Case No. 94-13602, Adver. No. 94-1325.United States Bankruptcy Court, D. New Jersey.
August 7, 2007
Samuel Mandel, Esq., Moorestown, New Jersey Attorney for Debtor.
Michael Zindler, Esq., Teich, Groh, Frost and Zindler, Trenton, New Jersey Attorney for Debtor.
Charles X. Gormally, Esq., Carl J. Soranno, Esq., Roseland, New Jersey Attorney for Ohio Casualty Group.
OPINION
JUDITH WIZMUR, Bankruptcy Judge
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After thirteen years of litigation, the defendants herein, Ohio Casualty Group of Insurance Companies[1] and the Harleysville Group[2] move to dismiss the plaintiff’s complaint, with prejudice, on grounds of collateral estoppel, res judicata, judicial estoppel and latches. Because the issues have been adjudicated fully in another forum, the causes of action asserted again Ohio and Harleysville in Counts I, II and VII, respectively, will be dismissed with prejudice. The defendants’ motions to dismiss the remaining counts will be amended to be considered as motions for summary judgment.
FACTS AND PROCEDURAL HISTORY
Professional Insurance Management, Inc., (“PIM”) the Chapter 11 debtor herein, filed its Chapter 11 case on August 5, 1994. On August 22, 1994, PIM removed a pending action filed in February 1994 in the Superior Court of New Jersey to this court. The debtor sought injunctive relief and monetary damages based on tort and contract causes of action against Ohio Casualty and
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Harleysville. The debtor’s causes of action were premised primarily on the allegation that the insurance companies violated the provisions of the “Fair Automobile Insurance Reform Act of 1990”, N.J.S.A. 17:33B-1 et. seq., effective April 1, 1992 (“FAIRA”), and wrongfully terminated their respective agency contracts with the debtor in November 1993.
Years of litigation followed the removal of the complaint to bankruptcy court. Following a series of motions to dismiss and a motion for summary judgment, all of which resulted in the filing of an amended complaint and an amendment to the first amended complaint, the matter was ready to be tried in July 2001. Based on the New Jersey Supreme Court decision of R.J. Gaydos Ins.Agency, Inc. v. National Consumer Ins. Co., 168 N.J. 255, 773 A.2d 1132 (2001), decided on June 28, 2001, Harleysville moved to refer the matter to the New Jersey Department of Banking and Insurance (“DOBI”) to resolve allegations that the defendants violated state statutes and regulations in the course of their conduct toward the plaintiffs. I denied the motion. My decision was reversed and remanded by the district court with instructions to refer the matter to the DOBI. On January 11, 2002, I entered an order staying the trial of the debtor’s complaint and referring the matter to the DOBI, with the following direction:
That the Department of Banking and Insurance conduct a
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complete investigation and make an administrative determination on the issue of whether defendants Ohio Casualty Group and/or Harleysville Mutual Insurance Company violated the Fair Automobile Insurance Reform Act of 1990 (FAIRA), N.J.S.A. 17:33B-1, et seq. by their actions toward the debtor, Professional Insurance Management, either prior to the termination of the respective agency contracts between the debtor and each of the defendants, and/or by the act of termination.
Sorrano Certif. at Exh. 20.
Following twenty-two days of hearings at the Office of Administrative Law before Administrative Law Judge Richard Wells and the issuance of a 177 page Report and Recommendations, the Commissioner of the DOBI adopted Judge Wells’ Recommendation on February 1, 2005. The Commissioner determined that “the evidence fail[ed] to show that either Ohio or Harleysville violated FAIRA in its dealings with PIM.” The debtor appealed to the Superior Court of New Jersey, Appellate Division, which affirmed the Commissioner’s determination on January 22, 2007. The debtor’s petition for certification to the Supreme Court of New Jersey was denied on April 12, 2007.
Thereafter, Ohio and Harleysville applied to dismiss plaintiffs adversary proceeding with prejudice. In response, the debtor moved to file a second amended complaint. Opposition to the filing of a second amended complaint was received from both Ohio Casualty and Harleysville.
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DISCUSSION
Upon receipt of Ohio’s letter request to dismiss the plaintiff’s complaint in its entirety, I determined to consider Ohio’s application as a motion to dismiss the complaint pursuant to Fed.R.Civ.P. 12(b)(6). Ohio is correct to assert that a Rule 12(b)(6) dismissal is proper “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, 104 S. Ct. 2229, 2232, 81 L.Ed.2d 59 (1984). The court must accept all of the plaintiffs allegations as true and draw all reasonable inferences therefrom. Jenkins v. McKeithen, 395 U.S. 411, 421, 89 S. Ct. 1843, 1849, 23 L.Ed. 2d 404 (1969);Holder v. City of Allentown, 987 F.2d 188, 194 (3d Cir. 1993).
