author: LEVIN, J.,

text:
    Butler v. Provident Mutual Life Insurance Co.

      C.P. of Philadelphia County,
    no. 9901-0780.

      Kenneth H. Jacobsen, for plaintiffs.

      Laurence Z. Shiekman, for defendants.
    September 16, 1999
   LEVIN, J.,

Before this court are plaintiffs’ motion for permanent injunction and all responses thereto, The court held a full hearing on the merits of plaintiffs’ motion on June 22, 1999. Under Pa.R.C.P 1517, the court’s statement of the issues, findings of fact, discussion of questions of law, conclusions of law, and decree nisi follow.

INTRODUCTION

On January 11,1999, plaintiffs, policyholders of Provident Mutual Insurance Company, filed a class action complaint against Provident on behalf of themselves and all other Provident policyholders containing six counts and prayers for declaratory, injunctive and monetary relief. Plaintiffs’ complaint arises out of Provident’s decision to convert from a mutual insurer to a stock insurer. Under the plan of conversion, policyholders’ membership rights “will be exchanged for membership rights in Provident Mutual Holding Company” while policyholders’ contract rights will be held in the stock life insurance company. (Policyholder information statement at 12.)

I. Statement of the Issues

The court must decide two issues. First, whether Provident is required to provide policyholders with dissenters’ rights, whereby policyholders can obtain the fair value of their membership interests in Provident. Second, whether to permanently enjoin Provident from effectuating the plan of conversion because the policyholder information statement Provident provided to policyholders did not enable the policyholders to make an informed vote on the plan. After the findings of fact, the court will discuss the law of permanent injunctions, state its conclusion to permanently enjoin Provident’s plan of conversion and then address each of these issues.

II. Findings of Fact

To persuade people to purchase its life insurance policies, Provident told its agents to tell prospective policyholders that: “[a] mutual life insurance company is one that is owned and operated by and for the benefit of its policyowners. ‘Profits’ are returned to policyowners in the form of policy dividends.” (Pis.’ exhibit 16 at 12, Provident Mutual sales presentation system.) Provident backed its sales pitch with a “vision statement.” In 1995, Provident stated that its “vision” was that “[a]s a mutual company, Provident Mutual Life Insurance Company is owned by its participating individual policyholders. All company affairs are managed in their best interest — to maximize the value of their relationship with us.” (Pls.’ exhibit 5-C, Provident Mutual strategic plan, Oct. 1995 at 2.) Provident described participating policyholders as “sharing] in some degree in the fortunes of the firm, positive or negative. Participating customers have some but not all incidents of ownership.” (Pls.’ exhibit 19, A proposed statement of the financial goal of the Provident Mutual fleet, July 11, 1986 at 1.) Provident distinguished participating from nonparticipating pohcy owners by stating that “the profits (and losses) from the nonparticipating lines are considered to belong to the participating policyholders.” (Id.)

Consistent with that distinction, Provident began awarding participating policyholders a “performance dividend” in 1987. (Pls.’ exhibit 13 at 2, August 1,1989, memo from Alan Hinkle to members of dividend committee of the board of directors.) Provident used profits from nonparticipating lines of business to pay these dividends. (Id.) It was also “[Provident’s] pohcy to pay these dividends out of accumulated surplus over a five-year period.” (Id.) Provident paid performance dividends for three reasons: (1) To pay out accumulated surplus to policyholders; (2) to return to owners of the corporation profits from nonparticipating lines of business; and (3) to improve the competitiveness of individual life products in a declining interest rate environment. (Id.) In 1989, when Provident was considering eliminating performance dividends, then-assistant vice-president and actuary, Alan Hinkle, was concerned:

“If performance dividends are eliminated, how will participating policyholders receive the benefit of their investment in nonpar lines of business. These lines will be providing capital for growth, but growth of which lines? What if the desired growth does not occur? How long should these policyholders fund rapid growth? I would prefer that performance dividends be reduced or temporarily suspended, but not eliminated. The mechanism should be in place to eventually begin paying back the policyholders for funding this growth.” (Pis.’ exhibit 14, memorandum from Alan F. Hinkle to John McClel-land dated May 25, 1989.)

Despite Mr. Hinkle’s concerns, Provident eventually eliminated performance dividends, and beginning in 1995, began considering alternative corporate structures for Provident. By January of 1998, Provident’s board of directors had approved a plan to convert to a mutual holding company corporate structure. (Aff. Robert Kloss at ¶2; pis.’ exhibit 5-bb, minutes of January 5, 1998 board of directors meeting.) Provident’s “mission” and “vision” changed accordingly. By March of 1998, Provident no longer stated that its “vision” was that all company affairs be managed in participating policyholders’ “best interest — to maximize the value of their relationship with us.” (See pis.’ exhibit 9, 1997 year in review.) Instead, Provident’s vision had now broadened: “[Provident’s] vision is to enhance the quality of life of [its] policyholders, clients and all our associates.” Similarly, it was now “Provident Mutual’s corporate mission to market high quality insurance, retirement and investment products that satisfy [its] customers[’] needs for protection, asset accumulation and preservation of wealth over the course of a long-term relationship with the company.” (Id.) Noticeably absent from Provident’s new vision and mission statements are the words “ownership” and “participating policyholders.” Participating policyholders’ interests are now considered along with an array of other “stakeholders’ ” interests: employees, agents, management and the community. (See Notes of Testimony, March 16,1999 at 92; see also, information statement at 18.) Presently, Provident considers participating policyholders contingent owners of the company; that is, they have the right to receive a portion of Provident’s capital upon Provident’s liquidation, dissolution or winding up. (Id. at 89-90.) Provident now views the right to receive dividends as a contractual right. (Id.) Provident’s chief financial officer, John Neasey, characterized as “incomplete” and “simplistic” Provident’s prior statement that policyowners are owners of the company and entitled to share in the profits of the company. (Notes of Testimony, June 22, 1999 at 82.) In fact, Mr. Neasey does not believe that it is his fiduciary duty to return profits to policyholders. (Id. at 121.)

Provident’s plan of conversion illustrates that Provident no longer emphasizes participating policyholders’ interests. The de-emphasis is evident in the board’s approval of the mutual holding company structure despite Morgan Stanley’s indication that full demutualization coupled with an initial public offering or merger with a stock company was “strongly positive” for current policyholders, while demutualization through a mutual holding company structure was merely “positive” for current policyholders. (Pis.’ exhibit 10 at 36; Provident Mutual board presentation August 1, 1996.) Further evidence that the mutual holding company structure de-empha-sizes participating policyholders’ interests is that the strategic advisory committee of Provident’s board of directors cited as one of the “benefits” of the mutual holding company structure that Provident could avoid paying policyholders consideration for their interests in Provident. (Pls.’ exhibit 5-K, April 24,1996, minutes of strategic advisory committee meeting at 1.) Another example that Provident no longer emphasizes participating policyholders’ interests is the mechanism Provident uses in the conversion to purportedly protect participating policyholders’ interests: the closed block’s use of the 1997 dividend scale. The 1997 dividend scale, which the closed block is designed to continue, neither reflects Provident’s past practice of paying performance dividends nor addresses Mr. Hinkle’s prior concern that a mechanism be in place to pay participating policyholders for their investments in nonparticipating lines. (Notes of Testimony, June 12,1999 at 47,63-64.) In addition, the closed block does not contain assets from nonparticipang lines of business; the board may exercise its discretion to use profits from these lines to pay closed block policyholders’ dividends. (Id. at 63-64.) Furthermore, the closed block is not funded to maximize the participating policyholders’ relationship with Provident. Instead, Provident funds the closed block “just sufficiently to pay all necessary benefits, dividends, expenses, and taxes charged to the closed block.” (Information statement at exhibit H, closed block memorandum.)

III. Discussion of Law

A. Permanent Injunction

A court should issue a permanent injunction if “such relief is necessary to prevent a legal wrong for which there is no adequate redress at law.” Soja v. Factoryville Sportsmen’s Club, 361 Pa. Super. 473, 479, 522 A.2d 1129, 1131 (1987). To issue a permanent injunction, the court is not required to find that imminent, irreparable harm is present. Id. at 481, 522 A.2d at 1133. Instead, a permanent injunction disposes of the merits of the case and attempts to permanently remedy the situation. Id. at 480-81, 522 A.2d at 1132. We conclude that Provident’s directors breached their duty of disclosure because they disseminated a policyholder information statement which unfairly described the plan of conversion, and therefore prevented policyholders from making an informed vote on the plan. The only adequate remedy is to revise the information statement, redistribute the information statement containing the disclosures explained in this opinion and identified in the court’s decree nisi, and to have the policyholders vote again on the plan of conversion.

