Lori A. Scott v. PNC BANK, NATIONAL ASSOCIATION Appeal from the United States District Court for the…

NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
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No. 18-3363
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LORI A. SCOTT,
Appellant
v.
PNC BANK, NATIONAL ASSOCIATION
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Appeal from the United States District Court
for the Western District of Pennsylvania
(D.C. Civil Action No. 2-18-cv-00619)
District Judge: Honorable Nora B. Fischer
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Argued June 18, 2019
Before: AMBRO, RESTREPO, and FISHER, Circuit Judges
(Opinion filed August 20, 2019)
Kenneth D. Perkins (Argued)
301 Grant Street, Suite 4300
Pittsburgh, PA 15219
Counsel for Appellant
Justin J. Kontul (Argued)
Brian J. Willett
Reed Smith
225 Fifth Avenue, Suite 1200
Pittsburgh, PA 15222
Counsel for Appellee

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OPINION*
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AMBRO, Circuit Judge
Lori Scott appeals from the District Court’s dismissal of her three-count complaint
against PNC Bank, N.A., based on PNC’s alleged interference with her receipt of the
proceeds of her husband’s life insurance policy. We affirm in part, reverse in part, and
remand for further proceedings consistent with this opinion.
I. Background
In 2001 Scott’s husband obtained a $1 million life insurance policy from
Transamerica Life Insurance. (App. 23 ¶ 6.) He listed Scott as the beneficiary of the
policy but in 2003 assigned, via an Assignment of Policy as Collateral Security, its
proceeds to RBC Centura Bank, a bank headquartered in North Carolina, as collateral for
a loan by RBC to Marathon Holdings, LLC, a company he controlled. (Id. ¶¶ 6–7; see
also App. 33–36 (Assignment Agreement).)
The RBC loan was fully repaid in 2004, which Scott claims “effectively negat[ed]
the assignment of the [p]olicy.” (App. 23 ¶ 7.) However, neither Scott’s husband nor
RBC notified Transamerica about the repayment, so Transamerica’s records still showed
the assignment. (Id.)
After repaying the RBC loan in 2004, Scott’s husband had no further dealings with
RBC. Eight years later, RBC was acquired by PNC. Another five years then passed with
* This disposition is not an opinion of the full Court and pursuant to I.O.P. 5.7 does not
constitute binding precedent.

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no dealings between Scott’s husband and PNC until, in March 2017, it made a $500,000
business loan to AccuDoc Solutions, Inc., another entity Scott’s husband controlled.
(App. 24 ¶ 13.) According to Scott, the loan was not linked to the Transamerica
insurance policy or the assignment in any way. (Id.)
A few months later, in August 2017, Scott’s husband died, leaving Scott full
beneficial and legal ownership of AccuDoc. (Id. ¶ 14.) Scott and PNC then began
discussions about AccuDoc’s repayment of the March 2017 loan. (Id. ¶ 15.) During
those discussions, PNC used the RBC assignment as leverage to pressure Scott to repay
immediately that loan. (App. 24–25 ¶¶ 15–16.)
On January 31, 2018, Scott and PNC reached an agreement concerning the
insurance proceeds and the March 2017 loan. (App. 25 ¶ 16.) Specifically, PNC agreed
to release the insurance proceeds as soon as Scott contributed $500,000 in cash to
AccuDoc so that it could repay its loan. (Id.) The agreement also provided that Scott’s
$500,000 contribution to AccuDoc would be in the form of a loan that was subordinated
to AccuDoc’s debt to PNC to the extent of $500,000. (Id.)
In keeping with this agreement, Scott wired $500,000 to AccuDoc and caused it to
transfer $497,523.15 to PNC in repayment of debt. (Id. ¶ 17.) She provided PNC
scanned copies of the relevant documentation. (Id.) Later that day, a PNC representative
sent Scott’s counsel a boilerplate subordination agreement that did not reflect the
agreement between the parties; it did not have a cap on the extent to which Scott’s
$500,000 loan to AccuDoc would be subordinated to AccuDoc’s debt to PNC. (Id. ¶ 18.)
When Scott’s attorney objected to that inconsistency, PNC responded that the boilerplate

