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First National Bank of Pennsylvania v. Transamerica Life Insurance Co.

United States District Court, W.D. Pennsylvania

July 6, 2017



          Cynthia Reed Eddy, United States Magistrate Judge.

         I. INTRODUCTION[1]

         Plaintiff First National Bank of Pennsylvania (“FNB”) initiated this civil action for breach of contract and insurance bad faith against the insurer of its bank owned life insurance policies, Defendant Transamerica Life Insurance Company (“Transamerica”), and for breach of fiduciary duty against its insurance broker, Defendant Clark Consulting, Inc. (“Clark”); (collectively “Defendants”). The dispute boils down to whether FNB was paid the entire amount it was owed after it surrendered the policies. FNB claims that in addition to the amount it was paid at surrender (approximately $18 million), it was owed an amount known as the “Bank Enhancement Amount” (worth more than $2.5 million) from a third-party, and that Defendants' actions directly prevented FNB from receiving it. Presently pending before the Court is Defendants' motion for summary judgment. After careful consideration of the parties' arguments on the matter and all of the exhibits filed in connection therewith, and for the reasons that follow, the Court will grant Defendants' motion and enter summary judgment in their favor.


         As will be explained in greater detail below, FNB acquired the bank owned life insurance policies at issue in this case (“the Policies”) in the fall of 2013 when FNB merged with Park View Federal Savings Bank (“Park View”).[3] By way of background, Park View, a federal savings bank located in Ohio at the time, purchased the Policies seven years earlier from Defendant Transamerica and Transamerica's affiliate for $20 million.[4] Defendant Clark, which is also affiliated with Transamerica, acted as the insurance broker in connection with the purchase of the Policies. Thereafter, Clark serviced the Policies and continued acting as the insurance broker after the FNB-Park View merger and through FNB's eventual surrender of the Policies in 2014.

         The Policies were “separate account” policies, meaning that there were a number of different investment accounts, known as “subaccounts, ” to which Park View could choose to allocate its policy values. According to the parties, a bank's decision as to which subaccount(s) to allocate its policy values is informed by the material that it receives from the insurance company in a private placement memorandum (“PPM”). The PPM contains detailed disclosures about the attributes of each of the available subaccounts and the terms of any agreements with third parties that may apply if a specific subaccount is selected. The insurance company may later add a new subaccount to the “menu” of available options, at which point the insurance company would send the bank a supplement to the PPM.

         When Park View initially purchased the Policies from Transamerica in 2006, it selected the “JP Morgan Core” subaccount. This subaccount was specified in the policy form and was described in multiple PPMs that Park View received prior to selecting it.

         On August 7, 2009, Park View, through its Chief Financial Officer, signed a Customer Service Change Form for the Policies (the “2009 Change Form”), which re-allocated 100% of Park View's policy values to a new subaccount offered by Transamerica: the “Stable Value Subaccount.” The 2009 Change Form specifically stated that Park View's re-allocation request was “subject to the restrictions of the Stable Value Subaccount.” Park View's selection of the Stable Value Subaccount meant that the following additional agreements needed to be executed by parties other than Park View to carry out the subaccount's goal: (1) a Stable Value Agreement between Transamerica and its affiliate Commonwealth General (the “SVA”), and (2) an Enhancement Amortization Agreement between Commonwealth General and JP Morgan (the “EAA”).

         Parenthetically, Transamerica and Commonwealth General are both subsidiaries of the same parent company. Commonwealth General does not have any employees and was included in the SVA merely for capital and/or accounting purposes. It is undisputed that although Commonwealth General was the signatory to the EAA, Transamerica could also exercise the rights provided to Commonwealth General in the EAA against JP Morgan.