B. Dissenters’ Rights

Defendants devote much of their argument against the applicability of dissenters’ rights by arguing that dissenters’ rights do not apply to Provident’s conversion because it is not effectuated by a “share exchange” under 15 Pa.C.S. §1931(d). Plaintiffs respond that Provident used a share exchange to effectuate the plan of conversion under 15 Pa.C.S. § 1931 because Provident described the process of conversion by stating that “Membership rights in Provident Mutual will be exchanged for membership rights in Provident Mutual Holding Company.” Because Provident purportedly pursued a share exchange, plaintiffs argue that Provident must provide dissenters’ rights pursuant to 15 Pa.C.S. §§1931(d) and 1571. The court need not decide that issue because we determined that even if section 1931(d) applied, Provident’s policyholders do not receive dissenters’ rights because, after the conversion, policyholders’ membership rights in Provident Mutual Life Insurance Company are converted solely into membership rights in Provident Mutual Holding Company; therefore, the exceptions to dissenters’ rights in section 1571(b)(1)(h) apply.

One finds the provision for dissenters’ rights in 15 Pa.C.S. § 1571(a):

“Except as otherwise provided in subsection (b), any shareholder of a business corporation shall have the right to dissent from, and to obtain payment of the fair value of his shares in the event of, any corporate action or to otherwise obtain fair value for his shares, where this part expressly provides that a shareholder shall have rights and remedies provided in this subchapter. See:
“Section 1931(d) (relating to dissenters’ rights in share exchanges).”

This provision applies to nonstock companies like Provident (i.epreconversion Provident) because under 15 Pa.C.S. §2101(c), the court substitutes “memberships” for “shares” or “shareholder.”

The exceptions to section 1571 are found in section 1571(b):

“(1) Except as otherwise provided in paragraph (2), the holders of the shares of any class or series of shares, that at the record date fixed to determine the shareholders entitled to notice of and to vote at the meeting at which a plan specified in any of section... 1931(d) is to be voted on are either:
“(i) listed on a national securities exchange; or
“(ii) held of record by more than 2,000 shareholders [members]; shall not have the right to obtain payment of the fair value of any such shares under this subchapter.”

The clear intention of this section is to eliminate dissenters’ rights with respect to listed or widely-held shares in certain fundamental transactions. Because there are over 2,000 members of Provident Mutual, section 1571 (b)(1)(h) applies to Provident’s plan of conversion.

Although this section applies, it does not end the court’s inquiry because the BCL provides for dissenters’ rights if the shares are not converted solely into shares of the acquiring corporation. Paragraph (2) of 1571(b) states:

“Paragraph (1) shall not apply to and dissenters’ rights shall be available without regard to the exception provided in that paragraph in the case of:
“(i) Shares converted by a plan if the shares are not converted solely into shares of the acquiring, surviving, new or other corporation or solely into such shares and money in lieu of fractional shares.” 15 Pa.C.S. §1571 (b)(2)(i). (emphasis added)

The plaintiff argues that the so-called “market exception” to dissenters’ rights does not apply to Provident’s transaction because the shares (memberships) are not exchanged solely for shares (memberships) of the acquiring corporation. The plaintiffs argue that Provident’s conversion separates participating policyholders’ membership interests by exchanging their membership in Provident Mutual Insurance Company for a policy in the stock insurer and a membership in the mutual holding company. Thus, plaintiffs argue “[u]pon conversion, the participating policyholders will receive membership rights in the mutual holding company which are divorced from their policies, and any ownership rights they have become diluted among all members — participating and nonparticipating policyholders alike.” (Pls.’ reply to defs.’ further supp. mem. regarding dissenters’ rights at 13.) The court finds that plaintiffs are not correct. Only the participating policyholders will be shareholders. The plan’s use of a separate stock company to issue the insurance policy does not deprive the participating policyholders of their full membership rights in the new mutual holding company. The court concludes that the membership rights of the current members of Provident will be converted solely into membership rights in the new mutual holding company. Therefore, the exception in 15 Pa.C.S. §1571(b)(2)(i) does not apply, and the exception in 15 Pa.C.S. §1571(b)(l)(ii) applies, making dissenters’ rights unavailable.

C. Policyholder Information Statement Disclosures

Underlying the findings of fact is the court’s conclusion (and its fundamental disagreement with Provident) that participating policyholders lose something by approving the plan of conversion: they forego the right to have their dividends paid from and policies secured by profits from nonparticipating lines of business, and they lose the priority they once received under the mutual insurance structure. The court does not challenge policyholders’ prerogative to forego these rights by approving the plan of conversion or Provident’s decision to pursue a corporate structure which limits those rights. However, the policyholder information statement must detail what policyholders forego and make certain that policyholders are properly informed. Accordingly, after discussing why the court is not deferring to the insurance department and after annunciating the disclosure standard the court will apply, the court will outline the deficiencies in the policyholder information statement and suggest ways to rectify those deficiencies.

The insurance department’s approval of the policyholder information statement does not preclude this court from finding that the statement fails to disclose information that would enable the policyholders to make an informed decision on whether to approve or disapprove the plan. If plaintiffs are seeking relief for alleged torts arising out of an insurance company’s corporate actions, jurisdiction lies with the court of common pleas. Drain v. Covenant Life Insurance Co., 551 Pa. 570, 574, 712 A.2d 273, 277 (1998). To resolve allegations that an insurance company failed to disclose material information to policyholders before policyholders approved the insurance company’s corporate actions, the court does not need to consider insurance laws, and thus can properly decide plaintiffs’ claims. Id. at 578-79, 712 A.2d at 277. In addition, the court need not defer to the insurance department’s decision to approve the policyholder information statement because “[t]he department has no particular expertise in matters of corporate action.” Id. at 578, 712 A.2d at 277, citing Trustees of the Presbytery v. Provident Mutual Life Insurance Co., 685 A.2d 635 (Pa. Commw. 1996) (quoting insurance commissioner’s opinion dated September 28, 1994 at 7-8).

Here, plaintiffs allege that Provident’s directors violated their duty of disclosure (candor) because they disseminated a policyholder information statement that “contained] misrepresentations or omissions which are material to any decision by the members on how to vote ....”(Pls.’ compl. ¶101.) Plaintiffs challenge the propriety of Provident’s corporate action by alleging that Provident’s directors failed to disclose material information in the information statement. Because this claim does not involve the consideration of insurance laws, the court is not bound by the insurance department’s approval of the policyholder information statement.

To enable policyholders to make an informed decision to approve the plan, the information statement must “fairly describe the proposed conversion plan.” 40 P.S. 913-A-f. Because the Conversion Act does not define “fairly,” the court will construe the word according to its common and approved usage. MacElree v. Chester County, 667 A.2d 1188 (Pa. Commw. 1995), appeal denied, 545 Pa. 666, 681 A.2d 180 (1996), reconsideration denied; Commonwealth v. Lopez, 444 Pa. Super. 206, 663 A.2d 746 (1995); see 1 Pa.C.S. §1903. The common and approved usage of “fair” is found in Black’s Law Dictionary: “Having the qualities of impartiality and honesty; free from prejudice, favoritism, and self-interest. Just; equitable; even-handed; equal as between conflicting interests.” Black’s Law Dictionary, 5th ed. at 535 (West Publishing). The court accepts this definition and is not persuaded by the decision in Pincus v. The Mutual Assurance Co., March term 1973, no. 4604 (Phila. C.P., Oct. 29, 1979). In Pincus, the parties asked the court to decide whether defendant’s failure to disclose certain information in its proxy statement constituted fraud. Id. at 1. Pincus does not stand for the broad proposition that any disclosure is fair as long as it is not fraudulent. A statement can be non-fraudulent but still be unfair. Therefore, to fairly describe the proposed conversion, the information statement must not generalize the risks of the plan while specifying its benefits, must not omit information needed to give a balanced discussion to critical components of the plan, and must not fail to explain certain important words and phrases. The court finds that the information statement Provident provided to policyholders did all those things.

1. Closed block

The statement in the policyholder information statement that “[t]he purpose of the closed block is to provide reasonable assurance to holders of policies included in the closed block that their policy dividend expectations will be protected after the effective date” is misleading because the information statement does not state that the 1997 dividend scale neither factors in profits from nonparticipating lines of business nor provides a mechanism to repay participating policyholders for their prior investment in nonparticipating lines of business. (See policyholder information statement at 32.) Expectations are formed from experiences. From 1987 to 1991, participating policyholders experienced a dividend which included profits from nonparticipating lines of business. (Pls.’ exhibit 13, 18.) Provident paid performance dividends because it believed that “the profits (and losses) from the nonparticipating lines of business are considered to belong to the participating policyholders.” (Pis.’ exhibit 19 at 1.) Thus, the right to receive profits from nonparticipating lines of business was an “incident of ownership” that policyholders justifiably expected. The 1997 dividend scale does not include a component to pay dividends from the profits of nonparticipating lines and does not include a mechanism for participating policyholders to obtain the benefit of their prior investment in those lines. (Notes of Testimony, June 22,1999 at 47, 64; Notes of Testimony, March 16, 1999 at 328, 333.) Therefore, the statement that the closed block provides “reasonable assurance to policyholders that their dividend expectations will be protected” is misleading because the 1997 dividend scale does not include a component for performance dividends, a benefit policyholders could reasonably expect to receive based on Provident’s past practice.

