Applied Underwriters, Inc. v. Top's Personnel, Inc.

Filing 202

MEMORANDUM AND ORDER - Applied Underwriters' motion for summary judgment (filing 141 ) is granted. Applied Underwriters' motion to strike (filing 163 ) is denied. Top's motion for summary judgment (filing 145 ) is denied. Top's is ordered to pay Applied the sum of $166,202.65. This matter is referred to the Magistrate Judge for case progression. Ordered by Judge John M. Gerrard. (JAB)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEBRASKA
APPLIED UNDERWRITERS, INC.,
Plaintiff,

8:15-CV-90

vs.
MEMORANDUM AND ORDER
TOP'S PERSONNEL, INC.,
Defendant.
This dispute concerns a promissory note issued by the defendant, Top's
Personnel, Inc., to the plaintiff, Applied Underwriters, Inc., in 2014. Filing 231. Applied is suing Top's on the promissory note, claiming that Top's "has made
no payments" toward its obligation. Filing 142 at 1. Top's has responded with
an affirmative defense, arguing that the note is "void" and the alleged
obligation unenforceable. Filing 129 at 3.
This matter is before the Court on the parties' cross-motions for
summary judgment. Filing 141; filing 145. For the reasons explained below,
Applied's motion (filing 141) will be granted, and Top's motion (filing 145) will
be denied. Top's will be ordered to pay Applied the sum of $166,202.65.
BACKGROUND
Applied Underwriters markets and sells a workers' compensation
program called EquityComp. Filing 146 at 2; see filing 148-4 at 8. In 2011,
Applied sold an EquityComp policy to Top's Personnel. Filing 146 at 2.
Top's monthly premiums under its policy generally ranged from
$50,000.00 to $120,000.00 per month. Filing 146 at 7; filing 148-9. But in
January 2014, Top's received an invoice for $511,358.70. Filing 146 at 7; filing
148-9 at 51-52. Unable to pay that amount, Top's issued a promissory note to

Applied in the amount of $119,645.13. See filing 23-1 at 1-6. Top's
"acknowledge[d] its indebtedness" in the note, and "promise[d] to pay" Applied
the amount reflected above. Filing 23-1 at 1.
When Top's failed to pay its alleged obligation, Applied filed suit, seeking
$126,488.45 "plus accruing per diem interest." Filing 23 at 2. Top's answered
Applied's complaint with a series of affirmative defenses, including the one at
issue here: that EquityComp is unlawful and the promissory note void. Filing
129 at 3. Top's now moves for summary judgment on those grounds, arguing
that it is entitled to relief as a matter of law. See filing 145. Applied, too, has
moved for summary judgment, claiming that it is owed $166,202.65. Filing 141;
see filing 143 at 12.
STANDARD OF REVIEW
Summary judgment is proper if the movant shows that there is no
genuine dispute as to any material fact and that the movant is entitled to
judgment as a matter of law. See Fed. R. Civ. P. 56(a). The movant bears the
initial responsibility of informing the Court of the basis for the motion, and
must identify those portions of the record which the movant believes
demonstrate the absence of a genuine issue of material fact. Torgerson v. City
of Rochester, 643 F.3d 1031, 1042 (8th Cir. 2011) (en banc). If the movant does
so, the nonmovant must respond by submitting evidentiary materials that set
out specific facts showing that there is a genuine issue for trial. Id.
On a motion for summary judgment, facts must be viewed in the light
most favorable to the nonmoving party only if there is a genuine dispute as to
those facts. Id. Credibility determinations, the weighing of the evidence, and
the drawing of legitimate inferences from the evidence are jury functions, not
those of a judge. Id. But the nonmovant must do more than simply show that
there is some metaphysical doubt as to the material facts. Id. In order to show
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that disputed facts are material, the party opposing summary judgment must
cite to the relevant substantive law in identifying facts that might affect the
outcome of the suit. Quinn v. St. Louis County, 653 F.3d 745, 751 (8th Cir.
2011). The existence of a mere scintilla of evidence in support of the
nonmovant's position will be insufficient; there must be evidence on which the
jury could conceivably find for the nonmovant. Barber v. C1 Truck Driver
Training, LLC, 656 F.3d 782, 791-92 (8th Cir. 2011). Where the record taken
as a whole could not lead a rational trier of fact to find for the nonmoving party,
there is no genuine issue for trial. Torgerson, 643 F.3d at 1042.
DISCUSSION
As noted, the parties dispute the validity of Top's 2014 promissory note.
Top's argues that the note is unenforceable because it derives from an
insurance program (EquityComp) that is "unlawful under New Jersey law."
Filing 147 at 18. Applied disagrees, arguing that the note is enforceable
regardless of its compliance (or noncompliance) with state regulations. Filing
158 at 3. The Court will provide a brief overview of EquityComp, and the
relevant statutory requirements, before addressing the parties' dispute.
1. EQUITYCOMP
As a New Jersey employer, Top's is required to obtain workers'
compensation insurance for its employees. See N.J. Stat. Ann. § 34:15-78. So,
in 2011, Top's purchased an insurance policy through Applied's EquityComp
program. Filing 146 at 2. The details of that program are complex and
disputed, but it's generally described as a unified package consisting of three
separate, yet related agreements. Filing 160 at 3.
The first agreement is between the participant-insured and a subsidiary
of Applied—in this case, Continental Indemnity Company. Filing 147 at 2, 4;