         By deciding to re-allocate its policy values into the Stable Value Subaccount, Park View agreed to additional surrender restrictions contained in the SVA and the EAA. Before Park View signed the 2009 Change Form, its CFO, independent auditor, and independent financial accountant all separately reviewed supplements to the original PPMs (which discussed, inter alia, surrender restrictions), as well as forms of the SVA and EAA.[5] Based on Park View's decision to re-allocate its policy values into the Stable Value Subaccount, the SVA was executed by Transamerica and Commonwealth General, and the EAA was executed by Commonwealth General and JP Morgan.

         The amount owed to the Policyowner at surrender under the Stable Value Subaccount is governed by various provisions in the SVA and the EAA. Under the EAA, JP Morgan promised that, subject to certain limits and conditions which had to be “strictly satisfied, ” it would pay an amount known as the “Bank Enhancement Amount” to Commonwealth General at surrender.[6]Two conditions in the EAA are relevant to this dispute. The first condition was that “[t]he Polices are not, and have not been previously, owned by an entity other than the Policyowner on or prior to the Immunization Termination Date.”[7] The second condition required that, within a specified time period, the Policyowner deliver “a fully executed and complete Surrender Certificate” that is “substantially in the form of the document attached as Exhibit C” to the EAA.[8] Failure to strictly satisfy either of these conditions under the EAA discharged JP Morgan's obligation to pay the Bank Enhancement Amount to Commonwealth General.

         Under the SVA, the amount owed to the Policyowner was to be determined after the Policyowner provided notice of surrender.[9] The parties offer different views as to how the agreements operate if JP Morgan were to incorrectly withhold the Bank Enhancement Amount.[10]In any event, they agree that if JP Morgan correctly refused to pay the Bank Enhancement Amount to Commonwealth General under the EAA, then, ultimately, Transamerica would not be obligated to pay the Bank Enhancement Amount to the Policyowner at surrender.[11]

         A few years after Park View selected the Stable Value Subaccount, in the summer of 2012, FNB's parent company was considering a potential acquisition of Park View's parent company and began conducting due diligence of Park View. On February 19, 2013, FNB's parent and Park View's parent publicly announced that they had entered into an Agreement and Plan of Merger (the “Parent Merger Agreement”). The Parent Merger Agreement provided that Park View's parent would merge with and into FNB's parent, and that FNB's parent would be the surviving entity.[12] It also provided that, as soon as practicable after the execution of the agreement, both parent companies would cause their subsidiaries, FNB and Park View respectively, to enter into a merger agreement of their own (the “Bank Merger Agreement”). A form of the Bank Merger Agreement was attached to the Parent Merger Agreement.

         The Bank Merger Agreement provided, subject to the terms and conditions of the Parent Merger Agreement, other terms in the Bank Merger Agreement, and approval from the relevant national bank regulator, the Office of the Comptroller of the Currency (“OCC”), that Park View would merge “with and into” FNB and FNB “shall be the surviving bank.”[13] Describing the effects of the merger, the Bank Merger Agreement further stated that:

Upon consummation of the Bank Merger, and in addition to the effects set forth at 12 U.S.C. § 215c, the applicable provisions of the regulations of the OCC and other applicable law . . . the Surviving Bank shall be considered the same business and corporate entity as each constituent bank with all the rights, powers and duties of each constituent bank . . . all in accordance with the provisions of The National Bank Act.[14]

         The OCC approved the merger of Park View “with and into” FNB under 12 U.S.C. § 215c “based on a thorough review of all information available, including commitments and representations made in the application, merger agreement, and those of [the] representatives.”[15] The OCC's approval letter noted that the merger was subject to “applicable OCC regulations and policies.”[16]

         Meanwhile, on May 3, 2013, which was approximately two and a half months after Park View and FNB entered into the Bank Merger Agreement but prior to the OCC's approval, Park View contacted Clark for the first time about the merger. Park View's CFO sent an e-mail to Clark's Senior Consultant, Chris Parker, to notify Mr. Parker that Park View was being acquired by FNB and to inquire whether there was anything that needed to be done “regarding carrier or other notifications” in light of the approaching closing of the merger transaction set for October 12, 2013.[17] Mr. Parker responded that the carriers do not need advance notice, but “[o]nce the transaction is complete, there are potentially some changes we would want to make, ” including making “FNB the owner because when there are future deaths, it makes the process of getting paid somewhat easier for the bank.”[18]

