Opinion
02 Civ. 7168 (RPP).
June 12, 2003.
RICHARD A. CONN, Jr., Esq., Latham Watkins LLP, Washington, D.C., Counsel for Plaintiff Commercial Financial Services, Inc.
Caroline W. Spangenberg, Esq., Kilpatrick Stockton LLP, Atlanta, GA, Counsel for Plaintiff Commercial Financial Services, Inc.
Noah Nunberg, Esq., L'Abbate, Balkan, Colavita Contini, L.L.P., New York, NY, Counsel for Defendants Great American Insurance Company of New York and Ohio Casualty Insurance Company.
James Duggan, Esq., Sherri Robinson, Esq., Lustig Brown, New York, NY, Counsel for Dependant Westchester Fire Insurance Company.
OPINION AND ORDER
Defendants Great American Insurance Company of New York ("Great American") and Ohio Casualty Insurance Company ("Ohio Casualty"), joined by Westchester Fire Insurance Company ("Westchester Fire"), issuers of umbrella liability insurance coverage to Plaintiff, Commercial Financial Services, Inc. ("CFS"), move to dismiss the Complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure.
Westchester Fire's policy provided for "aggregate umbrella liability as provided by Great American Insurance Company." (Affidavit of Sherri N. Robinson dated November 25, 2002 in Support of Joinder in Motion to Dismiss ("Robinson Aff.") Ex. A.) Westchester Fire withdrew its motion dated October 1, 2002 to dismiss the third count of the complaint for bad faith failure and refusal to pay, and joined the Great American motion dated November 8, 2002, to dismiss the complaint in its entirety. (Robinson Aff. ¶¶ 5-14.).
BACKGROUND
The Complaint
This action for damages and declaratory relief arises out of the failure of Defendants Great American and Westchester Fire to pay claims on umbrella and excess umbrella insurance policies issued to CFS. (Compl. ¶ 1.) Ohio Casualty is named as a Defendant because it purchased the commercial lines of Great American in 1998. (Id. ¶ 6.)CFS, formed in 1986, was in the business of purchasing and selling non-performing loans and, at its peak, was the largest purchaser and servicer of defaulted credit card receivables in the world. CFS filed for protection in the United States Bankruptcy Court for the Northern District of Oklahoma on December 11, 1998. (Id. ¶¶ 2, 18-19.)
The Complaint alleges that CFS purchased primary coverage from American International Speciality Lines Insurance Company ("AISLIC") on October 4, 1997 and October 4, 1998 in the form of Bankers Professional Liability insurance ("BPL"). (Id. ¶¶ 3, 20-21.) The Complaint alleges that the BPL policy is underlying insurance for the Great American and Westchester Fire excess and umbrella policies. (Id. ¶ 3, 22.) It also alleges that CFS purchased excess and umbrella coverage from Great American with policy periods March 5, 1998 to March 5, 1999; May 14, 1998 to March 5, 1999; March 5, 1999 to March 5, 2000; and Westchester Fire issued an excess and umbrella insurance policy with a policy period April 7, 1998 to March 5, 1999, which "follows form" to the Great American policies. (Id. ¶¶ 21-27.)
The Complaint also alleges that claims totaling $1,610,133,452.75 were asserted against CFS in various legal proceedings for which coverage is provided in the BPL policy and were allowed against the bankrupt estate by confirmation of the plan by order of the Bankruptcy Court on September 14, 2001, and that on September 17, 2001, by a settlement of the coverage litigation against AISLIC, approved by the Bankruptcy Court, AISLIC paid the $5,000,000 aggregate limits of the BPL policy to the bankrupt estate. (Id. ¶¶ 29-30.)
The coverage litigation commenced by the bankrupt estate of CFS did not join, as Defendants, any of the Defendants in this action.
The Complaint then alleges that notice of these claims and judgments was given to Great American and Westchester Fire, and that on June 6, 2002, demand was made upon Great American and Westchester Fire for payment of their full policy limits, plus interest and defense costs. (Id. ¶ 31.)
The three causes of action alleged in the Complaint filed September 9, 2002 are: (1) breach of contract, (2) declaratory judgment, and (3) bad faith failure and refusal to pay. (Id. ¶¶ 40-56.)
In accordance with an earlier order of the Court, prior to argument on the Defendants' motion to dismiss, Ohio Casualty and Great American had turned over to the Plaintiff Great American's entire underwriting file as well as the 10,000 pages of documents Plaintiff had sent to them. (Transcript dated December 20, 2002, "Tr." at 18.).
