BANCROFT LIFE & CASUALTY ICC, LTD. v. LO et al

Filing 33

MEMORANDUM AND OPINION re: 5 Plaintiff's Motion for Summary Judgment. Signed by Judge Arthur J. Schwab on 01/02/2013. (lmt)

IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF PENNSYLVANIA
BANCROFT LIFE & CASUALTY,
Plaintiff,

12cv1431
ELECTRONICALLY FILED

v.
ERWIN LO, M.D., SUE JIN YU, M.D.,
Defendants.

MEMORANDUM OPINION
Before the Court is Plaintiff’s Motion for Summary Judgment in this breach of contract
case. Doc. no. 5. Defendants filed a Brief in Opposition to the Motion (doc. no. 15), Plaintiff
filed a Reply to the Brief in opposition (doc. no. 18), and Defendants filed a Sur-Reply. Doc. no.
23. The matter is now ripe for adjudication and for the reasons that follow, the Plaintiff’s
Motion will be denied.
I. Standard of Review
A Court must grant summary judgment, “if the movant shows that there is no genuine
dispute as to any material fact and [if] the movant is entitled to judgment as a matter of law.”
Fed. R.Civ.P. 56(a). This determination requires that we view the facts in the light most
favorable to the nonmovant and draw all inferences in her favor. Stratechuck v. Bd. of Educ., S.
Orange–Maplewood Sch. Dist., 587 F.3d 597, 603 (3d Cir. 2009).
A fact is material if it “might affect the outcome of the suit under the governing law,” and
the dispute is genuine if “the evidence is such that a reasonable jury could return a verdict for the
nonmoving party.” Olivieri v. County of Bucks, 2012 WL 5235684, *4 (3d Cir. 2012), citing

Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). “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.’” Id., citing Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587
(1986).
Once the moving party has properly supported its showing that there is no triable issue of
fact and demonstrated an entitlement to judgment as a matter of law, the non-moving party “must
do more than simply show that there is some metaphysical doubt as to material facts.”
Matsushita, 475 U.S. at 586. The non-moving party must go beyond the pleadings and by [its]
own affidavits, or by the depositions, answers to interrogatories, and admissions on file,
designate specific facts showing that there is a genuine issue for trial. Celotex Corp. v. Catrett,
477 U.S. 317, 324 (1986).
In summary, the inquiry under a Rule 56 motion is whether the evidence of record
presents a genuine dispute over material facts so as to require submission of the matter to a jury
for resolution of that factual dispute or whether the evidence is so one-sided that the movant
must prevail as a matter of law. It is on this standard that the Court has reviewed the Plaintiff’s
Summary Judgment Motion and the Defendants’ Response.

II. Background – Material Facts
The following facts are uncontested, unless otherwise indicated, and relevant to the
disposition of the pending Motion for Summary Judgment filed by Plaintiff.1

1

The Court notes that there are very few facts upon which Defendants and Plaintiff agree.
Importantly, the parties disagree as to the characterization of the funds that Defendants
“borrowed” from Plaintiff.
2

Plaintiff filed this lawsuit seeking damages for breach of contract and declaratory
judgment seeking damages and attorneys’ fees allegedly arising from Defendants’ breach of two
agreements with Plaintiff. See Plaintiff’s Complaint at doc. no. 1, ¶ 1, and Defendants’ Answer
and Counterclaims to Complaint at doc. no. 14, ¶ 1. Plaintiff is purportedly a licensed insurance
company (although this fact is not admitted by Defendants), which was organized and exists
under the laws of Saint Lucia. Doc. no. 1, ¶ 2, and doc. no. 14, ¶ 2. Defendants are Texas
residents, husband and wife, medical doctors, and maintain a medical practice in Texas. Doc.
no. 1, ¶ 3, and doc. no. 14, ¶ 3. (See also Plaintiff’s Statement of Undisputed Material Facts at
doc. no. 6, ¶ 2, and Defendants’ Response to Plaintiff’s Statement of Undisputed Material Facts
at doc. no. 15-2, ¶ 2.)
Plaintiff claims that as part of its “investment program of its general reserves,” it offers
“to make collateralized commercial loans to qualified applicants.” Doc. no. 1, ¶ 7, and doc. no.
14, ¶ 7. Defendants deny that Plaintiff gave them a “commercial loan” and deny that they were
guarantors on a “commercial loan”; rather, Defendants counter that Plaintiff actually marketed
and sold a tax-advantaged insurance program which involved the “loanback” to Defendants of a
portion of the money they paid to Plaintiff to establish a “reserve account.” Doc. no. 14, ¶ 7. Put
another way, Defendants claim that Plaintiff encouraged Defendants to “borrow back” a portion
of the funds Plaintiff previously paid to Defendants to establish a reserve account. Doc. nos. 6, ¶
3, and 15-2, ¶ 3.
Regardless of how the documents at issue are characterized (i.e., as either “loan” or
“borrow back” documents), Plaintiff attached them to its Complaint. See doc. nos. 1-1 through
1-8. Importantly, these documents appear to have been executed by Defendants. Id.