Provident’s statement is not made less misleading by its other statement in the policyholder information statement that the stock life insurance company could choose to pay dividends from its general funds. Nor is the statement any less misleading merely because, after conversion, Provident can use profits from non-closed block businesses to fund closed block policyholders’ dividends. What was once a “practice” under the mutual insurance structure becomes merely a “possibility” under the mutual holding company form. Policyholders will be aware of this distinction if the information statement discloses that the 1997 dividend scale neither includes a component for performance dividends nor contains a mechanism to refund policyholders for their prior investment in Provident’s growth.

Therefore, the information statement should state that Provident stopped paying performance dividends, that the 1997 scale does not include a component to pay dividends from profits from nonparticipating lines of business, and that the closed block is not calculated to refund policyholders’ prior investment in Provident’s growth. By adding these disclosures, the policyholder information statement will better explain — and thus help policyholders to better understand — the information statement’s important phrase that “the purpose of the closed block is to provide reasonable assurance ... that [participating policyholders] dividend expectations will be protected ....” (Information statement at 22.)

2. Full demutualization

The policyholder information statement gives an unbalanced discussion of full demutualization because it does not state that Morgan Stanley, in a document titled “Summary of the key long-term competitiveness factors addressed and possible implications,” indicated that full demutualization coupled with an IPO or merger with a stock company was “strongly positive” for current policyholders and that the mutual holding company structure was “positive.” The information statement should divulge this to enable the policyholders to determine whether the mutual holding company structure is in their best interests. The information statement asserts that “[i]n a demutualization policyholders/members receive an immediate benefit from the accumulated earnings of the former insurer.” (Policyholder information statement at 26.) Gary Parr, the Morgan Stanley partner who helped prepare Morgan Stanley’s “fairness opinion,” which concluded that the mutual holding company structure was financially fair to policyholders, explained the different ratings by testifying that some policyholders view as “better” the ability of Provident to immediately deliver value to policyholders. (Notes of Testimony, March 16, 1999 at 204.) Although Mr. Parr did not believe that the alternatives to the mutual holding company structure gave policyholders “maximum” value, he testified that “there are those people that would suggest that [delivering] something is better than delivering nothing.” (Id.) The court agrees. Therefore, the information statement should include the summary Morgan Stanley prepared which indicated that a full demutualization coupled with a merger with a stock company or initial public offering was “strongly positive” for current policyholders. Including the summary with the information statement will enable current policyholders to evaluate fairly the board’s conclusion that Provident’s conversion serves policyown-ers’ best interests.

3. Conflict of interest

The information statement inadequately identifies and explains the potential conflicts of interest between shareholders of the stock life insurance company and members of the mutual holding company. The information statement states that “the short-term and long-term interests of any public shareholders may at times conflict with interests of the members of Provident Mutual Holding Company, who will also generally be the policyholders of Provfirst Life. The plan of conversion contains structures such as the closed block, and procedures designed to address such conflicts but there can be no assurance that such structures and procedures will be effective or that management and directors will be able to reconcile the interests of members with the interests of public shareholders.” (Information statement at 18.)

Noticeably absent from the information statement is any discussion identifying specific areas where Provident directors’ duties to policyholders and shareholders potentially conflict. For example, after conversion, the board of directors must carefully balance the policyholders’ interest in receiving insurance at cost with the shareholders’ interest in receiving the highest return on their investment. A further conflict arises over how the directors will apportion the growth of and profits from the stock life insurance company between shareholders and policyholders. Current policyholders should be concerned about whether they will share in profits earned by the stock life insurance company, or instead, whether the stock life insurance company’s earnings will inure only to its shareholders. Current policyholders should be particularly concerned about how the mutual holding company’s directors will balance shareholders’ and policyholders’ interests since the directors of the mutual holding company, through the employee stock ownership plan and through possible stock options, will also be shareholders and likely directors of the stock life insurance company. (See information statement at 37.) Current policyholders are justifiably concerned that the closed block circumscribes their right to benefit from the stock life insurance company’s growth and profits. Thus, to reasonably inform policyholders about the plan, the policyholder information statement should not only identify these potential conflicts but also explain — with specifics and not with generalities — how the plan’s structures and procedures mitigate these conflicts.

Any discussion of conflicts of interest is incomplete without disclosing information about the nature and extent of policyholders’ control of the mutual holding company and without explaining that Provident cannot be acquired in a hostile takeover. Stating in a general and cursory fashion that Provident’s policyholders have overall control of the enterprise, without specifying the means policyholders have to exercise that control (i.e. nominations to board requires the greater of 7,500 members or 2.5 percent of the corporation), is not sufficient. Therefore, the information statement must state that Provident cannot be acquired in a hostile takeover and then explain how policyholders may exercise control of the mutual holding company.

Although the conflicts are potential, they still must be disclosed to give policyholders a fair and complete presentation of the plan. The policyholder information statement does not fairly present the plan if it specifies and expounds upon the plan’s benefits and generalizes or omits the plan’s risks. That the board believes the benefits are more likely to occur than the risks does not eliminate their duty to present the benefits and risks equally. Accordingly, the information statement must specifically identify the potential conflicts of interest and explain how Provident will rectify those conflicts.

4. Morgan Stanley and the fairness opinion

In preliminarily enjoining Provident’s plan of conversion, this court found that the information statement failed to disclose the material factors Morgan Stanley relied upon in rendering its fairness opinion and omitted information about why Provident did not ask Morgan Stanley to compare Provident’s plan with other demutualization alternatives to the mutual holding company structure. Our present decision to require Provident to include the summary of key long-term factors addressed, satisfies the court’s prior concerns about Morgan Stanley’s fairness opinion. Additionally, we will require Provident to disclose the compensation and contingency arrangement it has with Morgan Stanley.

IV. Conclusions of Law

(1) Current policyholders of Provident Mutual Life Insurance Company are not entitled to dissenters’ rights under 15 Pa.C.S. §1571(a) because the exceptions to dissenters’ rights provided in 15 Pa.C.S. §1571(b)(l)(ii) applies and 15 Pa.C.S. §1571(b)(2)(i) does not apply.

(2) The officers of Provident Mutual breached their duty of disclosure because the policyholder information statement they disseminated unfairly describes the plan of conversion and thus prevented policyholders from making an informed vote on the plan.

DECREE NISI

And now September 16,1999 having considered plaintiffs’ motion for permanent injunction, all responses thereto, and after a full hearing on the merits of plaintiffs’ motion on June 22, 1999, the court enters the following decree nisi:

(1) Provident Mutual Life Insurance Company is permanently enjoined from effectuating its plan of conversion until it:

(A) Revises and disseminates to current policyholders a policyholder information statement which discloses:

“That the dividends participating policyholders once received contained profits from nonparticipating lines of business.

“That the 1997 dividend scale does not include a dividend calculation component which includes profits from nonparticipating lines of business.
“That the 1997 dividend scale is not calculated to refund participating policyholders for their prior investment in nonparticipating lines of business.
“The summary of the key long-term competitiveness factors addressed and possible implications, prepared by Morgan Stanley and PriceWaterhouse Coopers.
“The specific conflicts of interest raised by the mutual holding company structure.
“How Provident intends to rectify those conflicts of interest.
“That Provident cannot be acquired in a hostile takeover.
“The procedure policyholders must use to elect the board of directors.
“Under risks of conversion, that before conversion, Provident officers’ compensation package did not include ownership interests in Provident, but after conversion, their compensation arrangement will likely include ownership interests in the form of the ESOP and stock options.
“The compensation and contingency arrangement Provident has with Morgan Stanley.”

(B) Submits the plan to voting policyholders after the policyholder information statement containing the aforementioned disclosures is distributed.

(C) Re-solicits proxies for policyholders to vote on the plan.

(D) Conducts a special meeting where policyholders may vote on the plan of conversion.

(2) The parties may file motions for post-trial (adjudication) relief to affirm, modify or change the decree nisi within 15 days of the date of this order. Pa.R.C.P. 227.1(a)(4) and Pa.R.C.P. 227.1(c)(2).

      . Rule 1517 no longer requires numerated findings of law and fact. Purdy v. Zaver, 398 Pa. Super. 190, 196, 580 A.2d 1127, 1130 (1990). Therefore, the following adjudication and discussion will be in narrative form.

