source: Caselaw Access Project

author: WETTICK, J.,

license: Public Domain

text:
    Haas v. Bowman

      C.P. of Allegheny County,
    nos. GD01-022324, GD02-005367, no. GD01-006043.

      Alan E. Cech, for plaintiffs Haas.

      Peter V. Marcoline Jr., for plaintiffs Bricker.

      Dennis M. Moskal and Gregg R. Zegarelli, for plaintiffs Elovitz.

      Michael A. Murphey, for defendant Bowman.

      Jerome DeRiso, for defendants Atkinson and Allied Track Inc.

      Richard F. Rinaldo, for defendant Scalera.

      Francis C. Sichko, for defendant Martin.

      Robert B. Smith and Lindsay S. Mork, for defendants Miller.
    June 4, 2003
   WETTICK, J.,

This opinion and order of court considers the requests of plaintiffs in these civil proceedings for sanctions against defendants who have asserted their Fifth Amendment privilege against self-incrimination in response to discovery requests.

In Haas, plaintiffs filed a complaint against John J. Bowman trading and doing business as Bowman & Associates in which they allege that they retained his services to render tax planning and investment services which they required in connection with a trust established for Melissa Haas from the proceeds of a medical malpractice claim. The complaint includes allegations that plaintiffs paid $69,500 to defendant against expected income tax liability which defendant converted to his own use; defendant converted to his own use $48,650 that plaintiffs paid for the creation of a family limited partnership which defendant never formed; plaintiffs gave to defendant in excess of $136,000 to be invested on their behalf that defendant converted to his own use; and defendant received in excess of $ 163,000 for tax and financial planning services that he never provided.

Defendant filed an answer and new matter, which he verified, in which he denied the allegation of wrongdoing in the complaint. For example, he specifically denied the allegation that he had converted approximately $69,500 paid for expected income tax liability by pleading that he never advised plaintiffs to make deposits against expected income tax liability and that the money was for professional services not covered under the professional services agreements. He responded to the allegations regarding payments of $48,650 for a family limited partnership by alleging that the limited partnership was never executed because of continued modifications sought by plaintiffs. He responded to the allegations regarding the payment of $ 136,000 for investment purposes by alleging that the money was paid for professional services.

After his answer was filed, defendant appeared for his deposition. At the deposition, he invoked his Fifth Amendment privilege as to any questions involving this litigation.

In Bricker, on August 9, 2002, plaintiffs filed a multiple count complaint against several defendants, including Robert Atkinson and Allied Track Inc., based on allegations that plaintiffs lost their entire investments as a result of fraud in the sale of unregistered securities, fraudulent misrepresentations and conversion. On August 22, 2002, the Pennsylvania Attorney General’s office filed criminal charges against Robert Atkinson for allegedly engaging in a scheme to defraud numerous investors in connection with a railroad salvage operation.

On September 24,2002, Mr. Atkinson and Allied Track Inc. filed a verified answer to plaintiffs’ complaint denying a majority of the averments but fully or partially admitting other averments. On January 16, 2003, defendants Robert C. Atkinson and Allied Track Inc. filed responses to plaintiffs’ first set of interrogatories and plaintiffs’ first request for production of documents directed to both defendants. They answered 10 interrogatories but refused to answer other interrogatories, asserting the privilege against self-incrimination. They responded to requests to produce documents by providing certain documents and raising the Fifth Amendment, privilege as to other document requests.

In Elovitz, plaintiffs allege that defendant Louis Miller had engaged in misconduct when providing consulting and management services. Allegations included the misuse of a credit card, directing payments that should have been made to plaintiffs to third parties, forging signatures on customer checks and forging a deed. Mr. Miller filed an amended answer, new matter and counterclaim, which he verified, that denied the allegations of wrongdoing set forth in the complaint. The new matter includes allegations that any purchases made by Mr. Miller on plaintiffs’ credit cards were authorized by plaintiffs. Subsequently, Mr. Miller furnished verified responses to plaintiffs’ request for admissions in which he denied the allegations of wrongdoing. Thereafter, Mr. Miller filed a motion for protective order in which he requested that further discovery, including his deposition, be prohibited on the basis of his privilege against self-incrimination. The motion alleges that there are outstanding criminal proceedings against Mr. Miller based on the same allegations that plaintiffs raise in these civil proceedings.

I.

In each of these cases, plaintiffs seek court orders (1) compelling defendants to furnish the information that defendants have withheld by asserting a Fifth Amendment privilege against self-incrimination or (2) imposing appropriate sanctions.

Defendants contend that plaintiffs are not entitled to any relief because a party who asserts his or her Fifth Amendment privilege cannot be penalized for exercising this constitutional right. Plaintiffs offer the following responses to this contention:

1.

By filing answers addressing the merits of the plaintiffs’ complaints, defendants have waived their right to assert a Fifth Amendment privilege as to any matters that their answers addressed;

2.

Where a defendant has responded to discovery requests, the defendant has waived his or her right to assert the Fifth Amendment privilege as to the subject matter which the discovery requests addressed;

3.

Once a defendant asserts a Fifth Amendment privilege to a discovery request governing any matter that the defendant specifically denied in the answer to the complaint, the denial should be stricken and the allegation should be deemed to be admitted. See Pa.R.C.P. 1029(b) which provides that averments in a pleading to which a responsive pleading is required are admitted when not denied specifically or by necessary implication;

4.

As a sanction for failure to provide discovery, the court should enter an order (1) barring the defendant from testifying at trial or submitting his or her affidavit in response to a motion for summary judgment and (2) permitting the fact-finder to draw an inference that whatever testimony a party asserting the Fifth Amendment, would have given would have been unfavorable;

5.

The corporation in the Bricker litigation has improperly raised a Fifth Amendment privilege because the Fifth Amendment protects only individuals; and

6.

Defendants are improperly raising a Fifth Amendment privilege to withhold documents prepared in the ordinary course of business.

II.

In discussing the relief which plaintiffs seek based on defendants’ exercise of the Fifth Amendment privilege in response to discovery requests, I will rely primarily on principles that are well-established in the federal courts because Pennsylvania case law is not as well-developed.

While the United States Supreme Court does not allow the imposition of sanctions in civil proceedings that make the assertion of the Fifth Amendment privilege too costly (Spevack v. Klein, 87 S.Ct. 625, 628 (1967)), the assertion of the Fifth Amendment privilege in civil proceedings may cause some disadvantage to the party who withholds relevant information (Baxter v. Palmigiano, 96 S.Ct. 1551, 1557-58 (1976)). In Mitchell v. United States, 119 S.Ct. 1307, 1315 (1999) (citations omitted), the court said:

“This court has recognized ‘the prevailing rule that the Fifth Amendment does not forbid adverse inferences against parties to civil actions when they refuse to testify in response to probative evidence offered against them,’ at least where refusal to waive the privilege does not lead ‘automatically and without more to [the] imposition of sanctions.’ ... The rule allowing invocation of the privilege, though at the risk of suffering an adverse inference or even a default, accommodates the right not to be a witness against oneself while still permitting civil litigation to proceed.”

