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In Beltz v. Erie Indem. Co., 279 F. Supp. 3d 569 (W.D. Pa. 2017), aff'd, 733 Fed. Appx. 595 (3d Cir. 2018) (unpublished), reh'g denied (June 14, 2018) ("Beltz II"), a putative class of subscribers, represented by the same counsel that represents Ritz here, commenced a class action against Indemnity and its Board for allegedly breaching its fiduciary duties for misappropriating service charges and additional fees under the Subscriber's Agreement's provision that Indemnity could only withhold 25% of the premiums for its Management Fee.
Summary of this case from Lynda Ritz ex rel. Situated v. Erie Indem. Co.Opinion
CASE NO. 1:16–cv–00179–BR
07-13-2017
Patricia R. BELTZ, Joseph S. Sullivan, and Anita Sullivan, individually and on behalf of all others similarly situated, and derivatively on Behalf of Nominal Defendant Erie Insurance Exchange, Plaintiffs, v. ERIE INDEMNITY COMPANY, et al., Defendants. and Erie Insurance Exchange, Nominal Defendant.
Joseph H. Meltzer, Peter Muhic, Robin Winchester, Kessler Topaz Meltzer & Check, LLP, Radnor, PA, William M. Radcliffe, Radcliffe & Dehaas, L.L.P., Uniontown, PA, for Plaintiffs. Michael L. Kichline, Steven B. Feirson, Jaclyn S. Whittaker, Kenneth J. Holloway, Ryan M. Moore, William T. McEnroe, Dechert LLP, Christie Callahan Comerford, Lawrence G. McMichael, Dilworth Paxson LLP, Philadelphia, PA, Geoffrey J. Ritts, Jones Day, Cleveland, OH, Katelyn M. Matscherz, Matthew R. Divelbiss, Thomas S. Jones, Jones Day, Daniel B. McLane, Dorothy A. Davis, Thomas E. Sanchez, Eckert Seamans Cherin & Mellott, LLC, Pittsburgh, PA, Roger W. Richards, Richards & Associates, P.C., Erie, PA, for Defendants.
Joseph H. Meltzer, Peter Muhic, Robin Winchester, Kessler Topaz Meltzer & Check, LLP, Radnor, PA, William M. Radcliffe, Radcliffe & Dehaas, L.L.P., Uniontown, PA, for Plaintiffs.
Michael L. Kichline, Steven B. Feirson, Jaclyn S. Whittaker, Kenneth J. Holloway, Ryan M. Moore, William T. McEnroe, Dechert LLP, Christie Callahan Comerford, Lawrence G. McMichael, Dilworth Paxson LLP, Philadelphia, PA, Geoffrey J. Ritts, Jones Day, Cleveland, OH, Katelyn M. Matscherz, Matthew R. Divelbiss, Thomas S. Jones, Jones Day, Daniel B. McLane, Dorothy A. Davis, Thomas E. Sanchez, Eckert Seamans Cherin & Mellott, LLC, Pittsburgh, PA, Roger W. Richards, Richards & Associates, P.C., Erie, PA, for Defendants.
MEMORANDUM OPINION GRANTING DEFENDANT INDEMNITY'S MOTION TO DISMISS; DEFENDANT VORSHECK'S MOTION TO DISMISS; DEFENDANTS BORNEMAN, CAVANAUGH, HARTZ, LILLY, PALMER, SHEFFIELD, STOVER, AND WILBURN'S MOTION TO DISMISS; DEFENDANTS DATESH AND LUCORE'S MOTION TO DISMISS; AND DEFENDANTS J. HAGEN AND T. HAGEN'S MOTION TO DISMISS
BARBARA J. ROTHSTEIN, UNITED STATES DISTRICT JUDGE I. INTRODUCTION
Plaintiffs Patricia R. Beltz, Joseph S. Sullivan, and Anita Sullivan, subscribers of Erie Insurance Exchange, ("Exchange"), bring this action individually, on behalf of all others similarly situated, and derivatively on behalf of nominal Defendant Exchange against multiple Defendants. The Defendants are: (1) Exchange, a reciprocal insurance exchange that is operated and managed by Erie Indemnity Company, ("Indemnity"); (2) Indemnity, which, in addition to operating and managing Exchange, serves as the attorney-in-fact for the subscribers of Exchange; and (3) Former and current Directors J. Ralph Borneman, Jr, ("Borneman"), Terrance W. Cavanaugh, ("Cavanaugh"), LuAnn Datesh, ("Datesh"), Jonathan Hirt Hagen, ("J. Hagen"), Thomas B. Hagen, ("T. Hagen"), C. Scott Hartz, ("Hartz"), Claude C. Lilly, III, ("Lilly"), George R. Lucore, ("Lucore"), Thomas W. Palmer, ("Palmer"), Martin P. Sheffield, ("Sheffield"), Richard L. Stover, ("Stover"), Elizabeth A. Hirt Vorsheck, ("Vorsheck"), Robert C. Wilburn, ("Wilburn"), (collectively, "Directors").
Plaintiffs allege that Defendants improperly retained charges paid by the subscribers of Exchange for certain installment premium payment plans, dishonored payments, policy cancellations, and policy reinstatements. Consequently, Plaintiffs brings the following causes of action: (1) Breach of contract and implied covenant of good faith and fair dealing against Defendant Indemnity, brought individually by Plaintiffs (Count I); (2) Breach of fiduciary duty against Defendants Indemnity and Directors, brought individually by Plaintiffs and derivatively on behalf of Exchange, (Counts II and IV) (3) Conversion against Defendant Indemnity, brought individually by Plaintiffs and derivatively on behalf of Exchange (Count III); and (4) Unjust Enrichment against Defendants Vorsheck, T. Hagen, and J. Hagen, brought derivatively on behalf of Exchange (Count V).