3

It is these documents which form the basis for Plaintiff’s breach of contract claim and for
its request for declaratory judgment. Defendants filed counterclaims suggesting that these
documents, while seemingly contractual in nature, cannot bind the parties for various reasons.

III. Discussion
In Pennsylvania the “only grounds upon which equity will permit rescission of an
executed contract are fraud, mistake, failure of consideration, and quia timet.” Umbelina v.
Adams, 34 A.3d 151, 158-59 (Pa. Super. 2011), quoting New–Com Corp. v. Estate of Gaffney,
72 B.R. 90, 93–94 (Bankr. W.D. Pa. 1987) (citing Windle v. Crescent Pipe–Line Company, 186
Pa. 224, 40 A. 310 (1898); Hays v. Hays, 179 Pa. 277, 36 A. 311 (1897); Delamater's Estate, 1
Whart. 362 (1836)).
The Court recognizes that the Pennsylvania Supreme Court has limited a party’s ability to
rescind an executed contract so that “in the absence of fraud or imposition a purchaser will not
be entitled to a recission of the contract[.]” Namy v. Black, 80 A.2d 744, 746 (Pa. 1951). Under
Pennsylvania law, executed contracts cannot be rescinded or annulled in the absence of showing
fraud or mistake, simply because a party found the contract to be burdensome or a financial
failure. New–Com Corp., 72 B.R. at 94 (citing Pennsylvania R. Co. v. Pennsylvania–Ohio
Electric Co., 296 Pa. 40, 48, 145 A. 686, 688 (1929); Bittenbender v. Bittenbender, 185 Pa. 135,
39 A. 838 (1898)) (remarking that a debtor should not be allowed to rescind a consummated
contract “simply because the deal was not the financial success anticipated”).
Count I of Plaintiff’s Complaint alleges that Defendants breached a contract with
Plaintiff. See doc. no. 1, ¶¶ 29-34. Plaintiff’s Brief in Support of its Motion for Summary
Judgment contends that this Court can rule as a matter of law that documents attached to the

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Complaint (doc. nos. 1-1 through 1-8), prove that a contract existed which contained all essential
terms. Doc. no. 7, p. 2. Plaintiff further contends that there is indisputable evidence that
Defendants defaulted on repayment and thus, breached the contract, resulting in Plaintiff’s
damages. Id.
There appears to be no dispute among the parties that Plaintiff provided two lump sum
payments to Defendants – regardless of whether the funds Defendants received from Plaintiff are
characterized as commercial loans or “borrow backs” under a tax-advantaged insurance program
used to establish insurance reserves. See Defendants’ Answer, doc. no. 14 ¶ 8; see also, doc. no.
15-2, ¶¶ 4, 19, and doc. no. 23, pp. 2-3. There is also evidence that Defendants signed
documents pertaining to the funds they received from Plaintiff. See Exhibits to Complaint
bearing signature of Defendant A-1 through A-4 and B-1 through B-4, doc. nos. 1-1 through 1-8.
However, Defendants’ Answer and Counterclaims to Plaintiff’s Complaint includes
affirmative defenses suggesting that Plaintiff’s breach of contract claim is barred: (1) by the
doctrine of illegality, (2) because Plaintiff may have violated the Racketeer Influenced and
Corrupt Organization Act, and (3) because Plaintiff procured the “loan” or “borrow back”
documents via fraud. Doc. no. 14, p. 10. Defendants’ counterclaims include the following
claims: fraud, illegality, and breach of fiduciary duty.2 Id., pp. 21-26. Defendants seek an
accounting, rescission, declaratory judgment, and other damages.3 Id., pp. 26-28, 30.

