Axis Surplus Insurance Company v. Oasis Trading, LLC et al

Filing 132

MEORANDUM OPINION AND ORDER finding as moot 58 Motion for Disbursement of Funds; granting 66 Motion for Summary Judgment, the sum of $1,451,000.00 shall be disbursed to ADFA from the registry of the Court; denying 71 Motion for Partial Sum mary Judgment; granting 88 Motion for Settlement, the Clerk of Court is directed to disburse the sum of $1,100,000.00 from the registry of the Court to the Trustee designated in the Settlement Agreement found in 81 ; denying 94 Motion to Se t Aside Order for leave or in the alternative Motion to Dismiss; denying 99 Motion for Partial Summary Judgment; denying 106 Motion to Strike Supplemental Response; defendants Arkansas Development Finance Authority and Parkway Bank claims are dismissed with prejudice from this lawsuit. Signed by Honorable Robert T. Dawson on March 21, 2012. (cnn)

IN THE UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF ARKANSAS
EL DORADO DIVISION

AXIS SURPLUS INSURANCE CO.
v.

PLAINTIFF

Case No. 1:11-CV-01028

OASIS TRADING, LLC
ARKANSAS DEVELOPMENT FINANCE
AUTHORITY, ARKANSAS ECONOMIC DEVELOPMENT COMMISSION,
WEBSTER BUSINESS CREDIT CORP.,
PARKWAY BANK and
BRADLEY LUMBER COMPANY, et al.

DEFENDANTS

MEMORANDUM OPINION AND ORDER
Before the Court are the following pending motions, all of
which are ripe for decision, and the Court’s judgment regarding
each:
Defendant Arkansas Economic Development Commission’s (“ADEA”)
Motion for Disbursal of Funds and for Dismissal (Doc. 58), which is
DENIED AS MOOT;
Defendant Arkansas Development Finance Authority’s

(“ADFA”)

Motion for Summary Judgment (Doc. 66), which is GRANTED;
Defendant Oasis Trading, LLC’s (“Oasis”) Motion for Partial
Summary Judgment (Doc. 71), which is DENIED;
Joint Motion to Approve Settlement Agreement (Doc. 88), which
is GRANTED;
Defendant ADFA’s Motion to Set Aside Order Granting Oasis
Leave to File Amended Crossclaim, or, Alternatively, Motion to
Dismiss Oasis’s Crossclaim (Doc. 94), which is DENIED;
Defendant Oasis’s Motion for Partial Summary Judgment (Doc.

99), which is DENIED; and
Defendant ADFA’s Motion to Strike Oasis’s Supplemental and
Amended Response to ADFA’s Motion for Summary Judgment (Doc. 106),
which is DENIED AS MOOT.
The Court will address the basis for decision on each of the
above Motions.
I.

Background
On September 11, 2010, the premises of Defendant Bradley

Lumber Company (“BLC”) were partially destroyed by fire.

The main

damage was to the Sawmill Building, otherwise known as Building 14,
which was completely destroyed along with certain equipment and
personal property contained within the building.

The entity

leasing the premises of BLC at the time of the fire was Defendant
Oasis Trading, LLC (“Oasis”).

Prior to the fire, Oasis had

purchased an insurance policy from Axis Surplus Insurance Company
(“Axis”), which provided coverage against loss for the twenty-one
buildings,
premises.

equipment,

and

personal

property

located

at

BLC’s

The policy of insurance provided coverage from July 7,

2010, to July 7, 2011.
After the fire, Axis determined that the property damage to
the Sawmill had a loss value of $1,565,700.00, in excess of the
policy limit of $1,451,000.000 for that location.

The equipment

destroyed in the fire was assigned a loss value of $2,696,921.72.
After application of the $10,000 deductible, the net amount of loss

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proceeds payable under the policy was

$4,137,921.72.

On September 28, 2010, Axis issued a check in the amount of
$250,000.00 to Oasis, the named insured.