Presently before the Court are the following five Motions: (1) Motion to Dismiss filed by Indemnity, (Doc. No. 34); (2) Motion to Dismiss filed by Defendant Vorsheck, (Doc. No. 38); (3) Motion to Dismiss filed by Defendants Borneman, Cavanaugh, Hartz, Lilly, Palmer, Sheffield, Stover, and Wilburn, (Doc. No. 39); Motion to Dismiss filed by Defendants Datesh and Lucore, (Doc. No. 40); and Motion to Dismiss filed by J. Hagen and T. Hagen, (Doc. No. 42). Plaintiffs filed two oppositions: first, an opposition in response to Defendant Indemnity's Motion to Dismiss, (Doc. No. 45), and second, an omnibus opposition in response to the separate Motions filed by Defendants Directors, (Doc. No. 50). Having reviewed the parties' briefs, the record, and the relevant authority, the Court GRANTS all of Defendants' Motions to Dismiss. II. BACKGROUND
A. Factual Background
1. History and Structure of Exchange and Indemnity
In 1925 H.O. Hirt established Indemnity and Exchange. (Doc. No. 1, Compl. ¶ 1). Exchange is a reciprocal insurance exchange organized pursuant to 40 P.S. § 961 –71, which defines such an entity as follows:
[i]ndividuals, partnerships, and corporations of this Commonwealth, hereby designated subscribers, are hereby authorized to exchange reciprocal or inter-insurance contracts with each other, or with individuals, partnerships, and corporations of other states and countries, providing indemnity among themselves from any loss which may be insured against under any provision of the insurance laws excepting life insurance.
Id. ; see also Neel v. Crittenden , 353 Pa. 201, 44 A.2d 558, 561 (1945) ("A reciprocal insurance exchange is a system of insurance whereby several individuals, partnerships and corporations underwrite each other's risks against loss by fire or other hazard, through an attorney-in-fact, common to all, under an agreement that each underwriter acts separately and severally and not jointly with any other.") As an unincorporated association, Exchange operates without a board of directors, officers, bylaws, or employees. (See Doc. No. 34–2, Joint Statement of Facts, ("JSOF"), ¶ 2; see also Compl. ¶ 2). As such, every subscriber of Exchange executes a Subscriber's Agreement appointing Indemnity as their attorney-in-fact to manage and conduct the business and affairs of Exchange. (Compl. ¶ 2).
Parties agree to use of the Joint Statement of Facts ("JSOF") filed in the proceedings before the Pennsylvania Insurance Department. See Doc. No. 34–2, JSOF, Erie Ins. Exch. v. Erie Indem. Co. , No. MS14–03–003 (Pa. Ins. Comm'r Sept. 3, 2014).
As for Indemnity, H.O. Hirt served as Indemity's President and Chief Executive Officer until 1976 and remained on its Board of Directors until 1980. (Id. ¶¶ 1, 44). H.O. Hirt structured Indemnity with two classes of common stock: Class A and Class B, the latter of which are the only voting shares. (Id. ¶ 43). Upon H.O. Hirt's death in 1982, his controlling interest in Indemnity passed to his children, F. W. William Hirt ("F.W. Hirt") and Susan Hirt Hagen, pursuant to trusts that he created. (Id. ¶ 45). As a result, 50% of Class A shares and 76.22% of the Class B shares passed to F.W. Hirt and Susan Hirt Hagen. (Id. ). At this point, Indemnity stock was not publicly traded. (Id. ).
Prior to Indemnity becoming a publicly traded company, Exchange paid dividends to subscribers. (Id. ¶ 47). For example, in 1975, when Exchange wrote $108 million in premiums, the subscribers received $10 million in dividends. (Id. ). According to Plaintiffs, the subscribers have not received dividends in over 25 years, despite the fact that Exchange's premiums have continually grown over the years and were worth nearly $6 billion in 2015. (Id. ).
In May 1994, Indemnity filed a Form 10 with the Securities and Exchange Commission, ("SEC"), and made shares of Indemnity stock available for sale to the public. (Id. ¶ 46). The following year, Indemnity became listed on the NASDAQ. (Id. ). According to Plaintiffs, since Indemnity became public, "the financial interests of Indemnity's shareholders, particularly those of Indemnity's controlling shareholders, have dominated those of Exchange and the subscribers—to the point where Indemnity and the Directors are wholly disregarding their fiduciary and contractual obligations to Exchange and the Class." (Id. ).2. The Subscriber's Agreement
Any subscriber who seeks to receive insurance through Exchange must execute a Subscriber's Agreement with Indemnity. (JSOF ¶ 66). The Subscriber's Agreement is the sole agreement that governs Indemnity's duties to Exchange as attorney-in-fact and the corresponding compensation provided to Indemnity for performing those duties. (Id. ¶ 62). While amended on occasion, the following pertinent language in the Subscriber's Agreement, has remained fundamentally unchanged since 1975:
1) You agree to pay your policy premiums and to exchange with other ERIE Subscribers policies providing insurance for any insured loss as stated in those policies.
2) You appoint us as Attorney-in-Fact with the power to: a) exchange policies with other ERIE Subscribers; b) take any action necessary for the exchange of such policies; c) issue, change, nonrenew or cancel policies; d) obtain reinsurance; e) collect premiums; f) invest and reinvest funds; g) receive notices and proofs of loss; h) appear for, compromise, prosecute, defend, adjust and settle losses and claims under your policies; i) accept service of process on behalf of ERIE as insurer; and j) manage and conduct the business and affairs of ERIE, its affiliates and subsidiaries. This power of attorney is limited to the purposes described in this Agreement.