The Motion to Dismiss
The Defendants' motion to dismiss is based on Great American's certified copies of its umbrella policies issued to CFS, Nos. UMB 8-52-26-68-05, with a policy period of March 5, 1998 to March 5, 1999; UMB 8-52-26-68-06, with a policy period from May 14, 1998 to March 5, 1999; and UMB 8-52-26-68-07, with a policy period of March 5, 1999 to March 5, 2000. Each of these policies are identified in the Complaint, ¶¶ 23-25. The Bankers Professional Liability policy issued by AISLIC is not listed as underlying insurance on any of Great American's copies of these policies. Great American's memorandum in support of its motion made two principal arguments for dismissal: (1) that Great American policies cited in the Complaint do not cover the losses incurred by CFS (Compl. ¶ 41) because the BPL policy is not listed as an underlying insurance policy in any of the Great American policies; and (2) that the umbrella policies issued by Great American expressly exclude liability for any claims other than claims for "bodily injury," "property damage," "personal injury," or "advertising injury" as defined in the policies, whereas the BPL policy issued by AISLIC to the Plaintiff involves coverage for claims arising out of Plaintiff's "servicing or failing to service loan accounts." (Declaration of Noah Nunberg, Esq., dated November 7, 2002 ("Nunberg Decl.") Ex. E at ¶¶ 17, 42) (CFS Amended Complaint against AISLIC in the Bankruptcy Court in District Court for Oklahoma).)In its answering papers, the Plaintiff submitted the affirmation of D. Benjamin Barros, Esq., an associate at the law firm of Latham Watkins, dated December 4, 2002 ("Barros Affm.") which attached three exhibits: Exhibit A, an affidavit of Steve Berry dated January 10, 2002 ("Berry Aff.") with attachment; Exhibit B, a fax copy of a letter dated December 14, 1998, from a wholesale insurance broker, Cooney Rikard Curtin ("Cooney Rikard"), with the same attachment; and Exhibit C, CFS's copy of an umbrella liability policy, UMB-8-52-26-68-05, issued by Great American and a two-page amendment on February 2, 1999.
The Barros affirmation stated:
4. Attached hereto as Exhibit C is a copy of the Great American policy (as defined in the accompanying memorandum of law) relied on by CFS in its Complaint. As described in the Berry affidavit, CFS relied on the policy schedule attached to the Berry affidavit, not on the policy schedule attached to Exhibit C.
(Barros Affm. ¶ 4.)
Exhibit A to the Barros affirmation, the Berry affidavit dated January 10, 2002, states that Mr. Berry, now with Blue Cross/Blue Shield, served as Manager of Administrative Services for CFS between 1993 and 1999, and was responsible during that period for procuring and maintaining the corporate insurance for CFS through the insurance brokerage firm, Chandler Frates Reitz ("Chandler Frates") and:
On or about December 9, 1998 I received from C.F.R. a schedule of underlying insurance policies (attached hereto) which, among other things, indicated that Bankers Professional Liability primary coverage was scheduled beneath certain umbrella policies. At no time do I recall receiving in writing or verbally any information suggesting that the schedule was incorrect or that there was any question as to its accuracy.
(Barros Affm., Ex. A ¶ 4.)
Notably, the Berry affidavit, Exhibit A to the Barros affirmation, does not include the statement that Mr. Berry relied on the "Schedule of Underlying Policies" attached thereto as Mr. Barros' affirmation states. The "Schedule of Underlying Policies" attached to the Berry Affidavit is a single page fax from Chandler Frates. It does not resemble the Schedule of Underlying Policies incorporated in the Great American policies identified in the Complaint. (Nunberg Decl., Ex. A, schedule A; Ex. B, schedule A.)
Exhibit B to the Barros affirmation consists of a copy of a fax dated December 14, 1998 from Nita Sanford of Cooney Rikard addressed to Karen Guidry of Great American re Commercial Financial Services, Policy No. UMB 8-52-26-68-06, 5-14-98 to 3-05-99, stating:
Attached please find a copy of correct underlying information. Other than changing policy numbers and dates, I really don't see anything except [t]he CGL on Security Guards and Bankers Professional Liability. I assume you can not include the Bankers Professional but what about the security guard. Please let me know.
The same "Schedule of Underlying Policies" attached to Mr. Berry's affidavit at Exhibit A is attached as page 2 to Exhibit B of the Barros affirmation.
Exhibit C to the Barros affirmation is a copy of UMB 8-52-26-68-06 and a two page amendment dated February 2, 1999. Neither the policy nor the amendment lists the BPL policy on its "Schedule of Underlying Policies."