      . The six counts are: I. Fundamental unfairness; II. Unfair self-dealing; HI. Failure to provide dissenters’ rights; IV. Failure to disclose dissenters’ rights; V. Violation of duty of disclosure; and VI. Misrepresentation.

      . Under Provident’s plan of conversion, Provident Mutual converts from a single mutual insurer corporation to three interrelated corporations. These three corporations are: (1) a holding company (entitled Provident Mutual Holding Company and purportedly a Pennsylvania nonstock corporation); (2) a stock corporation (entitled Provfirst American Corporation and purportedly a Pennsylvania stock corporation); and (3) a stock life insurance company (entitled Provfirst American Life Insurance Company and purportedly a Pennsylvania stock life insurance company).
      The stock corporation, Provfirst American Insurance Corporation, will own all the voting stock of the stock life insurance company, Provfirst American Life Insurance Company, thereby becoming a subsidiary of Provident Mutual Holding Company. The holding company will own at least a majority of the voting stock of the stock corporation. The minority voting authority of the stock corporation will be vested in the shareholders of Provfirst Life. (Policyholder information statement at 8.)

      . According to Provident, membership rights include the right to vote, and the right to any surplus which would remain after insolvency, winding up or liquidation of Provident Mutual. (Id. at 12.)

      . Provident defines contract rights as the right to receive benefits as specified in members’ policies or contracts and the right to dividends. (Id.)

      . A person can be a participating policyowner even if they do not receive a dividend. For example, variable life contract holders are considered participating policyholders even though they do not receive a dividend. (See March 16,1999 Notes of Testimony at 130.) However, the parties presented no evidence to show that a person can be a nonparticipating policyholder if she receives a dividend. In addition, nonparticipating policyholders do not have the right to vote on corporate actions. (Notes of Testimony, March 16, 1999 at 137-38.) Therefore, the court refers to participating policyowners as persons who have both the right to receive dividends and the right to vote.

      . Defendants also argue that dissenters’ rights are not available under the other two sections cited by the plaintiffs: 15 Pa.C.S. §§2104(b)(3) and 1962(c).

      . We do not decide two issues: (1) whether Provident’s plan of conversion complies with the Conversion Act; and (2) which provision of Pennsylvania’s Business Corporation Law did Provident use to accomplish the conversion. Instead, we decide that dissenters’ rights do not apply even if Provident’s plan of conversion does not comply with the Conversion Act (and must therefore comply with certain provisions of Pennsylvania Corporation Law to be effectuated).

      . Provident did not inform PriceWaterhouse Coopers, the accounting firm that structured the closed block, about Provident’s past practice of paying performance dividends to participating policyholders. (Notes of Testimony, June 22,1999 at 49; Notes of Testimony, March 16,1999 at 330.) Kenneth Beck, the partner at PriceWaterhouse Coopers who helped design the closed block, admitted that if he had known about Provident’s past practice of paying performance dividends, that information could have influenced how PriceWaterhouse Coopers ultimately structured the closed block. (Notes of Testimony, March 16, 1999 at 322-23.) However, Mr. Beck quickly added that the design of the closed block could depend on other factors besides the payment of performance dividends. (Id.)

      . Provident officers’ ability under the mutual holding company structure to receive equity compensation, by owning shares of the stock life insurance company and by receiving stock options, illustrates a fundamental difference between Provident’s current corporate structure and the mutual holding company form. Before conversion, it was difficult for policyholders to control the mutual insurer, because to nominate members to the board, policyholders were required to get approval from the greater of7,500 members or 2.5 percent of the members of Provident. After conversion, the voting requirement remains intact but the board now receives equity compensation through the ESOP and potential stock options. Thus, the mutual holding company form combines the entrenchment feature of a traditional mutual insurer with the potentially lucrative compensation feature of a stock company. Corporate officers’ ability to be entrenched and enriched under the mutual holding company form is a risk that should be disclosed to policyholders.


source: Caselaw Access Project

author: SMITH, S.J.,

license: Public Domain

text:
    Palmer v. Davis
    C.P. of Butler County,
    no. 96-10178.

      Jane B. Slovonic, for plaintiffs.

      Joann M. Jofrey, for defendant.
    July 27, 1999
   SMITH, S.J.,

This matter came before this court on defendant’s motion requesting plaintiffs’ complaint in civil action be dismissed.

On October 11, 1994, the plaintiffs, Gary Palmer and Donna Palmer, entered into a sale of timber contract with the defendant, Daniel Davis.

On February 26, 1996, the plaintiffs filed a civil action against the defendant arising out of the terms of the contract.

The issue before this court is whether this court would abuse its discretion in granting the defendant’s motion to dismiss the plaintiffs’ complaint on the basis of the facts and law tendered to this court on the issue.

Following the filing of the civil complaint, the defendant filed an answer to the complaint. In filing the answer initially, the defendant’s attorney listed an erroneous case term and number, causing the document to be misfiled. In time, this error was discovered and was corrected.

By September 4, 1996, the defendant had secured a new attorney. The defendant served interrogatories on the plaintiffs. On or about September 10,1996, upon the defendant’s motion, the court continued an arbitration hearing scheduled to try the case. The stated purpose for the continuation was to permit the defendant to employ discovery proceedings. The motion was unopposed by the plaintiffs. Continuation was granted to the defendant for the purpose of pursuing discovery. The defendant served interrogatories on the plaintiffs. The last communication between the plaintiffs and defendant was the plaintiffs’ request for an extension of time to file answers to the interrogatories. The request was granted.

The plaintiffs did not file answers to the defendant’s interrogatories until February 24, 1999, or 29 months after the same was served on the plaintiffs.

On March 11, 1999, the defendant in a single document filed three motions as follows: motion for protective order; motion to stay proceedings; motion to dismiss.

On March 24, 1999, the court ordered a rule to show cause against the plaintiffs to show why the requested relief should not be granted. The rule was returnable on April 28, 1999. The plaintiffs filed a timely answer to defendant’s motions.

A hearing was held on the rale on April 28,1999. The plaintiffs filed a memorandum of law in support of its position asking for dismissal. The defendant likewise filed a memorandum of law in support of its motion to dismiss. The two memorandums of law furnished by the counsel are attached to this court’s memorandum and order of disposition.

The parties agree on the facts provided to the court. The parties agree on the applicable law and its current application. The court is left to decide the issue on whether or not defendant’s motion for dismissal should be granted for plaintiffs’ inactivity as described under the facts submitted. The defendant contends that the 29-month delay had prejudiced the defendant’s case. The allegation of prejudice was that a key witness moved from the area. Further, the witness allegedly left no forwarding address. The testimony of this witness, according to the defendant, would have been helpful to the defense of his case.

On February 24, 1999, an answer to the interrogatories by the plaintiffs was filed. Two and one-half years had passed since the interrogatories had been served on the plaintiffs.

Furthermore, the defendant contends the plaintiffs have offered no compelling excuse for the delay on filing the answers to the interrogatories.

Pennsylvania courts have enunciated over 100 years that a motion to dismiss should be awarded only if it is shown that: (1) one party has shown a lack of due diligence in proceeding; (2) there was no compelling reason for the delay; (3) the delay causes some prejudice to the adverse party.

The Law

1896 — Wherry v. Pennsylvania Railroad Company, 176 Pa. 172, 35 A. 106 (1896) In this case, the Pennsylvania courts recognized that the power to issue a judgment of non pros originated with common law.

1992 — Penn Piping Inc. v. Insurance Company of North America, 529 Pa. 350, 603 A.2d 1006 (1992) The court raised a principle of law to the level of a presumption.

Under Pennsylvania law, a court can enter a judgment of non pros upon a party demonstrating three prongs mentioned above.

In 1998, the Pennsylvania Supreme Court in Jacobs v. Halloran, 551 Pa. 350, 710 A.2d 1998, held that there would no longer be presumed prejudice upon the defendant, merely because of inactivity for a period of two years or more. The case overruled the prior Penn Piping presumption of prejudice rule.

The third of the three-prong test needs closer examination. It must be determined that the delay has caused prejudice to the adverse party. Prejudice has been defined as “any substantial diminution of a party’s ability to properly present its case at trial.”

The defendant in this case argues that his witness has moved from the state. The witness unavailable is not specifically identified. The delay and prejudice caused thereby would appear to fall short of proving the third prong of prejudice. The witness was not identified nor specifics provided regarding testimony.

Accordingly, the following order is attached.

ORDER

And now, to wit, July 27, 1999, the prayer of the defendant’s motion to dismiss the above action is hereby denied.

MEMORANDUM OF LAW

And now come the plaintiffs, Gary Palmer and Donna Palmer, his wife, by and through their attorneys, Lindsay, Martin & Associates PC. and files the following memorandum of law.

I. Issue

1. Is Dismissal for Inactivity in this Case Improper When Defendant Cannot Show any Actual Prejudice Caused by the Delay in the Proceedings?

