Foster v. Westmoreland Cas. Co.

• Decision Date: 21 February 1992
• Citation: 145 Pa.Cmwlth. 638,604 A.2d 1131
• Parties: Constance B. FOSTER, Insurance Commissioner of the Commonwealth of Pennsylvania, Plaintiff, v. WESTMORELAND CASUALTY COMPANY, Defendant.
• Court: Pennsylvania Commonwealth Court

Page 1131

604 A.2d 1131

145 Pa.Cmwlth. 638

Constance B. FOSTER, Insurance Commissioner of the Commonwealth of Pennsylvania, Plaintiff, v. WESTMORELAND CASUALTY COMPANY, Defendant.

Commonwealth Court of Pennsylvania.

Argued Nov. 18, 1991.

Decided Feb. 21, 1992.

Karl F. Frantz, Asst. Counsel, for plaintiff.

Allen C. Warshaw and Frederick T. Lachat, Jr., for defendant.

Before COLINS, PALLADINO and SMITH, JJ.

SMITH, Judge.

Before this Court are exceptions filed by two law firms, Gallagher, Reilly and Lachat (Gallagher) and Duane, Morris and Heckscher (Duane), collectively Claimants, to the hearing referee's findings of fact and recommendation that Claimants' claims for attorney's fees for services rendered to Westmoreland Casualty Company (Westmoreland) during its suspension be classified as general creditor claims under Section 544(b) of the Act of May 17, 1921, P.L. 789, commonly known as the Insurance Department Act (Act), as amended, 40 P.S. § 221.44(b). ¹

Westmoreland was suspended by the November 12, 1987 order of the Insurance Commissioner (Commissioner) and placed under supervision of the Commissioner. On September 27, 1988, pursuant to Section 520 of the Act, 40 P.S. § 221.20, this Court ordered Westmoreland liquidated finding that Westmoreland was insolvent, and appointed the Commissioner as liquidator. ² On March 15, 1990, the Commissioner notified Claimants that their claims for unpaid attorney's fees would be classified as claims of general creditors under Section 544(d) of the Act. Following Claimants' timely objections, the Commissioner, pursuant to Section 541(b) of the Act, 40 P.S. § 221.41(b), filed a petition with this Court for appointment of a hearing referee.

On July 30, 1991, the court-appointed referee submitted to this Court his findings of fact and recommendation that Claimants' claims be classified as general creditor claims under Section 544(d). Claimants filed exceptions asserting that their attorney's fees should be evaluated as "costs and expenses of administration" under Section 544(b) and that the Commissioner is estopped from refusing to evaluate their claims under that section because Claimants justifiably relied upon assurance from the Insurance Department (Department) that the fees would be paid as administrative expenses. At issue here are those claims submitted after entry of the liquidation order. ³

The following testimony was presented at hearings before the referee. Victor Mastalski, the Department's field examiner, was present at Westmoreland during its suspension, and all payments and expenditures of Westmoreland required his approval. December 12, 1990 Hearing, N.T., pp. 102-3. At Mr. Mastalski's direction, notices of suspension were sent to all creditors, policyholders and all other interested persons. Upon learning of Westmoreland's suspension, Thomas F. Reilly, Gallagher's partner, and Anthony J. Bilotti, Duane's partner, contacted William T. Cline, Westmoreland's chief in-house counsel, to inquire about payment of attorney's fees incurred during Westmoreland's suspension. Mr. Cline stated that Department officials who were responsible for supervising Westmoreland's operations assured him that bills for attorney's fees would be paid as administrative expenses. Id. at 11-15, 57-59. Thereafter, Westmoreland sent a letter, reviewed and approved by Mr. Mastalski, to all attorneys who handled claims for Westmoreland. The letter, dated December 4, 1987, stated in pertinent part:

In the Department's effort to conserve the assets of the Company in accordance with the insurance law, they have restricted us from honoring your bills for work done prior to the date of the Suspension Order. Since the Department wishes Westmoreland Casualty Company to continue to make claim payments and to handle our claims in the normal manner, they have advised us that they will approve for payment any billing from your firm on our cases where the work performed falls after the suspension date.

As a result, we would ask that you continue to handle our current cases based upon the Department's assurances that your fees for current work will be honored. We would ask that you review your file and send us invoices covering your work performed up to and including November 11, 1987. We would then ask that you bill us on a monthly basis if the amount warrants it, for all work performed from November 12, 1987 and forward.