Great American's reply papers include the declaration of Robert Gardner, President of Chandler Frates, dated December 16, 2002 ("Gardner Decl.") stating that Chandler Frates never applied for the BPL policy to be included as underlying insurance and that the Umbrella Policy sold to CFS did not include the underlying policy as underlying insurance. (Gardner Decl. ¶ 7.) He also stated that Chandler Frates did not have the authority to bind ANFIC, Great American or Ohio Casualty for coverage or for the issuance of Umbrella Policies nor did Chandler Frates act as an agent of Cooney Rikard. (Gardner Decl. ¶¶ 4-5.) The declaration of Jerry D. Reeves, an independent contractor for Chandler Frates, dated December 16, 2002 ("Reeves Decl.") contained similar statements as Gardener's declaration.
Great American also included a declaration from Richard Hildbold, the Vice President of Ohio Casualty Group, dated December 16, 2002 ("Hildbold Decl.") which stated that neither Ohio Casualty nor Great American has any record of CRC even applying for the BPL policy to be listed as underlying insurance in any American National Fire umbrella policy listed in the Complaint. (Hildbold Decl. ¶ 6.) Attached to the Hildbold declaration as Exhibit B is a copy of the broker agreement between Cooney Rikard Curtin and American National, dated May 15, 1997, which sets forth in the first paragraph thereof that CRC is an independent contractor and has no authority to issue any insurance policies or bind American National Fire Insurance Company in any manner.
Gardener's, Reeves' and Hildbold's declarations all state that the BPL policy was not included on the Schedule of Underlying Policies contained in either Umbrella Policy No. UMB 8-52-26-68-05 or UMB 8-52-26-68-06. (Gardener Decl. at ¶ 7; Reeves Decl. ¶ 5; Hildbold Decl. ¶ 5.) Chandler Frates' file copy is attached as Exhibit A to the Gardner declaration and Ohio Casualty's file copy is attached as Exhibit A to the Hildbold declaration.
Great American's reply papers also include a declaration from Ms. Guidry, now of Ohio Casualty, stating that no application for such coverage exists in Great American's files and that the fax letter from Cooney Rikard dated December 14, 1998, was never received by Great American. The reply memorandum of law argues that CFS's answering papers ask the Court to disregard its Complaint, which did not allege that the policies were amended, and that CFS is now basing its claim on an "amendment" to CFS's file copy of the Great American policy. (Reply Memo at 3.)
The Cooney Rikard fax letter addressed to Ms. Guidry (Barros Affm. Ex. B) does not show that it was faxed to Great American, ANFIC or Ohio Casualty.
Oral Argument
At oral argument, counsel for Great American pointed out that Exhibit C to the Barros affirmation, CFS's umbrella liability policy, produced by Plaintiff, confirmed Great American's position that the BPL policy had not been made an underlying policy to the Great American umbrella policy because Exhibit C contains a two-page amendment dated February 2, 1999, less than two months after the date of Mr. Berry's receipt of the "Schedule of Underlying Policies," which lists all the underlying policies, and does not list the BPL policy as one of the underlying policies, and that, accordingly, the statement in Mr. Berry's affidavit that after December 9, 1998, he did not receive "any information suggesting that the schedule was incorrect," was not accurate. (Tr. 12-14.)
The Court's review showed that Mr. Berry's "Schedule of Underlying Policies" bore no resemblance to the "Schedule A — Schedule of Underlying Policies" contained in Great American's policies attached as Exhibits A and B of the Nunberg affirmation, or contained in Exhibit C to the Barros affirmation, and that the statements contained in the Berry affidavit of January 10, 2002 were insufficient for Mr. Barros to affirm that "CFS had relied on the December 1998 Schedule of Underlying Policies." The Court also noted that Mr. Berry's affidavit (Ex. A) did not state that he had ever applied to have the BPL policy made an underlying policy for the Great American umbrella coverage. (Tr. at 21-25.)
The Court then advised Plaintiff's counsel that its review of the motion papers raised Rule 11 issues, told counsel for Plaintiff that they had better get a strong affidavit from Mr. Berry (Tr. at 25), and gave Plaintiff's counsel one month to show that Plaintiff had an adequate basis to rely on the December 9, 1998 "Schedule of Underlying Policies" as evidence that the BPL policy was underlying insurance for the umbrella policies and to show that the Complaint should not be dismissed. (Tr. at 31.)
