Mountbatten Surety Company, Inc. v. Afny, Inc., CIVIL ACTION NO. 99-2687 (E.D. Pa. 4/11/2000), CIVIL ACTION NO. 99-2687.

Decision Date11 April 2000
Docket NumberCIVIL ACTION NO. 99-2687.
PartiesTHE MOUNTBATTEN SURETY COMPANY, INC., v. AFNY, INC. v. FIDELITY AND DEPOSIT COMPANY OF MARYLAND.
CourtU.S. District Court — Eastern District of Pennsylvania
MEMORANDUM

DALZELL, Judge.

This case stems from the termination of the business relationships between, on the one hand, AFNY, Inc., and, on the other, the Mountbatten Surety Company and Fidelity and Deposit Company of Maryland. Before us now are Mountbatten and F&D's motions for summary judgment on all claims and counterclaims.

I. Background
A. Facts1

Mountbatten is a surety company whose business it is to issue bonds to cover various risks.2 AFNY is a surety bond wholesaler, which acts in part as a conduit between the brokers of those who wish to be insured3 and surety companies such as Mountbatten. In particular, AFNY and Mountbatten work in the "non-standard" surety market, in which greater risks are insured for commensurately higher premiums. AFNY, as a wholesaler, makes its money from commissions4 on the premiums paid on the bonds issued through it.

AFNY began writing bond business with Mountbatten in 1997, and this relationship was formalized by an Agency Agreement dated March 11, 1998 (the "Mountbatten Agreement"). Under the Mountbatten Agreement, AFNY was appointed Mountbatten's agent to solicit business for Mountbatten and to collect premiums,5 in exchange for which AFNY would receive a specified commission on the bond premiums6 as well as an additional contingency payment based both on the total annual premiums generated and the "loss ratio" of the business written through AFNY.7 The Mountbatten Agreement also contained a provision that allowed either party to terminate the agreement for convenience after at least thirty days written notice.8

In August, 1998, F&D acquired Mountbatten, though Mountbatten continued to act independently as a wholly-owned subsidiary.9 In December, 1998, F&D executed powers of attorney to allow AFNY, upon receipt of advance approval by Mountbatten or F&D, to execute bonds on behalf of F&D, and on January 4, 1999, F&D and AFNY signed an Agency Agreement, retroactive to December 18, 1998 (the "F&D Agreement"), which gave AFNY authority to solicit bond applications and receive premiums for F&D in exchange for a commission on such premiums. The F&D Agreement, too, had a provision allowing termination at any time with ninety days' written notice.10

In a letter dated January 19, 1999, Mountbatten informed AFNY that it was terminating the Mountbatten Agreement, effective thirty days from the date of the letter. Mountbatten further stated that

During this thirty (30) day period The Mountbatten Surety Company, Inc. will not be accepting any new business, but will continue to service the existing accounts handled through your agency. All agency lines are cancelled effective immediately. Any approvals for bid or final bonds must be given by a home office underwriter, in writing, prior to being released from your office.

Ex. H, Mem. of Law in Opp'n to Mountbatten's Mot. for Summ. J. This letter also requested that all supplies11 belonging to both Mountbatten and F&D that had been entrusted to AFNY be returned at the end of the thirty day period.12

In a letter dated March 11, 1999, F&D informed AFNY that it was terminating the F&D Agreement effective ninety days from the date of that letter. The letter also stated: "During this ninety (90) day period our company will not be accepting any new business, but will continue to service existing accounts handled through your agency." Ex. G, Mem. of Law in Opp'n to F&D's Mot. for Summ. J. Enclosed with the letter were revocations of the power of attorney that F&D had previously given to AFNY.

B. Procedural History

On May 26, 1999, Mountbatten filed its Complaint, including claims of breach of contract (Count I) and conversion (Count II) alleging that AFNY had failed to remit to Mountbatten premium payments that were due for bonds issued through AFNY.13 AFNY14 counterclaimed against Mountbatten and impleaded F&D, alleging, inter alia, breach of contract, unjust enrichment, misrepresentation, and misappropriation of trade secrets. The factual thrust of these allegations was: (1) Mountbatten's letter of January 19, 1999 was in fact an immediate termination and Mountbatten had therefore failed to provide proper termination notice, and (2) Mountbatten had wrongly caused AFNY to reveal a list of the producers with which it worked and had done so for the purpose of taking business from these producers for itself. AFNY alleged that F&D was aware of and encouraged these actions. F&D itself then counterclaimed against AFNY, alleging breach of contract (Count I) and conversion (Count II) on the basis that AFNY had failed to remit to F&D premium payments that were due on F&D bonds that had been written through AFNY.