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was “a standard PNC doc,” and that Scott should “[p]roceed as you see fit.” (App. 26
¶ 19.)
After further communications with Scott, PNC did two things. It communicated to
Transamerica that it was “withdrawing its claim to the [life insurance] benefits” so that
Transamerica would release the insurance proceeds to Scott. (App. 27 ¶ 23.) Then it sent
Scott a revised subordination agreement that correctly reduced the extent of the
subordination to $500,000, but also added a new provision releasing PNC’s liability in
connection with its negotiations with Scott. (Id. ¶ 24.) She refused to sign that
agreement. (App. 28 ¶ 26.)
Scott received the $1 million of insurance proceeds on February 9, 2018, more
than five months after her husband passed away. (Id. ¶ 25.) Five days later, PNC waived
the signing of the subordination agreement. (Id. ¶ 26.)
Based on these alleged facts, Scott asserts claims under Pennsylvania law for
conversion, fraud, and breach of the covenant of good faith and fair dealing. She alleges
damages in the form of “emotional distress, loss of opportunity, financial damages, loss
of earnings, and damage to her credit standing.” (Id. ¶ 27.)
Scott initially filed her claims in Pennsylvania state court, but PNC removed the
action to the District Court based on diversity jurisdiction. After removal, the Court
granted PNC’s motion to dismiss all three claims under Federal Rule of Civil Procedure
12(b)(6). Scott appeals to us.

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II. Analysis1
Scott appeals the District Court’s dismissal of her claims for conversion, fraud,
and breach of the covenant of good faith and fair dealing. We address each claim in turn.
A. Conversion
To prove a claim for conversion under Pennsylvania law, a plaintiff must show
(1) the deprivation of her right of property in or use or possession of a chattel or other
interference therewith, (2) without her consent, and (3) without lawful justification.
Pioneer Commercial Funding Corp. v. Am. Fin. Mortg. Corp., 855 A.2d 818, 827
(Pa. 2004).
The District Court dismissed Scott’s conversion claim on two grounds. First, it
held the 2003 assignment of insurance proceeds gave PNC a contractual right to receive
those proceeds, which implied that Scott did not have an “immediate right” to possess
them. (App. 12–13.) Second, it held that insurance proceeds never can be the subject of
a conversion claim under Pennsylvania law. (App. 13.) We disagree with both
conclusions.
1. The Continuing Validity of the Assignment
The District Court was correct to review and consider the written life insurance
assignment in ruling on PNC’s motion to dismiss, as it was expressly mentioned by, and
integral to, the allegations in the complaint. See In re Burlington Coat Factory Sec.
Litig., 114 F.3d 1410, 1426 (3d Cir. 1997). But we part with its rejecting Scott’s
1 The District Court had jurisdiction under 28 U.S.C. § 1332(a), and we have
jurisdiction under 28 U.S.C. § 1291.

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contention that the assignment was negated when her husband repaid the RBC loan in
2004.
To make that assessment, we first determine the law that governs the validity of
the assignment agreement. “As a federal court sitting in diversity, we apply the choice-
of-law rules of the forum state, which is Pennsylvania in this case.” Pac. Emps. Ins. Co.
v. Glob. Reins. Corp. of Am., 693 F.3d 417, 432 (3d Cir. 2012) (citing Klaxon Co. v.
Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941)). “Pennsylvania applies the flexible,
‘interests/contacts’ methodology to contract choice-of-law questions.” Id. (quoting
Hammersmith v. TIG Ins. Co., 480 F.3d 220, 226–27 (3d Cir. 2007)) (internal alterations
omitted). Under this approach, we first determine the possible bodies of law that might
apply, and next examine those bodies of law for relevant differences. See id. If there are
“actual, relevant differences between the laws,” then we conduct a further inquiry to
choose between them. Id.
Here the two candidates are Pennsylvania (where the dispute arose) and North
Carolina (where the assignment agreement has its center of gravity, as both Scott’s
husband and RBC resided there). However, as concerns the validity of the assignment
agreement, we do not discern an “actual, relevant difference[]” between these two bodies
of law. Under both, the default rule is that, when a debtor discharges a secured
obligation, the security automatically expires on the obligation’s discharge. See, e.g.,
Smith v. Durham, 37 S.E. 473, 473 (N.C. 1900); Rozen v. N. Carolina Nat’l Bank, 588
F.2d 83, 86 (4th Cir. 1978); Dalfonso v. Benson, 2016 WL 6803836, at *4 (Pa. Super. Ct.
Nov. 17, 2016). Indeed, this is a well-established background principle of secured