Suggested answer: Yes.

II. Argument

Plaintiffs, Gary and Donna Palmer, filed a complaint against the defendant on or about February 23, 1996. The complaint seeks damages resulting from breach of contract, conversion of timber, and negligence on the part of the defendant. The plaintiffs and defendant entered into a contract, whereby the defendant agreed to purchase and remove certain timber from the plaintiffs’ property. From approximately October of 1994 until January of 1995, the defendant entered onto plaintiffs’ property in order to conduct logging operations in accordance with the contract.

Basically, the plaintiffs’ complaint alleges damages resulting from, among other things, the defendant cutting trees which measured under the minimum diameter prescribed by the contract, and other property damage resulting from defendant’s removal of trees. Plaintiffs’ complaint was filed in February of 1996, and a praecipe for an arbitration hearing had been submitted sometime in August of 1996. This matter was continued generally in September of 1996, upon defendant’s motion to continue this matter generally. Answers to defendant’s interrogatories were completed and forwarded in February of 1999, after which defendant filed this motion to dismiss.

To dismiss a case for inactivity pursuant to a defendant’s motion for non pros, there must be: (1) a lack of due diligence on the part of the plaintiff in failing to proceed with reasonable promptitude; (2) the plaintiff must have no compelling reason for the delay; and (3) the delay must cause actual prejudice to the defendant. Jacobs v. Halloran, 551 Pa. 350, 710 A.2d 1098 (1998). In Jacobs, the Supreme Court held that there would no longer be presumed prejudice upon the defendant, merely because of inactivity for a period of two years or more, overruling the prior Penn Piping presumption of prejudice rule. The court found that it was unnecessary to presume prejudice because the defendant is free to present evidence of actual prejudice. Id. at 1102.

Prejudice has been defined as “any substantial diminution of a party’s ability to properly present its case at trial.” Id. at 1103. Prejudice can be established by death or absence of a material witness. Defendant in this case argues that his witness has moved from the state and that he are no longer available to him, and that other witnesses have no recollection of the events that gave rise to this action. However, defendant has not named which witnesses are no longer available. In any case, any expert witness which might be used is not a factual witness, and therefore recollection of the events would not be relevant. Furthermore, the parties themselves are most likely the main witnesses concerning the events which led to this lawsuit.

Defendant’s logging operations on plaintiffs’ property ceased in January of 1995. The statute of limitations on a breach of contract action is four years. Therefore, plaintiffs could have brought this action much later than when it was initially filed, and the recollection of the parties or witnesses would be immaterial. Defendant has suffered no prejudice, as plaintiffs had placed defendant on notice of this action in February of 1996. Defendant can show no actual prejudice resulting from plaintiffs’ delay in proceeding with the case.

Because plaintiffs’ delay has caused no actual prejudice to the defendant, this action should proceed according to law. As defendant in this action can show no absence of material witnesses, nor any substantial diminution of his ability to present a case at trial, defendant’s motion to dismiss should be dismissed.

MEMORANDUM OF LAW IN SUPPORT OF DEFENDANT’S MOTION TO DISMISS

I. Facts

The parties to the instant action entered a contract for the sale (and removal) of timber on October 11, 1994. As a result of a dispute about that contract, plaintiffs, Gary and Donna Palmer, filed a complaint in civil action on or about February 23, 1996.

Defendant, Daniel Davis, hired Attorney Thomas S. Moore. Mr. Moore became ill and failed to pursue the action. It appears that Attorney Moore may have filed an answer at 96-10175 instead of 96-10178. When defendant received a notice of intention to take a default judgment, he refiled the answer pro se and contacted the undersigned attorney.

On or about September 4, 1996, the undersigned attorney filed a motion for continuance of arbitration hearing in order to pursue discovery. That motion was unopposed. Attorney Susan S. Jackson agreed to the continuance and acknowledged “that interrogatories could be completed in a timely fashion.” After the continuance was granted, Attorney Jackson requested an extension of time to answer the interrogatories. The extension was granted.

No further action on this matter was pursued by either side until February 24, 1999, when Attorney Jane B. Slovonic returned the interrogatories 29 months after receipt and proffered the plaintiffs’ first set of interrogatories to defendant. In that 29-month period, at least one witness potentially helpful to the defendant has moved and the defendant does not have an address for him. (Counsel has not even been able to interview this witness.)

II. Question presented

Does the court abuse its discretion by granting defendant’s motion to dismiss?

Answer: No.

III. Discussion

When this case was filed, the controlling law with regard to the issue of the defendant’s motion to dismiss was Penn Piping Inc. v. Insurance Company of North America, 529 Pa. 350, 603 A.2d 1006 (1992). When the Supreme Court decided Penn Piping, it raised a principle of case law to the level of a presumption. It is well-settled law that a court could enter a judgment of non pros upon a party showing the following: (1) that one party had shown a lack of due diligence in proceedings; (2) that there was no compelling reason for the delay; and (3) that the delay caused some prejudice to the adverse party. James Brothers Lumber Company v. Union Banking and Trust Co., 432 Pa. 129, 132, 247 A.2d 587, 589 (1968). In James, the court recognized principle that had been enunciated by the courts of Pennsylvania since the last century. (See Wherry v. Pennsylvania Railroad Company, 176 Pa. 172, 35 A. 106 (1896). In that case, the Pennsylvania courts recognized that the power to issue a judgment non pros originated with common law.)

Historically, the ability of the court to grant a judgment non pros has little to do with the statute of limitation but is rather tied to the equitable doctrine of laches.

Although the court may have modified the rule of law enunciated in Penn Piping, those modifications simply go to the issue of a presumption arising and not to any type of modification of the court’s equitable power. (See generally, Jacob v. Halloran, 551 Pa. 350, 710 A.2d 1108 (1999), and Shope v. Eagle, 557 Pa. 360, 710 A.2d 1104 (1998).

Butler County had adopted a local rule drawn from Pa.R.J.A. 1901(c) in Local Rule L 1901(b)(l)(i). The prothonotary sets a general call of cases the first of September which have been inactive for a period of two years. In the instant case, the inactivity went from September 10,1996 when Judge Doerr entered an order continuing the matter generally until late February 1999. But for the defendant’s motion filed on September 4, 1996, the prothonotary of Butler County would have listed this case as inactive on September 1,1998. In fact, this case missed being on that list by a matter of only 10 days. The plaintiffs did not decide to pursue the case until almost six months after it could have been dismissed.

The standard for review with regard to the court’s ability to grant the plaintiffs’ request is abuse of discretion. There are some cases that have held the standard “gross” abuse of discretion, but in reality the courts have defined gross abuse of discretion and abuse discretion as the same. See Moore v. Moore, 535 Pa. 18, 28 n.4, 634 A.2d 163, 168 n.4 (1994). In the instant case, for the court to grant the defendant’s motion when there has been no excuse offered for the delay, and when a potentially helpful witness has been lost, the appellate court could easily rely on the case law enunciated throughout the last 100 years.

III. Conclusion

Although the defendant does not come to court with the presumption that had been created in Penn Piping, the defendant can meet all three prongs of the test that is well-settled law in the Commonwealth and which is set out in James Brothers Lumber Company. Unless the plaintiffs can offer a compelling excuse for the plaintiffs’ failing to prosecute this case or in any way move it along, the defendant’s motion to dismiss should be granted.


author: WETTICK, J.,

text:
    Pawlowski v. Conrail Inc.
    C.P. of Allegheny County,
    no. GD96-1087.

      Thomas Hollander, for plaintiff.

      Stephen M. Houghton, for defendant Conrail Inc.

      George E. Yokitis, for defendant Shannon & Wilson Inc.
    February 25, 1999
   WETTICK, J.,

Conrail Inc.’s motion for summary judgment is the subject of this opinion and order of court. The issue raised through this motion is whether plaintiff may raise claims against Conrail based on the negligence of a general contractor whom Conrail hired to perform work on Conrail’s property.

This is a wrongful death and survival action arising out of the death of Gerald F. Lynch. Mr. Lynch died as the result of the collapse of a portion of a roof in a railroad tunnel (Allegheny Tunnel). Conrail owns the tunnel. Conrail had contracted with Shannon & Wilson Inc. to perform construction management services and with Monterey Construction to enlarge this tunnel. Mr. Lynch was a Monterey employee.

It is Conrail’s contention that the evidence establishes that it was the contractor’s responsibility to take precautions to avoid this type of rock fall and it was the contractor’s negligence which caused the rock fall. Reply brief in support of motion for summary judgment at 10. Conrail relies on the general rule that an employer of an independent contractor is not liable for the physical harm caused to another by an act or omission of that independent contractor or its servants. See Motter v. Meadows Limited Partnership, 451 Pa. Super. 520, 680 A.2d 887 (1996), and cases cited therein. See section 409 of the Restatement (Second) of Torts which provides that except as stated in sections 410-429, the employer of an independent contractor is not liable for physical harm caused to another by an act or omission of the contractor or his servants. Comment (b) to section 409 states that the explanation commonly given for this rule is that since the employer has no power of control over the manner in which the work is to be done by the contractor, it is to be regarded as the contractor’s own enterprise. Thus, the contractor rather than the employer is the proper party to be charged with the responsibility of preventing the risk and bearing and distributing it.

