In re Professional Ins. Management
| Decision Date | 01 April 2002 |
| Docket Number | No. 00-5201.,00-5201. |
| Citation | 285 F.3d 268 |
| Parties | In re PROFESSIONAL INSURANCE MANAGEMENT, Debtor. Professional Insurance Management, v. The Ohio Casualty Group of Insurance Companies; The Ohio Casualty Insurance; Ohio Life Insurance Company; Ohio Security Insurance Company and Ocasco Budget; West American Insurance Company; American Fire and Casualty Company, Appellants. |
| Court | U.S. Court of Appeals — Third Circuit |
Charles X. Gormally (Argued), Carl J. Soranno (Argued), Brach, Eichler, Rosenberg, Silver, Bernstein, Hammer & Gladstone, Roseland, NJ, Attorneys for Appellants, The Ohio Casualty Group of Insurance Companies, et al.
Michael A. Zindler Teich, Groh, Frost & Zindler, Trenton, NJ, Samuel Mandel (Argued), Moorestown, NJ, Attorneys for Appellee, Professional Insurance Management.
Before SLOVITER, AMBRO, and GARTH, Circuit Judges.
The primary issue presented by this appeal, stemming from a tortured procedural mess, is whether an insurance company must turn over to its terminated agent $259,315.95 in accrued commissions and interest, plus additional commissions that continue to be earned. The answer hinges on the interpretation of New Jersey's Agency Termination Statute found at N.J. Stat. Ann. § 17:22-6.14a (West 2000), a matter of first impression in this Court.1 Specifically, the parties call upon us to resolve the question of whether The Ohio Casualty Group of Insurance Companies ("Ohio Casualty") terminated its agent, Professional Insurance Management ("PIM"), essentially at will or, instead, for gross and willful misconduct or failure to pay over to Ohio Casualty moneys due after receipt of a written demand therefor. See N.J. Stat. Ann. § 17:22-6.14a(d), (e). The Bankruptcy Court ruled, and the District Court affirmed, that the termination was at will. The consequence of this ruling is that New Jersey's Agency Termination Statute requires Ohio Casualty to pay PIM commissions on all policies for one year following termination, and on automobile insurance policy renewals so long as PIM services the accounts. See N.J. Stat. Ann. § 17:22-6.14a(d), (l). Under a contrary ruling, PIM would have no right to these commissions.
The remaining issues on appeal arise from the ruling that the termination was at will, namely, (1) whether Ohio Casualty can successfully interpose the equitable remedy of recoupment against moneys PIM owed prior to its petition under Chapter 11 of the Bankruptcy Code, and (2) whether PIM is entitled to pre-judgment interest on the commissions.
For the reasons that follow, we vacate the order of the District Court requiring Ohio Casualty to turn over to PIM commissions due and accruing, plus interest. We remand to the Bankruptcy Court to apply to the facts of this case the legal determination that the initial at-will termination can become a termination for cause between the notice of termination and the effective termination date. We also vacate the orders denying the equitable remedy of recoupment and awarding PIM pre-judgment interest, pending the resolution of this question by the Bankruptcy Court on remand.2
The facts of this case are set out at length in previous opinions of this Court3 and the District Court,4 and the letter opinions of the Bankruptcy Court dated July 12, 1999 and October 22, 1999. The following discussion recounts the factual history bearing on the matters in this appeal. Despite our shortened recounting of the facts, they nonetheless remain complex.
PIM is a New Jersey-licensed insurance broker and agent. In 1980, PIM entered into an agency agreement with Ohio Casualty that permitted PIM to market Ohio Casualty's personal and commercial insurance policies. This agreement permitted Ohio Casualty to cancel the contract on 90 days notice and also reads in relevant part:
The Company [Ohio Casualty], in the exercise of the right reserved to it above, may, at its option, retain all commissions which are payable or which may become payable under contracts of insurance represented by such expirations, or renewals thereof, and apply same against the amount of the Agent's [PIM's] indebtedness to the Company, or may sell, assign, transfer or otherwise dispose of such expirations to any other agent or broker. If, in either event, the Company does not realize sufficient return to satisfy Agent's indebtedness to the Company in full, the Agent shall remain liable for the unpaid balance. Amounts realized by the Company in excess of such indebtedness, less expenses incurred by the Company in handling or other disposition of such expirations, shall be paid to the Agent.