Axis then interpled the

remaining sum of $3,887,921.72 to the registry of the Court, as
Axis was unable to determine which of BLC’s numerous creditors was
entitled to receive the remaining insurance proceeds.

At present,

there are six creditors maintaining they are owed a portion of the
interpled funds, and these creditors are now Defendants to the
instant lawsuit.

In many cases, BLC’s creditors held overlapping

notes on identical assets of BLC.

The Court’s task in this case is

to determine the relative positions of the creditors with respect
to their entitlement to the interpled funds.
A.

Defendant
(“AEDC”)

Arkansas

Economic

Development Commission

AEDC makes a claim to the interpled funds based on its status
as lienholder on certain equipment insured by the Axis policy. The
equipment included a Log Debarker System, two Carriage Optimizer
Systems, a Gang Edger System, a Lumber Re-entry System, a Hardwood
Planer System, and Truck Platforms.

AEDC perfected its security

interest in this equipment on May 7, 2003.
In the related case of Webster Business Credit Corporation v.
Bradley Lumber Company et al., Case Number 08-CV-1083, the Court
found

that

BLC

had

defaulted

on

AEDC’s

loan

regarding

this

equipment and entered summary judgment on behalf of AEDC on August
23, 2010, in the amount of $1,307,802.51.
3

This judgment was to

accrue interest at the rate of 3.5% per annum from June 15, 2010,
until paid in full. The Court also awarded AEDC attorney’s fees in
the amount of $5000.00.
When the fire at the BLC premises entirely destroyed the
equipment mortgaged to AEDC, Axis interpled $2,696,921.72 to cover
the loss associated with all equipment destroyed in the fire.

The

particular value assigned by Axis to the loss of the equipment
mortgaged to AEDC was $1,800,000.00.
judgment

ordered

by

the

Court

in

This amount exceeds the
Webster

Business

Credit

Corporation v. Bradley Lumber Company et al. to compensate AEDC for
BLC’s default.
B.

Defendant Arkansas Development Finance Authority (“ADFA”)

ADFA makes two claims to the interpled funds. The first claim
arises from a loan ADFA made to BLC, dated November 26, 2002.
loan

accompanied

interest

in

a

certain

security
personal

agreement
property

which
of

granted

BLC,

This

ADFA

including

an
all

equipment used in connection with BLC’s sawmill facility, as well
as all cash and non-cash proceeds arising from the equipment.
ADFA’s second claim to the interpled funds concerns ADFA’s status
as first lienholder of BLC’s real property at the sawmill facility.
ADFA’s mortgage on BLC’s real property was issued on June 1, 2003.
BLC defaulted on its loans with ADFA, and the Court entered
summary judgment in favor of ADFA on October 21, 2010, in the
related case of Webster Business Credit Corporation v. Bradley

4

Lumber Company et al., referenced above. Based on BLC’s default on
ADFA’s loans, the Court held that ADFA was owed $2,398,053.60, with
interest accruing daily in the amount of $196.30, until paid in
full, plus attorney’s fees, costs, and expenses.
One of the buildings secured by ADFA’s loan was completely
destroyed in the fire on September 11, 2010.

Axis designated

$1,451,000.000 of the total interpled funds to compensate for the
loss of this building.

There is no dispute among the Defendants

that ADFA maintains a first priority lienholder status with regard
to the interpled funds for this real property.

This amount

designated by Axis to compensate for the destruction of Building 14
is less than the total judgment owed by BLC to ADFA on its loans.
ADFA contends that it should recover more of the interpled funds,
up to the value of its total judgment against BLC, for losses
incurred due to the destruction of personal property and equipment,
for which ADFA also held a secured interest.
C.

Defendant Webster Business Credit Corp. (“Webster”)

Webster makes a claim to the interpled funds based on its
security interest and lien on all BLC assets, including equipment
and machinery.