PIM, the plaintiff herein, was a licensed independent insurance agent. PIM had agency contracts with both Ohio and Harleysville, as well as other insurance carriers. PIM considered itself to be a full-service agency, writing both commercial and personal lines of insurance.
With the enactment of FAIRA in 1990, effective April 1, 1992, agents and insurance carriers were required to “take all comers”, meaning that they were not permitted to turn away applicants for personal automobile insurance if the
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applicant was otherwise qualified for the coverage. The legislation was enacted to offer New Jersey citizens wider access to the conventional marketplace for personal automobile insurance policies. In its complaint against both Ohio and Harleysville, PIM claimed that both carriers engaged in a course of conduct that was violative of FAIRA provisions, and that both carriers sought to pressure PIM into violating FAIRA provisions as well. In the amended complaint filed by PIM[3] , specific courses of conduct alleged by PIM to be violative of FAIRA were asserted against Ohio and Harleysville, including the placing of limitations on the number of personal automobile insurance policies that the carriers would write for PIM’s customers, threatening PIM with limiting access to the carriers’ commercial markets, refusing to write applications for certain customers, requiring customers to submit all their insurance needs to the respective carriers, reducing commission rates on automobile insurance policies and restricting plaintiff’s contractual authority to bind personal automobile insurance coverage. PIM asserted that the carriers violated FAIRA both prior to the termination of the respective agency contracts with PIM, and by the termination of the PIM agency contracts.
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The specific allegations in PIM’s complaint regarding FAIRA violations committed by Ohio and Harleysville were presented for adjudication to Administrative Law Judge Wells. Judge Wells, in his Report and Recommendation to the DOBI Commissioner, outlined PIM’s position as follows:
PIM asserts that Ohio and Harleysville violated the letter and spirit of the FAIRA . . . when Ohio lowered PIM’s PPA [private passenger automobile] commissions and when both companies threatened PIM with termination if PIM did not adhere to certain quotas and did not desist from continued writing of PPA policies in increased numbers. PIM maintains that the ultimate violation of the FAIRA was the termination of PIM when it continued to submit PPA applications.
PIM v. Ohio Casualty Ins. Co. Harleysville Ins. Cos., OAL Dkt. No. BK1-139-02S at 4 (N.J. OAL Oct. 7, 2003) (hereinafter “Report and Recommendations”).
Further, PIM alleged in its presentation to Judge Wells that “any arguments proffered by the insurance carriers that alleged that PIM was unprofitable, uncooperative, or was guilty of accounting errors merely constituted a pretext to the insurance carrier’s true motivation, namely, to get rid of PIM because of PIM’s increased activity in the PPA arena.” Id. According to PIM, “the real reason for its termination was PIM’s refusal to succumb to pressures brought by the carriers to reduce the number of PPA applications submitted. As concerns Ohio, PIM maintains that Ohio reduced its
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commissions on PPA work as a direct result and in retaliation for PIM’s refusal to limit PPA production.” Id. at 5.
Judge Wells conducted an exhaustive review of all of the types of conduct alleged by PIM in the complaint to have been violative of FAIRA and/or applicable regulations, either individually or taken together. He concluded that each of the allegations of PIM against the insurer, including allegations relating to improper requirements of “tie-ins” and “channeling”, failure to accept policies, threats to limit access to commercial markets and reduction of commissions, was either not substantiated by the proofs or was engaged in by the respective carrier for legitimate business reasons. He examined the grounds raised by the insurance companies for the termination of PIM because PIM asserted that the motivations espoused by the insurance company were a pretext for the real reason for PIM’s termination, namely the unwillingness of PIM to succumb to the carriers’ pressures to violate the “take all comers” provisions of FAIRA. He specifically found that each of the courses of conduct complained of by PIM had a legitimate business reason. He concluded:
[T]hat PIM has failed to meet its burden and has failed to demonstrate that a direct, primary, and substantial motivating factor in the termination of PIM’s agency contract (by either Ohio or Harleysville), was not the poor performance or volume of PIM’s PPA business. PIM simply did not prove that the business reasons offered by Harlesyville and Ohio were pretextual, false, trumped-up,Page 9
or otherwise not valid. From the totality of the evidence before me, I CONCLUDE that the independent genesis of the termination decisions by both Ohio and Harleysville was the deterioration of the business relationship between the insurance carriers and its agent, together with the erosion of trust and compounded by the fact that PIM essentially was failing to heed the marketing suggestions continuously voiced by the insurance carriers, with the ultimate result that PIM was unprofitable in its commercial (and non-PPA) lines that historically have been the mainstay of the agency as well as the insurance carriers.
Report and Recommendations at 165.