... This agreement may be suspended or canceled for non-payment of balances due. During suspension, commissions due and payable to the Agent for Automatic Renewal type policies will be applied against balances due, to the extent of the indebtedness.
In re Professional Ins. Management, No. 94-1312, letter op. at 10 (Bankr.D.N.J. July 12, 1999).
PIM located customers, ascertained their insurance needs, and sold them Ohio Casualty policies. For personal automobile insurance policies, Ohio Casualty collected premiums directly from the policyholders and sent PIM its sales commissions. For other types of insurance, namely commercial lines, PIM collected the premiums, deducted its commissions, and then forwarded the balance to Ohio Casualty.
Each month, a reconciliation process occurred whereby Ohio Casualty provided PIM an account statement detailing each insurance account, the type of insurance, the gross premium, the commission rate, and details of the amounts currently due, past due and due in the future. PIM would customarily receive Ohio Casualty's monthly statement at the beginning of each month. PIM would then compare its own records to the statement, and would reconcile the items contained in the currently due column. If PIM disagreed with an entry, it would line off the entry and provide an explanation and documentation in support. Ohio Casualty would then carry forward the item into the past due column where it would remain until Ohio Casualty researched the item and the parties resolved the issue. PIM's reconciliation and payments were due by the 15th of the month. If an item that Ohio Casualty determined was due was not paid after a "please remit" notice, an Ohio Casualty account technician would issue an "open item letter" demanding payment and, at times, threatening suspension unless payment was received by a certain deadline. The relevant point is that in the reconciliation process the parties mixed the policy types and took credits against all policies in one monthly transaction, as per the agency agreement. In addition, in the case of agent indebtedness, the agency agreement specifically called for the application of commissions due against balances due regardless of the policy type.
In order to make its product more attractive in a highly competitive market, Ohio Casualty formed its own premium finance company, Ocasco. Ocasco offered to finance large premiums, particularly those in the commercial market, at no interest for premiums over $10,000 and at a nominal interest rate for premiums under $10,000. The vast majority of premiums on commercial policies sold by PIM, 96%-98% of its premiums in 1992 and 1993, were financed. In those cases, an agreement was prepared by the agent — PIM, signed by the insured, and sent to Ocasco. Ocasco would process the agreement and send a voucher back to PIM. PIM then forwarded the voucher in lieu of cash to Ohio Casualty when it made its monthly payments. Because PIM could not deduct its commissions from the vouchers directly, it was using the small percentage of cash receipts to pay its commissions. The volume of premiums PIM financed through Ocasco and the length of voucher processing time created accounting difficulties for PIM. As a result, PIM would credit vouchers prematurely and use vouchers-in-hand to credit premiums in the pipeline. The latter practice was permitted by an agreement between Ocasco and PIM.
Ohio Casualty complained of PIM's accounting procedures as early as 1989. PIM typically had 25% or more of its amount due in the past due column, and PIM's accounting practices with respect to past due balances and credits were the subject of at least nine letters from Ohio Casualty. After much discussion between the parties, Ocasco agreed to send its vouchers directly to Ohio Casualty. Despite this improvement and PIM's clarifications of its past due balances, accounting problems continued into 1993. PIM was twice threatened with suspension that year.
Finally, on November 15, 1993, Ohio Casualty sent the following letter of termination to PIM:
We have had a lot of conversations about continued existing problems with your agency regarding clearing accounting differences in a timely fashion resulting in a continued high "over 90 days" debt and continued problems with your agency reimbursing Ocasco Budget promptly on accounts that have been canceled. On many, the Accounting Department had to reimburse Ocasco and now since we have requested your agency not to use Ocasco on new accounts, we are beginning to get similar problems and requests from other premium finance companies.
Along with the above problems you are heading for the third consecutive unprofitable year (twelve months 86.9% thru October 30, 1993) and a six year Loss Ratio of 62.6%.
At this time it is necessary that I advise you that we are terminating your Agency Agreement effective March 1, 1994 and that you will no longer have the authority to write new business or bind coverage effective November 19, 1993. We will honor all prior binding commitments, subject to our underwriting rules, made prior to that date.
In re Professional Ins. Management, No. 94-1312, letter op. at 32 (Bankr.D.N.J. July 12, 1999). This...
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