While federal case law, based on these rulings of the United States Supreme Court, permits sanctions (frequently referred to as “remedies”) to be imposed in civil actions based on a party’s assertion of the Fifth Amendment privilege, such sanctions must be limited to what is necessary to prevent another party from being unduly disadvantaged. Sanctions may not be automatically imposed whenever a party asserts his or her Fifth Amendment protections in pleadings or responses to discovery requests. The bottom line in civil actions is that a price can be paid for exercising the Fifth Amendment privilege provided it is tied to the potential harm to other parties from the failure to provide relevant information. In Serafino v. Hasbro Inc., 82 F.3d 515, 518 (1st Cir. 1996), the court, in upholding the trial court’s dismissal of the plaintiff’s complaint because one of the plaintiffs invoked his Fifth Amendment privilege, described the standard as follows:

“The Supreme Court has indicated that the assertion of the privilege may sometimes disadvantage a party. See Baxter v. Palmigiano, 425 U.S. 308, 318, 96 S.Ct. 1551, 1557-58, 47 L.Ed.2d 810 (1976) (allowing adverse inferences to be drawn from a civil party’s assertion of the privilege); Flint v. Mullen, 499 F.2d 100, 104 (1st Cir. 1974) (‘[N]ot every undesirable consequence which may follow from the exercise of the privilege against self-incrimination can be characterized as a penalty.’). We think that in the civil context, where, systemically, the parties are on a somewhat equal footing, one party’s assertion of his constitutional right should not obliterate another party’s right to a fair proceeding. In other words, while a trial court should strive to accommodate a party’s Fifth Amendment interests, see United States v. Parcels of Land, 903 F.2d 36, 44 (1st Cir. 1990), it also must ensure that the opposing party is not unduly disadvantaged. See Gutierrez-Rodriguez v. Cartagena, 882 F.2d 553, 577 (1st Cir. 1989) (affirming district court’s refusal to allow defendant to testify at trial when he asserted Fifth Amendment privilege during discovery). After balancing the conflicting interests, dismissal may be the only viable alternative. [FN5]
“We reiterate that the balance must be weighed to safeguard the Fifth Amendment privilege: the burden on the party asserting it should be no more than is necessary to prevent unfair and unnecessary prejudice to the other side. See S. E. C. v. Graystone Nash Inc., 25 F.3d 187, 192 (3d Cir. 1994); Wehling, 608 F.2d at 1088. As correctly delineated by the district court in this case, ‘the Fifth Amendment privilege should be upheld unless defendants have substantial need for particular information and there is no other less burdensome effective means of obtaining it.’ See Black Panther Party v. Smith, 661 F.2d 1243, 1272 (D.C. Cir. 1981), vacated mem., 458 U.S. 1118, 102 S.Ct. 3505, 73 L.Ed.2d 1381 (1982) (enunciating similar balancing approach). Having determined that the district court could, within its discretion, dismiss this case, and that it utilized the proper balancing test, we now evaluate the balancing itself for abuse of discretion. See Parcels of Land 903 F.2d at 44.
“FN5. Though dismissal has rarely been imposed or affirmed, a number of courts have acknowledged the court’s power to dismiss even in the face of a party’s proper assertion of the privilege. See e.g., Wehling v. Columbia Broadcasting Sys., 608 F.2d 1084, 1087 n. 6 (5th Cir. 1979); Lyons v. Johnson, 415 F.2d 540, 542 (9th Cir. 1969); Mt. Vernon Sav. & Loan v. Partridge Assocs., 679 F. Supp. 522, 529 (D. Md. 1987); Stop & Shop Cos. v. Interstate Cigar Co., 110 F.R.D. 105, 108 (D. Mass.1986); Jones v. B.C. Christopher & Co., 466 F. Supp. 213, 227 (D. Kan. 1979); Penn Communications Specialties Inc. v. Hess, 65 F.R.D. 510, 512 (E.D. Pa. 1975); Wansong v. Wansong, 395 Mass. 154, 157-58, 478 N.E.2d 1270 (1985).” Also see United States v. 4003-4005 Fifth Avenue, 55 F.3d 78, 83-84 (2d Cir. 1995); SEC v. Graystone Nash Inc., 25 F.3d 187 (3d Cir. 1994), and the cases cited in these two opinions.

Under this standard, noncompliance with pleading requirements cannot be a basis for entering a judgment against a party properly invoking the Fifth Amendment privilege in his or her response to the complaint. If the claim of privilege is properly invoked, the invocation of the privilege will be treated as a specific denial, thus forcing the plaintiff to prove the matters covered by the denial. North River Insurance Co. Inc. v. Stefanou, 836 F.2d 484 (4th Cir. 1987); Rogers v. Webster, 776 F.2d 607, 611 (6th Cir. 1985), and cases cited therein; and 5 Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure §1280 at 515-16 (2d ed. 1990).

However, at the trial of a civil proceeding an adverse inference can be drawn when a party invokes the Fifth Amendment privilege and refuses to testify in response to probative evidence. See Harmon v. Mifflin County School District, 552 Pa. 92, 99, 713 A.2d 620, 623-24 (1998), where the Pennsylvania Supreme Court described the inferences that may be drawn as follows:

“The inference discussed in Baxter [v. Palmigiano, supra, 96 S.Ct. 1551] is akin to the well established rule in civil proceedings that a party’s failure to testify can support an inference that whatever testimony he [w]ould have given would have been unfavorable to him. See Beers v. Muth, 395 Pa. 624, 151 A.2d 465 (1959). Our case law indicates that the inference to be drawn from a party’s failure to testify serves to corroborate the evidence produced by the opposing party. See Dommes v. Zuroski, 350 Pa. 206, 209, 38 A.2d 73, 75 (1944). Also, the failure to testify to facts within one’s presumed knowledge permits an inference that can erase the equivocal nature of other evidence relating to a disputed fact. See Hall v. Vanderpool, 156 Pa. 152, 26 A. 1069 (1893). However, we have never suggested that a party could satisfy its burden of proof in a civil cause solely through reliance on the defendant’s failure to testify.” Also see Commonwealth v. $23,320.00 U.S. Currency, 733 A.2d 693 (Pa. Commw. 1999).

There are two waiver issues that are presented through the motions filed in these cases: (1) did defendants waive their right to assert a Fifth Amendment privilege by filing answers addressing the merits of each of the factual allegations in the complaint and, in one instance, by responding to a request for admissions; and (2) if defendants did not waive their right to raise a Fifth Amendment privilege, have they, by asserting this privilege, waived the right to testify at trial and to offer affidavits or other verified responses in opposition to a motion for summary judgment?

As to the first issue, case law holds that a party cannot during the trial of the proceeding voluntarily testify about a subject and then invoke the privilege against self-incrimination when questioned about the details. See Mitchell v. United States, supra, 119 S.Ct. at 1312, where the United States Supreme Court stated that the privilege is waived for the matters to which the witness testified; the witness determines the area of disclosure and, thus, establishes the scope of the cross-examination.