Following the submission by Judge Wells of the Report and Recommendation to the Commissioner of DOBI, the parties were afforded the opportunity to articulate exceptions to the Report. Among the exceptions submitted by PIM was that “instead of deciding whether Ohio and Harleysville violated FAIRA, the ALJ proceeded to decide the issue reserved to the bankruptcy court judge, i.e., whether or not Ohio and Harleysville had cause to terminate their agency contracts with PIM.” This exception was rejected by the Commissioner. The Commissioner determined that the specific issue taken up was whether the insurers violated FAIRA either prior to or by the act of terminating PIM, which was entirely consistent with the reference to DOBI. As well, the Commissioner agreed with the ALJ that “`it was necessary to include a detailed review of the relationship between PIM and the two insurance companies because PIM asserted, inter alia, that certain of the grounds raised
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by the insurance companies for the termination of PIM were simply pretext for the real reason for the termination.'” In reReferral by the U.S. Bankruptcy Court for a Determination as toWhether the Ohio Casualty Group of Ins. Cos. Harleysville Ins.Cos. Violated FAIRA in Their Dealings With Professional Ins.Mgmt, Inc., OAL Dkt. BK1-139-02 at 15-16 (N.J. Dept. of Banking Ins. Feb. 1, 2005) (Order No.: A05-105) (quoting Report and Recommendations at 151). The Commissioner concluded that “it was entirely appropriate for the ALJ to consider Ohio and Harleysville’s espoused reasons for terminating PIM in order to determine whether they were pretextual or legitimate.” Id. at 16. The New Jersey Superior Court, Appellate Division, affirmed the Commissioner’s decision for substantially the same reasons, rejecting, inter alia, PIM’s argument that “the Commissioner arbitrarily, capriciously and unreasonably refused to find that certain conduct of Harleysville and Ohio constituted FAIRA violations.” PIM v. The Ohio Casualty Group of Ins. Cos. TheHarleysville Ins. Co., No. A-3558-04T2 at 8 (N.J. App. Div. Jan. 22, 2007) (unpublished opinion).
In the revised Second Amended Complaint sought to be filed by the plaintiff, PIM reconstitutes the identical conduct listed as FAIRA violation in Counts I, II and VII against Ohio and Harleysville, respectively, as breaches of contract and breaches of the implied covenant of good faith and fair dealing.
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PIM apparently seeks to relitigate these matters, on the theory that each course of conduct alleged by itself, or all of them together, would still constitute a breach of contract even if there has been no FAIRA violation committed by the defendants. In light of the full adjudication by Judge Wells in his Report and Recommendations of each type of conduct described in Counts I, II and VII of the Second Amended Complaint, which was adopted by the Commissioner and affirmed by the Appellate Division, the plaintiff is collaterally estopped from relitigating the same issues in the bankruptcy court.
Collateral estoppel principles apply in bankruptcy proceedings.Grogan v. Garner, 498 U.S. 279, 285 n. 11, 111 S. Ct. 654, 658
n. 11, 112 L.Ed.2d 755 (1991); Brown v. Felsen, 442 U.S. 127, 139
n. 10, 99 S. Ct. 2205, 2213 n. 10, 60 L.Ed.2d 767 (1979) (applying collateral estoppel to nondischargeability proceeding). Where the prior judgment was rendered by a state court, the federal court must give a state court judgment, “the same preclusive effect as would be given that judgment under the law of the State in which the judgment was rendered.” Migra v. Warren City Sch. Dist. Bd.of Educ., 465 U.S. 75, 81, 104 S. Ct. 892, 896, 79 L.Ed. 2d 56
(1984); see also Gregory v. Chehi, 843 F.2d 111, 116 (3d Cir. 1998).
To estop a party from relitigating an issue, the movant must show that:
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(1) the issue sought to be precluded must be the same as the one involved in the prior action;
(2) the issue must have been actually litigated;
(3) the issue must have been determined by a valid and final judgment;
(4) the determination must have been essential to the prior judgment; and
(5) the party against whom the doctrine is asserted was a party to or in privity with a party to the earlier proceeding.
In re Dawson, 136 N.J. 1, 20-21, 641 A.2d 1026, 1034-35 (1994).See also Monek v. Borough of South River, 354 N.J. Super. 442, 454, 808 A.2d 114, 120-21 (App.Div. 2002); Caver v. City ofTrenton, 420 F.3d 243, 259 (3d Cir. 2005) (quoting Hennessey v.Winslow Township, 183 N.J. 593, 599, 875 A.2d 240, 243 (2005)).
“Whether collateral estoppel should apply depends . . . on many factors.” Continental Can Co. v. Hudson Foam Latex Prods. Inc., 129 N.J. Super. 426, 430, 324 A.2d 60, 61-62 (App.Div. 1974).