Response Papers
On January 22, 2003, Plaintiff supplied the Court with declarations by Caroline W. Spangenberg, Esq. of Kilpatrick Stockton LLP, and Richard A. Conn, Esq. of Latham Watkins, the two attorneys representing CFS during argument of the motion.
Ms. Spangenberg states in her declaration of January 20, 2003 ("Spangenberg Decl.") that on May 30, 2001, she "found the original December 9, 1998 Schedule of Underlying Policies in a three ring binder with the original Westchester Fire policy." (Spangenberg Decl. ¶ 6.) Ms. Spangenberg also states that she and Mr. Conn interviewed Mr. Berry in December 2001 and again on "January 10, 2003" [sic] and that they also interviewed Mr. Reeves, of C.F.R. Lisa Anderson, a former C.F.R. employee and Laurie Perkins, also a former C.F.R. employee. (Spangenberg Decl. ¶ 10.) Ms. Spangenberg states that Ms. Anderson admitted sending the Westchester policy and the "schedule" to Mr. Berry on December 9, 1998 (id. ¶ 11) and that Mr. Reeves disclaimed all contemporaneous knowledge about Ms. Anderson's fax or the transmission of the policy and the schedule to Mr. Berry. (Id. ¶ 12.) She notes that "[n]one of the interviewees testified that they had notified Steve Berry that the December 9, 1998 Schedule of Underlying Policies was incorrect; nor did they produce documentation of any such communication." (Spangenberg Decl. ¶ 13.) Ms. Spangenberg does not claim that Mr. Berry stated that he relied on the "schedule" he received from Ms. Anderson on December 9, 1998.
Mr. Conn's declaration dated January 21, 2003 ("Conn Decl.") states that he and Ms. Spangenberg interviewed Mr. Berry in Tulsa in late 2001. He states:
[o]ur interview revealed that Mr. Berry had received from Lisa Anderson of C.F.R. a letter dated December 9, 1998. This letter included a copy of the Great American policy and a corrected schedule of underlying insurance. The BPL policy was listed as underlying insurance on this corrected schedule. Mr. Berry further stated that he relied upon that communication and had never been told that the corrected schedule was incorrect or inaccurate. He also was not aware of any communication regarding the corrected schedule among insurance agents or the insurance carriers.
Contrary to Mr. Conn's declaration what Mr. Berry received, as noted by Ms. Spangenberg (Spangenberg Decl. ¶ 12), was not a letter from Ms. Anderson, but a covering fax accompanied by a copy of the Westchester policy, not the Great American policy. (See PX — 16, discussed infra.) Furthermore, the alleged "Schedule of Underlying Policies" is not marked "corrected" as Mr. Conn suggests.
Mr. Conn also stated that both Ms. Anderson and Mr. Reeves said they had never notified CFS that the schedule was incorrect. (Conn Decl. ¶¶ 6-7.) Mr. Conn also stated that he called Karen Guidry of Great American and Nita Sanford of CRC in 2002 but learned nothing, and that his call during that same time frame to Great American's General Counsel's office went unreturned. (Conn Decl. ¶ 8-9.)
Neither Mr. Conn nor Ms. Spangenberg claims that they were told by anyone that Mr. Berry or Ms. Anderson or anyone else had applied for the BPL policy to be added as underlying insurance for the Great American or Westchester Fire Umbrella or Excess policies.
Mr. Barros submitted nothing to explain his affirmation that CFS relied on the December 9, 1998 "Schedule of Underlying Policies."
The Plaintiff also provided declarations by Boyd A. Veenstra and William H. Bahr. The declaration of Mr. Veenstra, an insurance claim consultant and expert, is not based on personal knowledge of the facts and contains invalid and inaccurate assumptions of fact and is entirely disregarded on that basis. (See footnote 11 infra; Declaration of Boyd Veenstra dated January 20, 2003, ¶¶ 7-8.) The Bahr declaration relates to general insurance practices.
On January 22, 2003, Plaintiff also provided an undated declaration from Mr. Berry stating that, although he handled insurance for CFS from 1996 until 1999, he does not consider himself an expert and that Chandler Frates, an Oklahoma insurance agency, handled all of CFS's insurance needs and that CFS obtained coverage when Chandler Frates would issue a binder, and stated:
I do not know that I or anyone else at CFS ever consciously considered which specific policies should be listed as underlying insurance of the umbrella insurance policies.
(Declaration of Steve Berry, undated, received January 22, 2003 ("Berry Decl.") at ¶ 1.) The declaration does not state that Mr. Berry relied on the December 9, 1998 "Schedule of Underlying Polices" received from Ms. Anderson.
