Cohen v. Endurance American Speciality Insurance Company

Filing 28

MEMORANDUM OPINION. Signed by Judge Paul W. Grimm on 7/3/2013. (rss, Deputy Clerk)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MARYLAND
Southern Division
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MERRILL COHEN, AS TRUSTEE IN
BANKRUPTCY FOR ENVIRONMENTAL *
PRESERVATION ASSOCIATES, INC.
d/b/a USA LIGHTS and K&S MUIRKIRK *
ASSOCIATES,
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Joint Appellants,
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v.
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ENDURANCE AMERICAN SPECIALITY
INSURANCE COMPANY,
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Appellee.
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---------------------------------------------------------ENDURANCE AMERICAN SPECIALITY *
INSURANCE COMPANY,
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Plaintiff,
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v.
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MERRILL COHEN, AS TRUSTEE IN
BANKRUPTCY FOR ENVIRONMENTAL *
PRESERVATION ASSOCIATES, INC.
d/b/a USA LIGHTS and K&S MUIRKIRK *
ASSOCIATES,
*
Defendants.
---------------------------------------------------------- *
In re:
ENVIRONMENTAL PRESERVATION
*
ASSOCIATES, INC.,
*
Debtor.
*
*
*
*
*
*
*
*
*

United States District Court
Case No.: PWG-12-2863

Adversary Proc. No. 10-751

Case No. 10-14421-TJC
Chapter 7

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*

*

*

*

*

MEMORANDUM OPINION
Merrill Cohen, in his capacity as Chapter 7 Trustee for Debtor Environmental
Preservation Associates, Inc. d/b/a USA Lights (“EPAI”), and K&S Muirkirk Associates
(“K&S”), Appellants, have filed an appeal from the United States Bankruptcy Court for the
District of Maryland’s August 14, 2012 Memorandum of Decision (“Bankr. Ct. Dec.”) and
Order, ECF Nos. 1-1 & 1-2. In that Decision, the bankruptcy court granted summary judgment
in favor of Endurance American Specialty Insurance Co. (“Endurance”), Appellee, and denied
Appellants’ cross-motion for summary judgment.1 Appellants also have filed an Objection, ECF
No. 24, to the Bankruptcy Court’s April 25, 2013 Memorandum and Order Resolving Remand,
ECF No. 23. Appellee filed an Opposition to Appellants’ Objection, ECF No. 25, and the parties
requested oral argument, ECF Nos. 26 & 27.2 Appellants did not file a reply, and the time for
doing so has passed. See Loc. R. 105.2.a. Having reviewed the parties’ briefs (ECF Nos. 4, 15
1

Appellants do not challenge the bankruptcy court’s denial of their summary judgment motion.
See Appellants’ Br.
2

One ground of Appellee’s Opposition is that Appellants’ Objection is an “improper . . .
challenge [of] the District Court’s own remand order . . . that allowed for further evidentiary
findings.” Appellee’s Opp’n ¶ 1. Appellee argues that Appellants did not have the bankruptcy
court’s leave to object to the Memorandum and Order Resolving Remand. Id. ¶ 5. It is true that,
following this Court’s order remanding the case, this case was closed administratively for
convenience during the pendency of the bankruptcy court’s additional factual findings.
However, this closing was not ordered by the Court. See Mem. & Order 5–6. It was ministerial,
and it did not divest this Court of jurisdiction. Rather, this Court remanded the case because
“judicial efficiency and a need for the record to contain all documents to create a full
understanding of the case [for this Court to hear the appeal] necessitate[d] that this information
be included in the ultimate record before this court,” and this Court concluded that a “remand to
the [bankruptcy] court would satisfy this issue.” Id. at 5. It is hereby ORDERED that this case
be REOPENED to rule on the appeal that is still pending. As the appeal continues before this
Court and Appellants’ Objection relates to the original notice of appeal, ECF No. 1, and the
argument presented in Appellants’ Brief, this Court has jurisdiction to hear not only the appeal
but also Appellants’ Objection. See 28 U.S.C. § 158(a)(1) (district court has jurisdiction to hear
appeals from bankruptcy court’s final orders); Fed. R. Bankr. P. 8001(a) (party to bankruptcy
proceeding may appeal bankruptcy court’s final order to district court by filing notice of appeal);
Fed. R. Civ. P. 1.

