                                                                                                                           Opinions of the United
2003 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


4-17-2003

Lexington Natl Ins v. Ranger Ins Co
Precedential or Non-Precedential: Precedential

Docket 02-2635




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"Lexington Natl Ins v. Ranger Ins Co" (2003). 2003 Decisions. Paper 580.
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                                  PRECEDENTIAL

                                              Filed April 17, 2003

            UNITED STATES COURT OF APPEALS
                 FOR THE THIRD CIRCUIT


                           No. 02-2635


   LEXINGTON NATIONAL INSURANCE CORPORATION,
                             Appellant
                                  v.
               RANGER INSURANCE COMPANY

      On Appeal from the United States District Court
               for the District of New Jersey
         District Judge: Honorable Joel A. Pisano
                  (D.C. Civ. No. 02-00028)

                   Argued February 28, 2003
       Before: SCIRICA, GREENBERG, and GIBSON*,
                      Circuit Judges

                     (Filed: April 17, 2003)




* Honorable John R. Gibson, Senior Judge of the United States Court of
Appeals for the Eighth Circuit, sitting by designation.
                              2


                       David C. Dreifuss (argued)
                       Nagel Rice Dreifuss & Mazie
                       301 South Livingston Avenue,
                       Suite 201
                       Livingston, N.J. 07039-3991
                         Attorneys for Appellant
                       Joseph P. LaSala (argued)
                       Nancy McDonald
                       McElroy, Deutsch & Mulvaney, LLP
                       1300 Mount Kemble Avenue
                       P.O. Box 2075
                       Morristown, N.J. 07962-2075
                         Attorneys for Appellee


                 OPINION OF THE COURT

GREENBERG, Circuit Judge:

                     I. INTRODUCTION
   This matter comes on before this court on appeal from an
order entered May 23, 2002, granting defendant Ranger
Insurance Company’s (“Ranger”) motion under Fed. R. Civ.
P. 12(b)(6) to dismiss this action for failure to state a claim
on which relief may be granted. In view of the procedural
posture of the case we set forth the facts as alleged by the
plaintiff, Lexington National Insurance Corporation
(“Lexington”), and decide this appeal on the basis of them.
See Maio v. Aetna, Inc., 221 F.3d 472, 482 (3d Cir. 2000).
  Lexington and Ranger are licensed insurance companies
which underwrite bail bonds in New Jersey. They conduct
their bail bond businesses through contract bail agents
who, as between the agents and the companies, bear any
losses on bail bonds they issue. In the bail bond business
in New Jersey the purchasers of the bonds usually pay a
premium of ten per cent of the amount of the bond to the
bondsmen who divide the premiums with the companies.
The percentage of the premium the bondsmen retain varies
but typically they remit 20% of the premium to the
                              3


company for its share of the premium and 10% of the
premium to the company for payment into a reserve fund to
secure the company against loss in the event of a forfeiture.
   N.J. Stat. Ann. § 54:18A-2 (West 2002) imposes a tax of
2.1% on taxable premiums and N.J. Stat. Ann. § 54:18A-4
(West 2002) provides that taxable premiums consist, inter
alia, of “gross premiums.” Ranger calculates its tax only on
the portion of the premium that the bondsmen remit to it
but Lexington calculates its tax on the entire premium paid
for the bond. By reason of the differential in the tax
calculation, Lexington charges that Ranger “has the ability
to contract with its contract bail agents at a lower cost than
its competitors . . . and has done so.” App. at 4. Moreover,
Lexington claims that it has lost business to Ranger by
reason of Ranger’s underpayment of taxes.
   Lexington alleges that Ranger’s failure to pay the
premium tax on gross premiums “is a deceptive and
wrongful business practice [which] constitute[s] unfair
competition under New Jersey law” causing it injury. Id. It
further alleges that Ranger’s acts constitute intentional and
negligent     interference   with     Lexington’s    economic
relationship with customers and prospective customers and
interfere with Lexington’s prospective economic advantage.
Furthermore, Lexington asserts that by reason of Ranger’s
method of paying taxes it is “committ[ing] an
unconscionable commercial practice, deception, fraud,
falsity, or misrepresentation” in violation of the New Jersey
Consumer Fraud Act, N.J. Stat. Ann. § 56:8-1 et seq. (West
2001). App. at 7. Accordingly, Lexington seeks
compensatory, punitive, and treble damages, attorney’s
fees, interest, and costs. It also seeks injunctive relief,
apparently in the form of an order requiring Ranger to pay
its taxes to the State of New Jersey on what Lexington
believes is a correct basis.
  As we have indicated, Ranger moved to dismiss the
complaint pursuant to Rule 12(b)(6). It attached to its
motion an affidavit of its vice president responsible for its
bail bond business who stated that from the time Ranger
became authorized to underwrite bail bonds in New Jersey
in the early 1990s it has filed annual tax returns with the
State of New Jersey pursuant to N.J. Stat. Ann. 54:18A-1
                             4