Webster and BLC entered into a credit and security

agreement on October 30, 2006, and Webster’s security interest was
perfected by filing the proper notices with the Arkansas Secretary
of State’s office. By the terms of Webster’s credit agreement with
BLC, Webster’s security interest in the equipment collateral was

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secondary only to ADFA’s interest in the same equipment.
BLC defaulted on the note held by Webster, and the Court
entered summary judgment in favor of Webster on November 29, 2011,
in the related case of Webster Business Credit Corporation v.
Bradley Lumber Company et al., referenced above.

Based on BLC’s

default on Webster’s note, the Court concluded that Webster was
owed $2,888,307.72, exclusive of attorneys’ fees and interest.
Even though Webster was not named by Oasis as a secured creditor on
the Axis policy, Webster was and is a secured creditor of BLC’s.
D.

Defendant Oasis Trading, LLC (“Oasis”)

On June 1, 2010, Oasis entered into a lease agreement with
BLC.
as

a

At the time the lease was executed, BLC had ceased to exist
solvent

entity,

and

the

Court

had

become

involved

in

adjudicating the claims of BLC’s many creditors. The Court did not
give its approval to the lease agreement between Oasis and BLC, but
nevertheless, Oasis began occupying the BLC premises and making
improvements

to

furnishings,

fixtures,

equipment,

and

other

personal property.
When the fire occurred, Oasis claimed it sustained a loss in
the amount of $1,180,319.09 related to improvements, labor, and
inventory, and an additional loss in the amount of $380,000 for
damage related to eight Dry Kilns, a Boiler, and a Sorter, which
are all pieces of equipment. Oasis collected $250,000.00 from Axis
before Axis filed the instant interpleader action, because Oasis

6

was the named insured on the policy of insurance.
It is not clear whether the equipment Oasis claims it lost in
the fire was actually purchased and owned by Oasis or merely used
by Oasis and owned by BLC, subject to the liens of BLC’s creditors.
Oasis asserts an equitable lien claim to the interpled funds, based
on the improvements and betterments it made to the property during
its tenancy.
E.

Defendant Parkway Bank (“Parkway”)

Parkway loaned money to Dr. David Chambers, who is the
principal shareholder of BLC and other related lumber businesses
operating in Bradley County, Arkansas.

Parkway loaned $750,000 to

Dr. Chambers for a business he owned called Q.C. Fibers, LLC.

To

secure the note on Q.C. Fibers, Dr. Chambers executed a real estate
mortgage

dated

July

31,

collateral for the loan.

2007,

which

used

assets

of

BLC

as

Although Parkway was not listed on the

Axis policy as a loss payee, it appears Parkway does have a
perfected interest in various assets owned by BLC.
F.

Defendant Bradley Lumber Company (“BLC”)

BLC is the debtor in this case.

In no event will BLC recoup

any of the interpled funds, as the amount of those funds exceed the
amount

of

indebtedness

BLC

has

with

respect

to

its

various

creditors.
II.

Analysis of Pending Motions
A.

Joint Motion to Approve Settlement Agreement (Doc. 88)
and ADEA’s Motion for Disbursal of Funds and for
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Dismissal (Doc. 58)
Pending before the Court is a Motion to Approve Settlement
Agreement (Doc. 88).

All Defendants are in agreement regarding

certain distributions of interpled funds to Defendant AEDC and
Defendant Parkway. Specifically, the terms of the Settlement (Doc.
81) provide that the sum of $1,000,000.00 of interpled funds shall
be distributed to AEDC in full satisfaction of AEDC’s claims in
this case; and the sum of $100,000.00 of interpled funds shall be
distributed to Parkway Bank.

Following approval of the Settlement

by the Court, both AEDC and Parkway would be dismissed with
prejudice from this dispute.
After due consideration, the Court finds that the Settlement
(Doc. 81) is appropriate and should be approved.

Therefore, the

Joint Motion to Approve Settlement Agreement (Doc. 88) is GRANTED,
and the distributions specified in the Settlement are to be made by
the Clerk of Court. The sum of $1,100,000.00 shall be disbursed to
Williams & Anderson PLC, Trustee, at the address designated in the
Settlement.