“The justifications for the rule of waiver in the testimonial context are evident: A witness may not pick and choose what aspects of a particular subject to discuss without casting doubt on the trustworthiness of the statements and diminishing the integrity of the factual inquiry. As noted in Rogers [v. U.S., 340 U.S. 367, 371], a contrary rule ‘would open the way to distortion of facts by permitting a witness to select any stopping place in the testimony.’ ... The illogic of allowing a witness to offer only self-selected testimony should be obvious even to the witness, so there is no unfairness in allowing cross-examination when testimony is given without invoking the privilege.”

This rationale for finding a waiver for those matters to which a witness testified does not apply where a party either at the trial or prior to trial invokes the Fifth Amendment privilege as to matters that this party addressed in pleadings or through prior discovery responses. In this situation, the other parties to the litigation are not placed at a disadvantage by the shift of the party’s position. They can use any previous discovery which advances their case. However, the party now invoking the Fifth Amendment cannot during the remaining proceedings, including trial, use any of his or her pleadings or discovery responses to that party’s advantage as to any subject for which the privilege is now being invoked. For example, a party who asserts the Fifth Amendment privilege as to a particular subject is barred from responding to a motion for summary judgment by submitting his or her own affidavit addressing the subject (or from relying on any statements made under oath that are already part of the record). Edmond v. Consumer Protection Division, 934 F.2d 1304, 1308 (4th Cir. 1991) (“In the context of cross-examination, courts have struck testimony when the defendant has invoked the Fifth Amendment to refuse to respond to cross-examination questions....The same principle applies when a party seeks to invoke the Fifth Amendment to avoid discovery while offering an affidavit to compel a certain result on summary judgment.”); Dunkin’ Donuts Inc. v. Taseski, 47 F. Supp.2d 867, 872-73 (E.D. Mich. 1999), and cases cited therein; ABA Section of Antitrust Law, The Right Against Self-Incrimination in Civil Litigation 89-92 (2001).

There is little case law supporting the position that an answer to a complaint or a response to discovery constitutes a waiver of the Fifth Amendment privilege with respect to the matters addressed in the answer or response for the remainder of the proceedings. In order to find a waiver, a court must conclude that the risk of prosecution remains the same. ABA Section of Antitrust, The Right Against Self-Incrimination in Civil Litigation, supra at 128. Ordinarily, this conclusion cannot be made because the additional information that is being sought may provide more evidence that may tend to incriminate the party invoking the Fifth Amendment, including the possibility of evidence supporting a perjury charge.

I now address the issue of whether defendants, by invoking the Fifth Amendment privilege, have waived their right to offer testimony in this case (in which event plaintiffs would pursue discovery and otherwise prepare for a trial at which the defendants would not be testifying on any subject for which they have asserted the Fifth Amendment privilege).

A party who properly asserts the Fifth Amendment privilege in a civil proceeding is not automatically barred from later deciding to waive his or her Fifth Amendment protections. However, the party who switches positions will not be permitted to offer testimony as to matters for which the Fifth Amendment privilege had been invoked where this would provide a significant tactical advantage to this party. For example, ordinarily, a party who has avoided discovery by asserting the Fifth Amendment privilege will not be permitted on the eve of trial to waive his or her Fifth Amendment protections for the purpose of testifying at trial. Also, at the request of a party, a court may set a time, based on a need of the parties to complete discovery, after which the party who has invoked the Fifth Amendment privilege will be barred from offering at trial his or her testimony on matters for which the Fifth Amendment was invoked to prevent discovery. See generally, United States v. 4003-4005 Fifth Avenue, supra, 55 F.3d at 85-86; SEC v. Graystone Nash Inc. supra, 25 F.3d at 191-92; Gutierrez-Rodriguez v. Cartagena, 882 F.2d 553 (1st Cir. 1989); Dunkin’ Donuts Inc. v. Taseski, supra, 47 F. Supp.2d at 872-73.

The next issue is whether in the Bricker litigation the corporate defendant properly asserted the privilege against self-incrimination. The law is settled that only an individual may assert a Fifth Amendment privilege; the Fifth Amendment’s protection against self-incrimination does not apply to corporations. Braswell v. United States, 108 S.Ct. 2284, 2287 (1988); United States v. Kordel, 90 S.Ct. 763 (1970). Thus, when interrogatories are directed to a corporation, a corporate representative cannot object on the basis that the answers may tend to incriminate the corporation. However, the corporate representative may assert his or her privilege against self-incrimination if the answers may tend to incriminate the representative personally. But if the representative whom the corporation appoints to act on its behalf asserts the Fifth Amendment privilege, the corporation must appoint someone else to respond on its behalf unless the corporation can show that there is no corporate representative who could furnish the discovery without the possibility of self-incrimination. Id. at 767-68. ABA Section of Antitrust Law, The Right Against Self-Incrimination in Civil Litigation, supra at 123; 8 Charles Alan Wright, Arthur R. Miller & Richard L. Marcus, Federal Practice and Procedure §2018 at 276 (1994).

This litigation also raises the issue of whether a protective order should issue barring plaintiff from deposing defendant on the ground that defendant will invoke the Fifth Amendment privilege to any question that is asked. A protective order may not issue because “the invocation of the privilege is limited to those circumstances in which the person invoking the privilege reasonably believes that his disclosures could be used in a criminal prosecution, or could lead to other evidence that could be used in this manner .... The only way the privilege can be asserted is on a question-by-question basis, and thus as to each question asked, the party has to decide whether or not to raise his Fifth Amendment right.” Doe v. Glanzer, 232 F.3d 1258, 1263 (9th Cir. 2000). Also see In re DG Acquisition Corp., 151 F.3d 75, 80-81 (2d Cir. 1998), and cases cited therein.

A related issue is whether the party who has invoked the Fifth Amendment privilege in civil proceedings is entitled to a protective order barring the scheduling of his or her deposition until the criminal proceedings are completed. This depends upon the impact of such an order on the scheduling of the civil action. See Mitchell v. United States, supra, 119 S.Ct. at 1315, quoted at page 8 of this opinion which recognized that the accommodations afforded the party invoking the Fifth Amendment, privilege cannot unduly interfere with other parties’ interests in having the civil litigation proceed.

In this litigation, defendants who are natural persons have withheld documents they prepared in the ordinary course of business based on the Fifth Amendment privilege against self-incrimination. The Fifth Amendment applies only to compulsory testimony, so the Fifth Amendment does not protect any documents, including financial and other business records, absent proof that they were created under compulsion. However, an individual may raise the Fifth Amendment privilege against self-incrimination if his or her act of producing the documents may incriminate the individual. (But this Fifth Amendment protection may not extend to agents of corporate entities compelled to produce corporate records.) See generally, Fisher v. United States, 96 S.Ct. 1569 (1976); Braswell v. United States, supra, 108 S.Ct. 2284; ABA Section of Antitrust Law, The Right Against Self-Incrimination in Civil Litigation, supra, at 118-19; and 8 Wright, Miller & Marcus, Federal Practice and Procedure, supra, §2018 at 277-79.