(West 2002), the state has accepted every tax return as
filed, and the New Jersey Director of the Division of
Taxation “has never issued any deficiency assessments or
penalties against Ranger in connection with any return.”
App. at 12. In response, Lexington submitted an affidavit to
which it attached a letter from its own certified public
accountant to an officer or employee of the Office of
Financial Examination of the New Jersey Department of
Banking and Insurance reading in pertinent part as follows:
       I wanted to confirm my understanding of our earlier
    phone conversations. Based on these conversations, I
    am confirming that premium taxes on bail premiums
    must be paid on ‘gross premiums’ and our
    interpretations of the New Jersey Taxation statute, Title
    54: section 18A-2, et. seq. are correct and that my
    client has therefore been properly reporting and paying
    New Jersey premium taxes on this basis.
App. at 16. Without apparent objection of the parties the
district court considered these affidavits on the motion to
dismiss though it did not convert the motion into a motion
for summary judgment pursuant to Rule 12(b), see Rose v.
Bartle, 871 F.2d 331, 339-40 (3d Cir. 1989), and thus we
will consider them as well.
   The district court in granting Ranger’s motion to dismiss
discussed Lexington’s claims seriatim. First, it indicated
that New Jersey’s common law unfair competition law does
not have clear boundaries but is instead flexible and elastic
as evolving standards of morality demand and the essence
of an unfair competition claim is the enforcement of fair
play. See Duffy v. Charles Schwab & Co., 123 F. Supp. 2d
802, 815 (D.N.J. 2000); Ryan v. Carmona Bolen Home for
Funerals, 775 A.2d 92, 94 (N.J. Super. Ct. App. Div. 2001).
It then pointed out that Lexington did “not assert that
Ranger attempted to mislead the public, create confusion in
the trade, or misappropriate[ ] Lexington’s product.” App. at
24. Furthermore, Lexington did not have a property interest
in the allegedly withheld tax dollars. Thus, the court
concluded that Ranger’s failure to pay its taxes “is an issue
between Ranger and the State of New Jersey [and] [e]ven if
[Lexington] conclusively establishes that Ranger failed to
                                     5


pay its taxes, it would not amount to an unfair competition
claim.” Id. at 25. Accordingly, it dismissed that claim.
   The district court then dismissed Lexington’s claims for
tortious interference with prospective economic advantage
as it did not consider that its complaint adequately pled
that there was “a causal connection between Ranger’s
conduct and [its] loss of . . . business.” App. at 28. While
it recognized that it was required to accept Lexington’s
allegations it was not required to accept “bald assertions,
subjective characterizations, or legal conclusions.” See
General Motors Corp. v. The New A.C. Chevrolet, Inc., 263
F.3d 296, 333 (3d Cir. 2001). Finally, it held that the New
Jersey Consumer Fraud Act is inapplicable here as this
case “does not directly involve any merchandise that is
being sold to the public,” app. at 31, and thus does not
come within the act. See Cox v. Sears Roebuck & Co., 647
A.2d 454, 462 (N.J. 1994); J & R Ice Cream Corp. v.
California Smoothie Licensing Corp., 31 F.3d 1259, 1270-74
(3d Cir. 1994); N.J. Stat. Ann. 56:8-1(c) (West 2001). The
court then entered the order of May 23, 2002, from which
Lexington appeals.

      II. JURISDICTION AND STANDARD OF REVIEW
   The district court exercised diversity of citizenship
jurisdiction under 28 U.S.C. § 1332(a)(1) and we exercise
jurisdiction under 28 U.S.C. § 1291. Our standard of review
is plenary and we treat Lexington’s allegations as true for
the purposes of this appeal and draw all reasonable
inferences in its favor. See Maio, 221 F.3d at 482. We will
apply New Jersey law as the parties have briefed the case
on that basis.1

1. Lexington alleges that states other than New Jersey have tax laws
similar to N.J. Stat. Ann. § 54:18A-2 and that Ranger has been acting
unlawfully with respect to its taxes in those states as well. We, however,
will disregard these allegations as the parties do not cite the law of those
unspecified states and instead brief this case as if only New Jersey law
applies.
                                    6