Some of the factors favoring application of issue preclusion are: conservation of judicial resources; avoidance of repetitious litigation; and prevention of waste, harassment, uncertainty and inconsistency. In contrast, factors disfavoring application of collateral estoppel include: the party against whom preclusion was
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sought could not have obtained review of the judgment in the initial action; the quality or extensiveness of the procedures in the two actions were different; it was not foreseeable at the time of the initial action that the issue would arise in subsequent litigation; and the party sought to be precluded did not have an adequate opportunity to obtain a full and fair adjudication in the first action.
Pivnick v. Beck, 326 N.J. Super. 474, 486, 741 A.2d 655, 662
(App.Div. 1999), affd., 165 N.J. 670, 762 A.2d 653 (2000).
Here, each of the allegations recited in Counts I, II and VII against Ohio and Harleysville, respectively, were actually litigated before Judge Wells. A valid and final judgment, affirmed by the Appellate Division, has determined these issues. The determination that the conduct of Ohio and Harleysville leading up to PIM’s termination as an agent for each carrier was proper and in accordance with legitimate business practices was essential to the prior judgment that no FAIRA violations were committed by either carrier. PIM, against whom the doctrine of collateral estoppel is asserted, was a party to the earlier proceeding.
PIM contends that collateral estoppel should not apply because the issues raised were not the same as the ones involved in the prior action. As well, PIM contends that Judge Wells’ decision exceeded the jurisdictional
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bounds of his authority and his mandate. According to PIM, the claims asserted in Counts I, II and VII, now reconstituted without reference to FAIRA violations, “were not in the province of the ALJ or the Commissioner to decide, nor were they decided administratively.” Reply Brief of PIM, page 7. PIM is incorrect in both respects. The parties agree that under New Jersey law, “`determinations by administrative tribunals are entitled to preclusive effect if rendered in proceedings meriting that deference.'” Olivieri v. Y.M.F. Carpet, Inc., 186 N.J. 511, 522, 897 A.2d 1003, 1010 (2006) (citation omitted). A review of the ALJ’s decision reflects that Judge Wells details the identical factual issues raised in Counts I, II and VII of the Second Amended Complaint. All of these factual issues were extensively litigated before Judge Wells. Because PIM charged that the carriers’ true motives in engaging in the conduct described in these counts were designed to pressure PIM into violating FAIRA, and that the concerns ultimately terminated PIM in violation of FAIRA, Judge Wells determined that he was required to make specific factual findings and to recommend legal conclusions to the Commissioner regarding the carriers’ conduct toward PIM leading up to the terminations of the agency contracts. Judge Wells concluded that the carriers’ actions were not in violation of FAIRA, and were a reasonable exercise of the carriers rights to govern the agency relationships. As he explained in his Report and Recommendations, Judge Wells was compelled to expand his inquiry beyond whether the alleged conduct
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violated FAIRA to deal with PIM’s contention that the justifications and motivations of the carriers in terminating PIM were pretextual. The factual issues sought to be litigated in the applicable counts of the Second Amended Complaint are identical to the factual issues resolved by Judge Wells, and the determinations were essential to the prior judgment. It must be recognized that collateral estoppel applies not only to matters directly at issue, (in this case, whether FAIRA violations were committed), but also to facts necessary to support the judgment in the prior action, (in this case, Judge Wells’ findings that the insurers’ conduct represented legitimate business concerns.)See Warren Township v. Suffness, 225 N.J. Super. 399, 408, 542 A.2d 931, 936 (App.Div.), certif. denied 113 N.J. 640, 552 A.2d 166 (1988) (collateral estoppel applies to those matters and facts necessary to support the judgment rendered in the prior action.)
I conclude that the doctrine of collateral estoppel precludes the relitigation of the matters asserted in Counts I, II and VII of the plaintiffs’ complaint. Those counts will be dismissed with prejudice.
As to the other counts of the complaint, as discussed at the hearing, they involve three distinct breach of contract allegations. First, in Counts IV and IX,
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PIM asserts that the carriers secretly intended to termination PIM while they encouraged PIM to expand its capacity and resources. Second, in Counts V, VI, X and XI, PIM alleges that the insurers over-reserved for potential losses, thereby skewing loss ratios and wrongfully depriving PIM of contingencies, or profits, to which it would otherwise have been entitled. Third, in Counts III and VIII, PIM alleges that each carrier improperly effected an immediate termination of their respective agency contract, thereby violating the 90-day notice of termination provided for in the contract and by statute. Because the plaintiff is entitled to have its allegations accepted as true, and these issues have not been resolved in the context of the ALJ hearings,[4] it is necessary to amend the motions to dismiss and to convert each of them to a motion for summary judgment. The schedule announced at the hearing on July 24, 2007 for the submission of argument on the summary judgment motions will apply.