Petition for Writ of Certiorari — FBT Bancshares, Inc. v. Mutual Fire, Marine & Inland Insurance

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941 57 7 MAR 1 3 1995

~ NO. ”

In the

Supreme Court of the United States

OCTOBER TERM, 1994

FBT BANCSHARES, INC.

PETITIONER

versus

MUTUAL FIRE, MARINE AND INLAND

INSURANCE COMPANY, INC.,

(IN REHABILITATION)

RESPONDENT

CERTIORARI TO THE

SUPREME COURT OF PENNSYLVANIA

FROM THE ORDER DATED DECEMBER 13, 1994

PETITION FOR WRIT OF CERTIORARI

HENRY L. KLEIN, ESQ.

844 Baronne Street

New Orleans, LA 70113-1103

(504) 586-9971

PERRY S. BECHTLE, ESQ.

LABRUM & DOAK

Suite 2900

1818 Market Street

Philadelphia, PA 19103

(215) 561-4400

Attorneys for

Petitioner

A B Letter Service, Inc., 327 Chartres St., New Orleans, La. (504) 581-5555

. Se ee

IE hee DE te, CORT

QUESTIONS PRESENTED FOR REVIEW

QUESTION NUMBER 1

DOES THE RULING OF THE PENNSYLVANIA

SUPREME COURT, DENYING FBT’S! DIRECT AP-

PEAL WITHOUT REASONS, CONFLICT WITH THIS

COURT’S DECISION IN AMERICAN IRON & STEEL

MANUFACTURING v. SEABOARD AIR LINE

RAILWAY, 233 U.S. 261, 34 S.Ct. 502, 58 L.Ed 949 (1914)

AND ITS PROGENY?

QUESTION NUMBER 2

DOES THE RULING OF THE PENNSYLVANIA

SUPREME COURT, REFUSING (SUB SILENTIO) TO

GIVE FULL RECOGNITION TO A FINAL LOUI-

SIANA JUDGMENT, CONFLICT WITH THIS

COURT’S DECISION IN MORRIS v. JONES, 329 U.S.

545, 67 S.Ct. 451, 91 L.Ed 488 (1947) AND DEPRIVE FBT

OF RIGHTS GUARANTEED BY ARTICLE 4 §1 OF

THE UNITED STATES CONSTITUTION, KNOWN AS

THE “FULL FAITH AND CREDIT” CLAUSE?

1 Throughout this application, the reference to petitioner, FBT Banc-

shares, Inc., will be “FBT’’. Compliance with Rule 29.1 is found at page

2, infra.

QUESTIONS PRESENTED FOR REVIEW (continued)

QUESTION NUMBER 3

BY ENFORCING, (SUB SILENTIO), AN AD-

MINISTRATIVE PLAN UNDER STATE LAW WHICH

ELIMINATED, WITHOUT CONSIDERATION, NINE

YEARS OF JUDICIAL INTEREST, DID THE PENN-

SYLVANIA SUPREME COURT DEPRIVE FBT OF

RIGHTS GUARANTEED BY ARTICLE 1, §10 OF THE

UNITED STATES CONSTITUTION, KNOWN AS THE

“IMPAIRMENT OF CONTRACTS” CLAUSE?

QUESTION NUMBER 4

BY DENYING THE DIRECT APPEAL OF FBT

WITHOUT REASONS, DID THE PENNSYLVANIA

SUPREME COURT VIOLATE OTHER CONSTITU-

TIONAL RIGHTS GUARANTEED BY THE 14TH

AMENDMENT TO THE UNITED STATES CONSTITU-

TION, INCLUDING (a) THE GUARANTY AGAINST

RETROACTIVE APPLICATION OF SUBSTANTIVE

LAW, (b) THE ENFORCEMENT OF STATE LAW

WHICH (AS TO FBT) WAS “UNCONSTITUTIONAL

AS APPLIED” AND (c) THE ARBITRARY FAILURE

TO APPLY CONTROLLING PENNSYLVANIA LAW?

TABLE OF CONTENTS

Page (s)

Questions Presented for Review..................... i

Table of Contents................ Few tea cic i iii

oa xo us bebe koe ee hha iv

Opinions Delivered in the Case by Other Courts ..... l

Statement of Jurisdiction.............. Aes ere l

Constitutional Guarantees Applicable to this Case... . .2

Ee 2

I was kere veaeavees eee

A. Course of Proceedings and Disposition in

a gh eke vas Woe nen ae

8 5

Argument and Law............... ORI one ame 8

EE eit pa ee 19

RN rr a a A-1

re eo daw cae y S 4 wb we 0 A-4

IE EE IT Sa EE A-6

ee serge.) se acs ows a's ov A-14

a ss bw bce se bo a0 ba 0s A-58

ENS ES ee A-60

EE A-66

TABLE OF AUTHORITIES

CASES Page(s)

Allied Structural Steel Co. v. Spannaus, 438 U.S.

234, 98 S.Ct. 2716, 57 L.Ed.2d 727 (1978) ......... 14

American Iron & Steel Manufacturing Co. v.

Seaboard Air Line Railway, 233 U.S. 261, 34

S.Ct. 602, 58 L.Ed. 949 (1914) ............... passim

Association of PA. State College v. State System,

vig © §& E-. a. | Seer reer re 16

Barium Steel v. Wiley, 379 Pa. 38, 108 A.2d 336

BS. 5 ss sk kh oe es re BAe ee ee coe 14

Board of Governors v. First Linchwood Corp., 439

U.S. 234, 58 L.Ed.2d 484, 95 S.Ct. 505 (1978)....... 2

Fountleroy v. Lum, 210 U.S. 230, 28 S.Ct. 641, 52

gO eer eer res eee re ree 12

Foster v. The Mutual Fire, Marine and Inland In-

surance Company, 531 Pa.598, 614 A.2d 1086

(1992) cert. denied sub nomine Allstate Insurance

Company v. Maleski, 506 U.S. , 113 S.Ct.

1047, 122 L.Ed 2d 356 (1993) and cert. denied sub

nomine Republic Insurance Group v. Maleski, 506

U.S. ___, 113 S.Ct. 1066, 122 L.Ed 2d 371

SPR ereeperapete sh etree ee gmetntnrtys £ ayer es passim

Homebuilding and Loan v. Blaisdell, 290 U.S. 398

54 S.Ct 231, 78 L.EG.418 (11906 ..........64.5... 15

TABLE OF AUTHORITIES (continued)

CASES Page(s)

In Re Sublett, 895 F.2d 1381 (llth Cir.

DEN sc Ravine hace ae ea ee 11

In Re D. C. Sullivan & Co., Inc., 929 F.2d (1st Cir.

WE Sk Gc yas Ue haces oo eo Ge eee 11

In Re: Upset Sales Tax Claim Bureau of Burks, 479

Pm Fe 6 ere ee ee 10

Mathews v. Eldridge, 96 S.Ct. 893, 424 U.S. 319, 47

Same UP CE hs oo ho ke a oe ek oe ee ay

Morris v. Jones, 329 U.S. 545, 67 S.Ct. 451, 91 L.Ed.

Se es oa Vo hehe pee es .. . passim

Ohio Association, etc. v. PERS, 585 N.E.2d 597

eR ie a at 16

Roche v. McDonald, 275 U.S. 449, 48 S.Ct. 142, 77

Re SP EE oc a es ee ae a ae 12

Sanders v. Loomis Armored, Inc., 614 A.2d 320

PPS GE oe gy ieee ee 16

Ticonic Nat. Bank v. Sprague, 303 U.S. 406, 58 S.Ct.

612, 82 L.Ed 926 (1938)

TABLE OF AUTHORITIES (continued)

CASES Page(s)

Vanston Bondholders Protective Com. v. Green, 329

U.S. 156, 67 S.Ct. 237, 91 L.Ed 162 (1946) ........ 10

Verner v. Shaffer, 500 A.2d 479 (Pa.Super.1985)...... 14

Yick Wo v. Hopkins, 188 U.S. 356, 6 S.Ct. 1064, 30

i Ee aa 4,17

CONSTITUTIONAL CLAUSES

Full Faith and Credit Clause, Article 4 §1, United

TN er Passim

Impairment of Contracts Clause, Article 1, §10,

United States Constitution ................. Passim

Due Process Clause, 14th Amendment, United

States Constitution ........................ Passim

OPINIONS DELIVERED IN THE CASE

BY OTHER COURTS

1. On November 10, 1993, the Commonwealth Court

of Pennsylvania rendered an unreported memorandum opi-

nion, a full copy of which is included as Appendix C, A-6 -

A-13.

2. On December 13, 1994, on direct appeal from the

Commonwealth Court to the Pennsylvania Supreme Court,

the Pennsylvania Supreme Court entered the following

unreported Per Curiam Order as to FBT’s appeal, Appen-

dix E, A-58 - A-59:

“Order of the Commonwealth Court affirmed.”

STATEMENT OF JURISDICTION

Petitioner seeks review by way of a Petition for Writ

of Certiorari to a judgment rendered, in a direct appeal, by

the Supreme Court of Pennsylvania, M.D. Appeal Docket,

1993, on December 13, 1994.

Jurisdiction of this Honorable Court is invoked

under the provisions of Title 28 U.S.C. § 1257 and Rule

10.1(c) of the Rules of the Supreme Court of the United

States, which provides for the granting of a Writ of Cer-

tiorari, inter alia, when:

"'...A state court...has decided a federal question

in a way that conflicts with applicable decisions

of [the Supreme] Court.”’

CONSTITUTIONAL GUARANTEES APPLICABLE

TO THIS CASE

(1) The Full Faith and Credit Clause, Article 4 §1

of the United States Constitution.

(2) The Impairment of Contracts Clause, Article 1

§10 of the United States Constitution.

(3) The Due Process Clause, 14th Amendment to

the United States Constitution.

COMPLIANCE WITH RULE 29.1

FBT Bancshares, Inc. is a Louisiana Corporation

formed pursuant to the Bank Holding Company Act of

1956. It owned 100% of Fidelity Bank and Trust Company.

Because of the losses which led to the judgment of the

Louisiana Courts, Federal regulators issued a capital call

which FBT could not meet”. Accordingly, Fidelity was

merged into Bank of Louisiana on April 30, 1988. FBT has

no subsidiaries or assets except the Louisiana Judgment

sought to be given Full Faith and Credit herein.

STATEMENT OF THE CASE

A. Course of Proceedings and Disposition in

Courts Below

On June 28, 1990, the 22nd Judicial District Court

for the Parish of St. Tammany, State of Louisiana, entered

2 A Bank Holding Company is required to be a “...source of strength..."

to its bank. Board of Governors v. First Linchwood Corp., 439 U.S. 234,

58 L.Ed.2d 484, 95 S.Ct. 505 (1978).

Judgment in favor of FBT and against Mutual Fire,

Marine and Inland Insurance Company, Inc. (‘‘Mutual’’)

‘in the full and true sum of ONE MILLION DOLLARS

together with legal interest from date of judicial demand

until paid and for all costs...’’ (Appendix A @ A-2). After

the judgment was affirmed by the First Circuit Court of

Appeal for the State of Louisiana on December 27, 1991,

Mutual filed for supervisory writs to the Louisiana State

Supreme Court, which denied certiorari on September 4,

1992. (Appendix B @ A-4)

On February 8, 1993, FBT filed a motion for sum-

mary judgment with the Commonwealth Court of

Pennsylvania®, seeking recognition and enforcement of its

Louisiana Judgment. On November 10, 1993, the Com-

monwealth Court for the State of Pennsylvania granted

FBT’s motion for summary judgment in part, recognizing

FBT’s entitlement to One Million Dollars, but DENIED

FBT’s entitlement to interest under the Louisiana Judg-

ment, notwithstanding this Court’s decisions in American

Iron & Steel Manufacturing v. Seaboard Air Line Railway,

233 U.S. 261, 34 S.Ct. 502, 58 L.Ed. 949 (1914), and Morris

v. Jones, 329 U.S. 545, 67 S.Ct. 451, 91 L.Ed. 488 (1947).

Pursuant to the provisions of Section 723 of the

Pennsylvania Judicial Code, 42 Pa.C.S. §723, FBT took a

direct appeal to the Pennsylvania Supreme Court, raising,

inter alia, five federal questions:

3 Because Mutual was placed in Rehabilitation by the Commissioner of

Insurance on December 4, 1986, the Commonwealth Court of Penn-

sylvania, normally an appellate Court, had original jurisdiction with ap-

peals being taken directly to the Pennsylvania Supreme Court. See,

Foster v. The Mutual Fire, Marine and Inland Insurance Company, 531

Pa.598, 614 A.2d 1086 (1992) cert. denied sub nomine Allstate Insurance

Company v. Maleski, 560 U.S. ____, 113 S.Ct. 1047, 122 L.Ed 2d 356

(1993) and cert. denied sub nomine Republic Insurance Group v.

Maleski, 560 U.S. ___, 113 S.Ct. 1066, 122 L.Ed 2d 371 (1993).

(a) Violation of FBT’s rights under The Full Faith

and Credit Clause, Article 4 §1, United States Constitu-

tion; (Appendix D @ A-24, A-31, A-50)

(b) Violation of FBT’s rights under The Impairment

of Contracts Clause, Article 1 §10, United States Constitu-

tion; (Appendix D @ A-23, A-47)

Clause, Amendment 14, United States Constitution; (Ap-

pendix D @ A-23, A-44)

(d) Violation of FBT’s rights against The Retroactive

Application of Substantive Law, Amendment 14, United

States Constitution; (Appendix D @ A-24, A-51) and

(e) Violation of FBT’s rights against the imposition

of state law which is, as to FBT, was “...unconstitutional

as applied...”, Yick Wo v. Hopkins, 188 U.S. 356, 6 S.Ct.

1064, 30 L.Ed 220 (1886), and its progeny. (Appendix D @

A-23, A-50)

After all issues were briefed*, the Supreme Court rul-

ed on FBT’s direct appeal without hearing argument and

without giving reasons for its decision. On December 13,

1994, the following Per Curiam Order was entered:

“Order of the Commonwealth Court affirmed.’’

From the Judgment of the Pennsylvania Supreme

Court FBT respectfully files this application for a Writ of

Certiorari.

4 In addition to the five federal issues set forth above, FBT raised

serious issues under state law (Appendix D @ A-22, A-32-A-41). For Pur-

poses of this writ application, however, FBT only addresses violations

of rights, privileges and immunities guaranteed by the United States

Constitution.

B. Statement of Facts.

FBT is a Louisiana Bank holding company which

owned only one asset, The Fidelity Bank and Trust Com-

pany (‘‘Fidelity’’). From 1982 through 1984, Fidelity’s

president, Charles Faler, violated his fiduciary duty to the

bank and to FBT by making loans without Board approval

or in violation of Board approval, resulting in losses of

$1,730,297.61.

FBT’s sued Mutual under a Directors and Officers

Liability Policy on August 19, 1986. On September 13,

1986, the Commissioner of Insurance for the State of Penn-

sylvania issued a suspension order as to Mutual, and on

December 4, 1986, appointed a rehabilitator. Notwithstan-

ding the Pennsylvania rehabilitation proceedings, Mutual

actively and vigorously defended against FBT’s claim in

the Louisiana courts. Mutual neither requested a stay nor

relief from the imposition of judicial or ‘‘legal’’ interest re

quired by Louisiana law.

In the interim, the FDIC called for a capital infusion

which FBT could not meet, resulting in Fidelity’s merger

into Bank of Louisiana in 1988. FBT has no assets other

than the Louisiana Judgment which Pennsylvania has

refused to fully recognize.

