doc. no. 120. Bancroft's Motion also requests that this Court dismiss nineteen of Defendants' affirmative defenses, specifically the First, Second, Third, Sixth, Seventh, Eighth, Tenth, Twelfth, Thirteenth, Fourteenth, Fifteenth, Sixteenth, Eighteenth, Nineteenth, Twenty-second,
Twenty-third, Twenty-fifth, Twenty-eighth, and Twenty-ninth Affirmative Defenses. Id.
In their Brief in Opposition to Bancroft's Motion for Partial Summary Judgment, Defendants withdrew their Counterclaim for violations of Pennsylvania's Unfair Trade Practice and Consumer Protection Law (Count IX) and similarly withdrew their Third, Sixth, Eighteenth, Twenty-third, Twenty-eighth, and Twenty-ninth Affirmative Defenses. Doc. no. 136, fn. 53 (sealed).
Thus, there are four remaining Counterclaims at issue (fraud, illegality, breach of fiduciary duty, and conversion), and thirteen remaining Affirmative Defenses at issue (the First, Second, Seventh, Eighth, Tenth, Twelfth, Thirteenth, Fourteenth, Fifteenth, Sixteenth, Nineteenth, Twenty-second, and Twenty-fifth).
Based on the remaining Counterclaims and Affirmative Defenses at issue, the Court will grant in part and deny in part Bancroft's Motion for Partial Summary Judgment for the reasons set forth, infra.
B. Specific Counterclaims and Affirmative Defenses at Issue
1. Defendants' Fraud Counterclaim (Count I)
Bancroft advances three arguments as to why this Counterclaim should be dismissed. Each argument will be discussed seriatim.
a. Defendants sustained no damages in their individual capacities
Bancroft first argues that Drs. Lo and Yu lack standing to sue Bancroft for fraud because they did not sustain damages in their individual capacities. In essence, Bancroft argues that under the " derivative injury rule," shareholders, such as Drs. Lo and Yu, may not sue for personal injuries that result from injuries to a corporation -- even a closely held corporation -- such as SJYEL Ventures. See Kauffman v. Dreyfus Fund, Inc., 434 F.2d 727, 732 (3d Cir. 1970) (A stockholder of a corporation does not acquire standing to maintain an action in his own right, as a shareholder, when the alleged injury is inflicted upon the corporation and the only injury to the shareholder is the indirect harm which consists in the diminution in value of his corporate shares resulting from the impairment of corporate assets.); see also Pitchford v. PEPI, Inc., 531 F.2d 92, 97 (3d Cir. 1975) (holding in an antitrust action that indirect harm that the individual may suffer as a stockholder through injury inflicted upon the corporation may not to be redressed).
The Court recognizes that under Bancroft's application of the derivative injury rule, the individual Defendants are seemingly two steps removed from damages. First, SJYEL Ventures' general partner is SJYEL, Inc. -- not the individual Defendants -- and second, SJYEL, Inc.'s two shareholders are Drs. Lo and Yu.
However, in Temp-Way Corp. v. Continental Bank, 139 B.R. 299, 317 (E.D. Pa. 1992), aff'd, 981 F.2d 1248 (3d Cir. 1992), the District Court held that shareholders had standing as individuals to assert claims based on breach of fiduciary duty, breach of oral financing agreement, fraud, and negligent misrepresentation insofar as they sought compensation for damages sustained prior to the time they were stockholders of the corporation. In reaching this conclusion, the District Court noted:
[W]hile the Third Circuit has not squarely held as such, it is generally accepted that guarantors of a corporation's debt, even if those guarantors are also stockholders, do not have standing to bring an action if the only harm suffered
is derivative of the harm the corporation suffered. . . .
. . .There are several exceptions to the above rule, however. One such exception exists where there is a special duty, such as a contractual duty, between the wrongdoer and the stockholders. This special duty exception applies most often where there is a fiduciary relationship between the wrongdoer and the stockholder. Cole v. Ford Motor Co., 566 F.Supp. 558, 568-69 (W.D. Pa. 1983). Another exception exists where the stockholders suffer an injury separate and distinct from that suffered by the corporation as a result of the wrongdoer's actions. Id. Stockholders, similarly, have standing to seek damages in their own right for misrepresentations made to them before they were shareholders for the purpose of inducing their investment.
In addition to Temp-Way, in Kroblin Refrigerated Xpress, Inc. v. Pitterich, 805 F.2d 96, 104 (3d Cir. 1986), the United States Court of Appeals for the Third Circuit noted that, " [t]he course of dealing or conduct of the parties can evidence a contractual relationship between parties and thus can confer standing on an individual as a direct party to the agreement." In Kroblin, the Court of Appeals agreed with the District Court's finding that the documentary evidence and conduct of the parties supported a conclusion that the shareholders (Harold Doyle and Dorothy Ortbring) of the Great Lakes Express Company were direct parties to a loan agreement. Specifically, the Court of Appeals held that the District Court correctly concluded that Kroblin directly injured Doyle and Ortbring by refusing to continue payments on the Lakes note, thereby concluding that the shareholders had standing as individuals to sue under the Lakes note.
In In re Kaplan, the Court of Appeals for the Third Circuit reiterated that the " derivative injury rule holds that a shareholder (even a shareholder in a closely-held corporation) may not sue for personal injuries that result directly from injuries to the corporation." Kaplan, 143 F.3d 807, 811-12 (3d Cir. 1988), citing Pitchford, supra. The Court of Appeals, while applying Illinois law, next relied upon Kroblin for the exception to the rule noting, " [t]he derivative injury rule, however, will not bar Kaplan's claims if he seeks to recover for injuries that were inflicted on him individually rather than on the corporation." 143 F.3d at 812. The Court of Appeals held that because Kaplan signed the agreement at issue in his individual capacity and promised to give the promissee his income tax refund, " the central question with respect to the standing issue concerns the nature of the consideration, if any, that Kaplan himself received in exchange for this personal commitment." Id. The Court further explained that if Kaplan received promises in his individual capacity, he could sue for the breach of those promises. Id.
In addition to the above, other Courts around the country have held that a shareholder may bring an individual suit if the defendant has violated an independent duty to the shareholder, whether or not the corporation may also bring an action, although damages may be limited so as to avoid a double recovery. See Lawton v. Nyman, 327 F.3d 30 (1st Cir. 2003) (applying Rhode Island law); Smith Setzer & Sons, Inc. v. South Carolina Procurement Review Panel, 20 F.3d 1311 (4th Cir. 1994) (applying North Carolina law); Americas ...