                          III. DISCUSSION
  We are in agreement with the district court’s disposition
of this case and also are in accord with its reasoning. We
nevertheless place our decision on a slightly modified basis.
First, we point out that Lexington does not assert that
Ranger directly injured it by, for example, disparaging its
product. Nor does Lexington make factual allegations that
Ranger dealt unfairly with its customers, i.e., the bail
bondsmen or, more remotely, the persons purchasing
bonds, as it does not assert that the State of New Jersey
could hold them responsible for Ranger’s allegedly
underpaid taxes.2 In fact, quite the opposite is true as
Lexington charges that by reason of Ranger’s wrongful
conduct it was able to give its bondsmen more favorable
rates than those of its competitors. Rather, Lexington
contends that Ranger acted illegally with respect to the
State of New Jersey in a matter plainly collateral to its
dealings with its own customers.
   It should be clear that the implications of this case
cannot be cabined. For example, if a business may assert
a valid claim against a competitor for unlawfully reducing
its costs by underpaying its taxes it follows that a business
could assert a claim against a competitor predicated upon
a theory that it is obtaining an economic advantage by
underpaying its employees in violation of minimum wage
act or similar laws. Indeed, the principles underlying
Lexington’s claims, if accepted, would justify a business
suing its competitor on the theory that it is reducing its
costs by violating environmental protection laws or any
other federal or state law regulating its operations. If we
hold that Lexington has pled a claim on which relief may be
granted we will invite a tidal wave of litigation as
businesses find opportunities to meddle in their
competitors’ affairs. We are aware that in New Jersey

2. Lexington relies heavily on Feiler v. New Jersey Dental Association,
467 A.2d 276 (N.J. Super. Ct. Ch. Div. 1983), aff’d, 489 A.2d 1161 (N.J.
Super. Ct. App. Div. 1984), but that case concerned allegations charging
a dentist with untruthful and deceptive billing practices, 467 A.2d at
429, and thus, unlike this case, did not involve a matter collateral to the
defendant’s business dealings.
                             7


arguments that a result in a case may open a Pandora’s
box do not always fare well. Nevertheless, we will not reach
the result that Lexington seeks in part because a federal
court in a diversity case should be reluctant to expand the
common law. See Northview Motors, Inc. v. Chrysler Motors
Corp., 227 F.3d 78, 92 n.7 (3d Cir. 2000).
   In reaching our result we recognize that anyone familiar
with the development of New Jersey law over the last half
century fairly must acknowledge that the state’s courts
have expanded the circumstances that may give rise to tort
liability. But there has to be a limit somewhere. Our duty
here is to predict how the New Jersey Supreme Court would
view this case and we will discharge that duty by holding
that it would reject Lexington’s claims. See Leo v. Kerr-
McGee Chem. Corp., 37 F.3d 96, 99, 101 (3d Cir. 1994).
   We do not know whether Lexington’s or Ranger’s view of
the New Jersey tax law is correct and, though we do not
doubt our ability to do so, we will not decide that issue as
our result does not depend on it. We point out, however,
that Lexington’s letter confirming its conversations with an
officer or employee in the New Jersey Department of
Banking and Insurance surely cannot establish what the
New Jersey law is and, indeed, probably is not even binding
on the state. See Airwork Serv. Div. v. Director, Div. of
Taxation, 478 A.2d 729, 733 (N.J. 1984). Nor are we
impressed by the circumstance that the state has accepted
Ranger’s returns as filed for Ranger does not make a
showing that its returns reflected the circumstance that it
was paying tax only on the basis of the percentage of the
premiums paid for the bonds that reached it. Thus, for all
we know the state may not know how Ranger has been
computing premiums for tax purposes.
   In our view if Ranger has been underpaying its taxes that
matter is, as the district court said, an issue between the
State of New Jersey and Ranger. As Ranger correctly points
out in its brief, the state has a comprehensive system for
the examination of tax returns and may assess taxpayers
for deficiencies under the State Tax Uniform Procedure
Law. See N.J. Stat. Ann. §§ 54:48-1 to 54:53-18 (West
2002); see also N.J. Stat. Ann. § 54:18A-1.3(c) (West 2002).
If the state makes such an assessment against Ranger,
                                8


Ranger may seek a review of the assessment in the New
Jersey Tax Court. See N.J. Stat. Ann. § 2B:13-2 (West
Supp. 2002). In the circumstances, we agree with Ranger’s
contention that if it has underpaid its taxes, which it denies
is the case, the determination that it has done so must be
made in state administrative proceedings subject to state
judicial review. We also agree that its failure, if such be the
case, to pay its taxes in full cannot create “a private right
of action for a third party to seek an audit of [its] return”
on any of the theories Lexington has advanced in this
litigation even though the remedy it seeks is damages
payable to itself rather than the state. Appellee’s br. at 25.
  We do not know whether Lexington at a trial could
establish that it lost business because of Ranger’s ability to
reduce costs by underpaying its taxes but in deciding this
case we are assuming that it can do so, though, as the
district court noted, its factual allegations along these lines
seem to be insubstantial. Moreover, we will assume without
deciding that Lexington’s view of the tax law is correct.
Nevertheless, we hold that Lexington must suffer the loss of
which it complains without a remedy.

                      IV. CONCLUSION
  For the foregoing reasons the order of May 23, 2002, will
be affirmed.


A True Copy:
        Teste:

                    Clerk of the United States Court of Appeals
                                for the Third Circuit