On June 11, 1990, the trial court in the Louisiana pro-

ceedings heard motions and cross-motions for summary

judgment, based on stipulated and/or undisputed facts.

There was no dispute that damages exceeded the policy

limits of $1 Million. The legal dispute was over coverage.

On June 28, 1990, the District Court ruled in favor of FBT

and against Mutual. A subsequent appeal to the First Cir-

cuit Court of Appeal was unsuccessful, as was Mutual's ap-

plication for writs to the Louisiana State Supreme Court,

which denied writs on September 4, 1992. At that point,

the Louisiana judgment became final.

On August 21, 1992, the Pennsylvania Supreme

Court decided the matter of Foster v. Mutual, supra, confir-

ming a modified Plan of Rehabilitation. In so ruling, the

Pennsylvania Supreme Court held that the Plan did not

violate Article 1 §10 of the United States Constitution by

impairing contract rights because any actual impairments

to a policyholder were deemed to be “‘insubstantial’’.

Foster, supra, at 1094. Additionally, the Pennsylvania

Supreme Court dealt with a judgment in favor of Pepsi-

Cola Bottling Company, and affirmed the rehabilitator’s

right to limit or deny judicial interest®, citing American

Iron & Steel v. Seaboard, supra, at footnote 13. The Penn-

sylvania Supreme Court reasoned that the denial of in-

terest was nota violation of The Full Faith and Credit

Clause of the United States Constitution because interest

is ultimately due when all claims of equal dignity are paid

in full. Pursuant to the Plan itself, its effect would not take

place until an order of approval was final. Two creditors,

All-State Insurance Company and Republic Insurance

Group applied to this Court for writs, both of which were

denied on January 19, 1993. 113 S.Ct. @ 1047 and 1066.

On October 15, 1992, Mutual attempted to avail

itself of the Plan of Rehabilitation, which allowed Mutual

to “‘adjust’”’ claims by issuing so-called ‘“‘Notices of Deter-

mination’’. After having lost in the Louisiana courts at al/

three levels, Mutual notified FBT that it ““valued’’ FBT’s

claim at $350,000. FBT objected on the grounds that all

issues between FBT and Mutual were res judicata and on

the grounds that the Pennsylvania Commonwelath Court

was required to give full faith and credit to the Louisiana

Judgment. (Appendix H @ A-70)

5 The Plan did not “prohibit” the payment of interest. See n. 22, Appen-

dix D @ A-33 and n. 45, Appendix D @ A-54.

On February 8, 1993, FBT filed a motion for sum-

mary judgment with the Commonwealth Court, ultimately

resulting in that Court’s November 10, 1993 decision, fin-

ding that the United States Supreme Court’s ruling in Mor

ris v. Jones, supra, was controlling, but that the payment

of interest awarded by the Louisiana Judgment was not

binding upon that Pennsylvania Court.

While FBT’s direct appeal to the Pennsylvania

Supreme Court was pending, Mutual announced that it had

sufficient funds to pay all Class 4 or ‘‘policyholder’”’

claims®:

“‘In December, 1994, the Rehabilitator declared

that sufficient collections had been made to pay

all adjusted Class 4 claims in full and to adequate-

ly reserve for unadjusted Class 4 claims pursuant

to Section VI of the Plan.”’

In a subsequent declaration regarding the success of

the rehabilitation, Rehabilitator Alexander Bratic

predicted that Mutual ‘‘... would emerge as a functioning in-

surance company...”” fully rehabilitated. (Appendix G @

A-68)

The Pennsylvania Supreme Court, (a) without hear-

ing oral argument, (b) without considering the success of

the rehabilitation, and (c) without giving any reasons, af-

firmed the Commonwealth Court’s November 10, 1993

decision in six words:

“Order of the Commonwealth Court affirmed.”’

FBT waited almost one decade to be paid’. Now that

6 44 of Appendix F @ A-62. FBT’s claim is a Class 4 claim.

7 FBT had to file a separate motion to require Mutual to pay the prin-

cipal amount of $1 Million. On November 23, 1994, the Commonwealth

Court so ordered and payment was received by FBT on January 6, 1995.

all claims of ‘“‘equal dignity’’ have been paid (or will be

paid), FBT is constitutionally entitled to interest on the

money which Mutual has used since 1986. For all intents

and purposes, FBT has had no “meaningful appeal” and

respectfully requests that this Court grant certiorari to

protect FBT’s rights, privileges and immunities as

guaranteed by the United States Constitution and as pro-

vided by 28 U.S.C. §1257(a).

ARGUMENT AND LAW

QUESTION NUMBER 1

nor secaiaiels. taints

DOES THE RULING OF THE PENN-

SYLVANIA SUPREME COURT, DENYING

FBT’S DIRECT APPEAL WITHOUT

REASONS, CONFLICT WITH THIS COURT’S

DECISION IN AMERICAN IRON & STEEL

MANUFACTURING v. SEABOARD AIR

LINE RAILWAY, 233 U.S. 261, 34 S.Ct. 502, 58

L.Ed 949 (1914) AND ITS PROGENY?

Because the Pennsylvania Supreme Court handed

down no reasons, we must conclude that it rejected FBT’s

argument that, at the very least, FBT was owed interest on

its judgment when all Class 4 claims were paid. This argu-

ment was based on footnote 13 of the Pennsylvania

Supreme Court’s decision in Foster v. Mutual, supra, which

specifically relied upon this Court’s ruling in American

Iron & Steel v. Seaboard, supra.

In that case, this Court held that in a receivership,

where the assets of the insolvent are in custodia legis, the

payment of interest would be delayed, but never

eliminated, stating, at 504:

‘,..in case funds are not sufficient to pay claims of

equal dignity, the distribution is made only on the

basis of the principal of the debt. But that rule did

not prevent the running of interest during the

receivership; and if, as a result of good fortune or

good management, the estate proves sufficient to

discharge the claims in full, interest as well as

principal should be paid.”

This makes it clear that interest coes accrue. The

question lett is what are ‘claims of equal dignity?”’ In that

regard, this Court held that it is not necessary that claims

of ‘‘lower rank”’ be paid in full in order for a higher ranking

claim to receive the interest due, stating at 34 S.Ct. 505:

‘The principle is not limited to cases of technical

bankruptcy, where the assets ultimately prove

sufficient to pay all debts in full, but principal as

well as interest, accruing during a receivership, is

paid on debts of the highest dignity, even though

what remains is not sufficient to pay claims of a

lower rank in full.”’ [Citations omitted]

In answering affirmatively to the question which

was certified by the Fourth Circuit Court of Apeals®, this

court concluded that the payment of interest was “‘...but an

incident of that debt...’ Jd. @ 505. In the case at bar, the

judicial interest is also ‘‘...but an incident of the

judgment...’

Cases decided by this Court subsequent to American

Iron & Steel consistently adopt the proposition that an

obligation to pay interest is ‘‘...not destroyed by insolven-

cy...’ Ticonic Nat. Bank v. Sprague, 303 U.S. 406, 58 S.Ct.

8 The question certified was: ‘‘Is interest recoverable on such a claim (a

sale of supplies on 30 days credit) for the period of the receivership? * Id.

@ 503.

612 (1938). In that case, this Court also held that a

lienholder was entitled to have his lien satisfied ‘‘...not only

for the principal but also for the interest accruing up to the

date of payment, though his debtor has gone into

bankruptcy (citations omitted).’’ Jd. at 615.

In the case at bar, FBT reduced its claim to a judg-

ment, which constitutes a lien upon all of the property of

the debtor, including equitable interests and beneficial in-

terests. 42 Pa. C.S.A. §§ 1722(h), 2737(3), and 4303 (a)(h).

See, In Re: Upset Sales Tax Claim Bureau of Burks, 479

A.2d 940 (Pa. S.Ct. 1984). Pursuant to this Court’s holding

in Ticonic Nat. Bank, supra, FBT is entitled to look to the

assets of Mutual for both principal and interest. This is

particularly true where the rehabilitation has been suc-

cessful and all Class 4 claims have been (or will be) paid.

In Vanston Bondholders Protective Com. v. Green,

329 U.S. 156, 67 S.Ct. 237, 91 L.Ed 162 (1946), this Court

held that “‘...each decision on allowance of interest in

bankruptcy, receivership and reorganization has been a

balance of equities between...creditors and debtor...’’ Id. @

241. Here, we alerted the Pennsylvania Supreme Court of

the fact that the rehabilitator had in excess of $183 Million

invested and earning interest9. Notwithstanding the glut

of cash which Mutual has on hand and notwithstanding

FBT’s impecunious state, the Pennsylvania Supreme

Court ‘“‘balanced”’ no equities.

Subsequent to Vanston, supra, courts have con-

sistently recognized the ‘‘solvency exception’”’ to any rule

9 See, footnote 41 of FBT’s brief to Pennsylvania Supreme Court, poin-

ting out that by the time Mutual paid FBT the $1 Million in principal,

Mutual had earned $1.2 Million on the money which belonged to FBT.

regarding the suspension (but not the elimination) of in-

terest during insolvency proceedings. In Re Sublett, 895

F.2d 1381 (11th Cir. 1990), citing American Iron & Steel, @

1386 and In Re D.C. Sullivan & Co., Inc., 929 F.2d 1 (ist

Cir. 1991), citing American Iron & Steel @3.

Because the Pennsylvania Supreme Court ruling

leaves FBT no right to be paid interest when all claims

‘‘...0f equal dignity...’’ have been paid, or when Mutual

emerges from this rehabilitation as a “...functioning in-

surance company...’’, the judgment below is in conflict with

this Court’s decisions in American Iron & Steel and its

progeny.

QUESTION NUMBER 2

DOES THE RULING OF THE PENN-

SYLVANIA SUPREME COURT, REFUSING

(SUB SILENTIO) TO GIVE FULL RECOGNI-

TION TO A FINAL LOUISIANA JUDGMENT,

CONFLICT WITH THIS COURT’S DECISION

IN MORRIS v. JONES, 329 U.S. 545, 67 S.Ct.

451, 91 L.Ed 488 (1947) AND DEPRIVE FBT OF

RIGHTS GUARANTEED BY ARTICLE 4 §1

OF THE UNITED STATES CONSTITUTION,

KNOWN AS THE “FULL FAITH AND

CREDIT” CLAUSE?

The Commonwealth Court properly determined that

this Court’s decision in Morris v. Jones, supra, was binding

and that the Full Faith and Credit Clause of the United

States Constitution required Pennsylvania to recognize the

Louisiana Judgment. (Appendix C @ A-9). The Com-

monwealth Court then ‘‘split’’ the judgment as to interest,

a form of relief which Mutual did not request in the Loui-

siana Courts. In Morris v. Jones, supra, this Court held

that defenses to that judgment were required to be raised

in the underlying case and that the underlying judgment

was res judicata as to any defenses “‘...which could have

been raised...’ Jd. @ 552. Mutual could have, but did not

, raise any alleged prohibition against the award of interest

in the Louisiana Courts. When the judgment was rendered

and included the language:

‘‘..together with legal interest from date of

judicial demand until paid...”’

Mutual could have objected, but did not! The crux of rul-

ings of the Commonwealth and Supreme Courts of Penn-

sylvania is that enforcement of that aspect of the Louisiana

Judgment was “‘incongruous’”’ with Pennsylvania law as in-

terpreted by the Pennsylvania Supreme Court in Foster v.

Mutual, supra. This Court, however, has often held that a

judgment of one state must be enforced in another state

even though the judgment would not have been granted in

the second state because it was “...repugnant to its own

statutes.’’ Morris v. Jones, supra, @ 551; Roche v.

McDonald, 275 U.S. 449, 48 S.Ct. 142, 77 L.Ed. 365 (1927)

@ 454, citing Fauntleroy v. Lum, 210 U.S. 230, 28 S.Ct.

641, 52 L.Ed 1039 (1908).

FBT is protected (a) by Article 4 §1 of the United

States Constitution, (b) by the doctrine of res judicata, and

from ha‘ving to relitigate its entitlement to interest. Morris

v. Jones, supra, did not give the Pennsylvania Com-

monwealth Court or the Pennsylvania Supreme Court the

right to ‘“‘split’’ FBT’s judgment because the payment of

9 These state-law issues were fully briefed to the Pennsylvania Supreme

Court @ Appendix D, A-32 - A-41. The rulings below constitute an ar-

bitrary failure to apply controlling state law.

interest may have been repugnant to or “‘incongruous’”’

with Pennsylvania law. The Louisiana judgment is entitled

to full faith and credit, not 45% faith and credit.!!

This Court has always been the ultimate guardian of

the Full Faith and Credit Clause of the United States Con-

stitution and Certiorari should be granted.

QUESTION NUMBER 3

BY ENFORCING, (SUB SILENTIO), AN

ADMINISTRATIVE PLAN UNDER STATE

LAW WHICH ELIMINATED, WITHOUT

CONSIDERATION, NINE YEARS’ OF

JUDICIAL INTEREST, DID THE PENN-

SYLVANIA SUPREME COURT DEPRIVE

FBT OF RIGHTS GUARANTEED BY ARTI-

CLE 1, §10 OF THE UNITED STATES CON-

STITUTION, KNOWN AS THE “IMPAIR-

MENT OF CONTRACTS” CLAUSE?

Article 1 of the United States Constitution, Section

10 provides that “‘No State shall...pass any...law impairing

the obligation of contracts..”” This Court has consistently

interpreted that clause as prohibiting ‘‘substantial’’ im-

pairment of contractual obligations and has held that ‘‘The

severity of an impairment of contractual obligations can be

measured by the factors that reflect ‘‘...the high value the

11 The Louisiana J udgment is worth approximately $2.2 Million. The $1

Million which Mutual has paid equals 45% of the total amount due.

Framers (of the United States Constitution) placed on the

protection of private contracts...’ Allied Structural Steel

Co. v. Spannaus, 438 U.S. 234, 98 S.Ct. 2716 (1978), 57

L.Ed.2d 727.

Originally, the Pennsylvania Supreme Court held

that the Plan was not unconstitutional on its face, finding

that any impairments were ‘“‘insubstantial’’. Foster v.

Mutual, supra, at footnote 4. Moreover, the Pennsylvania

Supreme Court’s rationale in finding that the Plan was not

an unconstitutional impairment of contract rights was bas-

ed, in part, on the fact that a typical claimant would receive

‘“... proportionate periodic payments...’ Foster, @ 1090.

Under Pennsylvania law, interest is awarded as compensa-

tion for “‘...the use or detention of a plaintiff's property by

the defendant...’’, Verner v. Shaffer, 500 A.2d 479

(Pa.Super.1985), citing Barium Steel v. Wiley, 379 Pa. 38,

108 A.2d 336 (1954).

Mutual, however, made no periodic payments to

FBT and FBT was compelled to file a separate motion to

require payment of the principal amount due under the

Louisiana Judgment. Thus, FBT has received no quid pro

quo which would justify, constitutionally, an impairment

which measures approximately $1.2 Million.

The Pennsylvania Supreme Court did not measure

the impact of the impairment upon FBT. The Com-

monwealth Court equated FBT to Pepsi Cola, notwithstan-

ding that FBT lost the Fidelity Bank & Trust Company in

the process and has no assets other than this litigation!?.

12 On July 3, 1990, FBT filed a hardship application which it withdrew

after it filed the motion for summary judgment granted by the Com-

monwealth Court November 10, 1993.

