Drain v. Covenant Life Ins. Co.

• Decision Date: 09 December 1996
• Citation: 685 A.2d 119,454 Pa.Super. 143
• Parties: Reverend David Ross DRAIN and Reverend Michael Shea, on behalf of themselves and all others Similarly Situated, Appellants v. COVENANT LIFE INSURANCE COMPANY, Robert W. Kloss, Robert Lauterbach, William A. Pollard, Philip C. Herr, II, Leonard McCandless, George Jenkins, Eugene M. Twardowski and Provident Mutual Life Insurance Company of Philadelphia.
• Court: Pennsylvania Superior Court

Page 119

685 A.2d 119

454 Pa.Super. 143

Reverend David Ross DRAIN and Reverend Michael Shea, on behalf of themselves and all others Similarly Situated, Appellants v. COVENANT LIFE INSURANCE COMPANY, Robert W. Kloss, Robert Lauterbach, William A. Pollard, Philip C. Herr, II, Leonard McCandless, George Jenkins, Eugene M. Twardowski and Provident Mutual Life Insurance Company of Philadelphia.

Superior Court of Pennsylvania.

Argued May 14, 1996.

Filed Sept. 27, 1996.

Reargument Denied Dec. 9, 1996.

Kenneth A. Jacobsen, Haverford, for appellants.

Lewis R. Olshin, Philadelphia, for Covenant Life Ins. Co., etc., appellees.

Laurence Z. Shiekman, Philadelphia, for Provident Mutual Life Ins. Co., appellee.

Before JOHNSON, FORD ELLIOTT and HOFFMAN, JJ.

JOHNSON, Judge:

In this appeal, we are asked to determine whether the trial court erred in dismissing the complaint of Reverend David Ross Drain and Reverend Michael Shea upon the preliminary objections filed by Provident Mutual Life Insurance Company ("Provident") and Robert W. Kloss, Robert Lauterbach, William A. Pollard, Philip C. Herr, II, and Leonard McCandless (collectively, the "Individual Defendants"). This appeal by Reverends Drain and Shea requires us to consider, inter alia, the following primary questions: (1) Do the Courts of Common Pleas have jurisdiction over a claim alleging corporate-control torts in connection with a merger of mutual insurance companies, or is such a claim within the exclusive jurisdiction of the Insurance Commissioner? (2) Do plaintiffs in a derivative action challenging a merger lose their standing to maintain the action upon consummation of the merger where the disposition of their interests in the old corporation was involuntary and was related to allegedly illegal acts of the defendants? (3) Does a trial court abuse its discretion by denying leave to amend an initial complaint where amendment would be neither illegal nor significantly prejudicial, where it is not manifestly unlikely that an opportunity to amend will be fruitful, and where the trial court does not provide reasons on the record for its denial of leave to amend? Based upon our disposition of these questions as set forth in this Opinion, we vacate the judgment, reverse the order dismissing the complaint, and remand the matter for further proceedings consistent with the Opinion.

Reverends Drain and Shea filed class and derivative action claims in the Court of Common Pleas of Delaware County challenging the merger of Covenant Life Insurance Company ("Covenant") and Provident. Drain and Shea were policyholders of Covenant, which was formed to secure the relief of Presbyterian Ministers in 1717. Covenant focused throughout its 277-year history on providing low-cost basic insurance products to the clergy. Covenant was able efficiently to provide such insurance to its policyholders as a result of the homogeneous lifestyle and mortality characteristics of Covenant's policyholder base. These economies also permitted Covenant to pursue conservative investment strategies and resulted in accumulation of a substantial surplus, which in turn permitted further reduction in policyholder insurance costs and increased opportunities to provide Covenant policyholders with dividends. Generally speaking, the rights of Covenant's policyholders were similar to those held by policyholders of other mutual life insurance companies.

Individual Defendant Kloss, then President and Chief Executive Officer of Covenant, announced in early October of 1993 that Covenant had signed a letter of intent to merge with Provident. Provident filed an Application and Request for Approval of a Merger with the Pennsylvania Insurance Department on March 21, 1994. The merger proposal was submitted to a special meeting of Covenant's policyholders on July 25, 1994. With less than one-fourth of eligible policyholders voting, Covenant's policyholders approved the merger by a substantial margin, 13,873 to 1,630. The Pennsylvania Insurance Commissioner issued an order approving the merger on September 28, 1994. Drain and Shea filed a class and derivative action complaint approximately one week later. In their complaint, in Count I, Drain and Shea derivatively seek equitable relief and damages for alleged breach of fiduciary duty and waste of corporate assets, and, in Count II, they seek relief for alleged fundamental unfairness of the merger. On October 11, 1994, Drain and Shea filed a Petition for Preliminary Injunction to delay the consummation of the proposed merger. After extensive hearings before the Honorable Joseph P. Cronin, the Petition for Preliminary Injunction was denied. Upon receipt of the approval of the California Department of Insurance (required by the fact that certain policyholders of the companies were California residents), the merger was consummated on October 31, 1994. Provident and the Individual Defendants filed preliminary objections to the class and derivative action complaint. The trial court, by an order dated December 22, 1995, sustained these preliminary objections and dismissed the complaint with prejudice. This appeal followed.