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filing 160 at 4; filing 148-3 at 21. Through that agreement, Applied's subsidiary
agrees to provide the participant-insured a guaranteed-cost workers'
compensation policy. See filing 148-3 at 9. Those policies are fixed-rate plans—
meaning the insured's premiums remain consistent regardless of losses
accrued during the policy term. Filing 148-4 at 9. As discussed below, the fixedrate plan in this case was filed and approved by New Jersey's department of
banking and insurance. See N.J. Stat. Ann. §§ 34:15-78; 34:15-88; see filing 146
at 3; filing 148-4 at 10.
The second agreement is a Reinsurance Participation Agreement, or
"RPA." Very generally summarized, the RPA operates as EquityComp's
investment component, allowing participants to share in the profits and losses
associated with their coverage. Filing 160 at 4; filing 148-3 at 13-14. In that
way, the RPA is part and parcel of the guaranteed-cost insurance policy: if the
participant experiences fewer losses than expected under its policy, its
premiums under the RPA go down.1 Filing 148-4 at 8. If its losses are higher
than expected, its premiums under the RPA go up. Filing 148-4 at 8. The RPA,
unlike the guaranteed-cost policy, is neither filed with nor approved by state
regulatory authorities. See filing 158 at 10.
The third agreement is a "Reinsurance Treaty" between Applied and its
subsidiary-insurer. Filing 147 at 16; filing 160 at 4; see filing 148-4 at 10. The
details of this agreement are unclear from the record, but Top's describes it as
a means of "modify[ing] the rates of the [guaranteed-cost policy] pursuant to
the RPA." Filing 147 at 16 n. 6.

1

The parties dispute whether there are, in fact, two premiums (one under the guaranteed

cost policy and one under the RPA) as this description implies. The Court need not
conclusively resolve that dispute here.

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2. REGULATORY FRAMEWORK & ALLEGED VIOLATIONS
Under New Jersey law, providers of workers' compensation insurance
must "file with the commissioner of banking and insurance . . . a copy of the
policy of insurance and copies of all indorsements attached." § 34:15-78. They
must also file "classification of risks and premiums and rules pertaining
thereto," together with the "basis rates and system of merit or schedule rating
application to such insurance[.]" § 34:15-88. The commissioner must approve
the "classifications of risks" and "basis rates" before the policy can take effect.
Applied (or its subsidiary) filed and obtained approval for EquityComp's
guaranteed-cost workers' compensation policy in accordance with the laws set
forth above. See filing 146 at 3; filing 148-4 at 10. It did not, however, file the
RPA. See filing 158 at 9. On those grounds alone, Top's contends that
EquityComp is unlawful and "void" because "only one component of th[e]
program . . . is filed with and approved by the New Jersey Department of
Banking [and] Insurance." Filing 147 at 18, 20-21. As a result, Top's argues
that certain transactions arising from the program (including its promissory
note) are void as "fruit of the poisonous tree." Filing 147 at 23-24.
Those arguments are premised on more general allegations of bad faith.
In other words, Top's suggests that EquityComp was designed with the specific
intent of "circumvent[ing] state regulatory requirements." Filing 147 at 1. It
achieves that objective, Top's says, through an RPA that "converts" an
approved guaranteed-cost workers' compensation insurance policy to an
unapproved retrospective or "loss-sensitive" one.2 Filing 147 at 14.

2

Premiums under a "loss-sensitive" policy vary based on the participant's actual losses

during a coverage period. See Citizens of Humanity, LLC v. Applied Underwriters Captive
Risk Assurance Co., Inc., 909 N.W.2d 614, 620 (Neb. 2018).

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Top's allegations may, or may not, be true. But the Court need not, and
will not, conclusively resolve them here. Instead, the Court finds that the
promissory

note

is

enforceable,

even

assuming

(without

deciding)

noncompliance with state regulations. Stated another way, Applied's assumed
failure to file and obtain approval for its RPA does not, on these facts, void a
separately-executed promissory note for unpaid workers' compensation
premiums. Filing 23-1 at 3. Accordingly, Top's motion for summary judgment
will be denied.
Nebraska law applies
As a preliminary matter, Top's promissory note contains a choice of law
provision stating that the note "shall be governed by and construed in
accordance with the laws of the state of Nebraska[.]" Filing 23-1 at 5 (emphasis
omitted). Notwithstanding that provision, Top's argues that "New Jersey
rather than Nebraska law should apply[.]" Filing 157 at 6. But Top's provides
no support for its contention that the Court, in determining the validity of the
note, must disregard the parties' express consent to Nebraska law. Nebraska
law does govern this matter. See Coral Production Corp. v. Central Resources,
Inc., 730 N.W. 2d 357, 368 (Neb. 2007) ("[t]he law of the state chosen by the
parties to govern their contractual rights and duties will be applied[.]") (citing
Restatement (Second) of Conflict of Laws § 187(1)).
The promissory note is enforceable
As noted throughout, Top's issued its promissory note over two years
after it had purchased the EquityComp policy. See filing 23-1 at 1. So, while
the note undoubtedly derives from EquityComp and the RPA, it is a separatelyexecuted obligation for unpaid insurance premiums. In exchange for the