& 20), Appellant’s Objection, Appellee’s Opposition, and the record, I find oral argument
unnecessary.

See Fed. R. Bankr. P. 8012; Loc. R. 105.6.

For the reasons that follow,

Appellants’ Objection to the bankruptcy court’s order resolving remand will be OVERRULED,
and the bankruptcy court’s order granting summary judgment will be AFFIRMED.
I.

FACTUAL AND PROCEDURAL BACKGROUND

EPAI, a corporation that removed hazardous chemicals from light fixtures and resold the
glass and the chemicals, applied to Endurance for an environmental insurance policy (the
“Policy”) on June 10, 2009, without disclosing that the Maryland Department of the
Environment (“MDE”) uncovered violations of Maryland environmental laws when it inspected
EPAI’s operations less than one month earlier. Bankr. Ct. Dec. 3 & 5–6. Endurance issued the
Policy to EPAI for the period of July 5, 2009 to July 5, 2010, and EPAI paid a premium of
$6,575. Bankr. Ct. Dec. 3; Policy, ECF No. 1-24. The Policy provides that “[t]he Company may
cancel this Policy for . . . fraud or material misrepresentation by an Insured,” and that, “[i]f the
Insured willfully concealed or misrepresented any fact or circumstance material to the granting
of coverage under this Policy, this entire Policy shall be void.” Policy 27. Additionally, the
Policy provides that “[i]n the event of cancellation by the Company, the earned premium shall be
computed pro rata,” and “[t]he Company will tender any return premium subject to retaining a
minimum earned premium equal to 25% of the amount specified in the Declarations unless
modified by endorsement. . . . [N]either tender of the unearned premium nor return of this Policy
shall be a condition to cancellation hereunder.” Id. at 25. Notably, the Policy does not address
the return of the premium if the Policy is void or what expenses the insurer may deduct from the
premium before returning what, if anything, remains.

3

The MDE filed a complaint against EPAI on September 22, 2009, alleging that EPAI’s
handling of hazardous substances violated Maryland law. Compl. ¶ 5, ECF No. 1-13 at 29–47.
On January 29, 2010, EPAI notified Endurance of the complaint. Jan. 29, 2010 Ltr. 1, ECF No.
1-11. The attachments to the notification letter referenced the May 2009 MDE inspections,
although the letter itself “did not mention that [the inspections] had occurred before the inception
date of the policy.” Dec. 17, 2010 Aff. of Stephen Wunderlich ¶ 18, ECF No. 1-22; Jan. 29,
2010 Ltr. A settlement conference and an administrative hearing were scheduled, and Endurance
assigned counsel to represent EPAI. Wunderlich Aff. ¶¶ 16–17 & 22; Notice of Hr’g, ECF No.
1-12 at 32; Notice of Settlement Conf., ECF No. 1-12 at 33. The MDE and EPAI reached a
settlement agreement, under which the MDE would dismiss the complaint against EPAI, and
Endurance would fund a site study to test soil and groundwater on EPAI’s premises. Wunderlich
Aff. ¶¶ 23–24 & Ex. E, Settlement Agr., ECF No. 1-27. Bishop and Associates conducted the
study and issued a report on June 14, 2010 (“Bishop Report”). Id. ¶¶ 27 & 34 & Ex. I, Bishop
Report, ECF No. 1-31. Meanwhile, on March 3, 2010, EPAI filed a voluntary petition for
bankruptcy in the United States Bankruptcy Court for the District of Maryland under Chapter 7
of Title 11 of the United States Code. Adv. Compl. ¶ 8, ECF No. 1-4.
By letter dated July 27, 2010, Endurance declared the Policy “to be void ab initio” due to
the misrepresentations in the application and stated that it would be sending a check for the
remaining net premium to the Trustee after Endurance completed an accounting. July 27, 2010
Ltr. 6, ECF No. 1-16. On October 4, 2010, Endurance brought a declaratory judgment adversary
action in the bankruptcy proceeding, seeking a declaration that “the Policy is void ab initio and
Endurance has no obligation to provide coverage or otherwise defend or indemnify the
Defendant for any claims submitted for coverage under the policy.”

4

Adv. Compl. ¶ 44.