3) You agree that as compensation for us a) becoming and acting as Attorney–In–Fact; b) managing the business and affairs of ERIE; and c) paying general administrative expenses, including sales commissions, salaries and employee benefits, taxes, rent, depreciation, supplies and data processing, we may retain up to 25% of all premiums written or assumed by ERIE. The rest of the premiums will be used for losses, loss adjustment expenses, investment expenses, damages, legal expenses, court costs, taxes, assessments, licenses, fees, any other government fines and charges, establishment of reserves and surplus, and reinsurance, and may be used for dividends and other purposes we decided are to the advantage of the Subscribers.
(Doc. No. 1–2, Exhibit A to Compl.) (emphasis added). As will be discussed, the parties' dispute mainly focuses on the compensation provision set forth in paragraph 3 of the Subscriber's Agreement. Notably, the Subscriber's Agreement does not contain any express provision for subscribers to terminate Indemnity as attorney-in-fact. (Id. ¶ 61).
3. Service Charges and Additional Fees
Since 1975, subscribers of Exchange may pay their premiums for their insurance policies in multiple installments, rather than a lump sum. (Compl. ¶ 68; see also JSOF ¶ 67). Subscriber s who elect to pay in installments pay a service charge for each payment processed after the first one ("Service Charges"). (Compl. ¶ 68; see also JSOF ¶ 72). While some subscribers over the years have chosen to pay in installments, rather than in a single upfront lump sum, not all subscribers have chosen to do so. (JSOF ¶ 68). Additionally, not all subscribers who pay in installments are charged Service Charges. (Id. ¶ 69). Importantly, Service Charges are not used to indemnify the subscribers against any risk of loss. (Id. ¶ 91).
Indemnity incurs the cost of processing payments made under installment plans, and has done so since 1975. (Id. ¶ 70). Prior to 1997, Exchange retained all of the Service Charges as revenue, which, according to Plaintiffs, was available for the benefit of subscribers. (Compl. ¶ 70). As an increasing number of subscribers began using installment plans, Indemnity began to incur an increasing amount of corresponding costs. (JSOF ¶ 80). By 1997, an internal analysis indicated that Indemnity had more than 1.5 million separate policies in force using payment plans that included multiple installment payments, and that Indemnity was processing more than 5 million payments each year. (Id. ¶ 82).
Beginning in 1997, Indemnity began to retain a portion of the Services Charges formerly retained by Exchange. (Compl. ¶ 71; see also JSOF ¶ 83). The retention of the Service Charges was approved on September 15, 1997 at a Board of Directors' Planning Committee Meeting. (JSOF ¶ 84). Accordingly, Indemnity's Form 10–Q filed November 12, 1997 states as follows:
Beginning September 1, 1997, the Company was reimbursed by the Exchange a portion of service charges the Exchange collected from policyholders as reimbursement for the costs incurred by the Company in providing extended payment terms on policies written by the Exchange.
(Id. ¶ 85). In 1999, Indemnity began retaining all of the revenue collected from Service Charges. (Compl. ¶ 75; see also JSOF ¶ 86).
According to Plaintiffs, Indemnity "began taking the Service Charges revenue from Exchange's accounts ... as compensation above and beyond the compensation it was authorized to receive as a percentage of the premiums authorized by the Subscriber's Agreement." (Compl. ¶ 72). Moreover, Plaintiffs explain that Indemnity's Directors approved this policy "without obtaining a fairness opinion or other opinion from an independent person, expert, or entity solely representing Exchange's interests regarding whether Indemnity could retain those Service Charges." (Id. ¶ 73). Each year since 1997, the Directors "have similarly authorized and/or allowed the taking of all the Service Charges revenue from Exchange." (Id. ¶ 75).
In 2008, subscribers were required to pay an additional fee for checks or other payments returned unpaid, cancellation notices, and reinstatements of a policy following a lapse in coverage after a non-payment cancellation (collectively, "Additional Fees"). (Id. ¶ 77; see also JSOF ¶ 120). Indemnity incurs the cost of managing late payments, returning payments, and reinstating lapsed policies. (JSOF ¶ 124). Since the Additional Fees were instituted in 2008, Indemnity has retained the revenue from these charges. (Id. ¶ 135). Notably, the Directors did not specifically approve, disapprove, or otherwise make any decision as to the imposition or retention of Additional Fees at a Directors' meeting in 2008 or any year after. (Id. ¶ 131).
According to Plaintiffs, Indemnity retains the revenue from Additional Fees "as compensation above and beyond the compensation received as a percentage of the premiums authorized by the Subscriber's Agreement." (Compl. ¶ 79). Plaintiffs contend that if "Indemnity did not take the Additional Fees as additional compensation, that revenue would be available for the ultimate benefit of Exchange and the Subscribers." (Id. ¶ 80). Furthermore, Plaintiffs aver that the Directors allowed the taking of Additional Fees "without first obtaining a fairness opinion or other opinion from an independent person, or entity solely representing Exchange's interests regarding whether Indemnity could retain all of those Additional Fees." (Compl. ¶ 81; see also JSOF ¶¶ 129–130).
Since 1997, Plaintiffs explain, the amount of Service Charges and Additional Fees wrongfully taken by Indemnity as unauthorized compensation, which otherwise would have gone to the benefit of Exchange and the Subscribers, exceeds $400 million. (Id. ¶ 88). That is the subject of the instant litigation.
B. Procedural Background
In 2012, Plaintiffs initially brought suit against Indemnity in Pennsylvania state court. In state court, Plaintiffs alleged breach of contract and fiduciary duty claims against Indemnity for the improper retention of Service Charges. Erie Ins. Exch. v. Erie Indem. Co. , No. GD–1712 (Pa. Ct. Com. Pl., Fayette Cty.). Consequently, Indemnity moved to dismiss—known in state court as preliminary objections—arguing, among other things, that the matter was subject to the primary jurisdiction of the Pennsylvania Insurance Department ("Department"). The state granted that motion in part, referring the action to the Department. Erie Ins. Exch. v. Erie Indem. Co. , No. 1712 of 2012, Op. at 4–5 (Pa. Ct. Com. Pl., Fayette Cty. Dec. 19, 2013).