I.

It is plaintiff’s position that even assuming that Mon-terey was an independent contractor with full control over the manner in which the work was to be done, Conrail is liable for Monterey’s negligence because the work that Monterey was performing was exceptionally dangerous. This case, according to plaintiff, is not governed by the general rule that an owner is not responsible for the negligence of its contractor but rather by exceptions to this general rule that hold the owner responsible for the activities of its contractor. These exceptions upon which plaintiff relies are set forth in section 416 and section 427 of the Restatement (Second) of Torts.

Section 416 of the Restatement (Second) of Torts reads as follows:

“One who employs an independent contractor to do work which the employer should recognize as likely to create during its progress a peculiar risk of physical harm to others unless special precautions are taken, is subject to liability for physical harm caused to them by the failure of the contractor to exercise reasonable care to take such precautions, even though the employer has provided for such precautions in the contract or otherwise.”

Section 427 of the Restatement (Second) of Torts reads as follows:

“One who employs an independent contractor to do work involving a special danger to others which the employer knows or has reason to know to be inherent in or normal to the work, or which he contemplates or has reason to contemplate when making the contract, is subject to liability for physical harm caused to such others by the contractor’s failure to take reasonable precautions against such danger.”

In Philadelphia Electric Company v. Julian, 425 Pa. 217, 228 A.2d 669 (1967), the Supreme Court adopted sections 416 and 427 as the law of this Commonwealth. It described the impact of these exceptions as follows:

“Sections 416 and 427 recognize that there exists a vicarious liability on the part of an employer of an independent contractor, which imposes upon the former responsibility in damages for the negligence of the latter, regardless of the fault of the former.” Id. at 220, 228 A.2d at 671.

Also see Heath v. Huth Engineers Inc., 279 Pa. Super. 90, 93, 420 A.2d 758, 760 (1980) (employee of independent contractor was killed when a trench collapsed; court held that the owner was liable under section 416 because this section “imposes liability upon an employer regardless of control, the theory being that an employer hiring an independent contractor to do particularly dangerous work ought not to be allowed to insulate himself from liability”).

In Colloi v. Philadelphia Electric Company, 332 Pa. Super. 284, 481 A.2d 616 (1984), the plaintiff — an employee of independent contractor’s subcontractor — was injured when breaking through concrete with a jackhammer and striking an electric conduit. The plaintiff raised claims against the owner (Philadelphia Electric) based on the negligence of the independent contractor and its subcontractor. The trial court directed a verdict in favor of the owner; the Superior Court reversed. It ruled that the plaintiff’s evidence was sufficient to make out a prima facie case against the owner under section 416 and section 427 of the Restatement. In its opinion, the court ruled that employees of an independent contractor are among the third parties to whom the duties specified in section 416 and section 427 apply. The court described the duties which the owner owes under section 416 and section 427 as follows:

“The duties defined in these sections are said to be ‘non-delegable’; they impose vicarious liability for the negligence of an independent contractor upon one who employs the contractor to do work involving heightened risks of physical harm to third parties.” Id. at 296, 481 A.2d at 622. (citations omitted)

The remaining issue in part I is whether the evidence, as construed most favorably to plaintiff, makes out the elements of a case under section 416 and section 427. The Pennsylvania courts use the analysis developed in Ortiz v. Ra-El Development Corp., 365 Pa. Super. 48, 528 A.2d 1355 (1987), in deciding whether the section 416-section 427 exception applies.

In that case, an employee was injured when a 14-foot high scaffold collapsed. The employee, relying on section 416 and section 427, sued the owner based on allegations that its contractor failed to assemble the scaffolding in accordance with OSH A standards. The trial court granted the owner’s motion for summary judgment; it ruled that the special risk exception to the general rule of nonliability of an employer of an independent contractor was not applicable. The Superior Court affirmed.

In its opinion, the court blended section 416 and section 427 into a single exception that is applicable “where the work to be performed by the independent contractor involves special danger or peculiar risk.” Id. at 52, 528 A.2d at 1357. (footnote omitted) It ruled that the determination of whether a special danger or peculiar risk exists is a mixed question of law and fact and may, in clear cases, be made by the trial judge as a matter of law. Id. at 56, 528 A.2d at 1359. It adopted the following test for determining whether a special danger or peculiar risk exists:

“We hold that a special danger or particular risk exists where:
“(1) the risk is foreseeable to the employer of the independent contractor at the time the contract is executed, i.e., a reasonable person, in the position of the employer, would foresee the risk and recognize the need to take special measures; and
“(2) the risk is different from the usual or ordinary risk associated with the general type of work done, i.e., the specific project or task as chosen by the employer involves circumstances that are substantially out-of-the-ordinary.” Id. at 53, 528 A.2d at 1358.

The court said that its test should be applied in a manner that creates a narrow exception to the general rule of employer nonliability. Otherwise, this exception to the general rule will become the rule rather than the exception because all construction work involves a risk of some harm.

The court said that the second prong of its test focuses on the nature of the work to be performed and involves a two-step analysis. First, a court examines the risks that would be posed by the general type of work to be performed under typical circumstances. Next, the court determines whether the circumstances under which the general work is done (i.e., the specific project or task) introduces a different kind or level of risk.

The court ruled that the second prong of the test was not met in this case. The court concluded that all scaffolding work does not involve a special danger or peculiar risk and that there was nothing about the specific project upon which the plaintiff was working or the task that the plaintiff was performing which involved circumstances that were substantially out of the ordinary.

The court distinguished this case from Heath v. Huth Engineering Inc., supra, in which an employer was held liable for the death of an independent contractor’s worker who was killed digging a sewer trench because of “the specially dangerous circumstances under which the digging was done, i.e., in a sewer trench.” Ortiz, supra, 365 Pa. Super, at 54, 528 A.2d at 1359. It distinguished Colloi v. Philadelphia Electric Company, supra, because “[hjere again the general task of digging was not specially dangerous but the circumstances surrounding the specific task made it specially dangerous.” Ortiz, supra, 365 Pa. Super, at 55, 528 A.2d at 1359. The court stated that Ortiz’s injuries, on the other hand, were inflicted during “routine construction work on a 14-foot high scaffold [which] clearly involves no special danger or peculiar risk.” Id. at 56, 528 A.2d at 1359.

The present case falls within the exception to the general rule that the Ortiz opinion recognized. According to the facts most favorable to plaintiff, the Allegheny Tunnel is a single track tunnel constructed in the late 1800s. The tunnel is 3,570 feet long. The construction project that is the subject of this litigation involved both increasing the height of the entire existing tunnel to allow for double-stacked railroad cars and widening the entire existing tunnel to add a second rail line. Excavation was carried out from both ends working toward the middle. The excavation of the tunnel was done by blasting. The project involved removal of a tunnel lining that had been in place for over a century. The brick and masonry liner of the existing tunnel hid bad ground conditions. Difficult ground conditions and old coal mining operations were encountered during the excavation.

This was not a routine blasting/construction operation. Because of the magnitude of the project and the age and condition of the existing tunnel, work was being performed under unusually dangerous circumstances. If (under the facts most favorable to plaintiff) the special dangers/peculiar risk exception does not apply to this project, it is unclear when it would apply.

The cases upon which Conrail relies (Motter v. Meadows Limited Partnership, supra; Edwards v. Franklin & Marshall College, 444 Pa. Super. 1, 663 A.2d 187 (1995); Lorah v. Luppold Roofing Co. Inc., 424 Pa. Super. 439, 622 A.2d 1383 (1993); Mentzer v. Ognibene, 408 Pa. Super. 578, 597 A.2d 604 (1991), and Peffer v. Penn 21 Associates, 406 Pa. Super. 460, 594 A.2d 711 (1991), did not involve working environments that presented peculiar risks. In Motter, the plaintiff was injured when a 10-foot deep trench in which he was working collapsed. The court ruled that digging in a 10-foot deep sewer trench is a routine work site procedure; the conditions were not so unusual or out of the ordinary as to pose a peculiar risk to others.

In Edwards, the employee was injured when he fell through a roof. The peculiar risk doctrine did not apply because the work involved routine remodeling of an older structure.

In Lorah, the plaintiff was injured when he fell from a ladder that was not secured. The court ruled that the peculiar risk doctrine did not apply because the task being performed was nothing more than routine work site procedure and the construction site presented only ordinary risks.