Endurance claimed that the Policy was void ab initio and Endurance was “entitled to rescind the
Policy” because Endurance issued the Policy in reliance on material misrepresentations that
EPAI’s officers made. Id. ¶¶ 45–50. K&S, EPAI’s landlord, intervened in the action. Consent
Order 2, ECF No. 1-7.
The parties filed cross-motions for summary judgment, ECF Nos. 1-68 & 1-89. K&S and
Trustee Cohen argued that Endurance waived its right to rescind the Policy by “fail[ing] even
now to return Plaintiff’s premium payments,” as well as by failing to exercise its right promptly
and by taking actions through which it ratified the Policy. Defs.’ Mot. for Sum. J. 7 & 10–11;
Appellants’ Br. 3.

By affidavit attached to Endurance’s motion for summary judgment,

Endurance’s Claims Director and Rule 30(b)(6) deponent Stephen Wunderlich stated that
“Endurance is willing to refund to EPAI any premium owed under the policy, and will do so as
soon as its accounting is completed.” Wunderlich Aff. ¶ 39. Mr. Wunderlich later testified that
the accounting was “probably complete in 2010,” Apr. 22, 2011 Wunderlich Dep. 118:4–5, ECF
No. 1-80, but as of August 14, 2012, when the bankruptcy court issued its Memorandum of
Decision on the summary judgment motions, Endurance had neither produced the accounting nor
returned any portion of EPAI’s premium. Bankr. Ct. Dec. 19.
Concluding that Endurance could rescind the Policy, the bankruptcy court granted
summary judgment in favor of Endurance and denied K&S and the Trustee’s cross-motion for
summary judgment. Bankr. Ct. Order 2. The court held that Endurance had not waived its right
to rescind because it rescinded the Policy within a reasonable time. Bankr. Ct. Dec. 18. Nor had
Endurance “waived its right to rescind the Policy [through] its failure to promptly return the
Debtor’s premium when it informed the Debtor of its intent to rescind,” id., because “Endurance
did demonstrate an unconditional intent to rescind and an unconditional willingness to return the
5

premium to the Debtor upon completion of the accounting,” id. at 19. When the bankruptcy court
issued its Memorandum of Decision and Order on August 14, 2012, Endurance still had not sent
the accounting to the Trustee or returned the net premium. Id. In granting summary judgment,
the court ordered Endurance to return “the portion, if any, of the premium paid by EPAI that
remains after deducting the attorney fees and expenses paid by [Endurance] under the Policy and
the cost of the Bishop Report.” Bankr. Ct. Order 2. Approximately two weeks later, Endurance
provided the accounting, styled as Affidavit of Steve Wunderlich Providing Premium
Accounting to Chapter 7 Trustee Merrill Cohen (the “Accounting”), accompanied by proof of
Endurance’s payment of attorney’s fees and for the Bishop Report. Certif. of Gil M. Coogler &
Accounting, ECF Nos. 1-158 & 1-159.
On appeal, K&S and the Trustee ask this Court to reverse the bankruptcy court’s ruling
that Endurance could rescind the Policy “when it knowingly and intentionally failed to return the
premium paid for the insurance policy.”

Appellants’ Br. 1.

Endurance designated the

Accounting to be an item on the record on appeal, and Appellants moved to strike it from the
record. Appellants’ Mot. to Strike 1–2, ECF No. 3. This Court denied Endurance’s motion to
supplement the record with the Accounting, denied as moot Appellants’ motion to strike, and
remanded the case to the bankruptcy court for “factual findings regarding the status of Appellee
Endurance’s compliance with the bankruptcy court order to return EPAI’s remaining premium
money.” Mem. & Order 1, ECF No. 22.
On remand, relying on the Accounting and the documents submitted along with it, the
bankruptcy court found that “EPAI paid $6,575 in total premiums for the Policy,” plus
“[a]dditional taxes and policy fees . . . in an amount less than $500.” Bankr. Ct. Remand Mem. &
Order 6. The court also found that Endurance “paid $7,908.35 of fees and expenses to the law
6

firm of Ferguson Schetelich & Ballew, P.A. for its representation of EPAI prior to rescission of
the Policy” and “$10,972.50 to Bishop & Associates for the Bishop Report.” Id. Consequently,
the court concluded that “[t]he deductions the Court allowed in the Memorandum for attorney
fees and expenses and for the Bishop Report exceed the premium paid for the Policy, and no
refund is due pursuant to the accounting as directed by the Court.” Id. Appellants have filed an
objection to the bankruptcy court’s Memorandum and Order.
II.