Furthermore, all claims brought by AEDC and Parkway

are accordingly dismissed with prejudice, and the two parties are
hereby dismissed from this action.
In light of the Court’s decision regarding approval of the
parties’ Settlement (Doc. 88), Defendant ADEA’s pending Motion for
Disbursal of Funds and for Dismissal is DENIED AS MOOT.
B.

ADFA’s Motion for Summary Judgment (Doc. 66) and ADFA’s
Motion to Strike Oasis’s Supplemental and Amended
8

Response to ADFA’s Motion for Summary Judgment (Doc. 106)
On February 3, 2012, Defendant ADFA filed a Motion for Summary
Judgment

(Doc.

66)

and

brief

in

support

(Doc.

67)

seeking

$1,451,000, the portion of interpled funds assigned to compensate
for

the

loss

of

real

property

destroyed

in

the

BLC

fire.

Defendants Oasis and BLC were the only Defendants to file a
Response to the Motion (Doc. 85) along with a supporting brief
(Doc. 86). Thereafter, ADFA filed a Reply (Doc. 97), and Oasis and
BLC filed a Supplemental Response (Doc. 98).
In determining whether summary judgment is appropriate, the
burden is placed on the moving party to establish both the absence
of a genuine dispute of material fact and that it is entitled to
judgment as a matter of law.

See Fed. R. Civ. P. 56; Matsushita

Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586-87
(1986); Nat’l Bank of Commerce of El Dorado, Ark. v. Dow Chem. Co.,
165 F.3d 602 (8th Cir. 1999).

The Court must review the facts in

a light most favorable to the party opposing a motion for summary
judgment and give that party the benefit of any inferences that
logically can be drawn from those facts. Canada v. Union Elec. Co.,
135 F.3d 1211, 1212-13 (8th Cir. 1998).

In order for there to be

a genuine issue of material fact, the non-moving party must produce
evidence “such that a reasonable jury could return a verdict for
the nonmoving party.” Allison v. Flexway Trucking, Inc., 28 F.3d
64, 66 (8th Cir. 1994) (quoting Anderson v. Liberty Lobby, Inc.,

9

477 U.S. 242, 248 (1986)).
As discussed above, ADFA has a valid lien upon the real
property that was destroyed in the BLC fire and for which Axis
interpled

a

specific

judgment,

entered

by

dollar
the

amount.

Court

in

ADFA

also

Webster

has

Business

a

valid
Credit

Corporation v. Bradley Lumber Company et al., for an amount greater
than

that

property.

designated

by

Axis

to

compensate

for

the

loss

of

The Court determined in the related Webster case that

BLC defaulted on its loan obligation with ADFA with respect to
ADFA’s secured interest in the real property of the sawmill
premises.

There is no genuine issue of material fact as to BLC’s

lack of entitlement to any of these interpled funds.
The interest of Oasis with respect to these funds arises from
Oasis’s rental of BLC’s real property during 2010 and 2011.

The

lease agreement between Oasis and BLC specifically, and indeed
unequivocally, provides the following:
“[Oasis] agrees to subordinate its interest in the
Property to any mortgage lender of [BLC], on the
condition that such mortgage lender agrees that [Oasis’s]
occupancy shall not be disturbed as long as [Oasis] is
not in default of any of the terms, covenants and
conditions of this Lease. [Oasis] acknowledges that as of
the date of this Lease its interest in the Property is
subordinated to the interests of ADFA and AEDC in the
Property.”
(Doc. 66-3, para. 27).
Despite what appears to the Court to be very clear language
stating Oasis’s subordinated interest to any claim to compensation

10

for the destruction of the real property at issue, Oasis asserts
that ADFA failed to mitigate its damages when it rejected a
settlement proposal proffered earlier in the litigation by Oasis.
This argument is unavailing, as settlement negotiations are both
inadmissable and irrelevant to determining the priority issues in
this case.