III.

I will now apply these principles governing a party’s assertion of his or her Fifth Amendment rights in civil proceedings to the specific matters before the court.

Plaintiffs are not entitled to have the answers to the complaints stricken. Defendants could have, instead, filed answers raising the Fifth Amendment privilege to those allegations for which the privilege is applicable. If they had done so, the answers would have been treated as specific denials. Consequently, plaintiffs are in the same position as if the privilege had initially been asserted.

If the answers and the discovery responses which defendants filed constitute a waiver of defendants’ right to assert the Fifth Amendment privilege, defendants would have the choice of furnishing the discovery which plaintiffs seek or being subjected to those sanctions that a court may impose against a party that fails to comply with court orders compelling discovery. However, the answers and discovery responses do not constitute a waiver, because the additional discovery that is sought may present new or different self-incrimination risks.

At this time, any request for a court order that would preclude a defendant from testifying at trial or submitting his affidavit in summary judgment proceedings is premature. There has been no showing that any of the lawsuits are at a stage where the other parties cannot adequately prepare for trial if the defendant later withdraws his assertion of the Fifth Amendment privilege in order to offer testimony.

The documents which plaintiffs seek shall be produced because there has not been a showing that they were ereated under compulsion or that the act of producing the documents would tend to incriminate the defendant.

In the Haas litigation, defendants raised other grounds for refusing to produce documents. I find these other grounds to be without merit. However, the names of other clients may be redacted.

In the Bricker litigation, the corporate defendant’s answer to plaintiffs’ interrogatories is stricken as to those discovery requests for which the corporation invoked a Fifth Amendment privilege because this privilege does not protect corporations.

In the Elovitz case, there will be no further discovery until the criminal proceedings are resolved or until July 15, 2003, whichever is earlier.

ORDER

On June 4, 2003, it is ordered that within 20 days defendant shall furnish the documents described in the notice of deposition, and plaintiffs’ request to compel discovery or for the imposition of sanctions is otherwise denied.

ORDER

On June 4, 2003, it is hereby ordered that:

(1) within 20 days Allied Truck Inc., shall furnish the discovery that is sought in those interrogatories and document requests for which it asserted the privilege against self-incrimination;

(2) within 20 days Mr. Atkinson shall produce the documents described in document request numbers 3 and 4; and

(3) the request of plaintiffs to compel discovery is otherwise denied.

ORDER

On June 4, 2003, it is hereby ordered that:

(1) within 20 days defendants shall fully comply with my January 10, 2003 court order governing the production of documents;

(2) plaintiffs may schedule Mr. Miller’s deposition for a date after the criminal proceedings are completed or after July 14, 2003, whichever is earlier; and

(3) plaintiffs’ request to compel other discovery for which Mr. Miller asserts a Fifth Amendment privilege is denied.

      . Article 1, Section 9 of the Pennsylvania Constitution provides that a person “cannot be compelled to give evidence against himself.” The Fifth Amendment to the United States Constitution provides that no person “shall be compelled in any criminal case to be a witness against himself.” Since 1964, the protections of the Fifth Amendment have governed state court proceedings. Malloy v. Hogan, 84 S.Ct. 1489 (1964). Consequently, the privilege against self-incrimination is governed by the United States Supreme Court case law construing the Fifth Amendment unless a witness claiming a privilege against self-incrimination can establish that Article 1, Section 9 of the Pennsylvania Constitution provides greater protection. See generally, Commonwealth v. Swinehart, 541 Pa. 500, 664 A.2d 957 (1995). In this case, none of the defendants is claiming that Article 1, Section 9 of the Pennsylvania Constitution provides greater protection.

      . Case law holds that a party responding to the complaint shall not assert the privilege in a general fashion. A party shall file an answer in which the party answers those allegations that he or she can and asserts the privilege as to the rest. See North River Insurance Co. Inc. v. Stefanou, supra, 831 F.2d at 486-87; Rogers v. Webster, supra, 776 F.2d at 611.

      . Case law holds that tax returns are not created under compulsion for purposes of the Fifth Amendment’s protections against self-incrimination. Garner v. United States, 96 S.Ct. 1178 (1976).


author: ACKERMAN, C.J.,

text:
    Johnson v. American Home Products Corp.

      Christopher A. Gomez, for plaintiff.

      Michael T Scott, for defendants.

      June 11, 2003
   ACKERMAN, C.J.,

This court granted defendant Wyeth’s motion for summary judgment in its order of April 24, 2003, as follows:

“Order
“And now, April 24, 2003, after review of defendant Wyeth’s motion for reconsideration of this court’s order dated April 11, 2003 denying said defendant’s motion for summary judgment based on the statute of limitations, the plaintiff’s response thereto and the defendant’s reply to said plaintiff’s response, it is hereby
“Ordered that:
“(1) Defendant Wyeth’s motion for reconsideration of the order of this case dated April 11, 2003 is hereby granted.
“(2) This court’s order dated April 11, 2003 denying defendant Wyeth’s motion for summary judgment is vacated.
“(3) Defendant Wyeth’s motion for summary judgment based on the fact that the statute of limitations had run prior to filing of plaintiff’s complaint is hereby granted as to this defendant only on direct liability only.”

The plaintiff filed a notice of appeal on May 16,2003.

The essential facts of record are as follows:

The plaintiff alleged in her civil action complaint— short form that she ingested the following drugs relevant to this action:

“Duration of Use
“(a) Fenfluramine: January 1997 through March 1997
“(c) Phentermine: January 1997 through March 1997
“Brand name: Phentermine HCL” (See para. 4.)

Plaintiff alleges that she was diagnosed on or about March 30, 1999 by Dr. Beverly Stoudemire as having valvular regurgitation (i.e. heart valve regurgitation/pulmonary hypertension). (Short form complaint, para. 6.)

Plaintiff further alleges in her short form complaint that she “first learned that his/her injuries described therein were related to the ingestion of diet drugs on or about March 30, 1999.” (Para. 6a.)

Defendant Wyeth filed a motion for summary judgment to dismiss the case with prejudice because plaintiff’s claim was brought after the statute of limitations expired.

Plaintiff commenced this lawsuit on March 5, 2002, more than two years after her admitted knowledge of the source of her physical problems (28 days short of three years and 337 days after the two-year statute had run). (See exhibit “A” at para. 6 and 6a to motion for summary judgment.)

Plaintiff verified under penalty of perjury that these statements were true; id. at verification of complaint, and restated and reaffirmed them at her depositions taken in January 2003. (See plaintiff’s deposition, attached as exhibit “B” to motion for summary judgment at pp. 35-39.)

Plaintiff is a resident of Elinore, Alabama (see plaintiff’s fact sheet attached as exhibit “C” to motion for summary judgment at p. 2), and took diet drugs while she lived and worked as a nurse in Tacoma, Washington. (See exhibit “C.”)