         A few months later, on August 29, 2013, an FNB representative sent Mr. Parker an email to coordinate the transition of Park View's Policies to FNB in October 2013.[19] Mr. Parker responded by stating that such an acquisition can “create[] some challenges” regarding the payment of checks when a future death occurs, so some paperwork would need to be signed by a Park View representative “that acknowledges the new official signers at FNB” after the acquisition occurs.[20] The FNB representative then stated: “Yes. I know all about the official signer issue. FNB has done many acquisitions and is familiar with the process.”[21]

         On September 18, 2013, a different FNB representative contacted Transamerica for purposes of “obtaining the necessary procedures and documentation required to make the Owner/Beneficiary change of the Policies currently Owned by Park View.”[22] Transamerica advised that FNB would need to complete a “Customer Service Change form, ” including Section 5 relating to “Ownership Change, ” after the acquisition.[23]

         As expected, FNB's acquisition of Park View closed on October 12, 2013. Four days later, FNB's Treasurer, Scott D. Free, completed the “Customer Service Change Form” for the Policies (the “2013 Change Form”) in accordance with Transamerica's instructions from the previous month, and Transamerica recognized FNB as the “New Owner” of the Policies.[24] Mr. Free testified in his deposition that shortly after FNB closed on its acquisition of Park View, he obtained all of the documents in Park View's possession and specifically reviewed the surrenders clause in the supplements to the PPM and the unexecuted forms of the SVA and the EAA.[25]

         In late December 2013, Mr. Free advised Mr. Parker of Clark that FNB was considering a surrender of the Policies. Mr. Parker responded via e-mail to Mr. Free on December 31, 2013. In this message, Mr. Parker warned Mr. Free that JP Morgan might refuse to pay a specific amount at surrender - the Bank Enhancement Amount - based on certain language in the EAA. Specifically, this e-mail states, in relevant part, the following:

Just so you are aware, I don't think JP Morgan is going to play “nice” on this. They are currently having their attorneys review the surrender language. The bottom of page 22 and top of page 23 of the pdf file lists some documentation requirements for surrender [in the EAA], including the following:
a representation that the Polices are not, and have not been previously, owned by an entity other than the Policyowner on or prior to the Immunization Date;
I was taken by surprise that their attorneys would review this, and it would seem like a stretch to apply this language to an acquisition. However, I wanted you to be aware that this is why JP Morgan hasn't sent us the official surrender reps letter. . . .[26]

         A few days later, on January 3, 2014, Barbara Scoles from Transamerica had a conversation with a JP Morgan representative about the same topic. The JP Morgan representative informed Ms. Scoles that JP Morgan “did not believe that Park View could make the [continuous] ownership rep[resentations]” and that its “legal group was looking at the question.”[27] Within the next few days, Ms. Scoles had a phone conversation with Mr. Parker where she informed him of this conversation with JP Morgan.[28] Transamerica and Clark ultimately ended up agreeing with JP Morgan's conclusion that FNB could not satisfy the continuous ownership condition in the EAA.[29]

         Mr. Parker testified during his deposition that Clark's entire “investigation” into whether FNB could satisfy this condition was one phone call “to JP Morgan to ask whether or not this would potentially be an issue.”[30] In the phone call, the JP Morgan representative did not give Mr. Parker a definitive answer.[31] When asked whether he did “anything more than make a [single] phone call, ” Mr. Parker responded: “No. I had Mr. Free aware of the issue, and they've got lots of attorneys that provide advice. So I left it to him.”[32] FNB does not dispute that its own attorneys were looking into the situation and providing advice on the matter.