Oasis further contends that it is entitled to the

insurance proceeds because Oasis made certain improvements and
betterments at the sawmill facility during the course of Oasis’s
tenancy.

Under this theory, Oasis would potentially have an

equitable lien to the insurance money; however, equitable liens
only relate back to the time they were created.

In re J.V. Gleason

Co., 452 F.2d 1219 (8th Cir. 1971); Am. Jur. Liens § 72 (2012).
The undisputed facts in the case at bar show that any equitable
lien asserted by Oasis dates to mid-2010, when Oasis entered into
the lease with BLC. Clearly, ADFA’s mortgage on the real property,
issued in 2003, pre-dates the lease.
Accordingly, the Court finds that there is no genuine dispute
of material fact as to ADFA’s priority interest in the interpled
insurance funds that were designated to compensate for the value of
the loss of real property.

It is therefore the Court’s judgment

that ADFA’s Motion for Summary Judgment (Doc. 66) should be
GRANTED, and $1,451,000.00 disbursed to ADFA from the registry of
the Court.

In light of the Court’s decision to grant summary

judgment on ADFA’s Motion (Doc. 66), ADFA’s pending Motion to

11

Strike Oasis’s Supplemental and Amended Response to ADFA’s Motion
for Summary Judgment (Doc. 106) is DENIED AS MOOT.
C.

Defendant Oasis’s Motions for Partial Summary Judgment
(Docs. 71 and 99)

Oasis moves for partial summary judgment with respect to
Webster’s entitlement to any interest in the interpled insurance
funds.

In Oasis’s first Motion for Partial Summary Judgment (Doc.

71), the thrust of Oasis’s argument is that Webster lacks standing
to assert a claim in these proceedings because Webster was not a
named insured under the Axis policy of insurance.

Webster has

submitted a brief in response (Doc. 90) in which it contends that
the interpled funds constitute “proceeds” of Webster’s secured
interest in BLC’s equipment, thus entitling Webster to a share of
these proceeds.
The Court determined in Webster Business Credit Corporation
v. Bradley Lumber Company et al. that Webster had a perfected
security interest in the assets of BLC and ordered that BLC was
liable to Webster for breach of contract.

The amount of Webster’s

judgment against BLC is $2,888,307.72, exclusive of attorneys’ fees
and interest.

According to Arkansas law, Webster’s security

interest continues in the collateral notwithstanding the sale or
lease

of

the

collateral,

and

its

interest

identifiable proceeds of the collateral.
315(a).

attaches

to

any

Ark. Code Ann. § 4-9-

Webster refers the Court to an Arkansas statute that

defines “proceeds” to include insurance proceeds to the extent of
12

the value of the collateral and to the extent payable to the debtor
or

the

secured

party.

Ark.

Code

Ann.

§

4-9-102(64)(E).

Considering the authority cited by Webster, there remains a genuine
issue of material fact as to whether the interpled funds constitute
“proceeds” of the collateral secured by Webster in its loan with
BLC.

Accordingly, Oasis’s Motion for Partial Summary Judgment

(Doc. 71) is DENIED.
Oasis’s second Motion for Partial Summary Judgment (Doc. 99)
seeks to dismiss ADFA’s and Webster’s crossclaims (Docs. 83 and
84).

ADFA

and

Webster

have

submitted

virtually

identical

crossclaims against Oasis, charging that Oasis improperly claimed
and

converted

for

its

own

purposes

$250,000.00

of

the

Axis

insurance proceeds. Oasis contends that principles of res judicata
apply to bar the Court’s inquiry into Oasis’s entitlement to the
$250,000.00 payment, as Axis was dismissed as an interpleader
Plaintiff to this action, and according to Oasis, this makes any
decisions Axis made regarding payment of insurance proceeds outside
the scope of the Court’s purview.
The Court has never adjudicated the issue of Oasis’s right to
the $250,000.00 it received from Axis for being the named insured
on the policy; therefore, res judicata does not apply. The payment
at issue was made to Oasis on September 28, 2010, prior to Axis
filing this interpleader action and prior to Axis submitting
interpled funds to the registry of the Court.