An echocardiogram performed on March 30, 1999 reported mild mitral regurgitation. (See exhibit “D.”)

Three more echocardiograms were performed on plaintiff before she filed this lawsuit:

February 29, 2000 — trace mitral and tricuspid regurgitation;

August 31, 2001 — no evidence of valvular dysfunction;

December 29, 2001 — no significant valvular regurgitation noted. (See exhibit “E.”)

Under 42 Pa.C.S. §5521(b), Pennsylvania’s two-year statute of limitations applies to plaintiff’s claims.

In plaintiff’s response to defendant’s motion for summary judgment, plaintiff notes the following:

The doctrine of equitable tolling prevents summary judgment in this case based upon the statute of limitations and cites the case of Ravitch v. Pricewaterhouse, 793 A.2d 939, 941, 943, 944 (Pa. Super. 2002); and Simmons v. Cohen, 111 Pa. Commw. 267, 286-87, 534 A.2d 140, 149 (1987) (exhibit “E” and exhibit “D,” respectively, to plaintiff’s response); see also, exhibit “F” of plaintiff’s response citing Verrichia v. Commonwealth of Pennsylvania, Department of Revenue, 162 Pa. Commw. 610, 639 A.2d 957, 964 (1994).

Plaintiff provides the following chronological events in plaintiff’s response to defendant’s motion:

On or about September 15, 1997, the diet drugs Pondimin and Redux were withdrawn from the market by American Home Products at the behest of the United States Food and Drug Administration. Nine days later, on September 24, 1997, a class action complaint was filed in the Court of Common Pleas of Pennsylvania, Philadelphia. In re Pennsylvania Diet Drugs Litigation, master docket no. 9709-3162. On March 12, 1999, said class action was certified.

Thereafter, the case of Brown v. American Home Products was filed (October 12, 1999) for purposes of combining the claims of class members in federal and state class actions throughout the country into a single complaint. As noted in the Preamble to the Nationwide Class Action Settlement Agreement with American Home Products Corporation (a copy of which is attached as exhibit “G”), the Pennsylvania Diet Drugs Litigation (master docket no. 9709-3162) was effectively merged into the Brown v. American Home Products lawsuit. Subsequently, on or about March 28, 2000, plaintiff, Andrea Johnson, filed an “Orange Form no. 1,” effectively opting her out of the Brown v. American Home Products nationwide class action settlement agreement. The present cause of action before this honorable court was filed on March 5, 2002. (See exhibit “FI”.)

Plaintiff argues that on March 30, 1999 any and all statute of limitations were equitably tolled as plaintiff was a member of the In re Pennsylvania Diet Drugs Litigation class action lawsuit (case no. 9709-3162), brought on September 24, 1997 on behalf of “all diet drug users in the State of Pennsylvania” (see p. 6 of plaintiff’s response) and/or Brown v. American Home Products class action lawsuit (E.D. Pa. 09-20593, MD docket no. 1202), filed October 12, 1999, combining claims of all class members in federal and state courts throughout the country into a single complaint. Plaintiff claims that the time bar was March 21, 2002 because of the equitable tolling and, she filed on March 5, 2002, 16 days prior to that date because:

• September 15, 1997

Diet drugs removed from market

• September 24, 1997

Pennsylvania class complaint filed

Statute of limitation on any claim had only run for nine days at this point and was effectively tolled per American Pipe.

• March 29, 2000

Plaintiff files opt-out form removing herself from class

Any and all statutes of limitations would have begun running at this time. Two years from March 29, 2000 minus nine days (time period between September 15, 1997 and September 24, 1997) results in two-year statute of limitation date of March 21, 2002.

• March 5,2002 plaintiff’s complaint filed in Court of Common Pleas Philadelphia County (amended by agreement via short form complaint filed March 28, 2002).

It appears from plaintiff’s response that if equitable tolling does not apply in this case, the statute of limitations clearly bars this claim as plaintiff relies solely on that theory in her response. Ravitch and Simmons, supra, involved Pennsylvania citizens unlike the case at bar. Ravitch, supra, noted on page 941 that “in Pennsylvania, an individual action filed in federal court does not toll the running of the statute of limitations as to an action in state court... Nor does the filing of an action in state court toll the statute of limitations against a subsequent action filed in federal court....” (emphasis supplied) On page 943, Ravitch, supra, states that “Pennsylvania is devoid of any case law pertaining to whether a class action in another state’s court or in federal court tolls the limitation period for a class action or individual action filed in Pennsylvania’s state court.”

In the case at bar, a class action in the Pennsylvania courts was filed on September 24, 1997, merged into another class action filed on October 12,1999 in the federal court in the Eastern District of Pennsylvania.

On pages 944-45 of Ravitch, supra, the Pennsylvania Superior Court states:

“For those jurisdictions who do not permit cross-jurisdictional tolling, the rationale is generally the same. In Portwood, supra, the court noted:
“[Tjolling the statute of limitations for individual actions filed after the dismissal of a class action is sound policy when both actions are brought in the same court system. In such instances, failing to suspend the limitations period would burden the subject court system with the protective filings described by the Supreme Court in American Pipe and Crown, Cork.... Tolling a state statute of limitations during the pendency of a federal class action, however, may actually increase the burden on that state’s court system, because plaintiffs from across the country may elect to file a subsequent suit in that state solely to take advantage of the generous tolling rule. Unless all states simultaneously adopt the rule of cross-jurisdictional class action tolling, any state which independently does so will invite into its court a disproportionate share of suits which the federal courts have refused to certify as class actions after the statute of limitations has run.
“Portwood, 183 Ill.2d at 464-65, 701 N.E.2d at 1104, 233 Ill. Dec. at 830. We find this reasoning persuasive, especially in light in 42 Pa.C.S. § 1701(a) and Pennsylvania’s prohibition of cross-jurisdictional tolling for independent actions. . . .
“In conclusion, we hold that the filing of a class action in another state does not toll the statute of limitations as to a subsequent action filed in Pennsylvania’s state court system.” (emphasis added)

Our case involves the question of whether a Pennsylvania class action on behalf of all diet drug users in Pennsylvania merged into a United States District Court (in Pennsylvania) class action (combining class members in federal and state courts) tolls the statute of limitations as to the instant individual action filed in the Pennsylvania state court system.

Verrichia, supra, merely illustrates, in a case not factually similar to ours, that equitable tolling is still alive in Pennsylvania. Pennsylvania taxpayers were involved in that case.

In defendant’s reply brief, it emphasizes that since plaintiff was not a member of the Pennsylvania class action her personal injury claim was never included in the Pennsylvania class action.

Equitable tolling, says the defendant, cannot be applied unless, inter alia, “(a) the plaintiff who filed a subsequent individual suit could have been a member of the class, and (b) the claims in both the individual suit and the class action are the same. American Pipe and Construction Co. v. Utah, 414 U.S. 538 (1974). Plaintiff is plainly outside the scope of persons covered by the rule set forth in American Pipe.” (See p. 3 of defendant’s reply brief.)