On January 22, 2003, Plaintiff also delivered documents to the Court (Appendix Volume I containing Plaintiff's Exhibits 1-6 (hereinafter "PX 1-6"); 1-34 (hereinafter "PX I. 34"); 7-10 (hereinafter "PX 7-10") and Appendix Volume II containing Plaintiff's Exhibits 11-25 (hereinafter "PX 11-25"). Volume II included PX-16, a fax cover sheet dated December 9, 1998 at 9:40 a.m., the same date and time as the December 9, 1998 "Schedule of Underlying Policies," from Lisa Anderson of Chandler Frates (Mr. Reeves' clerk or assistant) to Steve, evidently Mr. Berry, entitled "Re Excess Umbrella Policy HXA-64-58-56-0." PX-16 casts doubt on Plaintiff's claim in this motion of CFS's reliance on the so-called "Schedule of Underlying Policies":
The Appendix of exhibits shows that Plaintiff had in its possession copies of the policy covering the period March 5, 1998 to March 5, 1999, and the policy covering the period May 14, 1998 to March 5, 1999, and amendments thereto issued by Great American, none of which list the BPL policy or any documents or notations raising questions why the BPL policy is not listed. (PXs-15, 21, 24.).
This is the Westchester Fire Policy number, not the Great American policy number.
Steve — I've attached a copy of the excess policy for you. I know you probably can't read it very well so I'll put the original in the mail to you. I've also attached a copy of the information I came up with for the Umbrella and Excess Umbrella carriers regarding underlying policy information. This is not a complete list of all your policies — only the liability policies that the Umbrella's would go over.
(PX-16 (emphasis added).) PX-16 is evidence that the December 9, 1998 "Schedule of Underlying Policies" had not been received by the Umbrella and Excess Carriers and possibly would be submitted for their review.
PX-16 was not attached to Mr. Berry's affirmation of January 10, 2002, although it was part of the same communication to Mr. Berry on December 9, 1998 at 9:40 a.m. as the alleged "Schedule of Underlying Policies."
Plaintiff also provided a letter, PX 1.-7 at 2, from James Danehy of Ohio Casualty in Hamilton, Ohio, to Cooney Rikard dated August 15, 2001 acknowledging the receipt of claim number 885-504607 under UMB 8522668 from an unknown claimant stating that based on the material received "we have decided not to follow the case with the primary carrier as it appears unlikely that the value of the claim will reach our umbrella limits." The letter also includes a notice that effective December 1, 1998 Ohio Casualty purchased Great American's commercial division, including the umbrella and excess business and will service it. (PX I.-7 at 2.) PX I.-7 at 1 appears to be the cover of the folder for claim number 885-504607 pertaining to the Great American Umbrella Policy UMB 8522668. PX I.-7 at 3 contains information on an auto insurance claim number 885-504607 under the Great American umbrella policy. PX I.-7 at 4 contains a letter dated June 28, 2001 containing notice of a "new loss" concerning the same claim number and date of loss as appears on PX 1.-7 at 2-3. PX 1.-7 at 5 contains a letter from Jenner Block, LLC to Great American and American National Fire Insurance Company in Cincinnati, Ohio, dated June 26, 2001, containing no claim number but giving notice that CFS's claims against AISLIC may give rise to claims against the Company (CFS) and attaching CFS's complaint and a plan of orderly liquidation which it states may result in claims against the Company.
Reply Papers
In reply, Great American provided a declaration from Jack Allen Jr., the Chairman of Chandler-Frates, stating that it had no authority to bind Great American and a declaration from Mr. Berry dated January 30, 2003 ("Berry Decl. II") stating:
As I previously advised those attorneys (Plaintiff's attorneys), I do not recall receiving the fax, nor do I recall the specifics of the fax. I do not recall why Lisa sent me that fax. Lisa Anderson was a clerk or administrative assistant at Chandler Frates Reitz who worked for Jerry Reeves, the insurance sales agent with whom I did business. (parenthetical identification added.)
(Berry Decl. II at ¶¶ 2-3.)