13

When the Court

dismissed Axis from the case as an interpleader Plaintiff, it found
that Axis no longer had a stake in the matter since the insurance
proceeds had been deposited into the registry of the Court.

The

Court did not, by dismissing Axis, determine that the advance
payout received by Oasis was proper.
There

remains

an

issue

of

fact

as

to

whether

Oasis

misrepresented to Axis that it had an ownership interest in the
buildings and personal property of BLC, justifying the advance
payment of $250,000.00 pursuant to the policy.

Accordingly,

Oasis’s Motion for Partial Summary Judgment (Doc. 99) is DENIED.
D.

Defendant ADFA’s Motion to Set Aside Order Granting Oasis
Leave to File Amended Crossclaim, or, Alternatively,
Motion to Dismiss Oasis’s Crossclaim (Doc. 94)

ADFA contends in its Motion that the Court should set aside
its Order of February 16, 2012 (Doc. 80), granting Oasis leave to
file an amended crossclaim.

In the same Order, the Court also

granted leave for ADFA to file a crossclaim against Oasis.
It is in the sound discretion of the Court to permit a party
to amend its pleadings if justice so requires.
The

deadline

for

amending

pleadings

Fed. R. Civ. P. 15.

specified

by

the

Final

Scheduling Order in this case was February 14, 2012, and Oasis
timely made its request to amend its pleadings.

Therefore, ADFA’s

Motion to set aside the Court’s order granting Oasis leave to file
its amended crossclaim is DENIED.
In the alternative, ADFA moves the Court to dismiss Oasis’s

14

amended crossclaim.

This request by ADFA is also DENIED.

A claim

should not be dismissed for failure to state a claim unless “it
appears beyond doubt that the plaintiff can prove no set of facts
in support of his claim which would entitle him to relief.”

Thomas

W. Garland, Inc. v. City of St. Louis, 596 F.2d 784 (8th Cir.
1979).

All reasonable inferences from the complaint must be drawn

in favor of the non-moving party.

Crumpley-Patterson v. Trinity

Lutheran Hosp., 388 F.3d 588, 590 (8th Cir. 2004).

In light of the

high burden ADFA must meet justifying dismissal, the Court does not
find

that

this

burden

has

been

met

and

that

dismissal

is

appropriate at this time.
III. Conclusion
For the reasons reflected above, the Court finds that:
Defendant

ADEA’s

Motion

for

Disbursal

of

Funds

and

for

Dismissal (Doc. 58) is DENIED AS MOOT;
Defendant ADFA’s Motion for Summary Judgment (Doc. 66) is
GRANTED, and the sum of $1,451,000.00 shall be disbursed to ADFA
from the registry of the Court;
Defendant Oasis’s Motion for Partial Summary Judgment (Doc.
71) is DENIED;
The parties’ Joint Motion to Approve Settlement Agreement
(Doc. 88) is GRANTED, and the Clerk of Court is directed to
disburse the sum of $1,100,000.00 from the registry of the Court to
the Trustee designated in the Settlement Agreement (Doc. 81);

15

further, the claims of Defendants AEDA and Parkway are dismissed
with prejudice from this lawsuit;
Defendant ADFA’s Motion to Set Aside Order Granting Oasis
Leave to File Amended Crossclaim, or, Alternatively, Motion to
Dismiss Oasis’s Crossclaim (Doc. 94) is DENIED;
Defendant Oasis’s Motion for Partial Summary Judgment (Doc.
99) is DENIED; and
Defendant ADFA’s Motion to Strike Oasis’s Supplemental and
Amended Response to ADFA’s Motion for Summary Judgment (Doc. 106)
is DENIED AS MOOT.
IT IS SO ORDERED this 21st day of March, 2012.
/s/ Robert T. Dawson
Honorable Robert T. Dawson
United States District Judge

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