2

Defendants also asserted counterclaims for breach of contract, conversion, violation of
Pennsylvania’s Unfair Trade Practice and Consumer Protection Law, and violation of
Pennsylvania’s Uniform Commercial Code. Doc. no. 14, pp. 28-30.
3

The Court notes that under Pennsylvania law, the doctrine of election of remedies prohibits a
party from seeking inconsistent relief; a party alleging he has been defrauded in a contract must
choose whether to seek rescission of the contract or to seek damages under the contract. See
Schwartz v. Rockey, 932 A.2d 885, 889 (Pa. 2007); see also, Umbelina v. Adams, 34 A.3d 151,
157 (Pa.Super. 2011) (The party’s election to seek one of the remedies effectively precludes
5

Defendants also contend, inter alia, that evidence, specifically declarations submitted by
Defendants Lo and Yu, supports their affirmative defenses of illegality and rescission. See
Defendants’ Sur-Reply Brief, doc. no. 23, p. 2. Defendants Lo and Yu have submitted
declarations suggesting that Plaintiff: (1) fraudulently induced Defendants into (a) signing the
documents attached to Plaintiff’s Complaint, and/or (b) accepting funds from Plaintiff, thereby
causing Plaintiff to enter into an agreement; and/or (2) made false representations, engaged in
“wrongdoing” and “improper conduct” pertaining to the execution of the agreement. See
Defendants’ Brief in Opposition, doc. no. 15, p. 9.
These declarations were proffered by Defendants (the nonmovants) in opposition to
Plaintiff’s Motion for Summary Judgment.4 These declarations suggest that the “loan” or
“borrow back” documents cannot be viewed in a vacuum. They claim that these documents were
tied to what Defendants call the “Bancroft Program.” Defendants claim that the Bancroft

further claims on the other inconsistent remedy: appellants may not maintain at the same time in
separate counts of one action, or in two different suits, claims for rescission of a contract and
restitution on the one hand and for damages for breach of the same contract together with
expectation interest, on the other hand. These remedies are essentially inconsistent.). Here,
whether Defendants counterclaims seek more than one form of remedy, is an issue for another
day and will not be discussed any further herein.
4

Rule 56 of the Federal Rules of Civil Procedure states in pertinent part:
(c) Procedures.
*

*

*

(4) Affidavits or Declarations. An affidavit or declaration used to support or oppose a
motion must be made on personal knowledge, set out facts that would be admissible in
evidence, and show that the affiant or declarant is competent to testify on the matters
stated.
Here, Plaintiff did not contend in its reply brief that the declarations filed by Defendants were
not based on personal knowledge, or set out facts that would be inadmissible, and/or showed that
the affiants were incompetent to testify on the matters.
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Program is “a massive, fraudulent, offshore abusive tax shelter insurance scheme.” Doc. No. 23,
p. 3.
Thus, Defendants declarations provide facts, which, if proven, call into question to the
validity (and possibly the legality) of the “loan” or “borrow back” documents attached to the
Complaint and at the heart of Plaintiff’s Motion for Summary Judgment. Defendants contend
that summary judgment is inappropriate here because there is a factual dispute as to whether
statements made and/or actions taken by Plaintiff constituted fraud and because the “loan
documents” attached to the Complaint are so inextricably intertwined or connected to the
Bancroft Program as a whole, that discovery on this point is necessary to aid a fact finder.
Defendants’ Sur Reply Brief, doc. no. 23, p. 3.
As noted above, under Pennsylvania law, fraud is a basis for rescission of a contract.
Accordingly, although Defendants may have a difficult burden of proof concerning their
entitlement to rescission of the contract(s), Plaintiff’s Motion for Judgment will be denied as
premature so that discovery related to Plaintiff's alleged fraud and illegality can be conducted.
Given that this Court has determined that it is proper to allow discovery on the fraud and
illegality issues raised by Defendants’ Counterclaims and as attested to by Defendants Lo and Yu
in their declarations, it is likewise premature to grant Plaintiff’s Motion for Summary Judgment
as to Count II of the Complaint. Therein, Plaintiff seeks a declaration that Defendants are in
default of the “loan” or “borrow back” documents (contracts) attached to the Complaint. Again,
Defendants are entitled to attempt to obtain evidence through the discovery process to prove their
counterclaims for fraud and/or illegality which could ultimately lead to the rescission of those
contracts. As such, Plaintiff’s Motion for Summary Judgment as to Count II is likewise
premature.

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IV. Conclusion
Plaintiff’s Motion for Summary Judgment will be denied as premature. An appropriate
Order of Court follows.
s/ Arthur J. Schwab
Arthur J. Schwab
United States District Judge
cc:

All Registered ECF Counsel

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