In 2013, Plaintiffs filed another action this time in Federal court against certain current and former Directors of Indemnity, alleging the same contract and fiduciary duty claims. After Indemnity intervened and the state court referred the action to the Department, the Federal court did the same, sending the case to the Department and dismissing the action without prejudice. Erie Ins. Exch. v. Stover , No. 13-37, 2014 WL 546707, at *1 (W.D. Pa. Feb. 10, 2014).
The issue before the Department was "whether Erie Indemnity Company's retention of the service charges and [additional fees] ... meets the standards set forth in the Insurance Holding Companies Act," i.e. whether these transactions are fair and reasonable. Dep't Decl. Op. & Order at 47, Erie Ins. Exch. v. Erie Indem. Co. , No. MS14–03–003 (Pa. Ins. Comm'r April 29, 2015). The Department determined that Indemnity "complied with applicable insurance laws and regulations" and that Indemnity properly "retained charges paid by Exchange policyholders for certain premium payment plans, dishonored payments, policy cancellations and policy reinstatements." Id. at 85.
On appeal, the Pennsylvania Commonwealth Court vacated the Department's ruling on the ground that the state court erred in referring the action to the Department. Erie Ins. Exch. ex rel. Sullivan v. Pa. Ins. Dep't , 133 A.3d 102, 113 (Pa. Commw. Ct. 2016). Specifically, the Pennsylvania Commonwealth Court held that the matter of whether Indemnity breached the compensation provision of the Subscriber's Agreement is not a complex one that requires the Department's expertise; rather, such matters, i.e. contract interpretation and fact finding, fall within the competence of trial courts. Id. at 112. Accordingly, the Pennsylvania Commonwealth Court remanded the action to state court for further proceedings, including rulings on Indemnity's other preliminary objections.
With the state action still pending, Plaintiffs initiated the instant action on July 8, 2016 against Defendants Indemnity and certain Directors of Indemnity. As mentioned, Plaintiffs assert breach of contract, breach of fiduciary duty, conversion, and unjust enrichment claims. Defendants filed separate Motions to Dismiss that are now ripe for review. III. STANDARD OF REVIEW
Although certain Defendants filed their motions separately, all Defendants noted that they incorporate arguments set forth in their co-Defendants' briefs. For ease, the Court will refer to Defendants' arguments as if they filed their motions jointly, and cite to the appropriate brief for reference.
"To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ " Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly , 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. "Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice." Id. In deciding whether a complaint states a plausible claim for relief, " ‘all well-pleaded allegations of the complaint must be taken as true and interpreted in the light most favorable to the plaintiffs, and all inferences must be drawn in favor of them.’ " McTernan v. City of York, Pa. , 577 F.3d 521, 526 (3d Cir. 2009) (quoting Schrob v. Catterson , 948 F.2d 1402, 1408 (3d Cir. 1991) ).
Relevant to this case, statute of limitations generally is not an appropriate ground for a Rule 12(b)(6) motion. See Oshiver v. Levin, Fishbein, Sedran & Berman , 38 F.3d 1380, 1384 n.1 (3d Cir. 1994). An exception may be made, however, "where the complaint facially shows noncompliance with the limitations period and the affirmative defense clearly appears on the face of the pleading." Id. ; see also W. Penn. Allegheny Health Sys., Inc. v. UPMC , 627 F.3d 85, 105 n.13 (3d Cir. 2010) ("[P]laintiff's tardiness in bringing the action must be apparent from the face of the complaint."). While the "point in time at which the plaintiff should reasonably be aware that he or she has suffered an injury is usually an issue of fact,"see J.H. Stevedoring Co. v. Fasig–Tipton Co., 275 F.Supp.2d 644 (E.D. Pa. 2003), the "commencement of the limitations period ... may be determined as a matter of law where the facts are so clear that reasonable minds cannot differ." Hayward v. Med. Ctr. of Beaver Cty. , 530 Pa. 320, 608 A.2d 1040 (1992).
IV. ANALYSIS
Defendants first argue that Plaintiffs' breach of contract, breach of fiduciary duty, and conversion claims (Counts I–IV), are barred by the applicable statute of limitations. Plaintiffs bring their remaining claim of unjust enrichment against Defendants Vorsheck, T. Hagen, and J. Hagen, who move to dismiss for failure to state a claim. The Court agrees—Plaintiffs' breach of contract and unjust enrichment claims fail as a matter of law, and Plaintiffs' breach of fiduciary duty and conversion claims are time-barred.
Given the Court's dismissal of Plaintiffs' breach of contract, breach of fiduciary duty, conversion, and unjust enrichment claims, the Court need not decide whether Pennsylvania law permits an individual subscriber to sue derivatively on behalf of a reciprocal insurance exchange.
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A. Plaintiffs Fail to State a Claim for Breach of Contract (Count I).
1. Plaintiffs' Breach of Contract Claim is Not Untimely.
In Count I, Plaintiffs assert a breach of contract claim against Indemnity, alleging that Indemnity's retention of the Service Charges and Additional Fees breached the compensation provision of the Subscriber's Agreement. (Compl. ¶¶ 114–121). Pennsylvania law provides that the statute of limitations for a breach of contract claim is four years. See 42 Pa. C. S. § 5525 (2013). Generally, in Pennsylvania, " ‘an action founded on a contract accrues when the contract is breached.’ " PSC Info Grp. v. Lason, Inc. , 681 F.Supp.2d 577, 588 (E.D. Pa. 2010) (quoting Sadtler v. Jackson–Cross Co. , 402 Pa.Super. 492, 587 A.2d 727 (1991) ).