The Pennsylvania class action was commenced on behalf of “all Pennsylvania residents who have used fenfluramine and/or dexfenfluramine” and asserted counts for medical monitoring and violation of Pennsylvania’s Unfair Trade Practice Law In re Pennsylvania Diet Drugs Litigation, 41 D.&C.4th 78, 79 (1999). (exhibit “A” to defendant’s reply brief.) Plaintiff was not a member of that class action because she did not assert a count for medical monitoring.

Defendant states that Brown, supra could only toll the statute if the courts of this Commonwealth recognized the doctrine of cross-jurisdiction equitable tolling, which they do not; see Ravitch, supra.

In plaintiff’s supplemental response to defendant’s motion for summary judgment, plaintiff argues that defendant does not assert with any specificity when any of plaintiff’s causes of action accrued. This court finds from the record that plaintiff’s contention is clearly without merit as the causes of action accrued on March 30,1999.

Next, the plaintiff argues that the three subsequent echocardiagrams somehow create an issue of fact. This court finds that plaintiff’s contention is also clearly without merit as plaintiff cannot wait until she has a negative echocardiagram in order to prolong the running of the statute of limitations.

Plaintiff finally argues that the Ravitch case is factually different from ours in that the class action filed in the Eastern District Court in Pennsylvania in Brown, supra, is not a class action in another state as in Ravitch, supra. Plaintiff also asserts that public policy should permit the application of equitable tolling under the facts of this case. Plaintiff also notes that plaintiff meets the definition of a class member under Brown, supra, (“all persons in the United States ... who ingested Pondimin and/or Redux.”) (p. 2, memorandum of understanding concerning settlement of diet drug litigation.)

Finally, plaintiff contends that any and all of her claims concerning her diet drug use were effectively tolled beginning September 14, 1998, the date of the filing in Jeffers v. American Home Products, CA no. 98-CV-20626, plaintiff was clearly not a member of that class because it involved a certified nationwide medical monitoring class to which plaintiff did not belong. (See exhibit “B”,pp. 10,11, of plaintiff’s response to defendant’s request for reconsideration.)

This court will not exhaustively review the policy arguments provided by plaintiff for establishing equitable tolling under the facts of this case because, even if equitable tolling is appropriate, as hereinafter set forth the statute of limitations still bars this suit.

It should be noted that this court initially believed that it was not clear and free from doubt as to whether or not equitable tolling applied to this case, and thus resolved the issue in favor of plaintiff, and denied summary judgment to defendant. (See this court’s order of April 11, 2003.) Defendant did not, until its motion for reconsideration, point out that even if equitable tolling applied in this case, the relevant statute of limitations still would have run.

Even if this court decided that the Brown class action could be used here to toll plaintiff’s claims, Brown was not filed until October 12,1999 (pointed out by the plaintiff and without using November 23,1999, suggested by the defendant, the date Judge Bechtel of the federal court for the Eastern District of Pennsylvania granted preliminary approval of the settlement agreement in Brown for an order certifying and approving a nationwide settlement class embodied in the settlement agreement) (see exhibit “B”, p. 15, to plaintiff’s supplemental response), and plaintiff affirmatively opted out of the Brown class on March 29, 2000. Thus, any tolling which could be attributed to Brown would not have extended plaintiff’s limitations period enough to prevent summary judgment. Even using the October 12, 1999 date, the statute ran from March 30, 1999 to October 12, 1999 (six months, 10 days) and then again for another 23 months, 24 days from her opt out on March 29, 2000 to March 5, 2002, when she filed, for a total of 30 months and four days. Even accepting tolling for Brown, she would still have missed the statute deadline by over six months.

The statute of limitations bars this action.


author: LEWIS, J.,

text:
    Mutual Benefit Insurance Co. v. Druce

      C.P. of Dauphin County,
    no. 1938 CV 2001.

      Robert E. Kelly Jr., for plaintiff.

      Matthew R. Gover, for defendants Druce.

      Timothy A. Shollenberger, for defendants Cains and Cains Williams.
    May 21, 2003
   LEWIS, J.,

The plaintiff, Mutual Benefit Insurance Company, and the defendants, Louis Cains Jr., individually and as administrator of the estate of Kenneth R. Cains, deceased, Debra Cains and Kenneth Williams, successor in interest to Delores Cains Williams, (collectively, the Cains family) have filed cross-motions for summary judgment to determine if an insurer’s denial of its duty to indemnify made on the basis of fraud and lack of notice by its insured applies only to the claims of the insured or to the claims of both the insured and innocent third parties injured by the tortious acts of the insured. As explained more thoroughly in this opinion, this court denies the summary judgment motion filed by Mutual and grants the motion filed by the Cains family.

This controversy emerges from the tragic accident that occurred on July 27, 1999, when a vehicle operated by then-State Representative Thomas W. Druce III struck and killed a pedestrian, Kenneth R. Cains, in the 1300 block of North Cameron Street, Harrisburg. Mutual and the Cains family have stipulated to the facts surrounding this episode that can be briefly summarized as follows:

On July 27, 1997, Mutual issued a private passenger motor vehicle policy to defendants Thomas and Amy Druce. The policy was renewed yearly and covered the period from July 22, 1999 to January 22, 2000. Mr. and Mrs. Druce paid all premiums necessary to keep the policy enforced. The policy provided liability coverage for bodily injury in the amount of $100,000 per person and $300,000 per accident. Part E of the policy required that the insured promptly notify Mutual of “how, when and where” an accident or loss occurs. Part F also indicates that the policy “does not provide coverage for any ‘insured’ who has made fraudulent statements or engaged in fraudulent conduct in connection with any accident or loss for which coverage is sought under this policy.”

On the evening of July 27,1999, Mr. Druce was operating a black 1997 Jeep Grand Cherokee in a southbound direction on North Cameron Street at approximately 10:30 p.m. In the vicinity of the 1300 block of North Cameron Street, Mr. Druce’s vehicle struck Kenneth Cains as Mr. Cains entered North Cameron Street on foot into the path of the Druce vehicle. As a result of this accident, Mr. Cains received serious injuries and died later that evening.

Mr. Druce’s vehicle sustained extensive damage to its right front fender, windshield, antenna and right front headlight. Mr. Druce did not stop his vehicle after the accident, but instead continued to proceed southbound on North Cameron Street before making a right turn onto Herr Street. Mr. Druce visited a local convenience store after the accident and purchased a roll of black electrical tape to make remedial repairs to the Grand Cherokee. Mr. Druce returned to his home in Bucks County, Pennsylvania later that evening by way of the Pennsylvania Turnpike.