During Westmoreland's suspension and liquidation, Ronald Chronister, Deputy Insurance Commissioner, was responsible for identifying insurance companies which were in financial trouble, overseeing the operation of suspended insurance companies and carrying out the Commissioner's responsibilities as liquidator. January 10, 1991 Hearing, N.T., pp. 174-75. Mr. Chronister testified that he reviewed the December 4, 1987 letter after it was sent and that the Department's policy as stated in the letter was correct, even though it did not state the Department's entire policy regarding payment of attorney's fees. He did not, however, direct Mr. Mastalski to clarify the letter to reflect the entire policy. Id. at 210-11. He further testified that the Department wanted Westmoreland to continue to process worker's compensation claims to pay compensation to injured workers and at the same time to protect Westmoreland's assets by preventing overpayments. Id. at 208-9. Kenneth Wolensky, the Department's program analyst, testified that he advised all counsel, on behalf of Mr. Chronister, that their fees incurred during Westmoreland's suspension would be paid if submitted in a timely fashion, but did not advise them that bills submitted after entry of the liquidation order might not be paid. Id. at 241-42.

Claimants first argue that their attorney's fees for services rendered during Westmoreland's suspension fall within the category of costs and expenses of administration under Section 544(b) because their services provided in worker's compensation proceedings helped to preserve Westmoreland's assets by reducing its ongoing obligations. On the other hand, the Commissioner argues that costs and expenses of administration must be limited to the liquidator's expenses incurred after entry of the liquidation order in administering Westmoreland's liquidated assets, attempting to make a distinction between pre-liquidation work and services performed after liquidation. The Commissioner, however agrees to treat as costs and expenses of administration those bills submitted by Claimants before entry of the liquidation order. Such an incongruous position advanced by the Commissioner is not supported by the classification of costs and expenses of administration under Section 544(b). ⁴

It is unnecessary to address the question of whether Claimants' attorney's fees fall within the category of costs and expenses of administration under Section 544(b) because the facts support Claimants' contention that their claims must be paid under the doctrine of equitable estoppel. The Pennsylvania Supreme Court defined equitable estoppel as follows:

Equitable estoppel is a doctrine that prevents one from doing an act differently than the manner in which another was induced by word or deed to expect. A doctrine sounding in equity, equitable estoppel recognizes that an informal promise implied by one's words, deeds or representations which leads another to rely justifiably thereon to his own injury or detriment, may be enforced in equity.

Novelty Knitting Mills, Inc. v. Siskind, 500 Pa. 432, 435, 457 A.2d 502, 503 (1983). The doctrine of estoppel may be asserted against a Commonwealth agency in Pennsylvania. Chester Extended Care Center v. Department of Public Welfare, 526 Pa. 350, 586 A.2d 379 (1991); Yurick v. Commonwealth, 130 Pa.Commonwealth Ct. 487, 568 A.2d 985 (1989). In order to apply the doctrine of equitable estoppel to a Commonwealth agency, the party to be estopped (1) must have intentionally or negligently misrepresented some material facts; (2) knowing or having reason to know that the other party would justifiably rely on the misrepresentation; and (3) induced the party to act to his or her detriment because of a justifiable reliance upon the misrepresented facts. State Public School Building Authority v. Noble C. Quandel Co., 137 Pa.Commonwealth Ct. 252, 585 A.2d 1136 (1991). In addition, one who asserts estoppel must establish the essential elements by clear, precise, and unequivocal evidence. Yurick.

In an effort to preserve Westmoreland's assets, it was the Commissioner's policy to encourage attorneys to continue to handle claims "in the normal manner" during suspension, as shown in the December 4, 1987 letter and as acknowledged by the Deputy Commissioner at hearing. ⁵ Upon learning of Westmoreland's suspension, Claimants immediately informed Department officials that Claimants would not render further services to Westmoreland until they had assurance of the payment of their attorney's fees incurred during suspension. The Department's officials assured Claimants that their attorney's fees would be paid as administrative expenses, and unless specifically asked, deliberately avoided advising all counsel that their fees might not be paid in the event of Westmoreland's liquidation. Consequently, Claimants established by clear and unequivocal evidence that they in good faith justifiably relied to their detriment upon the Commissioner's representations that their attorney's fees would be honored as administrative expenses even if submitted after liquidation, thus satisfying all necessary elements of equitable estoppel.

The Commissioner argues that the doctrine of equitable estoppel is inapplicable to this matter because Section 544 does not permit her to designate Claimants' claims as costs and expenses of administration. In support,...