More importantly, neither the Commonwealth Court

nor the Pennsylvania Supreme Court measured the severi-

ty of the impairment in view of Mutual’s present financial

condition. The resolution of issues under the Contract

Clause is not a simple task. As this Court held in

Homebuilding & Loan v. Blaisdell, 290 U.S. 398, 54 S. Ct

231, 78 L.Ed.413 (1934), regarded as the leading case in the

modern era of Contract Clause interpretation, ‘‘...Every

case must be determined upon its own circumstances...’’ Jd.

@ 430.

FBT is no Pepsico. The impairment is ‘‘substantial”’

to FBT, and Certiorari should be granted.

QUESTION NUMBER 4

BY DENYING THE DIRECT APPEAL

OF FBT WITHOUT REASONS, DID THE

PENNSYLVANIA SUPREME COURT

VIOLATE OTHER CONSTITUTIONAL

RIGHTS GUARANTEED BY THE 14TH

AMENDMENT TO THE UNITED STATES

CONSTITUTION, INCLUDING (a) THE

GUARANTY AGAINST RETROACTIVE AP-

PLICATION OF SUBSTANTIVE LAW, (b)

THE ENFORCEMENT OF STATE LAW

WHICH (AS TO FBT) WAS “UNCONSTITU-

TIONAL AS APPLIED” AND (c) THE AR-

BITRARY FAILURE TO APPLY CONTROLL-

ING PENNSYLVANIA LAW?

(a) Retroactive Application of Substantive Law. Sec-

tion 1 (12) of the plan defines the effective date of the plan

as “‘...The date on which this Plan is approved by final

Order...”” At best, the ‘‘final order” approving this plan did

not occur until August 21, 1992, the date Foster, supra,

was decided. That decision was the subject of two writ ap-

plications denied by this Court on January 19, 1993. By

this time, the FBT judgment had long reached finality. The

decision of the First Circuit Court of Appeals for the State

of Louisiana, denying Mutual’s request for reconsideration

was handed down March 13, 1992. That was Mutual’s last

right of appeal. The denial of certiorari by the Supreme

Court of Louisiana made the FBT judgment final as of

March 13, 1992. FBT’s judicial interest was a vested pro-

perty right before the effective date of the Plan.

The imposition of an administrative plan, effective

on a date substantially later than the date of FBT’s

vesting, amounts to a prohibited ‘‘retroactive’’ application

of law. This concept is fundamental. In Ohio Association,

etc. v. PERS, 585 N.E.2d 597 (Ohio Com.P1.,1990) that

court held, at 601:

‘“‘An administrative rule, having the force and

operation of a statute, which extinguishes or im-

pairs a vested legal relationship, creates a new

obligation, imposes a new duty or attaches a new

disability to previous transactions constitutes a

retroactive enactment and results in a depriva-

tion of property without due process of law.’’ See

also, Association of PA. State College v. State

System, 479 A.2d 962 (Pa. 1984).

The same analysis is applicable here. In Sanders v.

Loomis Armored, Inc., 614 A.2d 320 (Pa.Super. 1992), the

Pennsylvania Superior Court held, at 322:

‘Laws which are applied retroactively offend the

due process clause if, ‘balancing the interests of

both parties, such application would be

unreasonable.’ Jd. Retroactive laws which have

been deemed reasonable are those which ‘impair

no contract and disturb no vested right, but only

[vary] remedies, cure defects in proceedings other-

wise fair, and do not vary existing obligations

contrary to their situation when entered into and

prosecuted.’ (Citations omitted).

In the case at bar, the denia! of interest based on an

administrative plan which did not become “‘effective’’ until

after FBT was vested with a property right constitutes a

retroactive application of substantive law prohibited by

the Due Process Clause of the United States Constitution.

(b) “Unconstitutional as Applied”. While the deci-

sivn of the Commonwealth Court seemingly adopted the

Pennsylvania Supreme Court’s determination that the

Plan was not unconstitutional on its face, to the extent that

FBT is deprived of approximately $1.2 Million in interest,

the consequences of the plan are not “insubstantial’’ and

the plan, although constitutional on its face, becomes ‘‘un-

constitutional as applied’. Yick Wo v. Hopkins, 188 U.S.

356, 6 S.Ct. 1064, 30 L.Ed. 220 (1886) and its considerable

progeny.

our brief to the Pennsylvania Supreme Court we cited con-

trolling state law regarding the doctrines of Preclusion and

Merger, which hold that interest is merged into a judgment

and that ‘‘splitting” of interest from principal in a judg-

ment is prohibited. The administrative plan imposed upon

FBT to deprive it of interest ignores controlling Penn-

sylvania and Louisiana law and thereby violates due pro-

cess requirements. This Court, in Mathews v. Eldridge, 96

S.Ct. 893, 424 U.S. 319, 47 L.Ed.2d 18 (1976), has noted

that due process “‘...is not a technical conception with a fix-

ed content unrelated to time, place and circumstances...”

and that due process “...calls for such procedural protec-

tion as the particular situation demands.” Jd. @ 902. Deal-

ing with an administrative process, as here, this Court

defined the scope of inquiry as follows:

‘Accordingly, resolution of the issue whether the

administrative procedures provided here are con-

stitutionally sufficient requires analysis of the

governmental and private interests that are af-

fected.” [Emphasis Ours]

FBT’s “private interest’’ is clear. FBT, which began

in a hardship status, can hardly afford the loss of interest

due. The original claim was for $1,730,997 for losses incur-

red in 1984 and 1985. FBT will never be made whole

because the policy it purchased had a $1 Million limit. The

Commonwealth Court’s judgment, denying FBT interest,

means that FBT will recover less than 26.3% of the present

value of its actual losses. Thus, the ‘‘private interest”’ af-

fected here is hardly “‘insubstantial.”’

Mutual’s stake in this claim, on the other hand, is de

minimis. Liquid assets approach $200 Million. ‘Settled

Losses Remaining to Distribute”’ are but $54 Million. It ap-

pears that Mutual is near full rehabilitation, if not already

rehabilitated. Thus, in comparing the “‘private interests”’

of FBT to the ‘‘governmental interests”’ of this rather well-

heeled rehabilitation, the denial of FB7"s vested property

rights is a denial of due process of law. Certiorari is war-

ranted on various constitutional grounds.

ES ee

CONCLUSION

The only reason the Pennsylvania Commonwealth

Court did not enforce the interest awarded by the Loui-

siana Courts is because Pepsico was denied interest. FBT

is hardly Pepsico and the impairment of FBT’s contract

rights is hardly ‘‘insubstantial’’.

The Pennsylvania Supreme Court did not fulfill its

duty to uphold the United States Constitution and in affir-

ming the Commonwealth Court’s order, without reasons,

denied FBT of rights, privileges and immunities

guaranteed by (a) the Full Faith and Credit Clause of the

United States Constitution, (b) the Impairment of Con-

tracts Clause of the United States Constitution, and (c) The

Due Process Clause, incorporated into the United States

Constitution by the 14th Amendment.

The Pennsylvania Supreme Court’s “ruling”’ is in

direct conflict with this Court’s decisions in American Iron

and Steel, supra, and Morris v. Jones, supra, and other

Supreme Court authorities cited herein.

Pursuant to Title 28, U.S.C. §1257 and Rule 10.1(c)

of the Rules of this Court, Certiorari should be granted.

Respectfully submitted:

HENRY L. KLEIN, ESQ.

Bar No. 7440

844 Baronne Street

New Orleans, LA 70113-1103

(504) 586-9971

edi tel et ee ee

A-l

APPENDIX A

22ND JUDICIAL DISTRICT COURT

FOR THE PARISH OF ST. TAMMANY

STATE OF LOUISIANA

NO. 86-11418

DIVISION “A”

FBT BANCSHARES, INC., ET AL

VERSUS

MUTUAL FIRE, MARINE AND

INLAND INSURANCE COMPANY, ET AL

FILED: June 28, 1990 S/MARGARET M.McLAIN

DEPUTY CLERK

JUDGMENT

This matter came for hearing on June 11, 1990, on

Motions for Summary Judgment filed by all defendants

regarding coverage; a Cross-motion for Summary Judg-

ment filed by FBT Bancshares, Inc. regarding coverage;

and a Motion for Summary Judgment by FBT Bancshares,

Inc. regarding Liability and Quantum.

Based on the stipulations of the parties, based on the

A-2

concessions of the parties at oral argument and for the

reasons set forth in this Court’s written reasons for Judg-

ment, dated June 26, 1990, the following Judgment is

rendered:

IT IS ORDERED, ADJUDGED AND DECREED

that the Motion of FBT Bancshares, Inc for reformation of

the policy, deleting FBT Bancshares Inc. as a named in-

sured be and the same is hereby GRANTED, and that the

policy No. 100067, issued by Mutual Fire, Marine & Inland

Insurance Company to Fidelity Bank & Trust Company on

December 20, 1983, be and the same is hereby REFORM-

ED to exclude and delete FBT Bancshares, Inc. as a named

insured;

IT IS FURTHER ORDERED, ADJUDGED AND

DECREED that the Motion of FBT Bancshares, Inc. on

Liability and Quantum be and the same is hereby

GRANTED, and that there be Judgment herein in favor of

FBT Bancshares, Inc. and against Mutual Fire, Marine &

Inland Insurance Company in the full and true sum of ONE

MILLION ($1,000,000) DOLLARS, together with legal in-

terest from date or judicial demand until paid, and for all

costs.

IT IS FURTHER ORDERED, ADJUDGED AND

DECREED that the various motions of defendants for

Summary Judgment as to Fidelity Bank and Trust Com-

pany be and the same are hereby GRANTED, and that

there be Judgment herein, dismissing the First, Second,

Third and Fourth petitions of Fidelity Bank and Trust

Company, with prejudice, at Fidelity Bank and Trust Com-

pany’s cost.

A-3

IT IS FURTHER ORDERED, ADJUDGED AND

DECREED that the various motions for Summary Judg-

ment filed by defendants as to coverage be and the same

are hereby declared MOOT as a consequence of the Refor-

mation of the policy ordered herein.

IT IS FURTHER ORDERED, ADJUDGED AND

DECREED that the First, Second and Third petitions of

FBT Bancshares, Inc. against defendants Evanston In-

surance Company; Shand, Morahan and Company; Alex-

ander & Alexander, Inc.; and Vivien Insurance Company,

Inc., alleging a Cause of Action under LSA - R.S. 22:1262

be and the same are hereby DISMISSED, without pre-

judice, reserving unto FBT Bancshares, Inc. the right to re-

file, in the event that the Rehabilitator of Mutual Fire.

Marine & Inland Insurance Company does not render said

causes of action MOOT by virtue of payment.

JUDGMENT READ, RENDERED AND SIGNED.

in open Court, on the 28 day of June, 1990, at Covington,

Louisiana.

/s/ France W Watts

JUDGE

A TRUE COPY

/s/_ Margaret M. McLain

DY. CLERK 22nd JUD. DIST COURT

ST. TAMMANY PARISH, LA.

A-4

APPENDIX B

The Supreme Court of the State of Louisiana

FBT BANCSHARES INC. ETAL

VS. NO. 92-C - 1078

MUTUAL FIRE, MARINE AND INLAND

INSURANCE COMPANY ET AL

IN RE: Mutual Fire Marine, Inl.Ins.Co.; - Defendant(s);

Applying for Writ of Certiorari and, or Review; to the

Court of Appeal, First Circuit, Number CA90 1958; Parish

of St. Tammany Twenty-Second Judicial District Court

Div. ‘‘A’’ Number 86-11418

September 4, 1992

Denied.

A-5

LEMMON, COLE & HALL, JJ., would grant the writ.

Supreme Court of Louisiana

September 4, 1992

/s/ Franz J. LaBranche, Jr.

Clerk of Court

For the Court

A-6

APPENDIX C

IN THE COMMONWEALTH COURT

OF PENNSYLVANIA

GEORGE F. GRODE,

INSURANCE COMMIS-

SIONER OF THE COM-

MONWEALTH OF

PENNSYLVANIA

Plaintiff

V. : No. 3483 C.D. 1986

THE MUTUAL FIRE,

MARINE & INLAND IN-

SURANCE COMPANY,

Defendant

IN THE MATTER OF FBT

BANCSHARES’ CLAIM

MEMORANDUM OPINION BY

SENIOR JUDGE LORD

FILED: November 10, 1993

FBT Bancshares (FBT) has filed a Motion for Sum-

mary Judgment against the Rehabilitator of Mutual Fire,

Marine & Inland Insurance Company (Mutual Fire).

This case presents but one of many claims which are

part of the Rehabilitation of Mutual Fire. The history of

this rehabilitation is found in Grode v. The Mutual Fire,

A-7

Marine and Inland Insurance Company, 132 Pa. Com-

monwealth Ct. 196, 572 A.2d 798 (1990) which upheld with

modifications the fashioning of a rehabilitation plan that

was, in turn, affirmed, modified and remanded to this

Court in Foster v. The Mutual Fire, Marine and Inland In-

surance Company, 531 Pa. 598, 614 A.2d 1086 (1992) cert.

denied sub nom Allstate Insurance Company v. Maleski,

—_— U.S. __, 113 S. Ct. 1047, 122 L.Ed.2d 356 (1993) and

cert. denied sub nom Republic Insurance Group v. Maleski,

—_ U.S. ___, 113 S.Ct. 1066, 122 L.Ed.2d 371 (1993). The

original supervision order in this case was entered

September 13, 1986. In December 1986, the Insurance

Commissioner, after her appointment as rehabilitator, sub-

mitted a rehabilitation plan. Objections were heard and,

after many hearings and negotiations with various

creditors, an amended plan was submitted, which plan was,

after hearing and consideration of further objections,

modified by this Court and approved on J anuary 23, 1990.

This Court’s decision was affirmed as modified by the

Pennsylvania Supreme Court on August 21, 1992.

This action by FBT was filed August 19, 1986 in

Louisiana against Mutual Fire and others seeking a judg-

ment in the sum of $103,700.00. In essence, it sought

recovery on a policy issued by Mutual Fire which allegedly

insured FBT for the defalcations of its directors. On

September 15, 1986 (two days after the supervision order)

FBT’s claim was amended to increase that claim to more

than $1,700,000 against Mutual Fire. On June 20, 1988,

Mutual Fire answered the claim. On February 27, 1989,

FBT filed its proof of claim with the rehabilitator.

Thereafter, on June 20, 1990, the 22nd Judicial District

Court, Parish of Tammany, State of Louisiana, entered

judgment.!

Motions for a new trial were heard and denied, an ap-

peal was taken and, after argument on December 27, 1991,

the First Circuit Court of Appeals of Louisiana affirmed

the judgment and denied an application for rehearing on

March 3, 1992. Writs of Certiorari to the Louisiana

Supreme Court were requested. The writs were denied on

September 4, 1992.

Throughout the proceeding Mutual Fire was

represented by counsel and defended the action largely on

a question of non-coverage. Mutual Fire never sought a

stay of those proceedings based on the proposition that the

Commonwealth Insurance Commissioner’s suspension

order or the court-approved rehabilitation plan protected

Mutual Fire from suits and provided for a method of

disposing of all claims.

FBT in this Motion for Summary Judgment seeks to

obtain a judgment against Mutual Fire for $1,000,000 plus

interest. The amount of the policy involved is $1,000.000.

1 The motion for summary judgment unfortunately does not contain a

certified copy of such judgment. There is, however, a partly legible copy

of the judgment attached to FBT’s hardship petition which has subse-

quently been withdrawn. Rather than deny the motion for summary

judgment with leave to amend it, we verified the copy of the judgment

with the clerk of the Louisiana court. It reads in pertinent part: “IT IS

FURTHER ORDERED, ADJUDGED AND DECREED that the Mo-

tion of FBT Bancshares, Inc. on Liability and Quantum be and the same

is hereby GRANTED, and that there be Judgment herein in favor of

FBT Bancshares, Inc. and against Mutual Fire, Marine & Inland In-

surance Company in the full and true sum of ONE MILLION

DOLLARS together with legal interest from date of judicial demand un-

til paid and for all costs.”