On July 28,1999 Mr. Druce submitted a claim form to his insurance agent, PKG Insurance Associates Inc., reporting that he had been in a collision while proceeding through a construction zone on the Pennsylvania Turnpike. In his report to PKG, Mr. Druce indicated that the damage to the passenger side and windshield of his vehicle occurred as a result of striking a barrier and sign while he was driving through a construction zone on the turnpike. PKG forwarded the information to Mutual which began to process the claim. Mr. Druce later provided a statement to Mutual recounting that his vehicle struck sand-filled barrels and a sign as he was reaching for his car telephone that had fallen to the floor of the vehicle. On the basis of the information Mr. Druce provided to PKG and later to Mutual, Mutual paid a collision claim in the amount of $3,725.08 to Mr. Druce less the $500 collision deductible. The claim was paid in August 1999. Druce retained the services of an automobile body shop in Bucks County for the purpose of repairing the damage to his vehicle within a few days following the accident. Once the car was repaired, Mr. Druce traded in the vehicle for a new automobile.

On January 19, 2000 Mr. Druce was charged by the Harrisburg Police Department for various offenses growing out of the accident which caused the death of Kenneth R. Cains. On September 11, 2000, Mr. Druce entered pleas of guilty to several of the charges against him including accidents involving death or personal injury, 75 Pa.C.S. §3742(a); insurance fraud, 18 Pa.C.S. §4117(a)(2); tampering with physical evidence, 18 Pa.C.S. §4910, as well as two summary offenses.

At the time of his death, Kenneth R. Cains was neither a named insured nor an insured under any policy of private passenger or motor vehicle insurance. He did not own, nor did he reside with anyone that was the owner of a motor vehicle required to be registered or insured.

Mutual and the Cains family agreed that Mutual would file a complaint for declaratory judgment pursuant to the Pennsylvania Declaratory Judgment Act, 42 Pa.C.S. §7531 et seq. (1998), seeking a determination that Mutual owed no duty under the policy to defend or indemnify Mr. and Mrs. Druce with respect to any of the claims made by the estate of Kenneth R. Cains as a result of Mr. Druce’s false and misleading statements concerning the facts and circumstances surrounding the accident in violation of the express terms and conditions of the policy. On April 1,2001, Judge Todd A. Hoover of the Dauphin County Court of Common Pleas issued an order allowing the Cains family and Mutual to enter into a stipulation whereby if it was determined by this court that Mutual owed Mr. and Mrs. Druce a duty of defense and indemnification, that Mutual would pay the remaining $50,000 of the $100,000 bodily injury liability limit to said defendants in full and final satisfaction of all claims against the Druces and Mutual.

In its summary judgment motion, Mutual avers that because the Druces admitted that they submitted false and misleading material information regarding the accident and subsequent insurance claim, they waived their contractual right to a defense and indemnification for third-party claims made against them for the accident. Mutual vigorously contends that an insured who commits fraud under an insurance policy cannot then turn to that same policy for a defense and indemnification. Furthermore, Mutual argues that claimants such as the Cains family are “strangers to the contract of insurance” and not third-party beneficiaries to a liability insurance policy and are owed no duty when a liability policy is in question. Brown v. Candelora, 708 A.2d 104 (Pa. Super. 1998), appeal granted in part, 555 Pa. 478, 725 A.2d 176 (1999). Plaintiff also maintains that the potential impact that a denial of coverage for the Druces may have on the claims of the Cains family is not relevant. Plaintiff insists that the Cains are not without recourse directly against the tort-feasor, and to fashion a remedy based on the sympathy of their plight would be inimical to other insureds who have complied with their obligations under insurance policies. Dellenbaugh v. Commonwealth of Pennsylvania CAT Fund, 562 Pa. 558, 756 A.2d 1172 (2000).

The Cains counter that an insurer’s denial of its duty to indemnify made on the basis of fraud or misrepresentation only applies to the claim of the insured and not to claims of both the insured and innocent third parties injured by the tortious acts of the insured. Such a denial occurring more than 60 days after issuance of the policy is the functional equivalent of a rescission and thus runs afoul of Erie Insurance Exchange v. Lake, 543 Pa. 363, 671 A.2d 681 (1996), which held that an automobile policy of insurance cannot be rescinded with respect to innocent and injured third parties who were harmed through no fault of their own. The Cains family additionally emphasizes that Mutual suffered no prejudice by any breach of these provisions.

DISCUSSION

Mutual’s position is that this is not a rescission, a distinction without a difference. Their refusal to indemnify the Druces leads to the same outcome as a rescission with respect to the claim advanced by the Cains family since it abrogates the rights of the insured and the obligations of the insurer with respect to that claim in a retroactive manner. As early as 1991, the Pennsylvania Supreme Court recognized the plight of innocent and injured third parties following rescission of an automobile insurance policy. In Klopp v. Keystone Insurance Companies, 528 Pa. 1, 595 A.2d 1 (1991), our Supreme Court ruled that failure to disclose material information on an application for automobile insurance entitles the insurer to the common-law remedy of a contract rescission if the carrier acts within the first 60 days of issuing the binder. Klopp held that the insured, the fraudulent policyholder, is estopped from making personal claims arising out of the policy. However, two concurring opinions suggested that the rights of innocent and injured third parties were neither considered nor determined by Klopp. Justice Cappy’s concurring opinion, referencing Act 78 of the Unfair Insurance Practices Act, 40 P.S. §1171.1 et seq. (1999), remedial legislation designed to govern cancellation of policies between insurer and insured to preclude rescission of an insurance policy as to third parties beyond the 60-day grace period within the Act regardless of fraud or difficulty in discovering such, stated:

“Likewise, it would be preposterous to conclude that, with regard to innocent and injured third parties who participated in no way in the fraud perpetrated on the insurance company, the legislature would have intended that they be denied protection as a result of the policyholder’s fraud where the Act itself has been created for their protection and benefit. Thus, it is my view that, with regard to innocent and injured third parties, the insurance company would be bound to honor the liability provisions of the insurance contract and may cancel said provisions only pursuant to section 1008.5 of Act 78.” Id., 528 Pa. at 11, 595 A.2d at 5-6.

Several years later in Erie Insurance Exchange v. Lake, supra, Justice Cappy, now writing for the majority, made it abundantly clear that the claims of innocent and injured third parties could not be ignored even following rescission based on fraud or misrepresentation. He indicated that an insurer may rescind the policy of insurance as to the actual perpetrator of the fraud where the fraud could not reasonably have been discovered within the 60-day period immediately following the issuance of the policy as outlined by Act 78. Justice Cappy conceded that on the surface, it may appear harsh to force the insurance company to abide by a contract procured by fraud, but “it would be beyond harsh to preclude third party appellees who are innocent of trickery, and injured through no fault of their own, from receiving protection under the policy.” Id. at 375, 671 A.2d at 687.

The factual scenario in Erie Insurance Exchange is instructive. Lake and his friend Stover concocted a plan to overcome Stover’s inability to obtain automobile insurance due to a history of drunk driving episodes. The duo decided that Lake would obtain the insurance in his name on vehicles owned and operated exclusively by Stover.

They began this conspiracy in 1987 and by 1989, Erie Insurance had already insured three vehicles in the name of Lake but which were essentially owned and operated by Stover. In September of 1989, Stover was driving one of the vehicles while intoxicated and collided with a vehicle operated by William Sherman. Sherman was killed along with his wife and several grandchildren. Erie filed a declaratory judgment action seeking to rescind the policy because of the fraud and misrepresentation made by Lake in obtaining the policy.