STANDARD OF REVIEW

It is well established that this Court “reviews a bankruptcy court’s findings of fact for
clear error and conclusions of law de novo.” In re Rood, 448 B.R. 149, 157 (D. Md. 2011); see
In re Official Comm. of Unsecured for Dornier Aviation (N. Am.), Inc., 453 F.3d 225, 231 (4th
Cir. 2006). Thus, “[b]ecause the grant of summary judgment is a legal question, it is reviewed
de novo . . . .” In re Rood, 448 B.R. at 157.
In adversary proceedings in bankruptcy cases, Fed. R. Civ. P. 56 governs motions for
summary judgment. Fed. R. Bankr. P. 7056. Pursuant to Rule 56, summary judgment is proper
when the moving party demonstrates, through “particular parts of materials in the record,
including depositions, documents, electronically stored information, affidavits or declarations,
stipulations . . . , admissions, interrogatory answers, or other materials,” that “there is no genuine
dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.
R. Civ. P. 56(a), (c)(1)(A); see Baldwin v. City of Greensboro, 714 F.3d 828, 833 (4th Cir. May
6, 2013). When considering cross-motions for summary judgment, the court must consider
“each motion . . . individually” and view “the facts relevant to each . . . in the light most
favorable to the non-movant.” Mellen v. Bunting, 327 F.3d 355, 363 (4th Cir. 2003). If the party
seeking summary judgment demonstrates that there is no evidence to support the nonmoving
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party’s case, the burden shifts to the nonmoving party to identify evidence that shows that a
genuine dispute exists as to material facts. See Celotex v. Catrett, 477 U.S. 317 (1986). The
existence of only a “scintilla of evidence” is not enough to defeat a motion for summary
judgment. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251 (1986). Instead, the evidentiary
materials submitted must show facts from which the finder of fact reasonably could find for the
party opposing summary judgment. Id.
III.

DISCUSSION

A. Objection to Memorandum and Order Resolving Remand
This Court first addresses Appellants’ objection to the bankruptcy court’s Memorandum
and Order Resolving Remand. Appellants do not challenge the veracity of the expenses noted by
the bankruptcy court.

Rather, Appellants object to the bankruptcy court’s reliance on the

Accounting. Appellants’ Objection 5. They argue that the Accounting, which is in the form of
an affidavit from Claims Director Stephen Wunderlich, “contradict[s] [Endurance’s] prior
judicial admissions,” specifically the April 22, 2011 deposition testimony of Wunderlich as
Endurance’s Rule 30(b)(6) corporate designee, which Endurance attached to its summary
judgment motion, and a July 27, 2010 letter from Mr. Wunderlich to EPAI and the Trustee,
which was an exhibit to the deposition transcript, ECF Nos. 24-1 & 24-2. Appellants’ Objection
2–3. According to Appellants, by attaching the 30(b)(6) deposition and the July 27, 2010 letter
to its summary judgment motion, “Endurance admitted that it owed a refund of the premium
after Endurance completed the audit in 2010.” Id. at 4. In Appellants’ view, this is “a judicial
admission that [Endurance] cannot later contradict.” Id. Relying on Hernandez v. Trawler Miss
Vertie Mae, Inc., 187 F.3d 432 (4th Cir. 1999), Zimmerman v. Novartis Pharmaceuticals Corp.,
287 F.R.D. 357 (D. Md. 2012), and Rohrbough v. Wyeth Labs., Inc., 916 F.2d 970 (4th Cir. 1990),

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Appellants insist that “a party cannot submit a new affidavit [e.g., the Accounting] . . . that
contradicts previous sworn statements, such as an affidavit that contradicts that party’s earlier
deposition, unless it explains the contradiction or attempts to resolve a disparity.” Appellants’
Objection 5.
In Opposition, Endurance argues that the information that Mr. Wunderlich provided in
the Accounting is supplementary, rather than contradictory, to Mr. Wunderlich’s deposition
testimony.