A-9

Full Faith and Credit

This question is easily decided. The Supreme Court

of the United States has ruled on a similar situation in Mor.

ris v. Jones, 329 U.S. 545 (1947), rehearing denied, 330 U.S.

859 (1947).2 In that case, as in this case, the receivership

court in Illinois had before it a judgment acquired in an

out-of-state (Missouri) court against an Illinois insurance

company after a liquidator for the insurance company had

been appointed in Illinois. The Illinois Supreme Court held

that the liquidator was not required to recognize such a

judgment. Justice Douglas, writing for the United States

Supreme Court, reversed and held that the Full Faith and

Credit Clause required recognition of the judgment by the

Supreme Court of Illinois.

Mutual Fire argues at some length that the

automatic stay provisions of the Insurance Commis-

sioner’s supervision order and the rehabilitation order of

this Court should prevail, and that the Louisiana court

should have been bound by this Court’s orders, which were

issued before the entry of FBT’s original judgment on June

28, 1990. (The supervision order was entered on September

13, 1986; the proposed order of rehabilitation was filed on

December 4, 1986 and a plan of rehabilitation was approv-

ed on January 23, 1990.) We disagree with Mutual Fire’s

contention, for Morris v. Jones has answered that argu-

ment also.

¢ Curiously, although FBT makes a full faith and credit argument, it

does not cite this case.

3 U.S. CONST. Article IV, §1.

A-10 |

As to respondent’s contention that the II-

linois decree, of which petitioner had notice,

should have been given full faith and credit by the

Missouri court, only a word need be said. Roche i

v. McDonald, makes plain that the place to raise

that defense was in the Missouri proceedings.

And whatever might have been the ruling on the

question, the rights of the parties could have been

preserved by a resort to this Court, which is the

final arbiter of questions arising under the Full

Faith and Credit Clause. In any event the

Missouri Judgment is res judicata as to the

nature and amount of petitioner’s claim as

against all defenses which could have been raised.

Id. at 552 (citations omitted).

We hasten to add that the fact that we grant the mo-

tion for summary iudgment does not give FBT any priority

over any other creditors with respect to distribution other

than the priority accorded by the plan, for in Morris the

Supreme Court said:

We do not suggest that petitioner by proving his

claim in judgment form can gain a priority which

he would not have had if he had to relitigate his

claim in Illinois. And, as we have said, there is not

involved in this case any rule of distribution

which departs from the principle of parity as be-

tween Illinois creditors and creditors from other

States.

Id. at 554 (citations omitted).

A-11

We reach a different conclusion, however, with

respect to the interest claimed by FBT. As to this claim, we

are bound by a decision of the Supreme Court of Penn-

sylvania when it approved and modified the rehabilitation

plan. Foster. The Supreme Court had before it a federal

judgment in favor of Pepsi-Cola Bottling of Charlotte,

North Carolina, Inc., entered on September 4, 1986, one

week before the suspension of Mutual Fire’s business and

three months before the Commissioner filed the petition for

rehabilitation. The federal judgment in favor of Pepsi-Cola

awarded interest from May 21, 1986. Our Supreme Court

only allowed interest until the December 4, 1986 filing date

of the rehabilitation plan, the date the Insurance Commis-

sioner ‘‘invoked her equitable powers.” Id. at 629, 614 A.2d

at 1102.

In the instant case, FBT did not obtain its judgment

until more than 3 years after December 4, 1986 and under

no circumstances could we justify awarding interest on

such judgment when Pepsi-Cola was denied interest

beyond the date the Commissioner invoked her equitable

powers on a judgment which antedates suspension. Such a

result would be in direct conflict with the holding of the

Pennsylvania Supreme Court and would be unreasonable,

unsound and incongruous.4

With respect to FBT’s argument that the denial of

interest is a violation of the full faith and credit clause, we

quote the Supreme Court of Pennsylvania’s opinion in

4 As we have stated above, on February 27, 1989, FBT filed its proof

of claim. It is, therefore, at the very least a fair inference that FBT was

well aware of the rehabilitation and the Court’s consideration of the

plan. It could have appeared as did Pepsi-Cola to contest aspects of the

plan. It did not and we could hold that this failure bars FBT from raising

the question now.

A-12

Foster at footnote thirteen.

This result, we believe, properly satisfies

the results of applicable case law. Under the Full

Faith and Credit Clause, Article Four, Section

One of the United States Constitution, and an im-

plementing statute, 28 U.S.C. Section 1738, Pep-

si’s federal court judgment is to be accepted by

the states as conclusive proof of the rights ad-

judicated. See Stoll v. Gottlieb, 305 U.S. 165, 59

S.Ct. 134, 83 L.Ed. 104, reh’g denied, 305 U.S.

675, 59 S.Ct. 250, 83 L.Ed. 437 (1938). The result

of disallowing the payment of interest on Pepsi’s

judgment for any period beyond the date the Peti-

tion of Rehabilitation was filed is also consistent

with those decisions wherein courts have held

that interest accruing on claims after insolvency

proceedings have begun is payable only after the

principal on all claims have been paid in full.

American Iron and Steel Manufacturing Co. v.

Seaboard Air Line Railway, 233 U.S. 261, 266, 34

S.Ct. 502, 504, 58 L.Ed. 949 (1914); Commw. ex

rel. Woodside v. Seaboard Mutual Casualty Co.,

420 Pa. 237, 215 A.2d 673 (1966).

Id. at 629, n. 13.

We also conclude that a contrary result, allowing in-

terest on FBT’s judgment when it has been disallowed in

instances of other judgment creditors, would run afoul of

the dictates of Morris v. Jones (see, inter alia, citation p. 5,

supra), requiring parity between in-state creditors and

those of other states.

A-13

We will therefore enter judgment for FBT

for

$1,000,000 and deny any claim for interest.

/s/ Charles A. Lord

CHARLES A. LORD, Senior Judge

A-14

APPENDIX D

IN THE

SUPREME COURT OF PENNSYLVANIA

NO. 116 M.D. Appeal Docket 1993

CYNTHIA M. MALESKI, INSURANCE

COMMISSIONER OF THE

COMMONWEALTH OF PENNSYLVANIA

VERSUS

THE MUTUAL FIRE, MARINE AND INLAND

INSURANCE COMPANY

(IN REHABILITATION)

Appellee and Cross-Appellant

ADVERSUS

FBT BANCSHARES, INC.

Appellant and Cross-Appellee

BRIEF FOR APPELLANT-CROSS APPELLEE

Appeal from the Order dated November 10, 1993

of the Commonwealth Court

No. 3483 C.D. 198€

HENRY L. KLEIN, pro hac vice

and PERRY S. BECHTLE

Counsel for Appellant and Cross-Appellee,

FBT Bancshares, Inc.

LABRUM & DOAK

Suite 2900

1818 Market Street

Philadelphia, PA 19103

(215) 561-4400

A-15

page i

TABLE OF CONTENTS

PAGE NO(S):

TABLE OF AUTHORITIES ...................... ii

STATEMENT OF JURISDICTION ............._.. 1

STATEMENT OF QUESTIONS INVOLVED ...._._.. 2

STATEMENT OF THE CASE.................._.. 4

SUMMARY OF ARGUMENT..................... .

ARGUMENT AND LAW........................ 12

a 33

A-16

page ii

TABLE OF AUTHORITIES

PAGE NO(S):

American Iron & Steel Manufacturing v.

Seaboard Airline Railway, 233 U.S. 261,

34 S.Ct. 502, 58 L.Ed 949 (1917)................. 21

Anshutz v. J. Ray McDermott, 642 F.2d 94

es Ds ee o's 5 SOR cea hk eee 16

Altoona Vo-Tech Ed. Assoc. v. Altoona Vo-Tech

School, 559 A.2d 974 (Pa.Cmwlth.1989,

3 PS oo kb eee ee PO eee 14,25

Association of PA. State College v. State System,

op EF 2 BRR ee rrr 31

Barium Steel v. Wiley, 379 Pa. 38, 108 A.2d

OT err ec” Salm rer rere wake 27

Central Trust Co. v. Condon, 14 C.C.A. 314,

Se Shae FU, Bilin He Gs 8 0.5 08 6 6 052 verdes 22

Cloonan v. Thornburgh, 519 A.2d 1040

(Pa.Cmwlth. 1986, Crumlish, J.).................. 25

Coleman v. Coleman, 522 A.2d 1115 (Pa.Super.

Bs My ME ncaa a's 65 oO XE EO RAE AD EN Ow 19,25

Colorado River Water Assn. v. United States,

424 U.S. 800; 96 S.Ct. 1236;

47 L.Ed.2d 483 (1976)

Seeoeoeooonoeseeoeaeveeeoneeseeenene 6 @

eeee

A-17

TABLE OF AUTHORITIES (continued)

PAGE NO(S):

Commonwealth, Dept. of Environmental Resources

uv. Leechburg Mioning Co., 305 A.2d 764

(Pa.Cmwlth.1973, Bowman, P.J.) .............. 14,25

Deets v. Mountain Top Area Joint Sanitary

Authority, 479 A.2d 49 (Pa.Cmwlth.1984,

Sb SARS ors ia Dev ee 14,25

Feigh v. Glendale School District, 545 A.2d

447 (Pa.Cmwlth.1988, McPhail, Jr.) ..... Peek So 18,25

First Nat. Bank v. Ewing, 43 C.C.A. 150,

RM a 6h dik aad oc ain bok cathe l nec ck. 22

Foster v. Mutual Fire, Marine and Inland

Insurance Co., 531 Pa. 598, 614 A.2nd

ia Oh er es passim

page tii

Gold & Co., Inc. v. Northeast Theater Corp.

421 A.2d 1151 (Pa.Super.1979, Lipez, J.) ...... 20,26

Jost v. Phoenixville Area School Dist., 547 A.2d

830 (Pa.Cmwlth.1988, Kalish, J.) ............. 18,25

Judge v. Alientown and Sacred Heart Hospital,

506 Pa. 636, 487 A.2d 817 (1985) ............. ey

Kapil v. Association of Pennsylvania State

College and University Faculties,

504 Pa. 92, 99, 470 A.2d 482, 485 (1983) ........ .32

A-18

TABLE OF AUTHORITIES (continued)

PAGE NO(S):

Kessler v. Old Guard Mut. Ins. Co., 570 A.2d 569

(Pa.Super.1990, Wieand, J.) ............ 2,18,19,20,25

Knox v. Board of Probation & Parole, 588 A.2d 79

at 82 (Pa.Cmwlth.1991, Pellegrini, J.) .......... 18,25

Krenzelak v. Krenzelak, 503 Pa. at 382-83,

Oe Ae a Oe. os se beak ee ae 32

Martin v. Department of Environmental Resources,

548 A.2d 672 (Pa.Cmwlth, 1988, Smith, J.)...... 14,25

Mathews v. Eldridge, 96 S.Ct. 893, 424 U.S. 319,

My DG Tho 6 oo con 6abedsate eases 24

Matter of Howe, 913 F.2d 1141 (5th Cir.,1990) ....... 17

Nilsen v. City of Moss Point, 701 F.2d 556

tO ree rer ee 18

NOPSI v. New Orleans, 911 F.2d 993

To 5 re eee re ee re 15

Ohio Association, etc. v. PERS, 585 N.E.2d 597

pte Cet Oe Se os vctcs Sean kseeee eee 31

Ohio Casualty Group v. Argonaut Insurance

Company, 514 Pa. 430, 525 A.2d 1195 (1987) ....... 1

Pawk v. Department of Environmental Resources,

395 A.2d 692 (Pa.Cmwith.1978,

Ce, BD oo cc cccacccsecccevesibe eae 14,25

A-19

TABLE OF AUTHORITIES (continued)

PAGE NO(S):

Pearson v. City of Grand Blanc, 961 F.2d 1211

0s eee c ccc ccncc cence. 12

Richmond & I. Constr. Co. v. Richmond,

N.I. & B.R. Co. 34 L..R.A. 625, 15 C.C. A.

289, 31 U.S. App. 704, 68 Fed. 116........... ae

page iv

Rucker v. Civil Service Commission, 491 A.2d 933

(Pa.Cmwlth. 1985, Craig, J.)............... . .14,25

Sanders v. Loomis Armored, Inc., 614 A.2d 320

Pen. BOD ccc cee, ..02

Smith v. Fenner, 399 Pa. 633, 641, 161 A.2d

EE 32

Township of McCandless v. McCarthy, 300

A.2d 815 (Pa.Cmwlth.1973, Mencer, J.)........ . 18,25

Verner v. Shaffer, 500 A.2d 479 (Pa.Super.1985,

a. 20,25,26,27

West Middlesex Area School District v.

Pennsylvania Labor Relations Bd.,

423 A.2d 781 (Pa.Cmwlth.1980, Rogers,J.) ...... 14,25

Yick Wo v. Hopkins, 188 U.S. 356, 6 S.Ct. 1064,

WM vn wee we cere ccc ccn, 28

A-20

TABLE OF AUTHORITIES (continued)

PAGE NO(S)

OTHER AUTHORITIES:

Article 1, §10 of the U.S. Constitution .......

Impairment of Contracts Clause

Article 4 §1 of the U.S. Constitution

Full Faith and Credit Clause of the

United States Constitution and

its implementing statute, 28 U.S.C. § 1728 ...

Fourteenth Amendment to the United States

CD oo ip ceudecaun anaes bees)

Rule 1101 of the Pennsylvania Rules

of Appellate Procedure ...................

Rule 2542(a) of the Pa. Rules of Appellate

I Sn 18 0 in oe at a a

Section 723 of the Judicial Code

ek ae ae i 5 aE ed kee

.3,10,29

A-21

page 1

STATEMENT OF JURISDICTION

This is an appeal from a case commenced in the Com-

monwealth Court and decided by that court on November

10, 1993. Jurisdiction of the Supreme Court is based upon

Section 723 of the Judicial Code, 42 Pa. C.S. § 723, which

provides that the Supreme Court shall have jurisdiction

over direct appeals from the Commonwealth Court in cases

commenced in that Court, and Rule 1101 of the Penn-

sylvania Rules of Appellate Procedure. providing that an

appeal may be taken as of right to the Supreme Court in

any action commenced in the Commonwealth Court and

not constituting an appeal to that Court. Ohio Casualty

Group v. Argonaut Insurance Company, 514 Pa. 430, 525

A.2d 1195 (1987); Judge v. Allentown and Sacred Heart

Hospital, 506 Pa. 636, 487 A.2d 817 (1985).

A-22

page 2

STATEMENT OF QUESTIONS INVOLVED

(a) Mutual’s Election of Remedies. DID THE

COMMONWEALTH COURT ERR IN FAIL-

ING TO FIND THAT MUTUAL FIRE WAS

ESTOPPED FROM INVOKING THE

BENEFITS OF THE PLAN OF REHABILITA-

TION WHEN IT OPTED OUT OF THE CLAIM

SETTLEMENT PROCEDURE OF THE PLAN

AND INSTEAD ELECTED TO RESOLVE

THE DISPUTE IN THE STATE COURTS OF

LOUISIANA?

STATED DIFFERENTLY, DID THE COM-

MONWEALTH COURT FAIL TO APPLY THE

DOCTRINES OF PRECLUSION and ELEC-

TION OF REMEDIES?