         In early March 2014, FNB, through Mr. Free, elected to surrender the Policies. Thereafter, Clark provided guidance, assistance, and advice to FNB regarding the procedures and representations commensurate with the surrender of the Policies. Of relevance here, Clark provided a draft form to FNB called a “Surrender Certificate” that contained numerous representations that the Policyowner had to make. As stated above, it was a separate condition under the EAA that, within a specified time period, the Policyowner deliver “a fully executed and complete Surrender Certificate” that is “substantially in the form of the document attached as Exhibit C” to the EAA.[33]

         The Surrender Certificate form that Clark provided to FNB complied with this provision in the EAA. Before FNB submitted the Surrender Certificate form, however, it deleted five paragraphs therein, with the effect being that the Surrender Certificate was no longer “substantially in the form of the document attached as Exhibit C” to the EAA.[34] In particular, FNB deleted a representation stating that if JP Morgan determined that any of the representations made by FNB were not true, including the representation that FNB was the continuous owner of the Policies, then FNB “expressly agrees to pay [JP Morgan] an amount equal to . . . the amount paid by [JP Morgan] . . . in connection with the surrender, ” plus interest, legal fees, and expenses incurred by JP Morgan.[35]

         In Mr. Free's deposition, he explained that the reason he deleted this representation was because FNB felt that JP Morgan was taking an erroneous position in concluding that FNB could not satisfy the continuous ownership condition in the EAA and, therefore, FNB “needed to protect [itself] with this other agreement.”[36] Mr. Free explained that he deleted this paragraph only after FNB sought adequate assurance from JP Morgan that it would pay the Bank Enhancement Amount if FNB made the representation. Because FNB “could not get any adequate assurance that [JP Morgan was] going to pay” the amount, FNB decided to delete the representation from the form Surrender Certificate. In doing so, FNB did not rely on any advice from Defendants, and instead deferred to its own in-house legal counsel on the matter.[37]

         On March 11, 2014, JP Morgan notified Transamerica in writing that it was refusing to pay the Bank Enhancement Amount.[38] The letter stated that because FNB failed to satisfy two conditions in the EAA, JP Morgan was not obligated under the Agreement to pay the Bank Enhancement Amount. Specifically, the letter stated as follows:

         Notice is hereby given by J.P. Morgan that the conditions in Section 2(ii) and Section 2(vi) of the [EAA] have not been satisfied:

• Section 2(vi) of the [EAA] requires that “[t]he Polices are not, and have not been previously, owned by an entity other than the Policyowner on or prior to the Immunization Termination Date”, and the [EAA] separately defines the “Policyowner” as “Park View Federal Savings Bank”. Given that (i) Park View Federal Savings Bank is no longer in existence and (ii) the owner of the Polices has changed from Park View Federal Savings Bank to FNB PA, Section 2(vi) of the [EAA] has not been satisfied.
• Separately, Section 2(ii) of the [EAA] requires, in part, that “the Policyholder had, within five (5) Business Days after the Surrender Notice Date, delivered to Transamerica a fully executed and complete Surrender Certificate”, and the [EAA] separately defines a “Surrender Certificate” as “a certificate from an officer of the Policyholder required pursuant to Section 2 for the benefit of J.P. Morgan, substantially in the form of the document attached as Exhibit C.” Given that (i) Park View Federal Savings Bank is no longer in existence, such that the Policyowner cannot submit the notice, and (ii) neither of the written notices that FNB PA submitted to Transamerica on March 10, 2014 was substantially in the form of the document as Exhibit C to the [EAA], Section 2(ii) of the [EAA] has not been satisfied.[39]

         Under the structure of the relevant agreements, JP Morgan was to pay the Bank Enhancement Amount to Commonwealth General; then Commonwealth General would pay the Bank Enhancement Amount to Transamerica; and then Transamerica would pay the Bank Enhancement Amount to FNB. At the time of surrender, the Bank Enhancement Amount was worth about $2.5 million. Because JP Morgan refused to pay the Bank Enhancement Amount, Transamerica did not include the Bank Enhancement Amount in the amount that it paid to FNB at surrender. After deducting the Bank Enhancement Amount, Transamerica paid FNB approximately $18 million, which Defendants assert is the full amount available from liquidation of the assets Park View had re-allocated to the Stable Value Subaccount. Thereafter, FNB attempted to get JP Morgan to reconsider paying the Bank Enhancement Amount by reaching out to its various contacts at JP Morgan. Those attempts, however, were unsuccessful.