Appellee’s Opp’n ¶ 7.

Appellee notes that Appellants “declined to take any

additional discovery on remand . . . to establish any evidence to contradict the evidentiary
findings regarding the cost to Endurance of the Bishop & Associates environmental report and
the costs to defend EPAI in the administrative proceedings.” Id. ¶ 3. Endurance also contends
that Appellants failed to argue on appeal that Mr. Wunderlich’s deposition testimony was a
judicial admission. Id. ¶ 6. Endurance does not cite any authority in support of its arguments.
Appellants’ reliance on Hernandez, 187 F.3d 432, Zimmerman, 287 F.R.D. 357, and
Rohrbough, 916 F.2d 970, is misplaced. In Hernandez, 187 F.3d 432, the plaintiff sustained

injury at sea when going to repair an allegedly defective winch on his ship. Id. at 434. In the
affidavit that the plaintiff filed in opposition to the defendant’s motion for summary judgment,
the plaintiff stated that “the dredges crossed because ‘the starboard side winch did not engage
properly and therefore caused the vessel to pull to the left.’” Id. at 437–38 (quoting aff.). Yet, he
had testified in his deposition that “the dredges tangled because he failed to steer the vessel in a
straight line.” Id. at 438. The Fourth Circuit concluded that “[t]he district court appropriately
disregarded Hernandez’ affidavit in considering the summary judgment motion because it
contradicted his deposition testimony.” Id. The Fourth Circuit noted: “[W]e have consistently

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held that a party cannot create a triable issue in opposition to summary judgment simply by
contradicting his deposition testimony with a subsequent affidavit.” Id.
In Zimmerman, 287 F.R.D. 357, the plaintiff attached an affidavit from her expert to her
opposition to the defendant’s motion for summary judgment and, relying on the affidavit, argued
that there was a genuine dispute as to material fact.

Id. at 362.

The affidavit “flatly

contradict[ed] [the expert’s] earlier deposition testimony,” and on that basis, this Court
disregarded it as a “sham affidavit.” Id. The Court explained:
Under the sham affidavit doctrine, “a party cannot create a genuine issue of fact
sufficient to survive summary judgment simply by contradicting his or her own
previous sworn statement (by, say, filing a later affidavit that flatly contradicts
that party's earlier sworn deposition) without explaining the contradiction or
attempting to resolve the disparity.” Cleveland v. Policy Mgmt. Sys. Corp., 526
U.S. 795, 806 (1999). Application of the sham affidavit rule at the summary
judgment stage “must be carefully limited to situations involving flat
contradictions of material fact.” Mandengue v. ADT Sec. Sys., Inc., No. ELH–09–
3103, 2012 WL 892621, at *18 (D. Md. Mar. 14, 2012).
Id. (emphasis added). Similarly, in Rohrbough, 916 F.2d at 975–76, the Fourth Circuit held that
“the district court was justified in disregarding the affidavit” of one of plaintiff’s experts because
it “contrast[ed] starkly” with and was “in such conflict” with the expert’s previous testimony,
taken at a deposition, that “the affidavit should be disregarded as a sham issue of fact.”
Here, the Accounting does not “flatly contradict[]” or “contrast[] starkly” with Mr.
Wunderlich’s prior statements. See id.; Zimmerman, 287 F.R.D. at 362. In the Accounting, Mr.
Wunderlich stated that the premiums that EPAI paid for the Policy totaled $6,575, plus less than
$500 in taxes and fees. Accounting ¶ 3. This accords with Mr. Wunderlich’s earlier testimony
that the cost of the Policy was $6,575 plus “some additional charges, taxes and so on and so
forth.” Wunderlich Dep. 115:3–10. Mr. Wunderlich also indicated in the Accounting that
Endurance paid $7,908.53 in attorney’s fees for EPAI’s representation and $10,972.50 for the
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Bishop Report. Accounting ¶¶ 4–5. These assertions cannot be contradictions because Mr.
Wunderlich never addressed attorney’s fees or the Bishop Report in his previous testimony.
Mr. Wunderlich also stated in the Accounting that Endurance did not owe EPAI a refund.
Accounting ¶ 6. It is true that Mr. Wunderlich previously testified that Endurance was “aware of
the premium, [knew] what amounts each person needs to refund, and [was] in the position to do
it as soon as the trustee makes a demand for the money,” Wunderlich Dep. 116:18–21, ECF No.
1-127, and wrote, on behalf of Endurance, that “[a] copy of [the 2010] accounting indicating the
net premium remaining will be sent under separate cover to you. A check will then be sent to the
Bankruptcy Trustee, Merrill Cohen, and if rejected, will be paid into the Court,” July 27, 2010
Ltr. 6. Thus, it appears that Endurance initially believed there would be a refund. Yet, the
Accounting was submitted “to comply with the Court’s directive . . . to return . . . the portion of
the premium . . . that remains, if any, after deducting the attorney fees and expenses paid by
Endurance under the Policy and the cost of the Bishop Report.” Accounting ¶ 2 (emphasis
added). Indeed, Mr. Wunderlich makes clear that he deducted the expenses that “the Court
allowed,” and did so “in accordance with the Court’s Decision and Order.” Id. ¶ 6. Endurance
may not have made these deductions previously.3
More significantly, because EPAI had made material misrepresentations when it entered
into the insurance agreement with Endurance, Endurance had “‘a right to rescind the contract
3