(b) FBT’s Substantive Right to Interest. DID

THE COMMONWEALTH COURT ERR IN

FAILING TO HOLD THAT UNDER PENN-

SYLVANIA LAW A CLAIM FOR INTEREST

IS PART OF THE SUBSTANTIVE CAUSE OF

ACTION AND MERGED INTO THE

JUDGMENT?

STATED DIFFERENTLY, DID THE COM-

MONWEALTH COURT ERR IN “SPLIT-

TING” ISSUES AND DISREGARDING THE

DOCTRINE OF MERGER BY NOT MERGING

THE AWARD OF INTEREST INTO THE

JUDGMENT? Kessler v. Old Guard Mutual Ins.

Co., 570 A.2d 569 (Pa.Super. 1990, Wieand, J.).

A-23

COURT ERR IN HOLDING THAT MUTUAL

FIRE WOULD NEVER BE OBLIGATED TO

PAY INTEREST, NOTWITHSTANDING THE

HOLDING IN Foster v. Mutual Fire, 614 A.2d

1086 (1992), PARTICULARLY FOOTNOTE 13

THEREOF WHICH HELD THAT:

“‘..interest accruing on claims after insolvency

proceedings have begun is payable only after the

principal on all claims have been paid in full...""?

(d) Due Process Violations. DID THE COM-

MONWEALTH COURT'S FAILURE TO APP-

LY THE DOCTRINES OF ELECTION OF

REMEDIES, PRECLUSION AND/OR

MERGER CONSTITUTE A VIOLATION OF

THE DUE PROCESS CLAUSE OF THE

UNITED STATES CONSTITUTION?

page 3

(e) Impairment of Contract Rights. DID THE

COMMONWEALTH COURT ERR BY NOT

APPLYING, OR BY IMPROPERLY APPLY-

ING, THE IMPAIRMENT OF CONTRACTS

CLAUSE OF THE UNITED STATES CON-

SITUTION, ARTICLE 1 §10?

(f) Unconstitutional as Applied. UNDER THE

CIRCUMSTANCES OF THIS CASE, ASSUM-

ING ARGUENDO THAT THE PLAN IS AP.

PLICABLE TO FBT’S JUDGMENT, IS THE

PLAN UNCONSTITUTIONAL “AS

APPLIED’?

A-24

(g) Full Faith and Credit.1 DID THE COM-

MONWEALTH COURT ERR IN NOT APPLY-

ING, OR BY IMPROPERLY APPLYING, THE

FULL FAITH AND CREDIT CLAUSE OF

THE UNITED STATES CONSTITUTION, AR-

TICLE 4 81?

(h) Retroactive Application. BECAUSE THE

“EFFECTIVE DATE” OF THE PLAN DID

NOT OCCUR UNTIL THE SUPREME COURT

DECISION IN Foster v. Mutual BECAME

FINAL AND NON-APPEALABLE, WILL

ANY IMPOSITION OF THE PLAN UPON FBT

CONSTITUTE A “RETROACTIVE” AP-

PLICATION OF SUBSTANTIVE LAW, IN

VIOLATION OF THE 14TH AMENDMENT

TO THE UNITED STATES CONSTITUTION?

—

1 The penultimate location of this argument should not be taken as an

indication of its importance. This could easily be the most compelling

reason cited by FBT.

A-25

page 4

STATEMENT OF THE CASE

1. History of FBT’s Litigation in the Louisiana State

Court System. On August 19, 1986, FBT Bancshares, Inc.

(“FBT’’) filed a petition for Damages in the 22nd Judicial

District Court for the Parish of St. Tammany, State of

Louisiana, against Mutual Fire, Marine and Inland In-

surance Company (‘‘Mutual”’) and other parties, seeking

recovery under Policy No. CB 100067, issued by Mutual

through its general underwriters, Shand Morahan?. On

September 15, 1986, FBT amended its petition to increase

the claim for damages to the sum of $1,730,297.61,

together with legal interest from date of judicial demand

until paid, as provided by Louisiana law’. On June 20,

1988, Mutual answered the petitions of FBT, but did not

apply for a stay under The Plan‘. On June 11, 1990, FBT

filed a motion for summary judgment in the Louisiana

courts, seeking a judgment against Mutual for policy

limits, $1,000,000, together with legal interest as provided

by law>. Judgment against Mutual was rendered on June

26, 1990, and the court’s Reasons for Judgment indicated

that Mutual did not raise any defense related to The Plan®.

On August 9, 1990, FBT’s James A. Comiskey met with

Mutual claims director Ottheinz R. Larisch at

2 Exhibit A. ‘Motion for Summary judgment (‘M.S.J.”’

3 Exhibit B. M.S.J.

4 Exhibit D, M.S.J.

5 Exhibit H, M.S.J.

6 Exhibit J, M.S.J.

A-26

page 5

the law offices of Lord, Bissell & Brook in Chicago, Illinois;

Judge Comiskey (a retired Federal District Judge) was told

that Mutual desired to proceed within the Louisiana State

Court system as opposed to The Plan’. On August 27,

1990, Jeanne K. Jones, Senior Settlement Specialist for

Mutual (and the Rehabilitator) confirmed that Mutual in-

tended to prosecute an appeal in the Louisiana state court

system®. On October 31, 1990, Director of Claims Charles

D. Henderson advised that no consideration would be

given to FBT until “...the underlying litigation has been

resolved’’?. On December 27, 1991, a three judge panel of

the 1st Circuit Court of Appels affirmed the lower court

Judgment. Mutual’s application for rehearing, which did

not invoke the plan, was denied March 13, 1992! On

April 13, 1992, Mutual applied for writs of certiorari or

review to the Louisiana State Supreme Court without in-

voking the plan!!. On September 4, 1992, the Louisiana

State Supreme Court denied writs!2.

2.History of FBT’s Actions in the Commonwealth

Court.On July 3, 1990, after FBT’s claim was reduced to

judgments, FBT filed a Hardship Application. Essentially,

7 Exhibit N, M.S.J.

8 Exhibit O, M.S.J.

9 Exhibit P, M.S.J.

10 Exhibit S, M.S.J.

11 Exhibit T, M.S.J.

12 Bxhidit U, M.S.J.

A-27

FBT’s bank, Fidelity,

page 6

was about to be closed by the FDIC because of the losses

incurred but not paid by Mutual. This was avoided by

merging with the Bank of Louisiana, which brought that

bank under FDIC attack!3. Thus, the hardship application

was filed and Judge Comiskey travelled to Chicago to make

a personal plea that the judgment be paid. Mutual, on three

documented occasions, told FBT that its Hardship Ap-

plication would be deferred until all appeals were over.

On August 9, 1990, at Judge Comiskey’s meeting

with Lord, Bissel & Brook, the following colloguy was

transcribed, at page 24:

“MR. ZOLLNER: My personal preference would

be to have the appellate decision run its course.

And I’m wondering whether there’s any way that

we could get the FDIC to hold off on its cease and

desist order until that’s resolved?

MR. COMISKEY: We are certainly working on

that very thing.

MR. ZOLLNER: What I’m asking is: do you

think Mutual Fire’s joint request with Bank of

Louisiana that they hold off until we get this

thing resolved at the appellate level would have

any more weight than just the Bank of

Louisiana?’’!4

13 See Affidavits of James A. Comiskey and G. Harrison Scott, filed

with the hardship application.

14 Exhibit N, M.S.J.

A-28

On August 27, 1990, Jeanne K. Jones of Mutual con-

firmed that the application was not “ripe’”’ and that Mutual

intended to prosecute an appeal!®. On October 31, 1990,

FBT was again advised by the Director of Claims Charles

D. Henderson that its hardship application would be held

‘‘...in abeyance pending all appeals in the State of Loui-

siana...’’ and that it would not be considered

page 7

until ‘‘...the underlying litigation has been resolved’’!6,

No pleadings whatsoever were filed by Mutual until

after the Louisiana Supreme Court denied writs on

September 4, 1992. On October 2, 1992 when the value of

the judgment exceeded $2 Million, Mutual issued a Notice

of Determination setting the value of FBT’s claim at

$350,00017. On October 13, 1992, FBT’s Objection to the

Notice of Determination was filed with the Commonwealth

Court of Pennsylvania!8, citing the Full Faith and Credit

Clause of the United States Constitution, Election of

Remedies and res judicata in opposition to FBT’s arbitrary

NOD.

On February 8, 1993, FBT filed a motion for sum-

mary judgment with 23 exhibits and 18 Pennsylvania cases

in support. FBT’s motion for summary judgment was

granted in part and denied in part by the Commonwealth

Court on November 10, 1993. In partially granting the

15 Exhibit O, M.S.J.

16 Exhibit P, M.S.J

17 Exhibit V, M.S.J.

18 Exhibit W, M.S.J.

A-29

motion, the Commonwealth Court recognized the final

judgment in the Louisiana Courts to the extent that it

awarded FBT $1 Million. In partially denying the motion,

however, the Commonwealth Court did not recognize

FBT’s entitlement to any interest whatsoever.

FBT has appealed that judgment insofar as it denies

FBT judicial interest.

page 8

SUMMARY OF THE ARGUMENT

(a) Mutual’s Election of Remedies. Mutual has waiv-

ed the plan. Pursuant to the doctrine of Election of

Remedies, Mutual elected to litigate this dispute in the

Louisiana judicial system and is now bound by the final

Louisiana judgment. Pursuant to the doctrine of Preclu-

sion, Mutual is precluded from invoking Section XVII of

the plan as a defense to FBT’s entitlement to judicial

interest.

(b) FBT’s Substantive Right to Interest. The Loui-

siana judgment includes interest, which is a substantive

right. Under the doctrine of Merger, interest (subject only

to clerical computation) becomes “merged” into the judg-

ment. Mutual did not request that the issue of interest be

split during the litigation in the Louisiana courts. The

Commonwealth Court erred in “splitting” issues where no

such request was ever made.

above, the Commonwealth Court misunderstood this

Court’s holding in connection with a judgment held by Pep-

sico. Footnote 13 of this Court’s opinion in Foster v.

A-30

Mutual, 614 A.2d, at 1102 (1992) held that the plan was not

unconstitutional, per se, because interest would be payable

after the principal on all claims was paid. At worst, FBT is

entitled to have its interest paid after the principal on all

class 4 claims are paid. Additionally, in the Pepsico

instancel9, Pepsico received recognition of interest which

page 9

accrued prior to December 4, 1986. FBT did not receive this

recognition.

(d) Due Process Violations. The failure by a state

court to apply state law fairly and impartially can, under

certain circumstances, constitute a violation of the con-

stitutional guaranty of due process. The commonwealth

Court’s failure to apply the doctrines of Election of

Remedies, Preclusion, and Merger, under the cir-

cumstances of this case, constitutes a denial of due process.

(e) Impairment of Contract Rights. The Impairment

of Contract Rights Clause of the United States Constitu-

tion prohibits state action which impairs the right of con-

tract. FBT’s contract of insurance with Mutual has been

“‘impaired’”’ to the tune of $1.2 Million in unrecognized in-

terest. This Court’s ruling in Foster, supra, was based on

the rationale that the loss of interest would have an “‘in-

substantial’ impact on claimants. The rationale was also

based on the premise that claimants would receive propor-

tional payments. Neither of these two considerations exist

as to FBT. The loss of interest now exceeds the principal

19 FBT does not believe that this Court’s decision regarding Pepsico is

“‘precedent’”’, because in Pepsico, Mutual immediately invoked the plan.

Mutual did not make an “election of remedies’’, and there was no waiver

of the plan by Mutual. Thus, the Pepsico decision is inapposite.

me ge ee oe

A-31

balance due. That is not ‘insubstantial’. Moreover, FBT,

lured into litigation through three levels of Louisiana

judiciary, has not yet received one penny. Accordingly, the

Commonwealth Court’s judgment results in an unconstitu-

tional impairment of contract.

(f) Unconstitutional ‘“‘As Applied”. The application

of the plan, if applied to FBT so as to deprive FBT of in-

terest, would also be unconstitutional ‘‘as applied”. This

Court’s original ruling in Foster, supra, considered

creditors which have received

page 10

treatment far different than FBT. This Court should not

allow Mutual to litigate to its heart’s content and then at-

tempt to start over under a dispute resolution procedure.

To do so would sanction an unconstitutional application of

an otherwise constitutional plan.

(g) Full Faith and Credit.11 The Full Faith and

Credit Clause of the United States Constitution requires

that the State of Pennsylvania give full faith and credit to

the final judgment of its sister state, Louisiana. Under

Louisiana law, the judgment orders payment of legal in-

terest “from date of judicial demand until paid’. That

substantive element of the Louisiana judgment must be

given full faith and credit by the courts of Pennsylvania.

Mutual did not, as it could have, attempt to defend against

the adjudication of legal interest. That matter is now res

judicata, and any decision severing that entitlement would

be a violation of the Full Faith and Credit Clause of the

United States Constitution.

20 The penultimate location of this argument should not be taken as an

indication of its importance. This could easily be the most compelling

reason cited by FBT.

A-32

(h) Retroactive Application. Foster, supra, was decid-

ed August 21, 1992. Considering the time for applying for

rehearing and for filing a certiorari application to the

United States Supreme Court, the judgment approving the

plan did not become final and non-appealable until

December 4, 1992. FBT was by then fully vested with its

judgment. The plan did not become “‘effective’’, by its own

provisions, until after FBT had obtained its judgment.

Any deprivation of FBT’s vested rights, which include its

entitlement

page 11

to interest, would violate the Fourteenth Amendment to

the United States Constitution and would constitute a pro-

hibited ‘‘retroactive application’’ of substantive law.

page 12

ARGUMENT AND LAW

(a) Mutual’s Election of Remedies

DID THE COMMONWEALTH COURT ERR

IN FAILING TO FIND THAT MUTUAL FIRE

WAS ESTOPPED FROM INVOKING THE

BENEFITS OF THE PLAN OF REHABILITA-

TION WHEN IT OPTED OUT OF THE CLAIM

SETTLEMENT PROCEDURE OF THE PLAN

AND INSTEAD ELECTED TO RESOLVE

THE DISPUTE IN THE STATE COURTS OF

LOUISIANA?

STATED DIFFERENTLY, DID THE COM-

MONWEALTH COURT FAIL TO APPLY THE

DOCTRINES OF PRECLUSION AND ELEC-

TION OF REMEDIES?

A-33

As to FBT, Mutual has waived the plan. When it was

expedient not to process FBT’s claim administratively,

Mutual ignored the plan, vigorously litigated with FBT,

sought no stay, and made no efforts to place FBT’s claim

‘‘in line” for payment. FBT has clearly not been treated in

the same manner as other Class 4 claimants and has been

prejudiced thereby. Only after having been defeated at

three judicial levels did Mutual look to the plan for consola-

tion, making the unconscionable ‘‘determination” that

FBT’s claim was worth $350,0002!. As we set forth in our

Motion for Summary Judgment to the Commonwealth

Court, Mutual abandoned the plan long ago when it came

to FBT and it is too late to now ‘‘selectively’’ look to the

plan for assistance. FBT has a Judgment which includes in-

terest. Because of Mutual’s election of remedies, the plan

is unavailable. Mutual is estopped from avoiding the conse-

quences of its choice to litigate this matter to judgment.

pagel3

In the litigation below, Mutual clearly failed to in-

voke Section XVII of the plan regarding interest?*. During

the entire course of litigation in the Louisiana Courts,

21 The decision to value our claim at $350,000 is unreasonable, ar-

bitrary, and irrational. Where there is ‘‘...no rational basis for an ad-

ministrative decision...” such action constitutes a denial of due process

under the United States Constitution. Pearson v. City of Grand Blanc,

961 F.2d 1211, at 1221 (C.A. 6th Cir.1992).

22 Section XVII, entitled Interest, actually does not deprive FBT of

interest:

“Except as may be otherwise provided for in this Plan, or as

may be otherwise required under applicable law, all Creditors

holding Unsecured Claims shall waive interest...’