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promissory note, Applied agreed to continue the insurance coverage
notwithstanding Top's nonpayment.
There is limited caselaw in Nebraska regarding when, and under what
circumstances, a promissory note may be void as against public policy. And for
good reason: it rarely is. In Schuyler Coop. Ass'n v. Sahs, 755 N.W.2d 802 (Neb.
2008), the plaintiff sued the defendant on an outstanding debt. The parties
eventually resolved that dispute by executing several documents, including a
settlement agreement and promissory note. Pursuant to the settlement
agreement, the defendant agreed to pay the plaintiff $53,072.81 over a set
period of time. Id. at 804. If the defendant missed a payment, the plaintiff had
the "immediate right" to file suit on the promissory note, which the defendant
issued in the amount of $70,000.00. Id.
When the defendant missed a payment under the settlement schedule,
the plaintiff filed suit to enforce the promissory note. Id. The defendant, in
response, argued that the promissory note was unenforceable as against public
policy because it amounted to an "unreasonable penalty[.]" Id. at 805. The
Nebraska Supreme Court rejected that argument, noting that the viability of
the promissory note "[was] not conditioned on the contents of the subsequently
executed settlement agreement." Id. Rather, the note was an "unconditional
promise" to pay a fixed amount at a definite time. Id. at 807. As such, the
obligation was "conclusive between the parties" and "[could not] be reopened
either at law or at equity, except upon clear proof of fraud, or mistake, or of an
express understanding that certain matters were left open for future
adjustment." Id. at 806; cf. Hansen v. Abbott, 188 N.W.2d 717, 719 (Neb. 1971).
The same principles apply here. Indeed, Top's responded to the March
2014 invoice by "acknowledging its indebtedness" and "promis[ing] to pay"
Applied the amount due. See filing 23-1. That promissory note clearly

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represented an agreement between Top's and Applied to "settle" the delinquent
account. Schuyler Coop., 755 N.W.2d at 806. As in Schuyler Coop., this Court
cannot now, in retrospect, reopen or look behind the unconditional agreement
based on the violations alleged in Top's answer. Id. That is particularly true on
these facts, where Top's neither indicates nor alleges fraud or mistake in the
issuance of the note. See id. Without such allegations, and in light of the
specific facts alleged, the Court cannot say that the promissory note is void as
against public policy. Accordingly, Top's motion for summary judgment will be
denied, and, because there is no material dispute of fact regarding the issuance
of the promissory note or Top's nonpayment,3 Applied's motion will be granted.
That does not mean, of course, that Top's is without a potential remedy.
In its amended answer, Top's alleges (among other claims) consumer
protection violations and deceptive trade practices. Filing 129 at 26-35. And
those claims are premised on the same general allegations at issue here: that
EquityComp "violate[s] New Jersey law" by not filing the RPA. Filing 129 at
26, 30. So, while voiding the promissory note is not a viable remedy on these
facts, Top's may—or may not—find appropriate relief in its class-action
counterclaims (none of which are currently at issue).
As a final matter, Applied moves to strike the declaration (and
accompanying attachments) of attorney Aaron Peskin. See filing 163; filing
148-1. In light of the Court's findings as set forth above, Applied's motion will
be denied as moot.

3

Nor does Top's dispute the $166,202.65 figure provided by Applied. See filing 142 at 2. That

figure reflects the amount due under the promissory note ($119,645.13) plus accrued interest
($46,557.52).

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CONCLUSION
Therefore, Top's motion for summary judgment will be denied. Applied's
cross-motion for summary judgment will be granted, and its motion to strike
will be denied as moot. Top's will be ordered to pay Applied the sum of
$166,202.65. This case will be referred to the Magistrate Judge for case
progression on Top's remaining counterclaims.
IT IS ORDERED:
1.

Applied Underwriters' motion for summary judgment (filing
141) is granted.

2.

Applied Underwriters' motion to strike (filing 163) is denied.

3.

Top's motion for summary judgment (filing 145) is denied.

4.

Top's is ordered to pay Applied the sum of $166,202.65.

5.

This matter is referred to the Magistrate Judge for case
progression.

Dated this 2nd day of August, 2018.
BY THE COURT:

John M. Gerrard
United States District Judge

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