Contrary to Appellants’ assertion that the Court’s directive “contravened the criteria that
Endurance admittedly used two years earlier in its audit,” Appellants’ Reply Br. 2 (emphasis
added), Endurance never stated what deductions it would make in its accounting. Certainly, in
his deposition, Mr. Wunderlich explained that an accounting was necessary in conjunction with
returning the premium because “there are certain commissions, there are certain amounts that
may or may not have to be refunded to people down the chain of underwriting.” Wunderlich
Dep. 116:4–6. A statement regarding commissions is not equivalent to a declaration that
attorney’s fees and other expenses that Endurance incurred would not be deducted from the
premium.
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and recover [its] own expenditures.’” See Lazorcak v. Feuerstein, 327 A.2d 477, 481 (Md. 1974)
(quoting Kemp v. Weber, 24 A.2d 779, 780 (Md. 1942)) (emphasis added); Kemp, 24 A.2d at 780
(“[I]f [a contract is] rescinded, [the party to the contract] must return his benefits and get back
his expenditures. … [H]e has an opportunity to disavow [the contract], get back what he has put
out, and place himself in approximately the same position in which he would have been had no
contract been made.”) (emphasis added). EPAI’s expenditures included attorney’s fees and the
Bishop Report. Therefore, those items should have been deducted from the premium in the
Accounting, even if they were not deducted previously. See Lazorcak, 327 A.2d at 481; Kemp,
24 A.2d at 780. Thus, the bankruptcy court properly instructed Endurance to deduct those items
from any refund due to EPAI.
Further, at the April 2, 2013 status conference before the bankruptcy court and again at
the April 18, 2013 hearing before the bankruptcy court, the court afforded Appellants “the
opportunity for discovery to challenge the matters in the [Accounting],” but Appellants “declined
that request.” Bankr. Ct. Remand Mem. & Order 3–4. Thus, Appellants’ failure to challenge the
veracity of the contents of the Accounting, when presented with the opportunity to do so, is an
evidentiary admission that the Accounting is factually accurate. See Fed. R. Evid. 801(d)(2)(B);
Fed. R. Evid. 801(d)(2)(B) advisory committee notes (1972) (“Under established principles an
admission may be made by . . . acquiescing in the statement of another. . . . When silence is
relied upon, the theory is that the person would, under the circumstances, protest the statement
made in his presence, if untrue.”).
Appellants’ Objection is OVERRULED. Consequently, the relevant facts for purposes of
summary judgment include that “EPAI paid $6,575 in total premiums for the Policy,” plus
“[a]dditional taxes and policy fees . . . in an amount less than $500,” and that Endurance paid
12