"In an appeal from an order sustaining a preliminary objection in the nature of a demurrer, our scope of review is plenary[;] preliminary objections which result in the dismissal of the suit or the denial of the claim should be sustained only in cases which are clear and free from doubt." Ham v. Sulek, 422 Pa.Super. 615, 622, 620 A.2d 5, 8 (1993). Further, "the facts that are well-pleaded, material, and relevant will be considered as true, together with such reasonable inferences as may be drawn from such facts." Mellon Bank v. Fabinyi, 437 Pa.Super. 559, 567, 650 A.2d 895, 899 (1994). Importantly,

preliminary objections in the nature of a demurrer require the court to resolve the issues solely on the basis of the pleadings; no testimony or other evidence outside of the complaint may be considered to dispose of the legal issues presented by a demurrer. In order to sustain a demurrer, it is essential that the face of the complaint indicate that its claims may not be sustained and that the law will not permit recovery. If there is any doubt, it should be resolved by the overruling of the demurrer.

Id. at 567-68, 650 A.2d at 899 (citations omitted); Ham, supra, at 622, 620 A.2d at 9 ("The question presented by the demurrer is whether, on the facts averred, the law says with certainty that no recovery is possible."). The complaint in this case includes a derivative claim for breach of fiduciary duties and waste of corporate assets (Count I) and a class claim for fundamental unfairness under the Business Corporation Law asserting certain common law and contract rights (Count II). We consider the trial court's disposition of these claims in reverse order.

Jurisdiction over the class claim asserted in Count II is vested in the Courts of Common Pleas by 15 Pa.C.S. § 1793, which provides that "[u]pon application of any person aggrieved by any corporate action, the court may hear and determine the validity of the corporate action." Such jurisdiction is, however, circumscribed by the jurisdiction of the Insurance Commissioner under 15 Pa.C.S. § 3138, which provides that § 1793 "shall not be applicable to an insurance corporation insofar as inconsistent with the jurisdiction of the insurance department." This provision is made applicable to Covenant by 15 Pa.C.S. § 3102, which defines "insurance corporation" as "a domestic business corporation that is engaged in the business of writing insurance ... and is subject to regulation by the insurance department."

The trial court sustained the demurrer to Count II on the basis of its ruling that it lacked subject-matter jurisdiction over the class claim. The court reasoned as follows:

Pennsylvania law clearly provides that the Insurance Commissioner alone has the jurisdiction to assess the fairness to policyholders of a merger involving an insurance company, pursuant to 42 Pa.C.S.A. 763(a). In order to merge, Pennsylvania law required that Covenant Insurance Company and Provident Mutual Life Insurance Company obtain authorization from the Insurance Commissioner. See 40 Pa.C.S.A. § 991.1402(h)(2). The Insurance Commissioner has exclusive statutory jurisdiction to determine whether a proposed merger of Pennsylvania-domiciled insurance corporations is fair to the policyholders of the merging entities and can disapprove a proposed merger if she finds the proposed merger is unfair to such policyholders. See 40 Pa.C.S.A. § 991.1402(f)(1)(iii-iv) (Supp.1994). The Commissioner is specifically granted the authority to determine whether the plan to merge "jeopardizes the financial stability of the insurer or prejudices the interests of its policyholders" or whether the plan to merge is "unfair and unreasonable to policyholders of the insurer and not in the public interest." See [Id. ].

* * * * * *

As is reflected in the Insurance Commissioner's Order approving the merger, the Commissioner reviewed the extensive materials provided by Provident and Covenant and made the determination that the proposed merger was fair to the policyholders of the two companies and that the merger could proceed. The identical fairness issues that Plaintiffs seek to challenge in this Court have already been considered, adjudicated and rejected by the Insurance Commissioner and, thus, are not properly before this Court.

Opinion, supra, at 4-5.

While we are not aware of any Pennsylvania decisional precedent guiding this Court as to the specific interpretation of the statutes governing this issue, consideration of applicable precedent from other jurisdictions and of the role of the Insurance Commissioner in reviewing the merger that is the subject of this action indicates that the trial court's conclusion was in error.

Covenant's Amended and Restated By-Laws establish Covenant policyholders as "members" of Covenant, a mutual insurance...