Here, interest is ‘‘...required under applicable law..." and FBT has not

“waived interest’’.

A-34

Mutual had the opportunity to file a simple motion to stay,

or a simple motion to limit the judgment to principal. The

motion would have been no more than one or two pages

long, with a certified copy of the plan annexed. Mutual took

no such action. Mutual sought no such protection. Mutual

invoked no provision of the plan, nor the plan itself. Under

the doctrines of Election of Remedies and/or Preclusion,

Mutual is unable to invoke the plan and it was error for the

Commonwealth Court to afford Mutual any protection

whatsoever.

The Doctrine of Election of Remedies. The law of

Pennsylvania clearly holds that, when a party has two in-

consistent paths to the same relief, the selection of one

precludes resort to the other. One or the other must be

chosen, and the loser cannot return for a “second bite’”’ at

the forum he initially excluded. Here, the “inconsistent

paths”’ were (a) the administrative process provided by the

plan and (b) the judicial, or legal remedies afforded by the

Louisiana Courts. Mutual elected to choose the Louisiana

Courts and cannot now return to the «dministrative

process.

page 14

This is the doctrine of ‘“‘Election of Remedies’’, and

is not only deeply entrenched in Pennsylvania law, but has

been uniformly and consistently applied by many members

of the very Commonwealth Court whose judgment is on

review herein. Commonwealth, Dept. of Environmental

Resources v. Leechburg Mining Co., 305 A.2d 764,

(Pa.Cmwlth. 1973, Bowman, P.J.); Pawk v. Department of

Environmental Resources, 395 A.2d 692, (Pa.Cmwlth.

1978, Crumlish, J.); West Middlesex Area School District

v. Pennsylvania Labor Relations Bd., 423 A.2d 781

A-35

(Pa.Cmwilth. 1980, Rogers, J.); Deets v. Mountain Top Area

Joint Sanitary Authority, 479 A.2d 49 (Pa.Cmwlth. 1984,

Williams, J.); Rucker v. Civil Service Commission, 491

A.2d 933 (Pa.Cmwlth. 1985, Craig, J.); Martin v. Depart-

ment of Environmental Resources, 548 A.2d 672

(Pa.Cmwlth. 1988, Smith, J.) and Altoona Vo-Tech Ed.

Assoc. v. Altoona Vo-Tech School, 559 A.2d 974

(Pa.Cmwlth. 1989, Palladino, J.).

Mutual’s choice was intelligent and purposeful. A

calculated risk. Mutual thought that it could prevail

against FBT as to the entirety of FBT’s claim, and thus

pay nothing at all. That was a gamble which Mutual pur-

posefully chose to take. As various pleadings clearly show-

ed, Mutual had multitudinous opportunities to stop the

litigation and proceed in the administrative forum provid-

ed by the plan. On June 20, 1988, Mutual answered the

petitions of FBT Bancshares, but did not apply (page 15)

for a stay23 On February 27, 1989, FBT filed its Proof of

Claim with the Rehabilitator in the principal amount of

$1,730,297.6124. That Proof of Claim was assigned No.

10891 and received by the Rehabilitator on February 28,

1989. The claim is also docketed as Class 4 Claim No. BA

03317.26

23 Exhibit D. M.S.J.

24 PRT will never be made whole. The Louisiana judgment cast Mutual

for only 57.8% of FBT’s loss. If FBT’s judicial interest in taken away.

FBT will recover less than 26.3% of the present value of its loss.

25 Exhibit E. M.S.J.

A-36

At this juncture, there existed two “inconsistent”

avenues for the resolution of the same claim. FBT pressed

its lawsuit forward, prepared to oppose a motion for a

stay26, but one was never filed. On March 5, 1990, Mutual

representatives working with the plan clearly became

aware of the lawsuit against it, when in response to a re-

quest for information regarding litigation, FBT wrote to

Mr. Ron K. Paul, at Mutual’s offices, 1760 Market Street,

Philadelphia, Pennsylvania?’. On June 11, 1990, FBT’s

Motion for Summary Judgment?®, seeking policy limits of

$1 Million, together (page 16) with legal interest, was

argued. Again, Mutual did not invoke the Plan. On June

14, 1990, Mutual filed a Motion to Supplement its previous

answer, and again, did not invoke the Plan.

26 There are defenses available to a party opposing such a motion. The

grant of a stay requires that many factors be weighed. No one factor is

necessarily determinative. Colorado River Water Assn. v. United States,

424 U.S. 800, at 818; 96 S.Ct. 1236, at 1247; 47 L.Ed.2d 483 (1976). A

court faced with such a motion should “...not apply these factors as a

mechanical checklist...’ and should “...weigh the balance heavily in

favor of exercising jurisdiction”. NOPSI v. New Orleans, 911 F.2d 993,

(5th Cir. 1990).

Moreover, The Plan was amended on February 26, 1990 to provide an

exception to the stay: “‘...as permitted under the terms of this plan or

by the Courts.” Prior to the amendment, the singular ‘‘court”’ was used,

referring to the Commonwealth Court. By adding the letter “‘s’’, we

believe Judge Crumlish envisioned other courts dealing with motions to

stay, if Mutual chose to file such a motion in actions brought against it

in other jurisdictions.

27 Exhibit F, M.S.J.

28 Exhibit H, M.S.J.

29 Exhibit I, M.S.J.

A-37

Judgment was originally rendered on June 28,

199030. The Court’s reasons for Judgment correctly in-

dicate that Mutual did not raise any defense related to the

plan of rehabilitation*?.

On October 28, 1991, argument was heard by the

First Circuit Court of Appeals. Mutual made no request for

a stay, although certain Louisiana jurisprudence would

have supported a stay of proceedings at the appellate level

where an out-of-state insurance carrier was in rehabilita-

tion. Anshutz v. J. Ray McDermott, 642 F.2d 94 (5th Cir.

1981)32. On December 27, 1991, the Court of Appeals af-

firmed the lower court Judgment. Mutual applied for

rehearing, but did not request a stay. The application for

rehearing, which did not invoke any aspect of the plan, was

denied March 13, 199233. On April 13, 1992, Mutual ap-

plied for writs of certiorari or review to the Louisiana State

Supreme Court. Again, Mutual’s application did not re

quest a stay or argue against (page 17) the award of

interest.24 On September 4, 1992, the Louisiana State

30 In Reasons for Judgment dated November 10, 1993, the Com-

monwealth Court indicated that the judgment by the Louisiana District

Court was not in the record, requiring he Court to confirm the judg-

ment. The judgment is in the record, however, in connection with FBT’s

Hardship Application.

31 Exhibit J, M.S.J.

32 Exhibit R, M.S.J.

33 Exhibit S, M.S.J.

34 Exhibit T, M.S.J.

A-38

Supreme Court denied writs*5. That ended the litigation.

Mutual lost its gamble to ‘‘zero” FBT.

Mutual’s Election of Remedies had run its full

course.

The Doctrine of Preclusion and Legal Interest.

- Throughout the litigation, and at all three levels of the

Louisiana court system, Mutual failed to raise any defense

regarding FBT’s entitlement to legal interest. It is fun-

damental that the doctrines of res judicata and Preclusion

not only encompass those matters which were actually

litigated, but also those matters which could have been, or

should have been litigated. That is, all triable issues must

be raised before the first court, and relitigation of any

triable matter is precluded. FBT sought legal interest in its

first petition®® and in its first amended petition®’?. Mutual

joined issue by denying FBT’s paragraph 14, which re

quested legal interest on $1,730,297.61°8.

Mutual failed to invoke Section XVII of the plan

regarding the issue of legal interest. The interest award,

which is part of the Judgment rendered by the Louisiana

Courts, is now res judicata under Louisiana and Penn-

sylvania Law. Matter of Howe, (page 18) 913 F.2d 1141, at

1144 (5th Cir.,1990); Nilsen v. City of Moss Point, 701 F.2d

556 (5th Cir.,1993) citing Restatement (2d) of Judgments

35 Exhibit U, M.S.J.

36 Exhibit A, M.S.J.

37 Exhibit B, M.S.J.

38 Exhibit D, M.S.J.

A-39

§ 24; Township of McCandless v. McCarthy, 300 A.2d 815

(Pa.Cmwlth.,1973, Mencer, J.); Feigh v. Glendale School

District, 545 A.2d 447 (Pa.Cmwith., 1988, McPhail, J.);

Jost v. Phoenixville Area School Dist., 547 A.2d 830

(Pa.Cmwlth.,1988, Kalish, J.); Knox v. Board of Probation

& Parole, 588 A.2d 79, at 82 (Pa.Cmwith.,1991, Pellegrini,

J.).

Mutual is precluded from now raising any defense as

to FBT’s entitlement of interest, as a matter of law. FBT

has been prejudiced by Mutual’s delay in payment and is

entitled to receive the full award it fought hard to obtain

through vigorous litigation.

(b) FBT’s Substantive Right to Interest

DID THE COMMONWEALTH COURT ERR

IN FAILING TO HOLD THAT UNDER PENN-

SYLVANIA LAW A CLAIM FOR INTEREST

IS PART OF THE SUBSTANTIVE CAUSE OF

ACTION AND MERGED INTO THE

JUDGMENT?

STATED DIFFERENTLY, DID THE COM-

MONWEALTH COURT ERR IN “SPLIT-

TING” ISSUES AND DISREGARDING THE

DOCTRINE OF MERGER BY NOT MERGING

THE AWARD OF INTEREST INTO THE

JUDGMENT? Kessler v. Old Guard Mutual Ins.

Co., 570 A.2d 569 (Pa.Super. 1990, Wieand, J.).

The Doctrine of Merger. Under Pennsylvania law, a

claim for interest is part of the ‘‘substantive cause of ac-

tion” and an award of interest is “merged” into the

A-40

judgment. This is the doctrine of Merger and is no different

from Louisiana law. It is fundamental that interest is

substantive and ‘‘ancillary’’ to the (page 19) main demand.

Kessler v. Old Guard Mut. Ins. Co., 570 A.2d 569

(Pa.Super.1990), Wieand, J.). Adjudications regarding

judicial interest, one way or another, become ‘‘merged”’ in-

to a final judgment and are res judicata thereafter. Kessler,

supra, is particularly dispositive. There, the plaintiff,

although entitled to receive pre-judgment interest under

Pennsylvania law, was not specifically awarded pre-

judgment interest by the decree eventually entered by the

Court. Lamenting that although the computation of the in-

terest was a “‘simple clerical matter based upon dates and

amounts appearing on the face of the record’’, the Court

held that, because the judgment entered did not specifical-

ly contain an award of pre-judgment interest, the plaintiff

could not recover same. The plaintiff’s claims, including

the claim for interest, said the Court, had become ‘“‘merged

in the judgment’’. So too, in the case of FBT, has the award

of legal interest been ‘‘merged’’ into the final judgment

rendered by the Louisiana courts.

Stated differently, the interest issue cannot be

“‘split’”’ from the remainder of the judgment, since it was

not specifically reserved for another forum, but was rather

clearly adjudicated. In order to “‘split’’ issues, the judg-

ment must specifically so provide. Coleman v. Coleman,

522 A.2d 1115 (Pa.Super.,1987, Beck, J.). Had judicial in-

terest not been included in FBT’s judgment, as in Kessler,

supra, FBT would have been barred from thereafter re-

questing it, even though both Pennsylvania and Louisiana

substative law allowed it.

A-41

page 20

Indeed, the law of Pennsylvania recognizes that in-

terest is substantively due on a contract claim, or a claim

for money due, exactly as here. Kessler, supra; Verner v.

Shaffer, 500 A.2d 479 (Pa.Super.,1985, Feeney, J.). As

such, we were awarded judicial interest in Louisiana in the

same way we would have been entitled to judicial interest

had this matter been decided under Pennsylvania law. Gold

& Co. Inc. v. Northeast Theater Corp., 421 A.2d 1151

(Pa.Super.,1979, Lipez, J.).

FBT’s right to receive interest was vested long

before the plan became ‘“‘effective’’®?, and it was error to

split the judgment.

DID THE COMMONWEALTH COURT ERR

IN HOLDING THAT MUTUAL FIRE WOULD

NEVER BE OBLIGATED TO PAY IN-

TEREST, NOTWITHSTANDING THE

HOLDING IN Foster v. Mutual Fire, 614 A.2d

1086 (1992), PARTICULARLY FOOTNOTE 13

THEREOF WHICH HELD THAT:

“interest accruing on claims after insolvency

proceedings have begun is payable only after the

principal on all claims have been paid in full..’’?

Without prejudice to our argument that Mutual is

not entitled to any benefits under the plan, and that

Mutual is bound by the Judgment in its entirety, and for

purposes of preserving our rights, we point out to this

39 By its own terms, the plan did not become “effective” until December

4, 1992. See point (h), infra.

A-42

Honorable Court that, alternatively, the payment of in-

terest is, at worst, delayed until all class 4 claims are paid.

(page21)

Although the Commonwealth Court determined that it was

bound by the Supreme Court’s decision regarding the Pepsi

Cola judgment, it has disallowed FBT’s judicial interest

altogether! Footnote 13 of this Court’s decision, however,

indicates that the rationale for denying interest on claims

was that “...interest accruing on claims after insolvency

proceedings have begun is payable only after the principal

on all claims have been paid in full..."” Accordingly and at

a minimum, the Commonwealth Court’s judgment should

be amended to require payment of interest at such time as

the principal on all class 4 claims against Mutual shall have

been paid in full.

We emphasize that interest is due on FBT’s claim

after payment of all class 4 claims because that is what the

United States Supreme Court held in American Iron &

Steel Manufacturing v. Seaboard Airline Railway, 233 U.S.

261, 34 S.Ct. 502, 58 L.Ed 949 (1914), which was specifical-

ly relied upon by this Court in footnote 13. In that case, the

Supreme Court held that in a receivership, where the assets

of the insolvent are in custodia legis, the payment of in-

terest would be delayed but never eliminated, stating, at

504:

‘*...in case funds are not sufficient to pay claims of

equal dignity, the distribution is made only on the

basis of the principal of the debt. But that rule did

not prevent the running of interest during the

receivership; and if, as a result of good fortune or

good managment, the estate proves sufficient to

A-43

discharge the claims in full, interest as well as

principal should be paid.”’

This makes it clear that interest does accrue. The (page 22)

question left is what are “claims of equal dignity’’. In that

regard, the United States Supreme Court held that it is not

necessary that claims of “lower rank’’ be paid in full in

order for a higher ranking claim to receive the interest due.

Specifically, at 505, after reiterating the rule that creditors

are entitled to interest after bankruptcy adjudication, the

Court dealt with differing ranks of claimants, thus:

“The principle is not limited to cases of technical

bankruptcy, where the assets ultimately prove

sufficient to pay all debts in full, but principal as

well as interest, accruing during a receivership, is

paid on debts of the highest dignity, even though

what remains is not sufficient to pay claims of a

lower rank in full. Central Trust Co. v. Condon, 14

C.C.A. 314, 31 U.S. App. 387, 67 Fed. 84; Rich-

mond & I. Constr. Co. v. Richmond, N.I. & B.R.

Co. 34 L.R.A. 625, 15 C.C. A. 289, 31 U.S. App.

104, 68 Fed. 116; First Nat. Bank v. Ewing, 43

C.C. A. 150, 103 Fed. 190.”