In Mentzer, the plaintiff fell because a hole cut in the floor for a stairway in a two-story building did not have a railing, toe boards around its perimeter, or a sufficient floor hole covering. The court ruled that the special risk doctrine did not apply because “[tjhere was nothing about this particular construction project, or the surroundings or circumstances of its performance, that either created or heightened this risk.” 408 Pa. Super, at 593, 597 A.2d at 611.

In Peffer, plaintiff fell when a ladder kicked out from under him. The peculiar risk doctrine did not apply because the danger encountered was not different from that normally associated with the general type of work being performed.

Because the project at which plaintiff was killed created a heightened risk of falling rock, I deny Conrail’s motion for summary judgment seeking dismissal of plaintiff’s claims based on section 416 and section 427 of the Restatement (Second) of Torts.

II.

Plaintiff also claims that Conrail is liable for activities of its general contractor (Monterey) because Conrail exercised control over the manner in which Monterey performed its work. See Restatement (Second) of Torts §414 which reads as follows:

“One who entrusts work to an independent contractor, but who retains the control of any part of the work, is subject to liability for physical harm to others for whose safety the employer owes a duty to exercise reasonable care, which is caused by his failure to exercise his control with reasonable care.”

It is Conrail’s position that the evidence, as construed most favorably to plaintiff, does not support a finding that Conrail exercised control over the manner and method of the work performed by the general contractor. Consequently, summary judgment should be granted as to any claims that are not based on section 416 and section 427. Plaintiff relies on case law holding that the independent contractor rule applies where the owner has only a general right of inspection and supervision that an owner ordinarily enjoys and exercises to insure that it is receiving the performance that it bargained for. See Brletich v. United States Steel Corp., 445 Pa. 525, 285 A.2d 133 (1971); Hader v. Coplay Cement Manufacturing Co., 410 Pa. 139, 189 A.2d 271 (1963); Celender v. Allegheny County Sanitary Authority, 208 Pa. Super. 390, 222 A.2d 461 (1966).

Neither party discussed the issue of who bears the burden of proof with respect to whether Monterey should be characterized as an independent contractor over which Conrail did not exercise sufficient control to subject it to liability. If Conrail has the burden of proof, under the Nanty-Glo rule, it cannot prevail.

Even assuming that plaintiff bears the burden of proof, the evidence, as construed most favorably to plaintiff, establishes that Conrail, through Shannon & Wilson, exercised significant control over the manner and method of the work that Monterey was performing. At the time of the accident, Mr. Kevin Miller was the superintendent for the Allegheny Tunnel renovation project for Monterey. He was responsible for overseeing the entire project in the field. According to his affidavit, Shannon & Wilson was hired by Conrail to perform construction management with regard to the tunnel. Monterey, with input from Shannon & Wilson, determined what work would be done, when the work would be done, who would do the work, and how the work would be done. (Exhibit H, paragraphs 12, 13, 19, and 34.)

Mr. Robert Robinson, the site manager and later the project manager with Shannon & Wilson, testified concerning Shannon & Wilson’s involvement with Monterey. (Exhibit F.) Shannon & Wilson had arguments with Monterey with regard to smooth-wall blasting and about overblasting that resulted in excessive quantities of rock. (T. 111-15.) Shannon & Wilson made recommendations concerning the placing and spacing of blast holes because Monterey was blasting outside of the pay line; it made recommendations concerning the angles of the blast holes because excessive outward angles were resulting in increased requirements for concrete and somewhat decreased tunnel stability. (T. 119-24.) Shannon & Wilson rejected batches of shotcrete that were delivered because they did not have the correct consistency. (T. 132.) Shannon & Wilson intervened because of Monterey’s failure to install depth probes (T. 132-33); Shannon & Wilson intervened with respect to the spacing of rock bolts which, inter alia, are designed to minimize exposure of workmen to rock falls. (T. 134, 165-66.) Shannon & Wilson participated with the contractor in vibration monitoring and assisted the contractor by having Shannon & Wilson employees measure the blast and monitor the concrete quantities. (T. 176-77.) Shannon & Wilson provided input to Monterey when Monterey deviated from established procedures and methods for blasting and roof support. (T. 178.)

Similar testimony was offered in the excerpts of the deposition of Mr. Robinson attached as an appendix to plaintiff’s brief. Directions were given by Shannon & Wilson engineers to Monterey during the construction including that for one specific area all rock bolts be 15 feet long and that the initial shotcrete lining be Bekart fibre rather than Novocon. (T. 245-46.) Shannon & Wilson prepared memos advising the contractor as to when full face excavation would be permitted. (T. 263.) There was a continuing battle with the contractor over staggering of the two headings versus a single heading. (T. 361-65.) There were discussions concerning the length of unsupported rock. (T. 386-88.) Shannon & Wilson reviewed resumes of nozzlemen to determine their experience. (T. 426-27.)

Conrail’s reply brief in support of motion for summary judgment characterizes testimony and evidence as demonstrating that Shannon & Wilson monitored the blasting, determined the length of the tunnel to be excavated with each blast, made decisions regarding design changes, and issued directives and made decisions regarding the blast activity (no. 6 at 4-5); that it was Shannon & Wilson’s responsibility to monitor the application of the shotcrete (no. 7 at 5); that it was Shannon & Wilson who made the determination on the rock bolt installation, the type of rock bolts to be applied, and the use of tension as opposed to untensioned rock bolts (no. 8 at 5-6); that it was Shannon & Wilson who approved the grouting plan, decided to bring in a grouting subcontractor and determined what strategy to follow when difficult ground conditions were encountered (no. 9 at 6); that it was Shannon & Wilson who approved resumes of nozzlemen of Monterey and who ordered Monterey to hire Hydro-Group as a subcontractor (no. 10 at 6-7); and that it was Shannon & Wilson who controlled the other general conditions on the job (no. 11 at 7).

Plaintiff contends that the control exercised by Shannon & Wilson must be attributed to Conrail because Conrail hired Shannon & Wilson and Shannon & Wilson exercised authority over Monterey as Conrail’s agent. In other words, under the evidence as construed most favorably to plaintiff, Monterey was not an independent contractor because of the control that Shannon & Wilson exercised over the details of the work. This is not a situation in which Monterey was free to do work in its own way.

It is Conrail’s position that Shannon & Wilson was an independent contractor that it hired to supervise the work of its general contractor. Therefore, it is not liable because of any control that Shannon & Wilson exercised over Monterey.

Conrail cites only one case in support of its position that it is not liable where it is controlling the work of its general contractor through an independent contractor. Fisher v. United States of America, 441 F.2d 1288 (3d Cir. 1971). This case is not applicable because it did not involve a fact situation in which any entity exercised control over the general contractor. The court ruled that the independent contractor rule applied because the general contractor and its agents controlled the project.

At this stage of the proceedings, I do not need to decide whether Conrail would be liable if Shannon & Wilson was exercising control over Monterey’s work as an independent contractor. The evidence, as construed most favorably to plaintiff, indicates that where problems between Shannon & Wilson and Monterey were not resolved, Shannon & Wilson made recommendations to and sought direction from Conrail as to approaches it should take. In other words, the evidence does not necessarily support a finding that Shannon & Wilson was given a defined task and that Conrail played a passive role with respect to the work that Shannon & Wilson performed and the control that Shannon & Wilson exercised.

For these reasons, I enter the following order of court:

ORDER

On February 25, 1999, it is hereby ordered that the motion for summary judgment of Conrail Inc. is denied.

      . Under the Nanty-Glo rule (Nanty-Glo Boro. v. American Surety Co., 309 Pa. 236, 163 A. 523 (1932)), oral testimony alone of the party with the burden of proof is generally insufficient to establish the absence of a genuine issue of material fact. Penn Center House Inc. v. Hoffman, 520 Pa. 171, 553 A.2d 900 (1989).

      . The exhibits described by letter are attached to Conrad’s motion for summary judgment. The exhibits described by number are appendices of exhibits and depositions in support of plaintiff’s brief in opposition to Consolidated Rail Corporation’s motion for summary judgment.


author: STENGEL, J.,

text:
    Hornberger v. Commonwealth Security Systems Corp.
    C.P. of Lancaster County,
    no. 3050-1996.

      Frank G. Fina and Bradford H. Charles, for plaintiff.

      Michael J. Revness, for defendant.

      June 10, 1998
   STENGEL, J.,

This is a subrogation action and a direct action brought by Erie Insurance Co. and its insureds, James and Suzanne Homberger, against Commonwealth Security Systems arising out of a fire which occurred at plaintiffs’ residence. In July 1994, Commonwealth installed a burglar and fire alarm system at plaintiffs’ home. On August 5, 1994, a fire occurred at plaintiffs’ home which caused fire and water damage. Commonwealth’s central monitoring system did not receive an alarm signal despite the fire. Erie paid a claim to plaintiffs for the property damage and by way of subrogation now seeks to recover these insurance proceeds from Commonwealth. In addition, plaintiffs seek to recover from Commonwealth damages exceeding their insurance coverage. Plaintiffs have alleged eight counts in their complaint: negligence; products liability; breach of warranty; breach of contract; fraud; gross, willful and wanton misconduct; negligent infliction of emotional distress; and intentional infliction of emotional distress.