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transactions in the United States. See, e.g., Wilbur v. Almy, 53 U.S. 180, 196–97 (1851)
(rejecting claim based on security interest where party asserting claim had already
received payment of the underlying debt); Roberts v. Welch, 43 N.C. 287, 291 (1852)
(noting that “the whole benefit” of a “collateral security . . . sinks with the
extinguishment of the debt”). As Judge Posner once colorfully explained, a security
interest is “parasitic” on a debt obligation. If the obligation is discharged, “poof! the lien
is gone.” Unisys Fin. Corp. v. Resolution Tr. Corp., 979 F.2d 609, 611 (7th Cir. 1992).
Under this background principle, the natural result of Scott’s husband repaying the RBC
loan in 2004 is the automatic extinguishment of the assignment.
To be sure, one could argue that the assignment agreement overrides this
background principle. In relevant part, it states:
This assignment is made and the Policy is to be held as collateral
security for any and all liabilities of [Scott’s husband] or Marathon
Holdings, LLC[,] to the Assignee, both those now existing and those
that may hereafter arise in the ordinary course of business between
. . . the undersigned and the Assignee . . . .
(App. 35 ¶ D.) Thus, PNC could argue, the assignment survived the repayment of the
RBC loan and applied, thirteen years later, as collateral for PNC’s loan to AccuDoc. The
District Court appears to have implicitly adopted this line of reasoning. (App. 12–13.)
However, we believe it was premature to rule that the assignment survived the
repayment of the RBC loan, persisted for another thirteen years (during which RBC
happened to be acquired by PNC), and then applied as collateral to PNC’s unrelated loan
to AccuDoc. Based on the complaint’s allegations, we cannot conclude that PNC’s 2017
loan to AccuDoc was “within the ordinary course of business” established in the 2003

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assignment between Scott’s husband and RBC. Indeed, in these circumstances we
believe the “ordinary course of business” between Scott’s husband and RBC must have
expired within some reasonable time after he repaid the RBC loan in 2004 and had no
further dealings with RBC or PNC. Nonetheless, for purposes of this appeal, we need not
rule whether or when that expiration occurred. Discovery will presumably clarify this
issue. For now we merely hold the complaint alleges sufficiently that PNC had no right
to invoke the assignment in 2017 to gain negotiating leverage over Scott in the wake of
her husband’s death.
2. Conversion of Insurance Proceeds
The District Court dismissed the conversion claim for a second reason. It
concluded that, under Pennsylvania law, a claim for conversion cannot be based on the
alleged non-payment of insurance proceeds. (App. 13.) For this proposition, it cited
federal district court cases and a decision by the Superior Court of Pennsylvania. (Id.)
But we do not read those cases so broadly. In each of them, the court held that a claim
for conversion cannot stand when there is a contract between the parties that governs the
same disputed funds. Courts have denied claims for conversion in that situation because
the dispute is better handled as a breach of contract. See, e.g., Leonard A. Feinberg, Inc.
v. Cent. Asia Capital Corp., Ltd., 974 F. Supp. 822, 845 (E.D. Pa. 1997) (“These
decisions refused conversion claims because they felt that the true remedy for the harm
alleged lay in contract and not in tort.”); Ins. Adjustment Bureau, Inc. v. Allstate Ins. Co.,
860 A.2d 1038, 1043 (Pa. Super. Ct. 2004) (“[T]he essence of [plaintiff’s] claim is a
breach of contract action.”) (citing Feinberg, 974 F. Supp. at 845), rev’d on other