         This lawsuit followed. FNB filed a complaint against Transamerica and Clark on July 28, 2014, asserting the following claims: (i) breach of contract against Transamerica; (ii) breach of fiduciary duty against Transamerica and Clark; and (iii) insurance bad faith against Transamerica. The case was initially assigned to the Honorable Cathy Bissoon but was reassigned to the undersigned in September 2014 after all of the parties consented to jurisdiction of a magistrate judge under 28 U.S.C. § 636(c). (ECF Nos. 9, 12); see also Roell v. Withrow, 538 U.S. 580, 585 (2003) (when all parties consent to a magistrate judge under § 636(c), “the magistrate judge [has] full authority over dispositive motions, conduct of trial, and entry of final judgment, all without district court review”).

         Defendants responded to the complaint by filing a Rule 12(b)(6) motion to dismiss for failure to state a claim. The Court granted the motion, in part, dismissing only the claim for breach of fiduciary duty against Transamerica, reasoning that it was duplicative of Plaintiff's other claim for insurance bad faith against Transamerica. See Memorandum Opinion and Order (ECF No. 23); First Nat'l Bank of Pa. v. Transamerica Life Ins. Co., 2015 WL 321657 (W.D. Pa. 2015). The Court denied the motion in all other respects. Id.

         Defendants then attempted to add JP Morgan to this action by filing a third party complaint against it. JP Morgan responded by filing a Rule 12(b)(2) motion to dismiss for lack of personal jurisdiction, which the Court granted. See Memorandum Opinion and Order (ECF Nos. 65, 66); First Nat'l Bank of Pa. v. Transamerica Life Ins. Co., 2016 WL 520965 (W.D. Pa. 2016).

         Shortly thereafter, the Court held a case management conference and the parties proceeded to discovery. After discovery closed, the Court held another conference with the parties where a summary judgment schedule was discussed and issued. In accord with that schedule, Defendants filed the pending motion for summary judgment. (ECF No. 89). The motion has been fully briefed (ECF Nos. 90, 98, 103, 106, 109) and the record fully developed. (ECF Nos. 91-1-16, 92-1-2, 93-1-10, 94, 95, 99, 100-1-60). Accordingly, the matter is ripe for disposition.


         Because federal courts “are courts of limited jurisdiction, ” possessing “only that power authorized by Constitution and Statute, ” we must begin by confirming that the Court has subject matter jurisdiction to hear this dispute. See Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 377 (1994) (citations omitted). FNB asserts in the complaint that subject matter jurisdiction is satisfied under 28 U.S.C. § 1332(a)(1), which grants federal district courts original jurisdiction over “all civil actions where the matter in controversy exceeds the sum or value of $75, 000, exclusive of interest and costs, and is between citizens of different states.” Although Defendants do not challenge the Court's subject matter jurisdiction, the Court has “an independent obligation to determine whether subject-matter jurisdiction exists, even in the absence of a challenge from any party.” Arbaugh v. Y & H Corp., 546 U.S. 500, 514 (2006); see also Ruhrgas AG v. Marathon Oil Co., 526 U.S. 574, 583 (1999) (“subject matter delineations must be policed by the courts on their own initiative”).

         The party that commences the action in federal court bears the burden of establishing subject matter jurisdiction. Kokkonen, 511 U.S. at 377. Where, as here, the purported basis for jurisdiction is diversity of citizenship jurisdiction under § 1332(a), the citizenship of the parties at the time the action was commenced is what controls. See Grupo v. Dataflux v. Atlas Global Group, L.P., 541 U.S. 567, 571 (2004); see also Charles Alan Wright & Arthur R. Miller, 13E Federal Practice & Procedure Juris. § 3608 (3d ed.). FNB commenced this action on July 28, 2014 when it filed its complaint. See Fed.R.Civ.P. 3 (“A civil action is commenced by filing a complaint with the court.”). Therefore, FNB bears the burden of establishing jurisdiction on that date.