It is very clear that this rehabilitation has been well

managed and that all class 4 claims will be paid in full. The

most recent financial statement*? filed by the rehabilitator

shows that it has in excess of $183 Million

40 Financial statments are fled for each quarter. We refer to the finan-

cial statement filed for the fiscal year ending 12/31/93, available from

the record. As further financial statements are filed, these numbers may

change.

A-44

invested and earning interest.41 For the fiscal year 1993,

the rehabilitator paid out only $26 Million in proportional

payments, although the plan requires that interim partial

payments “‘...shall be made periodically on class 4 (page 23)

adjusted claims as cash is available...”

In any event, classes 5 through 10 are scheduled for

payment only after all class 4 claims are paid. Thus, classes

5 through 10 are of a “‘lower rank’’. It is not necessary to

wait to see if the lower ranking classes receive full pay-

ment, and FBT’s interest, at worst, will be due and payable

when the principal on all class 4 claims is paid.

We emphasize that this relief is requested arguendo.

For we do not concede that the plan has any application

whatsoever, having been waived by Mutual. Nor that the

Pepsico ‘“‘precedent”’ applies to FBT, since the Pepsico

matter did not involve an ‘‘Election of Remedies’’, and no

purposeful decision was made by Mutual to litigate that

case in lieu of administratively adjusting the claim. We

make the above argument only in the alternative, should

this Court not find in favor of FBT on points (a) and (b)

above.

(d) Due Process Violations

DID THE COMMONWEALTH COURT’S

FAILURE TO APPLY THE DOCTRINES OF

41 Because the “value of the money” (i.e., the interest earned by Mutual

on FBT’s $1 Million) now exceeds the principal amount due, Mutual has

gained a “windfall” and will pay this claim with FBT’s own interest

earned, with $200,000 still left over! This is a gross denial of due process.

Mutual has successfully played the “interest game” with FBT’s money

for eight years without any sincere or realistic chance of success.

Acie. ro allie Gaara aia cal het aS

A-45

ELECTION OF REMEDIES, PRECLUSION

AND/OR MERGER CONSTITUTE A VIOLA-

TION OF THE DUE PROCESS CLAUSE OF

THE UNITED STATES CONSTITUTION?

In granting summary judgment only in part, the

Commonwealth Court did not apply state or federal law

consistently, but rather imposed an administrative penalty

in lieu of substantive law. Failure by a state court to apply

previous decisions consistently, under certain cir-

cumstances, can constitute a denial of due process and/or

equal protections. Here, the Court opted to (page 24) en-

force an administrative rule rather than the law of the land.

The United States Supreme Court, in Mathews v. Eldridge,

96 S.Ct. 893, 424 U.S. 319, 47 L.Ed2d 18, has noted that

due process ”’...is not a technical conception with a fixed

content unrelated to time, place and circumstances...” and

that due process “‘...calls for such procedural protection as

the particular situation demands.”’ Jd. @ 902. Dealing with

an administrative process, as here, the United States

Supreme Court defined the scope of inquiry as follows:

“ Accordingly, resolution of the issue whether the

administrative procedures provided here are con-

stitutionally sufficient requires analysis of the

governmental and private interests that are

affected.”’

FBT’s “private interest” is clear. FBT, which began

in a hardship status, can hardly afford the loss of interest

due. The original claim was for $1,730,997 for losses incur-

red in 1984 and 1985. FBT will never be made whole

because the policy it purchased had a $1 Million limit. As

it stands, FBT’s judgment only casts Mutual for 57.8% of

A-46

its total losses. The Commonwealth Court’s judgment, de-

nying FBT interest, means that FBT will recover less than

26.3% of the present value of its losses. Thus, the “private

interest”’ affected here is hardly ‘‘insubstantial.’’

Mutual’s stake in this claim, on the other hand, is de

minimis. Liquid assets approach $200 Million. “‘Settled

Losses Remaining to Distribute” are but $54 Million. It ap-

pears that Mutual is near full rehabilitation, if not already

rehabilitated. Thus, in comparing the “private interests”

of FBT to the “‘governmental interests”’ of this rather well-

heeled rehabilitation, (page 25) the denial of FBT’s vested

property rights is a denial of due process of law.

More specifically, the Commonwealth Court’s failure

to grant FBT’s motion for summary judgment, in its en-

tirety, is inconsistent with at least the following controlling

Pennsylvania decisions**: Cloonan v. Thornburgh, 519

A.2d 1040 (Pa.Cmwlth. 1986), Crumlish, J.); Com-

monwealth, Dept. of Environmental Resources ov.

Leechburg Mining Co., 305 A.2d 764 (Pa.Cmwlth.1973,

Bowman, P.J.); Pawk v. Department of Environmental

Resources, 395 A.2d 692 (Pa.Cmwlth. 1978, Crumlish, J.);

West Middlesex Area School District V. Pennsylvania

Labor Relations Bd., 423 A.2d 781 (Pa.Cmwilth.1980,

Rogers, J.); Deets v. Mountain Top Area Joint Sanitary

Authority, 479 A.2d 49 (Pa.Cmwlth.1984, Williams, J.);

Rucker v. Civil Service Commission, 491 A.2d 933

(Pa.Cmwlth. 1985, Craig, J.); Martin v. Department of En-

vironmental Resources, 548 A.2d 672 (Pa.Cmwlth. 1988,

42 Rather than referring supra, we repeat complete citations for the con-

venience of the Court and the Court’s staff.

cadpapeat idle,

ce beasts Std om alee Slide

A-47

Smith, J.); Altoona Vo-Tech Ed. Assoc. v. Altoona Vo-Tech

School, 559 A.2d 974 (Pa-Cmwith.1989, Palladino, J.);

Township of McCandless v. McCarthy, 300 A.2d 815

(Pa.Cmwith.1973, Mencer, J.); Feigh v. Glendale School

District, 545 A.2d 447 (Pa.Cmwlth.1988, McPhail, Jr.);

Jost v. Phoenixville Area School Dist., 547 A.2d 830

(Pa.Cmwlth.1988, Kalish, J.); Knox v. Board of Probation

& Parole, 588 A.2d 79, at 82 (Pa.Cmwith.1991, Pellegrini,

J.); Keesler v. Old Guard Mut. Ins. Co., 570 A.2d 569

(Pa.Super.1990, Wieand, J.); Coleman v. Coleman, 522 A.2d

1115 (page 26) (Pa.Super.1987, Beck, J.); Verner v. Schaf-

fer, 500 A.2d 479 (Pa.Super.1985, Feeney, J.); Gold & Co.,

Inc. v. Northeast Theater Corp, 421 A.2d 1151

(Pa.Super.1979, Lipez, J.).

Under the totality of circumstances of this case, FBT

has been deprived of a vested property right, in violation of

The Due Process Clause of the United States Constitution.

(e) Impairment of Contract Rights

DID THE COMMONWEALTH COURT ERR

BY NOT APPLYING, OR BY IMPROPERLY

APPLYING, THE IMPAIRMENT OF CON-

TRACTS CLAUSE OF THE UNITED STATES

CONSTITUTION, ARTICLE 1 §10?

Article 1 of the United States Constitution, Section

10 provides that:

‘No State shall enter into any Treaty, Alliance, or

Confederation; grant Letters of Marque and

Reprisal; coin Money; emit Bills of Credit; make

any Thing but gold and silver Coin a Tender of

A-48

Payment of Debts; pass any Bill of Attainder, ex

post facto Law, or Law impairing the Obligation

of Contracts, or grant any Title of Nobility.”

This is known as the Impairment of Contracts Clause

of the United States Constitution, and was considered

when this Court originally considered the plan. After

careful review, this Court held that the plan was not un-

constitutional on its face. In part, this court’s decision was

based on the rationale that any actual impairment caused

by the plan would be ‘‘insubstantial’’ and for the good of all

affected parties, at 1094:

“‘Several objections to the plan assert that the

Plan as proposed impermissibly impairs their

various contractual rights. While this may in fact

be an accurate assessment of the consequence of

the proposed rehabilitation, (page 27) such im-

pairment is not a per se violation of law and we

agree with the Commonwealth Court that any ac-

tual impairments are insubstantial”’.

Additionally, this Court confirmed its rationale at

footnote 4, which further analyzed the plan, stating, at

1095:

“The Commonwealth Court properly upheld this

portion of the Plan and concluded that in order to

achieve the desired consequence of satisfying all

claims in an equitable and orderly manner the

resulting alleged contract impairments were

insubstantial.”

A-49

There is little doubt that in selecting the judicial pro-

cess in the instance of FBT’s claim, the rehabilitator was

exercising her fiduciary duty to protect her fisc. Indeed,

the position taken by Mutual in the Louisiana courts was

4 that there was no coverage whatsoever, and had Mutual

i prevailed, FBT’s claim would be reduced to zero. That

1 calculated risk had downside potential. Mutual now owes

FBT the full judgment cast. Principal is $1 Million and

judicial interest, as of the date of the filing of this brief, ex-

ceeds $1.1 Million. This is by no means “‘insubstantial’’.

PMS Pa toa? Lattighions.

i Moreover, this Court’s rationale in finding that the

plan was not an unconstitutional impairment of contract

rights was based, in part, on the fact that a typical clai-

mant would receive seasonable payments. Under Penn-

sylvania law, interest is awarded as compensation for

‘“‘.the use or detention of a plaintiff's property by the

defendant...”, Verner v. Shaffer, 500 S.2d 479

(Pa.Super.1985), citing Barium Steel v. Wiley, 379 Pa. 38,

108 A.2d 336 (1954). Here, Mutual is using the money

which in part belongs to FBT and is earning interest on

that money!

(page 28)

Moreover, because ‘‘The plan was to include...a pro-

vision for proportionate periodic payments of

policyholder’s claims”, Foster, at 1090, the denial of in-

terest would be theoretically justified by the periodic

payments provided in the plan. Mutual, however, has made

no payments to FBT*. Thus, FBT has received no quid

pro quo which would justify, constitutionally, FBT being

43 Most class 4 claimants have recieved 80 % of their claim. Mutual has

failed to even tender 80 % of its own outrageous NOD of $350,000.

A-50

deprived of interest on money which has been judicially

declared as due and payable since August 19, 1986.

Because the impact of the plan as to FBT is not “‘in-

substantial’’ and because FBT has been deprived of a

vested interest, The Impairment of Contracts clause pro-

hibits the “‘splitting’’ of FBT’s judgment so as to eliminate

judicial interest.

(f) Unconstitutional ‘‘As Applied”

UNDER THE CIRCUMSTANCES OF THIS

CASE, ASSUMING ARGUENDO THAT THE

PLAN IS APPLICABLE TO FBT’S JUDG-

MENT, IS THE PLAN UNCONSTITUTIONAL

“AS APPLIED’?

While the decision of the Commonwealth Court

seemingly adopted this Court’s determination that the

plan is not unconstitutional on its face, to the extent that

FBT is deprived of approximately $1.2 Million in interest,

the consequences of the plan are not “‘insubstantial’’ and

the plan, although constitutional on its face, becomes un-

constitutional, ‘‘as applied’. Yick Wo v. Hopkins, 188 U.S.

356, 6 S.Ct. 1064, 30 L.Ed. 220 (1886) and its considerable

progeny.

(page 29)

(g) Full Faith and Credit*4

DID THE COMMONWEALTH COURT ERR

IN NOT APPLYING, OR BY IMPROPERLY

44 The penultimate location of this argument should not be taken as an

indication of its importance. This could easily be the most compelling

reason cited by FBT.

carnal bathe

A-51

APPLYING, THE FULL FAITH AND

CREDIT CLAUSE OF THE UNITED STATES

CONSTITUTION, ARTICLE 4 §1?

Article 4 of the United States Constitution deals

with the reciprocal relationship between states and pro-

vides as follows:

“Section 1. Full Faith and Credit

‘Section 1. Full Faith and Credit shall be given in

each State to the public Acts, Records, and

Judicial Proceedings of every other State...’’

The Louisiana Supreme Court having denied writs,

the Louisiana Judgment became final on September 4,

1992. Mutual did not have a right to ask for reconsidera-

tion of the denial of writs and Mutual did not apply to the

United States Supreme Court for certiorari. Pursuant to

Article 4 §1 of the United States Constitution, the courts

of Pennsylvania are required to give the Louisiana Judg-

ment full faith and credit. The judgment of the Louisiana

Courts was conclusive and on the merits. Mutual actively

litigated the merits of the case at the district level, at the

appellate level, and at the Supreme Court level, never rais-

ing the plan or any of its provisions as a defense. Mutual’s

defenses regarding coverage were given full and fair con-

sideration and the judgment rendered must be given

deference and the full faith and credit it is constitutionally

entitled to receive.

page 30

(h) Retroactive Application

A-52

BECAUSE THE “EFFECTIVE DATE” OF

THE PLAN DID NOT OCCUR UNTIL THE

SUPREME COURT DECISION IN Foster v.

Mutual BECAME FINAL AND NON-

APPEALABLE, WILL ANY IMPOSITION OF

THE PLAN UPON FBT CONSTITUTE A

“RETROACTIVE” APPLICATION OF

SUBSTANTIVE LAW, IN VIOLATION OF

THE 14TH AMENDMENT TO THE UNITED

STATES CONSTITUTION?

Section 1 (12) of the plan defines the effective date of

the plan:

“The date on which this Plan is approved by final

Order, which Order is not subject to a motion for

reconsideration or an appeal and for which the

time to seek reconsideration or file an appeal has

expired.”’

The final order approving this plan did not occur un-

til August 21, 1992, the date of this Court’s decision in

Foster. Pursuant to Rule 2542(a) of the Pa. Rules of Ap-

pellate Procedure, the parties to that proceeding had four-

teen days to apply for reconsideration, or until September

4, 1992. Thereafter, the time period for applying to the

United States Supreme Court for writs of certiorari was

ninety days. Thus, the order approving the plan became

final and non-appealable on December 4, 1992. Until then,

the plan was not, by its own terms, “‘effective’’.

By December of 1992 the FBT judgment hed long

reached finality. The decision of the First Circuit Court of

Appeals for the State of Louisiana, denying Mutual’s re-

a teed O's S

A-53

quest for reconsideration was handed down March 13,

1992. That was Mutual’s last right of appeal. The denial of

certiorari by the Supreme Court of Louisiana made the

FBT judgment final as of March 13, 1992. FBT’s judicial

interest is a vested property right.

(page 31)

The imposition of an administrative plan, “‘effective’’

on a date substantially later than the date of FBT’s

vesting, would amount to a prohibited “retroactive” ap-

plication of law. This concept is fundamental. In Ohio

Association, etc. v. PERS, 585 N.E.2d 597 (Ohio

Com.P1.,1990) that court held, at 601:

‘‘An administrative rule, having the force and

operation of a statute, which extinguishes or im-

pairs a vested legal relationship, creates a new

obligation, imposes a new duty or attaches a new

disability to previous transactions constitutes a

retroactive enactment and results in a depriva-

tion of property without due process of law.”’

In connection with the unilateral devaluation of

retirement benefits in the Pennsylvania school system, this

Court has ruled that certain retroactive enactments are

constitutionally void regardless of the fiscal or actuarial in-

terests of the Commonwealth. In Association of PA. State

College v. State System, 479 A.2d 962 (Pa. 1984) this Court

stated, at 966:

“Accepting the principle that the state’s duty to

maintain the fiscal integrity of the retirement

fund through actuarial soundness is a valid basis

for some changes in a retirement system, never-

A-54

theless, the state’s unilateral reduction of retire-

ment benefits arising from the employment con-

tracts cannot pass constitutional muster and

must fall.”