Defendants argue that Plaintiffs' own allegations establish that their breach of contract claim has expired. According to Defendants, Plaintiffs' Complaint indicates that two actions constituted a breach of the Subscriber's Agreement: the first is Indemnity's decision in 1997 to begin retaining a portion of the Service Charges, and the second is Indemnity's decision in 1999 to begin retaining all of the Service Charges. (Doc. No. 34, at 14). As a result, Defendants aver that Plaintiffs' breach of contract claim has expired. In response, Plaintiffs contend that Defendants mischaracterize Plaintiffs' breach of contract claim to be based on single decisions by Defendants in 1997, 1999, and 2008. (Doc. No. 45, at 14). By doing so, according to Plaintiffs, Defendants ignore the fact that Indemnity and its Directors commit a separate breach of the Subscriber's Agreement each and every year. (Id. ). Plaintiffs assert that Plaintiffs' contract claim is not barred because the Subscriber's Agreement is a "continuing contract" and thus falls within the continuing contract exception. (Id. at 16).
The continuing contract exception is described as follows:
On a continuing contract which is entire, the statute of limitations begins to run only from the time when the breach occurs or the contract is in some way terminated. The test of continuity, so as to take the cause out of the operation of the statute of limitations, is to be determined by the answer to the question whether the services were performed under one continuous contract, whether express or implied, with no definite time fixed for payment, or were rendered under several separate contracts.
If services are rendered under an agreement which does not fix any certain time for payment or for the termination of the services, the contract will be treated as continuous, and the statute of limitations does not begin to run until the termination of the contractual relationship between the parties.
Thorpe v. Schoenbrun , 202 Pa.Super. 375, 195 A.2d 870, 872 (1963) (emphases added) (internal quotation marks omitted). Plaintiffs argue that the Subscriber's Agreement satisfies the "test of continuity" because the agreement "does not fix any certain time for payment or for the termination of the services." (Doc. No. 45, at 18). Therefore, Plaintiffs urge the Court to deem the Subscriber's Agreement a single continuous contract, and find that the statute of limitations does not run until the Subscriber's Agreement is terminated. (Id. ).
In response, Defendants argue that the "continuing contract" doctrine does not apply. Defendants point the Court to Welch Foods Inc. v. Borough of N.E. , No. CIV.A. 98-246 ERIE, 2001 WL 311204 (W.D. Pa. Feb. 6, 2001), aff'd , 46 Fed.Appx. 678 (3d Cir. 2002), to support their position. In Welch , the plaintiff manufacturer alleged that in 1978 the defendant borough violated their 1975 contract by enacting an ordinance that "increased [plaintiff's waste treatment] payment obligations beyond its proportionate share, and subsequently breached this contract each and every time it billed plaintiff according to the rate structure set forth in this ordinance." Id. at *8. Because the 1975 contract was still operative when litigation commenced, the plaintiff argued that it qualified as a "continuing contract" such that the statute of limitations would not begin to run until the contractual relationship was severed. Id. The court disagreed: " Thorpe states that even for continuing contracts, the statute of limitations begins to run from the date of a breach.... In this case, it is clear to us that a breach occurred, if at all, on May 11, 1978, when the Borough enacted the ordinance at issue. Thus, Plaintiff must have commenced suit against the Borough [within four years of that date]." Id. Defendants argue that the statute of limitations in the instant case should also run from the date of the alleged breach of contract, which occurred as early as 1997 when Indemnity began to retain service charges.
The unpublished decision in Welch , however, does not provide a persuasive reading of Thorpe . For a continuing contract, the statute of limitations begins to run when the contract is terminated, not from the time of breach. As our sister court has explained:
[Defendants'] argument simply does away with the principal distinction between contracts that are considered "continuing" under Pennsylvania law and those that are not. Defendants' argument is based solely on the following sentence in Thorpe:
On a continuing contract which is entire, the statute of limitations begins to run only from the time when the breach occurs or the contract is in some way terminated.
195 A.2d at 872. Defendants would have me read this sentence as meaning "from the time when the breach occurs or the contract is in some way terminated, whichever comes first. " Yet such a reading would be contradictory to both the language of Thorpe and its reasoning. First of all, in the very next paragraph, the court went on to state:
If the services are rendered under an agreement which does not fix any certain time for payment or for the termination of the services, the contract will be treated as continuous, and the statute of limitations does not begin to run until the termination of the contractual relationship between the parties.
Id. (emphasis added). This language directly contradicts Defendants' interpretation and indicates that the statute of limitations on a continuing contract runs from the termination of the parties' contractual relationship....
Furthermore, even a cursory reading of Thorpe reveals that the continuing contract doctrine is meant to carve out an exception to the general rule that the statute of limitations begins to run on the date of breach.... Therefore, Defendants' argument must be rejected as contrary to Thorpe.
If Plaintiff could prove that the continuing contract doctrine applied in this case, the statute of limitations on its breach of contract claim would run from the termination of the parties' contractual relationship.
Jodek Charitable Trust, R.A. v. Vertical Net Inc., 412 F.Supp.2d 469, 476–77 (E.D. Pa. 2006) (footnotes omitted). Because the Subscriber's Agreement does not fix a definitive time for payment or the termination of services, it is properly regarded as a single continuous contract. The statute of limitations for a breach of the continuous contract does not run until the contract is terminated. Therefore, Plaintiffs' breach of contract claims are not untimely.