The parties then engaged in discovery.15 Following the close of discovery, AFNY moved to amend its counterclaims against both Mountbatten and F&D in order to conform with the evidence as found through discovery,16 a motion we granted with respect to Mountbatten, but denied with respect to F&D.17 As a result of the consequent amendments, we have pending the following counterclaims of AFNY against Mountbatten: breach of contract (Count I), misrepresentation (Count II), misappropriation of trade secrets (Count III), tortious interference with contractual relations (Count IV), tortious interference with prospective contractual relations (Count V). The following counterclaims remain extant against F&D: misappropriation of trade secrets (Count III), tortious interference with contractual relations (Count VI), and tortious interference with prospective contractual relations (Count VII).18

Mountbatten and F&D have each moved for summary judgment on their claims against AFNY and AFNY's counterclaims against them.19

II. Analysis20
A. Mountbatten's Claims Against AFNY
1. Breach of Contract

"A cause of action for breach of contract must be established by pleading (1) the existence of a contract, including its essential terms, (2) a breach of a duty imposed by the contract and (3) resultant damages." Corestates Bank, N.A. v. Cutillo, 723 A.2d 1053, 1058 (Pa.Super. 1999).21 Here, there is no dispute that these elements, as such, are met. Mountbatten has presented evidence, which AFNY does not dispute, that there was an agency contract between Mountbatten and AFNY,22 that this contract required AFNY to remit to Mountbatten the bond premiums, net of AFNY's commissions,23 and that AFNY has retained some of these premiums instead of paying them over to Mountbatten.24 Instead of disputing these elements, AFNY argues that there exist disputed issues of material fact with respect to three defenses to the breach of contract claim: (1) Mountbatten itself first materially breached the contract by failing to give thirty days written notice of termination; (2) Mountbatten itself first materially breached the contract by violating the implicit covenant of good faith and fair dealing; and (3) there was in fact no breach of the contract because Mountbatten had waived its ability to enforce the payment provision of the contract.

A party that has materially breached a contract cannot demand that the other party conform to that agreement, see, e.g., Bohm v. Commerce Union Bank, 794 F. Supp. 158, 162 (M.D.Pa. 1992). Here, AFNY argues that there is at least a dispute of material fact over the question of whether Mountbatten first materially breached the Agreement.25

a. Mountbatten's Alleged
Failure to Provide Proper Notice

The first material breach that AFNY alleges is that Mountbatten failed to give proper notice for the termination of the Agreement. AFNY argues that the January 19, 1999 letter effectively terminated the Agreement immediately, because it stated that no new accounts would be serviced, that agency lines would be immediately canceled, and that AFNY was required to have express approval for some bonds. AFNY offers the testimony of AFNY principals Wayne Price and Mary Price, who state that following January 19, 1999 Mountbatten declined to issue bonds on accounts that were already existing, see Dep. of Wayne Price at 81-82, and that the issuance of new bonds is considered to be part of servicing an existing account, see Ex. 4, Mem. of Law in Opp'n to Mountbatten's Mot. for Summ. J., Dep. of Mary Price at 34. AFNY argues that the revocation of the benefits of the contract (to include to prohibition on new accounts, the cancellation of agency lines, and the requirement for special approval) and the failure to issue new bonds were a breach of the contract and that there exists an issue of material fact over their materiality, see Mem. of Law in Opp'n to Mountbatten's Mot. for Summ. J. at 11-12.

In deciding whether this argument suffices to prevent summary judgment on the breach of contract claim, we must first consider whether these actions, in the first instance, make out a breach of the contract provisions.26 After considering carefully the contract provisions, we find that, even taking as true AFNY's version of the letter's effects, the letter of January 19, 1999 was not a breach of the Mountbatten Agreement.

We first note that, as laid out in the margin above, the Mountbatten Agreement itself provides for the contract's termination "for convenience"27 of a party, see Mountbatten Agreement 13, and that there is nothing per se impermissible about contractual provisions allowing such terminations without cause, see Amoco Oil Co. v. Burns, 437 A.2d 381, 383-84 (Pa. 1981). Moreover, the Mountbatten Agreement grants only very limited powers to AFNY as Mountbatten's agent. Under the Agreement, AFNY is permitted to "solicit business" and to "collect and give receipts for premiums or fees due", Mountbatten Agreement 1. However, the Agreement gives AFNY absolutely no powers actually to write or issue any bonds, nor does it contain any representation...

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