Commonwealth is seeking judgment on the pleadings and/or summary judgment based on various limitation of action provisions in its contract with plaintiffs. Specifically, Commonwealth seeks enforcement of a one-year contractual limitation period. Under section 25 of the contract, plaintiffs agreed that actions against Commonwealth must be commenced within one year after the date the claim arose. Plaintiffs commenced this suit one year and 11 months after the fire.

Alternatively, Commonwealth asserts a contractual limitation on damages and/or waiver of subrogation. Section 3 of the contract limits Commonwealth’s liability for all loss or damage, including property damage, resulting from negligence (including gross negligence) or performance or nonperformance of obligations under the contract. Further, section 6 of the contract contains a waiver of subrogation provision where the parties agreed to shift the risk of loss to plaintiffs’ insurer, Erie.

A motion for judgment on the pleadings may be made “[ajfter the relevant pleadings are closed, but within such time as not to unreasonably delay the trial — ” Pa.R.C.P. 1034(a). Judgment on the pleadings should be granted where the pleadings demonstrate that no genuine issue of fact exists, and the moving party is entitled to judgment as a matter of law. Vetter v. Fun Footwear Co., 447 Pa. Super. 84, 668 A.2d 529 (1995). In ruling on a motion for judgment on the pleadings, a court must accept as true all well-pleaded facts of the party against whom the motion is made, while considering against it only those facts which it specifically admits. Shirley by Shirley v. Javan, 454 Pa. Super. 131, 684 A.2d 1088 (1996). In conducting its inquiry, the court should confine itself to the pleadings themselves and any relevant documents or exhibits properly attached to them. Hammerstein v. Lindsay, 440 Pa. Super. 350, 655 A.2d 597 (1995).

The fire at plaintiffs’ residence occurred on August 5, 1994. This action was commenced by the filing of a complaint on June 24,1996. Plaintiffs’ complaint pleads the existence of the contract at paragraph 4. Commonwealth filed its answer and new matter to the complaint on August 20, 1996. The answer admits the existence of the contract at paragraph 4, pleads limitation of liability at paragraph 76, pleads the one-year contractual limitation period at paragraph 77, and pleads the waiver of subro-gation provision at paragraph 75. On January 13, 1997, plaintiffs filed a reply to the new matter. The pleadings are now closed and this motion for judgment on the pleadings is ripe for disposition.

I. ONE-YEAR CONTRACTUAL LIMITATION PROVISION

Initially, Commonwealth contends that plaintiffs agreed that they could not file a civil action more than one year after the date the claim arose. Specifically, paragraph 25 of the contract states:

“All claims, actions or proceedings, legal or equitable, against company must be commenced in court within one year after the cause of action has accrued or the act, omission or event occurred from which the claim, action or proceeding arises, whichever is earlier, without judicial extension of time, or said claim, action or proceeding is barred, time being of the essence of this paragraph.”

It is well settled in Pennsylvania that a limitation on the time for bringing suit under a contract is a contractual undertaking between the parties to the contract which is both valid and reasonable. See General State Authority v. Planet Insurance Co., 464 Pa. 162, 165-66, 346 A.2d 265, 267 (1975) (judgment on the pleadings in favor of defendant affirmed where suit was not commenced within the one-year contractual limitation period); Lardas v. Underwriters Insurance Co., 426 Pa. 47, 50-51, 231 A.2d 740, 741-42 (1967) (judgment in favor of defendant affirmed where plaintiff failed to commence action within one-year period established by contract). See also, Toledo v. State Farm Fire & Casualty Co., 810 F. Supp. 156 (E.D. Pa. 1992) (applying Pennsylvania law) (motion for summary judgment granted where suit was not brought within one-year contractual limitation period); Satchell v. Insurance Placement Facility of Pennsylvania, 241 Pa. Super. 287, 294, 361 A.2d 375, 378 (1976) (trial court’s order sustaining demurrer affirmed where plaintiff did not bring suit within one-year contractual limitation period).

Additionally, Pennsylvania’s statute governing limitation of time for commencement of actions also authorizes modification of the statutory limitation period where “a shorter time which is not manifestly unreasonable is prescribed by written agreement.” 42 Pa.C.S. §5501.

There is no dispute that plaintiffs instituted this suit beyond the contract’s limitation period.

II. LIMITATION OF LIABILITY PROVISION

Alternatively, Commonwealth contends that several of plaintiffs’ claims are barred by the limitation of liability provision of the contract. Section 3 of the contract, limiting the damages recoverable against Commonwealth, provides as follows:

“Subscriber agrees and understands that company is not insurer and that insurance covering personal injury, including death, and real or personal property loss or damage in, about or to the premises shall be obtained by the subscriber; that company, except as set forth herein, makes no guarantee, representation or warranty, including, without limitation, any implied warranty of merchantability or fitness for purpose; that the equipment and services are designed to reduce, but not eliminate, certain risks of loss and the amounts being charged by company are not sufficient to warrant or guarantee that either no loss or damage will occur or increased loss or damage will not occur; that company is not liable for any loss or damage which may occur prior to, contemporaneous with, or subsequent to the execution of this agreement even if due to the improper performance of and/or failure to perform of the equipment, or breach of contract, express or implied, or breach of warranty, express or implied, or by loss or damage to facilities necessary to operate the system or any central station; that should there arise any liability on the part of company for personal injury and/or property damage, real or personal, which is in connection with, arises out of or from, or results from the design, sale, lease, installation, repair, inspection, test, service, maintenance, remote programming or monitoring of any equipment or system, and/or the equipment or central station facilities, and/or the active or passive sole, joint, or several negligence (including gross negligence) or company and/or its agents, servants, employees, suppliers or subcontractors, including without limitation, acts, errors, or omissions, which occur prior to, contemporaneously with or subsequent to the execution of this agreement, and/or any claim(s) brought in product or strict liability, and/or breach of warranty, express or implied, and/or breach of contract, express or implied, and/or for contribution or indemnification, whether in contract, tort or equity, including without limitation, any general, special, incidental, exemplary, punitive, statutory, and/or consequential damages, irrespective of cause, such liability shall be limited to the maximum of the sum of $250 and this liability shall be exclusive.”

This provision in the contract is written conspicuously, in capital letters and in unambiguous language.

Plaintiffs’ claims for negligence, products liability, breach of warranty, breach of contract, gross negligence and negligent infliction of emotional distress are based on failures in the installation, testing, activation, remote programming, maintenance and/or monitoring of the system. Section 3 limits Commonwealth’s liability for those claims. It provides that if Commonwealth should be found liable for loss or damage which “[r]esults from the design, sale, lease, installation, repair, inspection, test, service, maintenance, remote programming, or monitoring” then Commonwealth’s liability shall be limited to $250. The contract further provides that the limitation on liability “shall be exclusive.” Thus, all claims, with the exception of fraud, wilful and wanton conduct and intentional infliction of emotional distress, are barred by the limitation of liability provision.

Pennsylvania courts have enforced such limitation of damages clauses. See Valeo v. Pocono International Raceway Inc., 347 Pa. Super. 230, 232-33, 500 A.2d 492, 493 (1985); Lobianco v. Property Protection Inc., 292 Pa. Super. 346, 353, 437 A.2d 417, 420 (1981); Manix v. Commonwealth Security Systems Inc., 43 D.&C.3d 587, 593-94 (1986).

The limitation of damages clause in this contract bars the claims for negligence, products liability, breach of warranty, breach of contract, gross negligence and negligent infliction of emotional distress because they are based on failures in the installation, testing, activation, remote programming, maintenance and/or monitoring of the system. The parties have agreed in writing to this limitation, and Pennsylvania law provides that such limitations are enforceable. These claims are, therefore, barred by the contract. In light of the discussion in section I of this opinion regarding the one-year contractual limitation provision, it is not necessary for the court to base its decision on the motion for judgment on the pleadings on the limitation of damages clause set forth in section 3 of the contract.

Accordingly, we enter the following:

ORDER

And now, June 10, 1998, for the reasons set forth in the foregoing opinion, it is hereby ordered that defendant Commonwealth Security Systems Corporation’s motion for judgment on the pleadings is granted and plaintiffs’ complaint is hereby dismissed with prejudice in accordance with the one-year contractual limitation period set forth in the parties’ agreement. Judgment shall be entered in favor of defendant Commonwealth Security Systems Corp. and against plaintiffs James and Suzanne Homberger.