$7,908.35 in attorney’s fees for EPAI’s representation and $10,972.50 for the Bishop Report,
such that Endurance paid more on EPAI’s behalf than it received from EPAI. Bankr. Ct.
Remand Mem. & Order 6.
B. Appeal of Memorandum of Decision and Order
As the bankruptcy court noted, Appellants concede that Endurance has pleaded the
elements of a rescission claim sufficiently, even conceding that “material misrepresentations
were made in the Application, and that Endurance relied on those representations.” Bankr. Ct.
Dec. 12. The issue Appellants raised below, and now raise on appeal, is whether Endurance
waived its right to rescind the Policy by failing to return the premium promptly. Id.; Appellants’
Br. 1. For the reasons explained below, this Court concludes that Endurance did not waive its
right to rescind the Policy because Endurance was entitled to deduct its own expenses to achieve
the status quo ante and, after deducting its own expenses from the payment it received from
EPAI, Endurance had no portion of the premium left to refund.
On appeal, K&S and the Trustee argue that Endurance’s delay in returning the premium
“is untimely as a matter of Maryland law, and precludes Endurance from seeking to exercise an
extraordinary rescission claim.” Appellants’ Br. 11. Appellants contend that if a party to a
contract wants to rescind the contract, “he must promptly return the benefits, or be deemed to
have ratified the contract.” Id. at 13. Thus, in Appellants’ view, “[i]t was not enough for
Endurance to state that it had an ‘unconditional willingness’ to return the premium; it had to
follow through and promptly return the premium once the accounting was completed in 2010.”
Id. Appellants rely on Kemp v. Weber, 24 A.2d 779 (Md. 1942), and Finch v. Hughes Aircraft
Co., 469 A.2d 867 (Md. Ct. Spec. App. 1984). Id. at 13–15. They contest the bankruptcy court’s
reliance on Lazorcak v. Feuerstein, 327 A.2d 477 (Md. 1974), insisting that “the Bankruptcy
13

Court misread Lazorcak,” which, according to Appellants, “reaffirmed that a party seeking
rescission must both promptly articulate the intent to rescind the contract and promptly return the
consideration once it learns of the facts; it cannot just make an empty promise to tender back
consideration and then fail to return it, as Endurance did here.”

Appellants’ Br. 17. Appellants

contend: “Both acts had to be performed promptly, especially when the accounting was
conducted in 2010. Endurance did neither.” Appellants’ Reply Br. 10. They also argue that the
fact that Endurance did not conduct an accounting until the bankruptcy court ordered it to do so
“two years later—after summary judgment had been granted—proves that its ‘unconditional
intent’ in 2010 to return the premium was merely an empty promise.” Id.
Endurance counters that “[t]he Bankruptcy Court did not err in finding that Endurance
has not waived its right to rescind the policy for failing to promptly return the Debtor’s premium
when it informed the Debtor of its intent to rescind.” Appellee’s Br. 2. The insurer insists that it
“unequivocally expressed to EPAI and the Trustee its intent to rescind the policy and restore the
parties to the status quo” and “to return the premium once the accounting was complete.” Id.
According to Endurance, “the point [is] moot” because “there was no premium to return and
Endurance was entitled to return the consideration.” Id. Endurance argues that, to rescind the
Policy, it only needed to “express[] the intent and willingness to restore the parties to the status
quo,” id. at 14, because “a refund of consideration is not required in all instances in order to have
a valid rescission option,” id. at 24. Citing Lazorcak, 327 A.2d at 481, and Gaver v. Gaver, 4
A.2d 132, 140 (1939), Endurance contends that its “delay is not untimely as a matter of law,
especially in light of the exception to the general rule that the party seeking rescission must
restore to the other party the consideration given where the complaining party is entitled to retain
the consideration.” Appellee’s Br. 15–16. In the insurer’s view, “[u]nder Lazorcak and Gaver,

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where Endurance expended funds to the benefit of EPAI by retaining counsel for it and by
undertaking an independent inspection of the premises, it is legitimately entitled to retain the
premiums paid and still properly seek rescission of the policy.” Id. at 26.
A review of the relevant body of case law, relied on by the parties to reach opposing
positions, is necessary.