DISCUSSION
The Motion to Dismiss
The Barros affirmation states that Plaintiff relied, not on Exhibit C (the policy issued to cover the period March 5, 1998 to March 5, 1999, and amended February 2, 1999) but, instead, that CFS relied on the policy schedule attached to the Berry affidavit (Barros Affm. ¶ 4) received on December 9, 1998 at 9:40 a.m., two days before Plaintiff filed for bankruptcy, which was received from a clerk or administrative assistant of Chandler Frates who worked for Mr. Reeves. (Id., Ex. A at 2; PX-16). In Plaintiff's January 22, 2003 submission, it also relies on other documents, e.g., "accord" binders, in an effort to demonstrate that Chandler Frates had apparent authority to bind Great American.The Court recognizes that an insurance company may be liable for binders issued by its authorized agent or by brokers acting with apparent authority, Houston Fire Causualty Insurance Co. v. Jones, 315 F.2d 116 (10th Cir. 1963), but this is not the claim asserted in the Complaint. The Complaint alleges that "[t]he BPL Policy is underlying for the Great American and Westchester Fire Policies." (Compl. ¶ 22.) The Complaint identifies the Great American policies as follows:
23. Great American issued insurance policy number UMB 8-52-26-68-05 to CFS, with a policy period from March 5, 1998 to March 5, 1999.
24. Great American thereafter `reissued' policy number UMB 8-52-26-68-06 to CFS, with a policy period from May 14, 1998 to March 5, 1999.
25. Great American thereafter issued an annual renewal policy numbered UMB 8-52-26-68-07 with a policy period of March 5, 1999 to March 5, 2000.
26. The Great American Policies are excess and umbrella policies providing coverage to CFS and "following form" to underlying insurance. Upon exhaustion of underlying insurance, the Great American policies continue in force as such underlying insurance.
Certified copies of policies with those numbers and covering those periods produced by Great American in support of its motion do not list the BPL policy as underlying insurance. The copies of those policies in CFS's files, which were produced on January 22, 2003, confirm that the BPL policy was not listed in any of the three Great American policies cited in the Complaint or any other Great American umbrella policy documents. (PX I.-9; PXs-15, 18, 21, 23, 24.) In moving to dismiss a complaint, defendants are entitled to rely on documents incorporated by reference in a complaint. See Schnall v. Marine Midland Bank, 225 F.3d 256, 266 (2d Cir. 2000). CFS's Complaint contains no allegations claiming: (1) the amendment of any of the Great American policies; (2) that it relied on the "Schedule of Underlying Policies" received from Chandler Frates on December 9, 1998; or that (3) Chandler Frates had authority or apparent authority to issue binders for Great American. In fact, the Complaint makes no reference to Chandler Frates, Cooney Rikard or any agent of the insurer. In its response papers, Plaintiff took the position that CFS relied on the faxed "Schedule of Underlying Policies" received from Ms. Anderson of Chandler Frates on December 9, 1998 (Barros Aff. ¶ 4) (Pl.'s Mem. in Opp. at 2, 14), and that Chandler Frates, as Great American's agent, had authority to amend the Great American policies specified in the Complaint. (Id. at 3; Pl. Mem. of Law in Further Support at 2.) These facts, upon which Plaintiff now claims it is relying, are not pleaded in the Complaint. Accordingly, the Defendants' motions are granted and the Complaint is dismissed as the facts pleaded in the Complaint, supplemented by the policies identified in the Complaint, fail to state a cause of action.
The first and second causes of action are dismissed since they are both based on a claim of contract. Since the good faith failure and refusal to pay claim does not lie when the policies at issue do not provide for coverage, VBF, Inc. v. Chubb Group of Insurance Companies, 263 F.3d 1226, 1234 (10th Cir. 2001) (quoting McCorkle v. Great Atl. Ins. Co., 637 P.2d 583, 583 (Okla. 1981), CFS's third claim is also dismissed.
The Court must also consider whether the Complaint should be dismissed with prejudice or without prejudice.
At oral argument, the Court expressed its concerns about the adequacy of the Berry affidavit of January 10, 2002 to support Plaintiff's claim that it relied on the "Schedule of Underlying Policies" as an amendment to the Great American policies and told Plaintiff that it had better obtain a strong affidavit from Mr. Berry (Tr. at 25). Plaintiff obtained a new, undated declaration from Mr. Berry, but, in this declaration, Mr. Berry again does not state that he made an application to have the BPL policy added as underlying insurance or that he relied on the "Schedule of Underlying Policies." Indeed, he states that he does not know that he or anyone at CFS ever considered what policies should be underlying insurance. Of more concern, his January 30, 2003 declaration obtained by Defendants states, "[a]s I had previously advised those attorneys, I do not recall receiving the fax, nor do I recall the specifics of the fax." He also stated, "I understood Chandler Frates Reitz to be a local insurance brokerage firm that CFS used to go into the market on behalf of CFS to obtain quotes for insurance, and I followed that practice in connection with obtaining the Umbrella Policies." (Berry Decl. II ¶ 5.) Accordingly, it does not appear that Plaintiff has grounds to claim that Mr. Berry, the manger in charge of insurance for CFS between 1993 and 1999, relied on the "Schedule of Underlying Policies" or considered Chandler Frates to be acting on behalf of Great American as Plaintiff's counsel now claims.