The same analysis is applicable here. The denial of in-

terest under the plan had “‘acturial soundness’”’ as one of its

obvious goals. In view of the circumstances involved in this

case, however, that goal cannot overcome the impairment

of FBT’s rights and does not pass “‘constitutional muster”’

as a retroactive enactment of administrative law.

(page 32)

Finally, in Sanders v. Loomis Armored, Inc., 614

A.2d 320 (Pa. Super. 1992), the Pennsylvania Superior

Court held, at 322:

‘“‘Laws which are applied retroactively offend the

due process clause if, ‘balancing the interests of

both parties, such application would be

unreasonable.’ Jd. Retroactive laws which have

been deemed reasonable are those which ‘impair

no contract and disturb no vested right, but only

[vary] remedies, cure defects in proceedings other-

wise fair, and do not vary existing obligations

contrary to their situation when entered into and

prosecuted.’ Krenzelak v. Krenzelak, 503 Pa. at

382-83, 469 A.2d at 991 (quoting Smith v. Fenner,

399 Pa. 633, 641, 161 A.2d 150, 154 (1960).”

In the case at bar, imposition of Section XVII* of a

45 We repeat, at the risk of being redundant, that the language of Sec-

tion XVII does not actually deprive FBT of judicial interest, for the pro-

vision states ‘‘Except as may be otherwise provided for in this Plan, or

as many be otherwise required under applicable law, all Creditors

Sia as Nile tla Nl ‘ paar ree ee .

ae ee

6 ai enn. Ree

)

A-55

plan which did not become ‘‘effective’’ until December 4,

1992 would be an unreasonable impairment of contract and

a disturbance of FBT’s vested right. In Sanders, supra, the

Pennsylvania Superior court described a ‘‘vested”’ right as

including an accrued cause of action, ruling, at 323 that:

“The true test of when a cause of action arises or

accrues is ‘to establish the time when the Plaintiff

could have first maintained the action to a suc-

cessful conclusion.’ Kapil v. Association of Penn-

sylvania State College and University Faculties,

504 pa. 92, 99, 470 A.2d 482, 485 (1983).”’

Here, FBT’s cause of action included, under Loui-

siana law, its vested right to recover judicial interest. That

cause of action accrued and became a final judgment long

before the plan was (page 33) approved. Accordingly, a

denial of interest violates the 14th Amendment guaranty

against the enactment of retroactive law.

footnote 45 continued

holding Unsecured Claims shall waive interest...’

The payment of interest is “required under applicable law’’.

A-56

CONCLUSION

Mutual has waived the plan. Mutual elected

remedies. FBT’s judgment is final and requires full faith

and credit. FBT’s right to interest is vested. The interest

provision in the plan does not deprive FBT of interest. Any

interpretation of the plan disallowing FBT interest would

be an impairment of contract, a violation of due process

and a retroactive enactment of substantive law. The judg-

ment of the Commonwealth court should be amended to

allow FBT to be paid in the full and true sum of $1 Million

together with legal interest from date of judicial demand

until paid, as set forth in the final judgment rendered in the

Louisiana courts. Payment should be ordered from the cash

assets available or alternatively, when all class 4 claims are

paid.

Respectfully sumitted:

‘s/ Henry L. Klein

HENRY L. KLEIN, pro hac vice

Bar No. 7440

844 Baronne Street

New Orleans, LA 70113-1103

(504) 586-9971

/s/_ Perry S. Bechtle, Esq.

PERRY S. BECHTLE, ESQ.

LaBrum & Doak

Suite 2900

1818 Market Street

Philadelphia, PA 19103-3629

(215) 587-4302

A-57

CERTIFICATE OF SERVICE

I hereby certify that a copy of the above and forego-

ing pleading has been served on all counsel of record by

hand delivery, FAX and/or by depositing same into the

United States Mail, properly addressed and postage

prepaid on this 14th day of April, 1994.

/s/_ Illegible

A-58

APPENDIX E

IN THE SUPREME COURT OF PENNSYLVANIA

MIDDLE DISTRICT

CYNTHIA M. MALESKI, : No. 116 Middle District

INSURANCE COMMIS-_ : Appeal Docket 1993

SIONER OF THE COM-

MONWEALTH OF

PENNSYLVANIA

v. : Appeal from the Order

: of the Commonwealth

: Court, No. 3483 C.D.

THE MUTUAL FIRE : 1986, dated November

MARINE & INLAND : 10, 1993

INSURANCE COMPANY

APPEAL OF: FBT

BANCSHARES

ORDER

PER CURIAM DECIDED: DECEMBER 13, 1994

Order of the Commonwealth Court affirmed. Ap-

pellant’s Motion for Transfer of Appeal to Philadelphia for

Oral Argument is denied as moot.

A-59

Mr. Justice Montemuro is sitting by designation.

JUDGMENT ENTERED:

| DECEMBER 13, 1994

) /s/ John L. Stehulak

JOHN L. STEHULAK, ESQUIRE

DEPUTY PROTHONOTARY

mm oe nt

A-60

APPENDIX F

IN THE COMMONWEALTH COURT

OF PENNSYLVANIA

GEORGE F. GRODE,

INSURANCE COMMIS-

SIONER OF THE COM-

MONWEALTH OF

PENNSYLVANIA,

NO. 3483 C.D. 1986

Plaintiff

vs.

THE MUTUAL FIRE,

MARINE & INLAND IN-

SURANCE COMPANY,

Defendant

MOTION OF THE REHABILITATOR TO PAY

CLASS 4 LOSS ADJUSTMENT EXPENSES IN FULL

Linda S. Kaiser, Insurance Commissioner and

Rehabilitator of the Mutual Fire, Marine and Inland In-

surance Company, by his attorney, hereby seeks permis-

sion of this Honorable Court to pay the loss adjustment ex-

penses for outstanding class 4 claims in full as follows:

1. On February 26, 1990, this Honorable Court

issued an Order approving and amending the Plan of

Rehabilitation in the above-captioned matter. That Order

stated, inter alia, at paragraph 11:

A-61

11(A). The second paragraph of Section IX Loss Ad-

justment Expenses is amended to read:

Loss Adjustment Expenses related to the

employment of all investigators, adjustors and

counsel who are retained by the Rehabilitator or

Mutual Fire or either their authorized agents to in-

vestigate, adjust and defend claims asserted against

7 Mutual Fire’s Policyholders (‘‘Professionals’’) shall be

4 shared equally by Mutual Fire and its Policyholders

effective April 23, 1990. The Rehabilitator reserves

: the right to further reduce or terminate payment of

Loss Adjustment Expenses in the event that cash

flow is inadequate. Loss Adjustment Expenses will be

paid as aforesaid by Mutual Fire only if Policyholders

pay their share of Loss Adjustment Expenses and re-

tain the services of Professionals previously approved

or hereafter approved by the Rehabilitator.

Grode v. The Mutual Fire, Marine and Inland Insurance

| Company, 572 A.2d 798, 814 (Pa. Cmwlth 1990).

2. In approving the Plan, and thereafter modifying it

by the February 26, 1990 Order to provide for loss adjust-

ment expenses on Class 4 claims to be shared equally be-

tween Mutual Fire and its policyholders, this Court focused

on the staggering cost of loss adjustment expenses and its

effect upon the estate. This Court noted that ‘‘[w]e are pain-

fully aware of the magnitude of this - the largest current

expense of the estate - and the drain it causes on Mutual

Fire’s resources.” 572 A.2d at 808-809.

3. Pursuant to the Plan, the Rehabilitator has paid

and continues to pay its fifty percent (50%) share of the

loss adjustment expenses incurred on behalf of policy-

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holders.

4. In December, 1994, the Rehabilitator declared

that sufficient collections had been made to pay all ad-

justed Class 4 claims in full and to adequately reserve for

unadjusted Class 4 claims pursuant to Section VI of the

Plan.

5. Moreover, in accordance with Section 11(D)(1)(a)

and Section IX! of the Plan, the Rehabilitator has been ad-

justing reimbursement claims of policyholders seeking to

recover the fifty percent of the loss adjustment expenses

related to their claims that the policyholder paid pursuant

to the Court’s Order of February 26, 1990. The

Rehabilitator expects to be able to pay such claims after

the indemnity claims are paid.

6. The Rehabilitator has concluded that the payment

of loss adjustment expenses on Class 4 c.uims no longer

constitutes a significant drain on the assets of the estate,

since the claims for such expenses have dwindled

significantly and are limited to a small number of claims.

7. Adequate funds are available to pay such expenses

in full as they are incurred.

8. The estate would incur additional unnecessary ex-

pense if the fifty percent limitation of the payment of loss

1 Section IX of the Plan also prowides: ‘‘Policyholders may include in

their claims against Mutual Fire, for further review and consideration,

all costs in defending insured claims, which costs would have been paid

by Mutual Fire except for the suspension of certain Loss Adjustment

Expenses herein.”’

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adjustment expenses was continued in effect, because it re-

quires duplicative effort to adjust the original loss adjust-

ment expense claim, and then to adjust again the

policyholder’s claim for reimbursement of the fifty percent

of such expenses paid. Moreover, approval of this Motion

would reduce the continuing burden placed on

policyholders to pay 50% of the loss adjustment expenses

related to their claims.

9. Payment of these claims will in no way affect the

payment of Class 4 indemnity claims, since the funds for

such payments are already set aside in the Class 4 fund.

WHEREFORE, the Rehabilitator respectfully re-

quests that this Honorable Court enter an Order in the

form attached hereto amending the Court’s order of

February 26, 1990, to allow the Rehabilitator to pay in full

professionals incurring loss adjustment expenses relating

to Class 4 claims.

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Respectfully submitted,

LINDA S. KAISER, Insurance

Commissioner of the Commonwealth

of Pennsylvania, and Rehabilitator

of The Mutual Fire, Marine and In-

land Insurance Company (In

Rehabilitation)

By: /s/ James S. Gkonos

JAMES S. GKONOS, ESQUIRE

The Mutual Fire, Marine and

Inland Insurance Company

(In Rehabilitation)

Centre Square, East Tower

1500 Market Street, 17th Floor

Philadelphia, PA 19102

(215) 567-9600

Dated: January 31, 1995

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VERIFICATION

I, Alexander Bratic, Special Deputy Rehabilitator,

hereby certify that the averments of fact contained in the

foregoing Rehabilitator’s Motion to Pay Class 4 Loss Ad-

justment Expenses in Full are true and correct to the best

of my knowledge, information and belief. This verification

is made subject to penalties of 18 Pa. C.S.A. §4904 relating

to unsworn falsification to authorities.

/s/ Alexander Bratic

ALEXANDER BRATIC

SPECIAL DEPUTY REHABILITATOR

DATED: January 31, 1995

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APPENDIX G

4/9/1

DIALOG(R)File 633:Phil Inquirer

08032070

BANKRUPT 8 YEARS AGO, FIRM PAYS ALL

CLAIMS. “THAT’S UNPRECEDENTED” SO SAYS

THE ONE WHO HAS MANAGED MUTUAL FIRE

MARINE & INLAND FOR THE STATE.

Philadelphia Inquirer (Pl) - WEDNESDAY February 1,

1995

By: Andrew Cassel, INQUIRER STAFF WRITER

Edition: FINAL Section: BUSINESS Page: C01

Word Count: 394

TEXT:

More than eight years after they took on one of the largest

insurance bankruptcies in the nation, Pennsylvania in-

surance regulators have claimed a significant victory.

The Mutual Fire, Marine & Inland Insurance Co., a

Philadelphia company that went belly up in 1986, has paid

off all its policyholders in full, regulators said this week.

Alexander Bratic, who has managed the company on

behalf of the state since 1990, said yesterday that Mutual

Fire had paid out $235 million to between 4,000 and 5,000

policyholders, a critical step on the road to becoming a

A-67

functioning insurance company once again.

‘“‘That’s unprecedented,” Bratic said. ‘Without any

outside help, we paid off all the claims’’ against the

company.

Mutual Fire’s customers were businesses, ranging in

size ‘from the corner grocery to Exxon.”’ Bratic said. The

Company sold so-called “‘surplus lines’’ insurance, general-

ly higher-risk policies that other companies would not sell.

But the company slid into insolvency in the 1980s, as

its liabilities grew much larger than its assets. Mutual Fire

was more than $400 million in the hole when the state took

it over.

Rather than liquidate it or sell it to another insurer

- the typical way such bankruptcies are handled - Penn-

sylvania insurance regulators decided to try to

“rehabilitate’’ Mutual Fire. Bratic said that decision has

paid off.

“Liquidation could have lasted 30 years in a com-

pany like this,” he said. ‘The lesson is there is a faster way

to resolve these insolvencies.”’

The company still has about 130 unsettled

policyholder claims against it for about $90 million, Bratic

said, but Mutual Fire has established a reserve to pay

those off. Additionally, still to be settled are about 400

claims from other insurance companies for between $200

million and $250 million.

“I hope it won’t take more than a year, or a year and

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a half,’’ to resolve those, Bratic said.

If the rest of the rehabilitation is successful, Mutual

Fire could emerge as a functioning insurance company

again, although a much smaller one than when it entered

bankruptcy. Its assets would total $5 million or $6 million,

as opposed to more than $400 million before 1986, Bratic

said.

The company employs about 40 people in Center Ci-

ty, down from 250 before the bankruptcy. Bratic said the

company would end up with a staff of about ‘20 or less’’

at the end of the rehabilitation.

A-69

APPENDIX H

IN THE COMMONWEALTH COURT

OF PENNSYLVANIA

GEORGE F. GRODE, 4

INSURANCE COMMIS-

SIONER OF THE COM- *

MONWEALTH OF

PENNSYLVANIA, .

Plaintiff * NO. 3483 C.D. 1986

VERSUS “

THE MUTUAL FIRE, ’

MARINE & INLAND IN-

SURANCE COMPANY,

Defendant °

OBJECTION TO NOTICE OF DETERMINATION

AND NOW INTO COURT, through undersigned

counsel, comes FBT Bancshares, Inc., claimant, and ob-

jects to the Notice of Determination served upon it by

Mutual Fire, Marine and Inland Insurance Company on

October 2, 1992, on the following grounds:

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This matter has been the subject of litigation,

resulting in a final judgment in favor of FBT Bancshares,

Inc. in the full and true sum of $1 Million, together with

judicial interest from August 17, 1986 until paid.

Il.

Pursuant to the Full Faith and Credit Clause of the

United States Constitution, this Judgment must now be

given full faith and credit by the Commonwealth Court,

and is not subject to further ‘“‘adjustment’ by Mutual.

III.

Mutual is judicially, equitably and collaterally estop-

ped from attempting to adjust this matter because it

elected to litigate the issues in the Louisiana State Court

system, and elected not to file a motion to stay pro-

ceedings, but rather chose to take its chances in the con-

text of litigation.

IV.

Mutual’s reasons for seeking Court approvaa of a

lower payment than required under the judgment are iden-

tial to those reasons set forth in its defense of FBT’s

lawsuit in the Louisiana Courts, and the matter is now res

judicata.

A-71

Respectfully submitted:

/s) Henry L. Klein

HENRY L. KLEIN, ESQ.

Bar No. 7440

844 Baronne Street

New Orleans, LA 70113-1103

(504) 586-9971

CERTIFICATE OF SERVICE

I hereby certify that a copy of the above and forego-

ing pleading has been served on all counsel of record by

hand delivery, FAX and/or by depositing same into the

United States Mail, properly addressed and postage

prepaid on this 6th day of October 1992.

/s/_ Henry L. Klein

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.