2. Plaintiffs' Breach of Contract Claim Fails as a Matter of Law.
The continuing contract doctrine cannot save Plaintiffs' breach of contract claim from another fundamental problem: the Subscriber's Agreement does not govern the separate and additional charges at issue in the Complaint. State courts have consistently recognized that the kinds of charges disputed here may be imposed outside the contract for insurance. For example, in Nellis v. Farmers Ins. Co. of Arizona , 272 P.3d 143 (N.M. Ct. App. 2011), customers sued their insurance company when the company imposed a service charge on customers who sought to pay their premium in installments. The complaint asserted a breach of contract claim on the grounds that the fees, which allegedly constituted additional premium, were not identified in the contract for insurance. Id. at 146. The Court held that summary judgment in favor of the plaintiffs was not proper because installment payment fees are not premiums, as they "are not charged in connection with the procurement of insurance," but rather "are associated with the privilege of paying a premium in installments and are not for the actual purchase of insurance itself." Id. at 149 (quoting Nakashima v. State Farm Mutual Auto. Ins. Co. , 141 N.M. 239, 153 P.3d 664 (N.M. Ct. App. 2007) ). Thus, the court recognized that "insureds can enter into separate enforceable agreements for payment of premiums in a mode other than in a lump sum." Id. at 150.
Similarly, in In reIns. Installment Fee Cases , 211 Cal.App.4th 1395, 150 Cal.Rptr.3d 618 (2012), plaintiffs alleged their automobile insurer breached their insurance contract by charging service fees for payment in monthly installments. The court explained that an installment fee "is consideration for a benefit separate from the insurance and is paid under an agreement separate from the policy. Therefore, the installment fee is not an insurance premium or rate that must be stated on the declarations page or elsewhere in the policy." Id. at 1408, 150 Cal.Rptr.3d 618 ; see also Cacamo v. Liberty Mut. Fire Ins. Co. , 885 So.2d 1248, 1256 (La. Ct. App. 2004) (Because "[t]he installment fees paid by insureds choosing that option are not for the insurance or for the procurement of insurance ... installment fees are not included in the definition of ‘premium.’ ") (emphasis omitted).
The Subscriber's Agreement governs insurance premiums: how they are to be used and how much Indemnity may retain as compensation. The Subscriber's Agreement does not govern fees for separate services Indemnity may provide, such as accepting payments in installments, which are separately provided for in policy applications. (Doc. No. 34 Ex. 2 ¶ 201–05). Because service charges and additional fees are outside the Subscriber's Agreement, Indemnity did not breach that agreement by retaining those charges and fees for its services.
B. Plaintiffs' Breach of Fiduciary Duty Claims are Untimely (Counts II & IV).
In Counts II and IV, Plaintiffs, individually and derivatively on behalf of Exchange, respectively, allege breach of fiduciary duty claims against Defendants Indemnity and Directors. (Compl. ¶¶ 122–131, 136–140). Under Pennsylvania law, the statute of limitations for a breach of fiduciary duty claim is two years, see 42 Pa. C. S. § 5524(7) (2013), and it generally "begins to run ... when the [fiduciary] openly and unequivocally violates his duties." Weis–Buy Servs., Inc. v. Paglia , 411 F.3d 415, 422 (3d Cir. 2005).
Assuming the existence of a fiduciary duty between Defendants and Plaintiffs, Defendants argue that Plaintiffs' own allegations establish that Defendants breached their fiduciary duties in 1997, 1999, and 2008 when the decision to retain Service Charges and Additional Fees were approved. (Doc. No. 34 (citing to Compl. ¶¶ 127, 129). As a result, according to Defendants, Plaintiffs' fiduciary duty claims have expired.
In response, Plaintiffs claim that the Complaint sufficiently shows the timeliness of their fiduciary duty claims dating back to 1997. (Doc No. 45, at 18 (citing Compl. ¶¶ 67, 75–76, 81, 84–86, 127, & 129)). Specifically, Plaintiffs explain, "Indemnity, acting through its Directors, actively decided, each and every year, to unlawfully take and retain the Service Charges and Additional Fees collected that year." (Id. at 20). Because of these year after year violations, Plaintiffs' argument goes, the "continuing violations" exception applies. (Doc. No. 45, at 19).
The continuing violations exception is another equitable doctrine to toll the applicable statute of limitations. Cowell v. Palmer Tp. , 263 F.3d 286, 292 (3d Cir. 2001) (internal quotation marks omitted). " ‘[W]hen a defendant's conduct is part of a continuing practice, an action is timely so long as the last act evidencing the continuing practice falls within the limitations period; in such an instance, the court will grant relief for the earlier related acts that would otherwise be time-barred.’ " Id. (quoting Brenner v. Local 514, United Bhd. of Carpenters and Joiners of Am. , 927 F.2d 1283, 1295 (3d Cir. 1991) (finding that failure of union and its agents to refer plaintiffs for work in fair manner constituted the type of ongoing practice to which the continuing violation doctrine should be applied)). The continuing violations doctrine requires the Court to focus on a defendant's "affirmative acts." Id. at 293. Significantly, as cautioned by the Third Circuit, "equitable relief from the statutory limitations period is appropriate only where the alleged violation is ‘occasioned by continual unlawful acts , not continual ill effects from an original violation.’ " Tearpock–Martini v. Borough of Shickshinny , 756 F.3d 232, 236 (3d Cir. 2014) (quoting Cowell , 263 F.3d at 293 ) (emphasis added).
As mentioned, Plaintiffs argue that the Complaint sufficiently pleads facts to show that Defendants' "ongoing decisions" constituted breaches of fiduciary duties each year subsequent to 1997. (Doc. No. 45, at 20). The Court, according to Plaintiffs, therefore is permitted to find Plaintiffs' fiduciary duty claims dating back to 1997 as timely because the "last act evidencing the continuing practice falls within the limitations period."