More importantly, PX-16, the covering fax from Ms. Anderson of Chandler Frates to Mr. Berry, indicates that Mr. Berry should not have relied on the "Schedule of Underlying Policies," as affirmed by Mr. Barros and Mr. Conn, because the cover fax states that the alleged "Schedule of Underlying Policies" was a copy of "information" that she "came up with for the Umbrella and Excess Carriers" and that it was a list of liability policies that the Umbrella policies "would go over" not that it is a list of policies covered by the umbrella policies. Whether any insurance company would add a policy as underlying insurance after the insured had filed in bankruptcy is questionable and, of course, the CFS filing for bankruptcy would be material information required to be disclosed to the insurer or its agent for the binder to be legally binding. There appears to be no support for Plaintiff's attorneys' contention that CFS relied on Exhibit A to the Berry affidavit.
Plaintiff has also had cooperation in discovery from Great American, Ohio Casualty and Chandler Frates.
Plaintiff also claims that "[P]laintiff's counsel contacted Great American and Westchester Fire seeking indemnification of the claims against CFS . . . and that [t]he carriers' response to this correspondence never included a contention that the BPL Policy was not `underlying insurance'" (Pl.'s Mem. in Further Opp. at 12-13), but rather stated that, "the claims would not reach Great American's limits." (Id. at fh. 18.) Although the Plaintiff refers to the date of this response as "June 2001" (id.), the Plaintiff is referring to Mr. Danehy's letter to Cooney Rikard, dated August 15, 2001 (PX I.-7 at 2). However, as footnote 11 supra demonstrates, Mr. Danehy's letter is not a response to Jenner Block's letter of June 26, 2001 to Great American (PX I.-7 at 5-6). Examination of Mr. Danehy's letter (PX I.-7 at 2) shows that it referenced claim number 885-504607 which relates to an auto insurance policy claim under one of the other policies covered by Great American's Umbrella policy, and does not, as claimed by Plaintiff, pertain to a claim involving the BPL policy. The Court does not appreciate counsel misconstruing these documents in order to support arguments to the Court.
Lastly, Plaintiff's counsel points out that the real party in interest here is Mr. Whitaker, a fiduciary to the asset-backed creditors, and that Mr. Whitaker, as a fiduciary, could be sued by an asset-backed creditor if he did not pursue claims against Great American or Westchester Fire. This is not a valid excuse for filing an action without a factual foundation. It is also important that a fiduciary or bankrupt estate not be charged with needless attorneys' fees.
Nevertheless, Plaintiff may file an amended complaint if it makes an application to the Court within thirty days demonstrating that it has evidentiary grounds to believe that CFS did rely on the December 9, 1998 "Schedule of Underlying Policies" faxed by Ms. Anderson.
Rule 11 of the Fed.R.Civ.P.
The Court raised the issue of a potential violation of Rule 11 of the Federal Rules of Civil Procedure because Mr. Berry's affidavit of January 10, 2002 did not support counsel's claim that CFS relied on the "Schedule of Underlying Policies" received from Ms. Anderson.
Rule 11 of the Federal Rules of Civil Procedure states in pertinent part:
(b) Representations to Court. By presenting to the Court (whether by signing, filing, submitting or later advocating) a pleading, written motion, or other paper, an attorney . . . is certifying that to the best of the person's knowledge, information and belief, formed after an inquiry reasonable under the circumstances . . .
(3) The allegations and other factual contentions have evidentiary support or, if specifically so identified, are likely to have evidentiary support . . .
(c) If, after notice and a reasonable opportunity to respond, the court determines that subdivision (b) has been violated, the Court may, subject to the conditions below, impose an appropriate sanction upon the attorneys, law firms . . . that have violated subdivision (b) or are responsible for the violation.