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grounds, 905 A.2d 462 (Pa. 2006). In the absence of a contract claim between Scott and
PNC concerning its initial invocation of the assignment, we see no reason her conversion
claim must be dismissed as duplicative under the authorities cited by the District Court.
We note, however, that Scott’s claim that PNC wrongfully interfered with her
receipt of the insurance proceeds might conform more naturally to a claim for
interference with contract. See Daniel Adams Assocs., Inc. v. Rimbach Pub., Inc., 519
A.2d 997, 1000 (Pa. Super. Ct. 1987). Scott should have an opportunity on remand to
amend her complaint to add that claim.
B. Fraud
The elements of fraud under Pennsylvania law are (1) a representation or
omission, (2) that was material to the transaction, (3) made falsely with the requisite
mental state, (4) with the intent of misleading another into relying on it, (5) justifiable
reliance on the misrepresentation, and (6) injury proximately caused by the reliance.
Bortz v. Noon, 729 A.2d 555, 560 (Pa. 1999). The District Court dismissed Scott’s fraud
claim because she alleged neither a misrepresentation nor justifiable reliance. (App. 14–
15.)
This claim does not deserve a long discussion. The District Court was correct: the
complaint does not allege justifiable reliance by Scott on any false or misleading
statement or omission by PNC. To the contrary, the basis of her conversion claim is that
she knew PNC did not have a right under the assignment to interfere with her receipt of
the insurance proceeds. Hence the complaint does not adequately allege a claim of fraud,
and we affirm its dismissal.

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C. Breach of the Duty of Good Faith and Fair Dealing
Pennsylvania law does not recognize a distinct claim for breach of the duty of
good faith and fair dealing. See Burton v. Teleflex Inc., 707 F.3d 417, 432 (3d Cir. 2013).
Recognizing this, the District Court construed Scott’s good-faith claim as a claim for
breach of contract. (App. 16–17.) Nonetheless, it concluded the complaint failed to
allege a contract claim because Scott “has not even identified what contract was
breached.” (App. 16.)
We diverge from our District Court colleague on this point. The complaint
expressly alleges that Scott and PNC reached an agreement on January 31, 2018, to
resolve their ongoing dispute over the insurance proceeds and the March 2017 loan.
(App. 30 ¶¶ 44–46.) The terms of the agreement were that (i) Scott would make a loan of
$500,000 to AccuDoc, (ii) Scott’s loan to AccuDoc would be subordinated to AccuDoc’s
debt to PNC to the extent of $500,000, (iii) once the loan was made, AccuDoc would use
the funds to repay its debt to PNC, and (iv) once AccuDoc transferred the funds to PNC,
it would instruct Transamerica to release the insurance proceeds to Scott. (App. 25 ¶ 16.)
Scott performed her part of the bargain by transferring $500,000 to AccuDoc and
causing it to repay its debt to PNC. (Id. ¶ 17.) But PNC did not initially perform its end
of the bargain; instead it continued to obstruct, although briefly, her receipt of the
insurance proceeds and demanded subordination terms for their agreement. (App. 26
¶ 19.) When Scott cried foul about the new terms, PNC demanded that she sign a revised
agreement that purported to absolve it of liability stemming from its negotiations with
her. (App. 27 ¶ 24.) Scott did not sign that release. (App. 28 ¶ 26.)

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Given these allegations, the District Court should not have concluded that Scott
did not allege the existence of a contract. Yet, in oral argument Scott conceded that none
of the damages alleged in her complaint arose from PNC’s alleged deviations from the
January 31, 2018 agreement in the few days before it released the insurance proceeds on
February 9. Thus we affirm the dismissal of that claim.
* * * * *
We affirm the District Court’s dismissal of Scott’s claim for fraud and breach of
the duty of good faith and fair dealing, but we reverse the dismissal of her claim for
conversion. The case is remanded for further proceedings consistent with this opinion.

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