In response, Defendants reiterate that Plaintiffs' Complaint derives from the affirmative acts in 1997 and 1999, in which Defendants changed their long-standing practice and began retaining Service Charges. (Doc. No. 53, at 8–9 (citing Compl. ¶ 73–74)). Aside from those allegations, Defendants aver that Plaintiffs merely allege that "Indemnity and its Directors permitted the policy to remain in effect." (Id. (citing Compl. ¶ 75)). Defendants point out that Plaintiffs "do not accurately characterize their own complaint." (Doc. No. 56, at 2). In that vein, Defendants argue that "the Complaint is studiously agnostic as to whether the directors took any kind of action at any time other than in 1997, 1999, and 2008. What the Complaint actually says is that the directors "authorized and/or allowed" the retention of service charges each year." (Id. ; see also Compl. ¶¶ 75, 79, 81). Accordingly, Defendants explain, Plaintiffs challenge the continuing effects from the original violation, which does not justify the Court's application of the continuing violations exception.
The Court finds that Plaintiffs' breach of fiduciary claims are barred by the statute of limitations. The Court agrees that Plaintiffs mischaracterize their Complaint, which states that the Defendants "each year since" 1997 have "authorized and/or allowed" the taking of all the Service Charges revenue from Exchange. (Compl. ¶ 75; see also id. ¶¶ 79, 81 (similar allegations regarding Additional Fees)). Such conclusory language fails to meet the standards set forth in Iqbal , 556 U.S. at 678, 129 S.Ct. 1937, which require more than "threadbare recitals ... supported by mere conclusory statements."
However, assuming arguendo such allegations satisfied Iqbal , the inquiry is not over. Rather, "a plaintiff must establish that the defendant's conduct is ‘more than the occurrence of isolated or sporadic acts’ " to benefit from the continuing violations doctrine. Cowell , 263 F.3d at 292 (quoting West v. Philadelphia Elec. Co. , 45 F.3d 744, 754 (3d Cir. 1995) ). Regarding this inquiry, courts consider at least three factors:
(1) Subject-matters—whether the violations constitute the same type of discrimination, tending to connect them to a continuing violation; (2) Frequency—whether the acts are recurring or more in the nature of isolated incidents; and (3) Degree of permanence—whether the plaintiff's awareness of and duty to assert his/her rights and whether the consequences of the act would continue even in the absence of a continuing intent to discriminate.
Id. (citing Berry v. Board of Supervisors of Lousiana State Univ. , 715 F.2d 971, 981 (5th Cir. 1983) ). Of the Berry factors, "[t]he consideration of ‘degree of permanence’ is the most important of factors." Id. In Cowell , plaintiffs, a real estate development company and its owners, challenged liens imposed on certain properties by defendants, a township and individuals on the board of the township, as violating the Takings Clause of the Fifth Amendment and the Due Process Clause of the Fourteen Amendment. Id. at 286. In that case, plaintiffs conceded that the applicable statute of limitations for their due process claims was two years, but claimed that the continuing violations doctrine should apply. Id. at 291–92. In support of that argument, plaintiffs proffered several acts that occurred after defendants imposed the liens at issue. Id. at 294. In applying the third Berry factor, the Third Circuit explained that the "continuing violations doctrine should not provide a means for relieving plaintiffs from their duty to exercise reasonable diligence in pursuing their claims." Id. at 295. The Third Circuit then affirmed the district court's finding that plaintiffs "were aware of the wrongfulness of the liens when the liens were imposed ... the plaintiffs should have a brought a claim to strike the liens ... within the applicable limitations period. Id.
This case is of the Cowell ilk. Plaintiffs, by their own allegations, knew of the wrongfulness of the decision to retain Service Charges at the time those decisions were made. Plaintiffs should have brought those claims within the applicable statute of limitations, and cannot now rely on the continuing violations doctrine as a "means for relieving [them] from their duty to exercise reasonable diligence in pursuing their claims." Id. at 295. As mentioned, the continuing violations doctrine is an "equitable" exception, and the equities of this case tip in favor of Defendants given Plaintiffs' awareness of the wrongdoing and subsequent fifteen year delay before initiating an action. "Limitations periods are intended to put defendants on notice of adverse claims and to prevent plaintiffs from sleeping on their rights." Accordingly, Plaintiffs' breach of fiduciary duty claims against Indemnity and its Directors (Counts II and IV), brought individually and derivatively on behalf of Exchange, are time-barred. C. Plaintiffs' Conversion Claim is Untimely (Count III).
Under Pennsylvania law, there is a two-year statute of limitations for conversion. See 42 Pa. C. S. § 5524(3). "Generally, the statute of limitations begins when the plaintiff's cause of action accrues; although, there are certain instances where the statute of limitations may be tolled." New Castle v. Halliburton NUS Corp. , 111 F.3d 1116, 1124 (3d Cir. 1997).
Defendants argue that Plaintiffs' conversion claim accrued when the "first significant event necessary to make the claim suable occur[ed]." In re River Entm't Co. , 467 B.R. 808, 815 (Bankr. W.D. Pa. 2012). Therefore, as Defendants contend, Plaintiffs' conversion claim is untimely because the Complaint establishes that the first significant event occurred in 1997 when Defendants first "took" the Service Charges. (Doc. No. 34, at 16 (citing Compl. ¶ 133)).
In response, Plaintiffs do not dispute that the statute of limitations begins to run when the first significant event necessary to make the claim suable occurs. (Doc. No. 45, at 20). However, Plaintiffs aver that the first significant event is where there has "been a demand for goods and a refusal to deliver." (Id. ). Accordingly, Plaintiffs argue that the statute of limitations began to run when Plaintiffs made a formal demand, i.e. filed their State Court Complaint, not when Defendants took the Service Charges in 1997. (Id. at 21–22).