One of the factors the court had to consider was the provisions of Act 78, which placed limits on the ability of insurers to cancel an insurance policy without prior notice to its insured. 40 P.S. §1001 et seq. Allowing for the common-law right of rescission, the court made a critical distinction between an insurer’s ability to rescind the policy as to claims asserted by the insured himself as opposed to claims asserted by innocent and injured third parties who did not participate in any act of fraud or misrepresentation perpetrated by the insured. The court referenced a section of Act 78 which only allowed an insurer the right to rescind the policy within 60 days of issuance. Recognizing that some situations may arise similar to the Stover/Lake scheme where discovery within the first 60 days would be nearly impossible, the court indicated:

“We find, as a matter of common sense and public policy, that it would indeed be absurd to interpret Act 78 as permitting a person to financially benefit from his own illegal act of fraud. Therefore, an insurer may rescind the policy of insurance as to the actual perpetrator of the fraud, where the fraud could not reasonably have been discovered within the 60-day period immediately following the issuance of the policy; limited to those instances where the undiscovered fraud was of such a nature that it is clear that an insurer would never have accepted the risk inherent in issuing the policy.” (emphasis added)

It is abundantly clear to this court that the thrust of these Supreme Court decisions created a sound public policy to protect the interests of innocent and injured third parties. In Erie Insurance Exchange, the court reasoned that automobile insurance is not issued solely for the benefit of the individual purchaser but also for the benefit and protection of third parties who may sustain injuries at the hands of the insured.

In the instant case, Mutual can legitimately assert that it was deceived by Mr. Druce and now faces a significant loss because of the claim of the Cains family. But the premiums on the Druce policy were paid in full at the time of the accident, and had Mr. Druce not misrepresented his involvement in the accident, the insurance company may well have been liable for payment of the Cains claim. In Erie Insurance Exchange, the Supreme Court also discussed the “distribution of financial risk” as a legitimate and significant public policy concern. The court indicated that in the automobile insurance arena, the industry benefits from the fact that state law mandates the purchase of insurance, thus providing a guaranteed market.

Plaintiff counters that this is not a rescission case since the policy was never rescinded. Mutual advances that this is a “claim fraud” and the sole question is whether Mr. Druce lost his right to claim defense and indemnification protection under his policy based on the fraud and misrepresentation. Plaintiff relies on Parasco v. Pacific Indemnity Company, 920 F. Supp. 647 (E.D. Pa. 1996), to support its argument. In Parasco, the insureds sued under a homeowners policy maintaining that the insurance company wrongfully denied a fire claim based upon misstatements of fact made by the insureds. During the post-fire investigation, the Páraseos made certain misrepresentations regarding their financial status. In their lawsuit, they maintained that they made no such misrepresentations, and even if they did, they were immaterial. The court dismissed these arguments and found that the insurer was not obligated to pay the claim due to the misrepresentations.

This court does not find Parasco persuasive. Parasco deals with a fire insurance policy and not an automobile insurance policy. Parasco does not voice the public policy pronouncements advanced by our Supreme Court in Erie Insurance Exchange that discuss a distribution of financial risk in the auto insurance arena. Additionally, and perhaps most importantly, the decision in Parasco worked against the insured, the parties presumably guilty of fraud. There was no innocent and injured third party harmed by the deceit of the Parascos.

Plaintiff also relies on Dellenbaugh v. Commonwealth of Pennsylvania, supra, which indicated that the potential impact of a claim such as the one advanced by the Cains family does not alter the tort-feasor’s right to obtain insurance coverage if the insured is not otherwise entitled to such coverage. Dellenbaugh involved a case from the Medical Professional Liability Catastrophe Loss Fund (CAT fund), an agency of the Commonwealth. The Commonwealth Court held that the CAT fund has responsibility for providing excess liability coverage in a medical malpractice action against a surgeon even though the surgeon failed to pay his annual surcharge to the CAT fund. The Supreme Court reversed holding that the CAT fund was not liable to pay a claim where the physician failed to pay premiums. The court essentially said that it would be inequitable to other members of the CAT fund to pay for claims against those physicians who have ignored their obligation to pay into the fund. This stands in stark contrast to the instant case. Mr. Druce paid his premiums to Mutual Benefit for several years prior to the accident that killed Mr. Cains. An assertion that other policyholders are being made to pay more because of the payment to the Cains family runs contrary to Erie Insurance Exchange. Secondly, the CAT fund is an agency of the Commonwealth of Pennsylvania and quite unlike any other insurance company. The CAT fund does not issue policies of insurance to its customers in exchange for the payment of the premium. Rather, the CAT fund looks at settlements over a period of time and then surcharges doctors, hospitals, etc. to pay their fair share of the prior claims.

Lastly, the Cains family reasons that Mutual suffered no prejudice to its position because of the extensive investigation that was carried out by the police at the scene of the crash. The Cains family maintains that this thorough and complete inquiry compensated for any lost opportunity Mutual had for conducting an investigation immediately following the incident due to the misrepresentations of Thomas Druce.

Mutual counters that it has sufficiently established prejudice and specifically relies on Parasco, supra, to establish the “materiality” of Druce’s misrepresentations since they dealt with matters relevant and germane to the insurer’s investigation. Mutual points to the failure of Druce to make timely and accurate notification as well as his conviction of insurance fraud as damaging their ability to investigate, take measurements, examine the vehicle, interview witnesses, and present a credible insured as a witness. This court finds that there was indeed an extensive investigation by the police into the vehicular homicide. Further, the fact that Thomas Druce was convicted of insurance fraud presents no greater prejudice to the insurer than any other civil defendant with prior criminal convictions of a crimen falsi nature.

Further, this court believes that the public policy pronouncements of our Supreme Court in Erie Insurance Exchange trumps any consideration of the “materiality” of the Druce misrepresentations. In Par asco, the appellants made material misrepresentations and then attempted to rely on their own fraud to collect on their claim for a house fire. There were no innocent and injured third persons. In the instant case, Druce made misrepresentations, indisputably material, to avoid criminal liability and perhaps political repercussions. The Cains family made no misrepresentations, committed no fraud, and continue to wear the mantle of the innocent victims.

Accordingly, the following is entered:

ORDER

And now, May 21, 2003, the summary judgment motion filed by Mutual Benefit Insurance Company is hereby denied.

The summary judgment motion filed by Louis Cains Jr., individually and as administrator of the estate of Kenneth R. Cains, deceased; Debra Cains and Delores Cains Williams is granted.

      . Act of June 5, 1968, P.L. 140,40 P.S. §§1008.1-1008.11. Act 78 has since been repealed (effective August 16,1998) by the Act of June 17, 1998, P.L. 464, 40 P.S. §§991.2001-991.2013 (“Act 68”). Act 68, like its predecessor, Act 78, is liberally construed in order to effectuate its goal of protecting the public interest.