In this case, Latham Watkins submitted an affirmation of D. Benjamin Barros, Esq., dated December 9, 2002, in opposition to the motion to dismiss, stating: "CFS relied on the policy schedule attached to the Berry affidavit, not the policy schedule attached to Exhibit C." (Barros Affm. at ¶ 4.) At that time and before the commencement of this action, the umbrella policies were evidently in the possession of CFS. These policies are contained in CFS's Appendix of Exhibits, and do not list the BPL policy as underlying insurance. (See PXs-15, 21, 24.) Exhibit C to Barros' affirmation made clear that the BPL policy was not listed on February 2, 1998 as an underlying policy to the Great American Umbrella policy. CFS has not provided any internal memo, notation or other document to support Barros' claim that anyone at CFS relied on the BPL policy as underlying insurance to the Great American Umbrella policy.
On December 20, 2002, the Court pointed out that Mr. Berry's affidavit was "equivocal" (Tr. at 21) and that Mr. Berry's affidavit (Barros Affm., Ex. C) did not say that he understood that the BPL was an underlying policy for the Great American Umbrella policy. (Tr. at 23.) Thereafter, the following took place:
MR. CONN: Your Honor, the way CFS worked with Great American was through the entity in Oklahoma. They were provided with a schedule not on one but a couple of occasions. We have additional correspondence on that that we have produced, which indicates that not only did CFS have a reasonable ground to believe this was their policy and notwithstanding the fact that the folks in Oklahoma who were concerned with liability deny it
THE COURT: What evidence have you got that they even applied to have bankers [policy] included? What indication have you got that they asked for bankers [policy] to be included?
MR. CONN: Your Honor, we have spoken of course to Mr. Berry respecting this subject and Mr. Berry was the individual at CFS —
THE COURT: You better get an affidavit from Mr. Berry, a pretty darn strong one.
(Tr. at 25.)
The January 10, 2002 affidavit and the subsequent declarations of Mr. Berry do not support Mr. Barros' affirmation or Mr. Conn's statement at oral argument that Plaintiff's counsel had reasonable grounds to believe that CFS relied on the "policy schedule" attached to the Berry affidavit of January 10, 2002.
Mr. Berry's declaration of January 30, 2003 states:
¶ 3. [a]s I previously advised those attorneys, I do not recall receiving the fax, nor do I recall the specifics of the fax. I also do not recall why Lisa sent me the fax.
¶ 4. Lisa Anderson was a clerk or administrative assistant at Chandler Frates Reitz who worked for Jerry Reeves, the insurance sales agent with whom I did business.
¶ 5. It was the practice of Jerry Reeves to send the policies to me once issued by the insurance company. It was also my practice to review certain aspects of the policies, such as the limits of coverage, the deductibles, and the premiums for such policies.
¶ 6. I understood Chandler Frates Reitz to be a local brokerage firm that CFS used to go into the market on behalf of CFS to obtain quotes for insurance, and I followed that practice in connection with obtaining the Umbrella Policies.
Mr. Barros has offered no support for the statements in his affirmation that CFS relied on the "Schedule of Underlying Policies" received from Ms. Anderson.
Mr. Conn's declaration of January 21, 2003 offers an account of his interview with Mr. Berry which refers to a letter from Ms. Anderson (with no copy attached) including a copy of the Great American Policy, not a covering fax and a copy of the Westchester Fire policy as reflected in PX-16 and in Ms. Spangenberg's declaration. If Mr. Conn's declaration was accurate, there is no explanation as to: (1) why the affidavit obtained from Mr. Berry on January 10, 2002 does not state that he relied on the "Schedule of Underlying Insurance" as the policies covered by the Umbrella policies as of that date; or (2) why the undated affirmation of Mr. Berry obtained by Plaintiff in 2003 does not make such a representation.
On March 14, 2003, the Second Circuit concluded that "where, as here, a sua sponte Rule 11 sanction denies a lawyer the opportunity to withdraw the challenged document pursuant to the "safe harbor" provision of Rule 11(c)(1)(A), the appropriate standard is subjective bad faith." In re Pennie Edmonds LLP, 323 F.3d 86, 87 (2d Cir. 2003).
In this case the Court has not offered Mr. Barros, Mr. Conn or Latham Watkins the opportunity, after receipt of Mr. Berry's Declaration of January 30, 2003, to retract or withdraw their position that Mr. Berry and CFS relied on the December 9, 1998 "Schedule of Underlying Policies" as evidence of CFS's having umbrella coverage applicable to the Umbrella and Excess Policies issued by Great American and Westchester Fire. Accordingly, as requested in Plaintiff's Memorandum in Further Opposition to Defendants' Motion to Dismiss, an evidentiary hearing will be held on June 30, 2003 at 10:00 a.m. as to whether Plaintiff's counsel had adequate evidentiary support to bring the claims contained in Plaintiff's Complaint.
IT IS SO ORDERED.