The Court finds that Plaintiffs' conversion claim is barred by the statute of limitations. Plaintiffs improperly rely on Fenton v. Balick , 821 F.Supp.2d 755 (E.D. Pa. 2011), for the proposition that the statute of limitations should accrue when Plaintiffs filed their State Court Complaint. In Fenton , a district court examined a conversion claim regarding an Andy Warhol painting. Id. at 758. After finding that defendant possessed the painting with the plaintiff's permission, the district court determined that a claim for conversion arose once plaintiff demanded its return and defendant refused. Id. at 761. Stated differently, the district court held that plaintiff's claim for conversion arose once a permissible possession became impermissible.
The instant case is not the one presented in Fenton . As Defendants correctly point out, Plaintiffs' own allegations, taken as true, establish that Defendants impermissibly took the Service Charges in 1997. (See, e.g. , Compl. ¶ 134 ("Indemnity took the funds from the account of Exchange without the consent of Exchange and Plaintiffs, to whom the funds belonged, and without legal justification.")). Accordingly, the statute of limitations for Plaintiffs' conversion claim began to run "when the first significant event necessary to make the claim suable occur[ed]," i.e. when Defendants took the Service Charges in 1997. See J.H. StevedoringCo. v. Fasig–Tipton Co. , 275 F.Supp.2d 644, 647 (E.D. Pa. 2003) ("The statute of limitations is tolled only if a reasonable person in the plaintiff's position would not have been aware of the salient facts."). Therefore, Plaintiffs' conversion claim against Indemnity brought individually and derivatively on behalf of Exchange, Count III, has expired.
D. Plaintiffs' Unjust Enrichment Claim Fails to State a Plausible Claim for Relief (Count V).
In Count V, Plaintiffs, derivatively on behalf of Exchange, assert an unjust enrichment claim against Defendants Vorsheck, T. Hagen and J. Hagen. (Compl. ¶ 141–143). Specifically, Plaintiffs contend that Defendants Vorsheck, T. Hagen, and J. Hagen "received excessive and unwarranted payments or the inequitable transfer of Exchange assets as a result of the misconduct" described in Plaintiffs' Complaint. (Id. ¶ 142).
Unjust enrichment is an equitable doctrine. See Mitchell v. Moore , 729 A.2d 1200, 1203 (Pa. Super. Ct. 1999). The elements for an unjust enrichment claim under Pennsylvania law are as follows: "(1) a benefit was conferred on the defendant; (2) the defendant retained that benefit; and (3) it would be inequitable for the defendant to retain the benefit without paying the full value for it." In re Lampe , 665 F.3d 506, 520 (3d Cir. 2011). "[T]he most important element of unjust enrichment is " ‘whether the enrichment of the defendant is unjust; the doctrine does not apply simply because the defendant may have benefited as a result of the actions of the plaintiff.’ " Car Sense Inc. v. Am. Special Risk, LLC , 56 F.Supp.3d 686, 698 (E.D. Pa. 2014) (quoting Temple University Hosp., Inc. v. Healthcare Management Alternatives, Inc. , 832 A.2d 501, 507 (Pa. Super. Ct. 2003) ).
Plaintiffs allege that Defendants' "disabling self-interests and their knowing and willful involvement in Indemnity's improper retention of the Service Charges and Additional Fees make it patently inequitable for them to retain the dividends they received as a result of the misconduct." (Doc. No. 50 at 39). However, Plaintiffs are estopped from arguing inequity because they represented to the Commonwealth Court that they were not challenging the fairness or reasonableness of the transactions. After the Department determined that the contested fees and charges were fair and reasonable, the Commonwealth Court vacated the Department's order, holding that the controversy "fall[s] within the competence of our trial courts." Erie Ins. Exch. ex rel. Sullivan v. Pennsylvania Ins. Dep't , 133 A.3d 102, 112 (Pa. Commw. Ct.), appeal denied , 636 Pa. 680, 145 A.3d 728 (Pa. 2016). The court further held:
When read as a whole, however, the Second Amended Complaint does not appear to challenge the fairness and reasonableness of the Transactions from a commercial or even regulatory standpoint. In drawing this conclusion, we expressly bind Petitioners to their representation in their brief: "Nowhere in the Second Amended Complaint did Exchange allege that the Transactions were somehow unfair or unreasonable...." (Pet'r's. Br. at 21.) Moreover, we see nothing in the Second Amended Complaint that calls into question Indemnity's compliance with the other statutory standards set forth in the IHCA which the Commissioner addresses in her Declaratory Opinion and Order.
Id. at 113.
"[T]he Department possesses both the jurisdiction and the special competency to review and decide whether an inter-company transaction within an insurance holding company system is both fair and reasonable." Id. at 110. The Department's order was vacated because the Commonwealth Court concluded that Plaintiffs were not challenging the fairness or reasonableness of the transactions. Plaintiffs may not attempt to resurrect their fairness arguments now. Plaintiffs' claim for unjust enrichment is dismissed for failure to state a claim upon which relief may be granted.
V. CONCLUSION
For the foregoing reasons, IT IS HEREBY ORDERED as follows:
1. The Court GRANTS the Motion to Dismiss filed by Indemnity, (Doc. No. 34);
2. The Court GRANTS the Motion to Dismiss filed by Defendant Vorsheck, (Doc. No. 38);
3. The Court GRANTS the Motion to Dismiss filed by Defendants Borneman, Cavanaugh, Hartz, Lilly, Palmer, Sheffield, Stover, and Wilburn, (Doc. No. 39);
4. The Court GRANTS the Motion to Dismiss filed by Defendants Datesh and Lucore, (Doc. No. 40);
5. The Court GRANTS the Motion to Dismiss filed by J. Hagen and T. Hagen, (Doc. No. 42); and
6. Given that no further action is required of this Court, this case is now CLOSED.