         Determining the citizenship of FNB (a national banking association) and Transamerica (a corporation) is relatively straight forward. By statute, national banking associations are “deemed citizens of the States in which they are respectively located, ” 28 U.S.C. § 1348, which the Supreme Court has construed as meaning only “the State in which its main office, as set forth in its articles of association, is located.” Wachovia Bank v. Schmidt, 546 U.S. 303, 307 (2006). Because FNB is a national banking association with its main office located in Greenville, Pennsylvania, as specified in its articles of association, (ECF No. 87 at ¶ 3), it is a citizen of Pennsylvania for diversity purposes. Additionally, Transamerica, as a corporation, is deemed a citizen of its (1) place of incorporation and (2) principal place of business, i.e., the corporation's “nerve center.” 28 U.S.C. § 1332(c); Hertz Corp. v. Friend, 559 U.S. 77, 92-93 (2010). Because it is undisputed that Iowa is both Transamerica's place of incorporation and its principal place of business, Transamerica is a citizen of Iowa for diversity purposes. (ECF No. 87 at ¶ 4); (ECF No. 25 at ¶ 12); see also Transamerica Life Ins. Co. v. Peggy Carskadon Bagala, 2016 WL 3144380, *3 (E.D. La. 2016).

         Clark's citizenship, however, is not as obvious. While the complaint identifies Clark as a corporation, the parties' filings and submissions in advance of the case management conference indicated that Clark was actually a limited liability company (“LLC”) when the action was commenced. Based on these submissions, it also seemed that Clark was composed of several layers of other entities. This distinction as to whether Clark was an LLC or a corporation at the time the action was commenced matters because “Congress never expanded [the] grant of citizenship [in § 1332(c)] to include artificial entities other than corporations.” Americold Realty Trust v. Conagra Foods, Inc., 136 S.Ct. 1012, 1015 (2016).

         Although LLCs and corporations share many common characteristics, LLCs are treated like partnerships and other unincorporated associations for diversity jurisdiction purposes. See Zambelli Fireworks Mfg. Co., Inc. v. Wood, 592 F.3d 412, 420 (3d Cir. 2010). Therefore, unlike corporations, the “principal place of business of an [LLC] is … irrelevant to determine if diversity jurisdiction exists.” Johnson v. SmithKline Beecham Corp., 724 F.3d 337, 348 (3d Cir. 2013). Instead, “the citizenship of an LLC is determined by the citizenship of its members.” Zambelli, 592 F.3d at 420. In situations “where an LLC has, as one of its members, another LLC, ‘the citizenship of unincorporated associations must be traced through however many layers of partners or members there may be' to determine the citizenship of the LLC.” Id. (quoting Hart v. Terminex Int'l., 336 F.3d 541, 543 (7th Cir. 2003)); see also Americold, 136 S.Ct. at 1015 (noting that the “members” of an unincorporated entity or association are its owners; and in the context of partnerships, the members are the partners).

         When the Court learned that Clark was an LLC with multiple layers of members, the Court discussed this issue with the parties at the case management conference and ordered that FNB file a certificate confirming that complete diversity of citizenship exists in this case. (ECF Nos. 71, 86). FNB filed its certificate on October 12, 2016. (ECF No. 87). According to the certificate, on July 28, 2014 - the date that FNB commenced the case - Defendant Clark was wholly owned by Clark, LLC. Id. at ¶ 5. Clark LLC, in turn, was wholly owned by Transamerica Retirement Solutions Corporation. Id. at ¶ 6. Transamerica Retirement Solutions Corporation was incorporated in Delaware and had its principal place of business in New York on that date. Id. at ...

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