In Kemp v. Weber, 24 A.2d 779 (Md. 1942), the Kemps, having

purchased a tract of land in 1932 and then learned a few years later that it was about 24 acres,
rather than about 44 acres, as they had been told, sued the seller, seeking “the return of all
payments” they made to the seller, as well as reimbursement of the money and labor they put
into the land. Id. at 779. The court noted that, after learning that the property was only 24 acres,
the Kemps “continued to live on the property,” made various repairs and improvements, sold
some of the acreage, built another house, and paid down the mortgage over the course of about
four years. Id. at 780. The circuit court dismissed the lawsuit on multiple grounds including
that, “after discovering the supposed deficit in acreage, the [Kemps] continued to occupy and use
the land.” Id. The appellate court held, id.:
When a party to a contract is faced by some failure in carrying out its
terms on the part of the other party, he has, in general, either a right to retain the
contract, and collect damages for its breach, or a right to rescind the contract and
recover his own expenditures. Obviously he cannot do both. The contract cannot
be in effect, and at the same time rescinded. If in effect, he can get damages; if
rescinded, he must return his benefits, and receive his expenditures. He cannot, of
course, retain the benefits and get back his expenditures. He would then be
receiving a free gift of whatever he got under the contract. He, therefore, has a
choice.
All the authorities hold that such choice must be exercised as soon as the
party ascertains the facts, and is informed of the failure on the part of the other
party. The reason for this is clear. Having then a knowledge of the facts, he is not
deceived. If he is unwilling to take the benefits accrued or accruing under the
contract, he has an opportunity to disavow it, get back what he has put out, and
place himself in approximately the same position in which he would have been
had no contract been made. If he does not do this, but continues receiving the
benefits coming to him under the contract, he has affirmed the contract after
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knowing the facts. He may have been deceived in the first instance, but he is not
deceived after he knows. Making his choice after he knows, he must abide by it.
In Lazorcak v. Feuerstein, 327 A.2d 477 (Md. 1974), Lazorcak purchased Feuerstein’s
laundry business. Id. at 478. After a few months, Lazorcak learned that “the dry cleaning
machine, which was included in the initial purchase and which was quite profitable, was being
operated in the basement in violation of … the District of Columbia fire code.” Id. at 479.
Through counsel, Lazorcak contacted Feuerstein and proposed “‘a rescission, cancellation of all
indebtedness and return of funds.’” Id. Feuerstein did not respond, and Lazorcak continued to
operate the business and make monthly payments to Feuerstein under the contract for three
months. After Lazorcak missed three payments, Feuerstein filed suit, and Lazorcak filed a
counterclaim for, inter alia, rescission. The circuit court entered judgment for Feuerstein. Id. at
480.
With regard to the rescission counterclaim, the appellate court said:
[A]s a general rule, the party seeking rescission must indicate to the other party at
least the intent to restore the parties to the relative positions which they would
have occupied if no such contract had ever been made, and this as soon as the
disenchanted party learns of the facts. This offer of restoration or tender back
must, at a minimum, demonstrate an unconditional willingness to return to the
other party both the consideration that was given by that party and any benefits
received under the contract. This effort to resume the status quo is required as, if a
party who knows the facts which would justify rescission, does any act which
recognizes the continued validity of the contract or indicates that he still feels
bound under it, he will be held to have waived his right to rescind.
Id. at 481 (citations omitted). The court observed that exceptions exist to prevent the “tender
back” requirement from “becom[ing] too harsh,” such as when “‘the complainant can properly
retain [the consideration and any benefits received] irrespective of the voidable transaction.’” Id.
at 482 (quoting Funger v. Mayor of Somerset, 223 A.2d 168, 174 (Md. 1966)); see Gaver v.
Gaver, 4 A.2d 132, 140 (Md. 1939) (“It is axiomatic that one who seeks the rescission of a deed
or other instrument . . . must restore the consideration paid by the defendant, except . . . where
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for some reason the plaintiff is entitled in any event to retain the consideration, or where it is
without value or is a past due debt.”).
The appellate court affirmed the circuit court, concluding that none of the exceptions
applied to Lazorcak, and he did not qualify for rescission because, rather than “promptly and
properly manifest[ing] his determination to repudiate the contract,” Lazorcak acted in a way that
could “only be viewed as a reaffirmation of the contract.” Id. at 481–82. The court reasoned
that Lazorcak’s letter to Feuerstein did “not amount to an unequivocal offer of restoration, as it
d[id] not specify that appellant ha[d] definitely decided that he want[ed] rescission,” and
“perhaps of greater significance, [Lazorcak] retained ownership rather than offering to return the
business to the seller when he learned of the fire code violation in July of 1972,” and he made
payments under the contract, operated the business, and profited from it. Id.
In Finch v. Hughes Aircraft Co., 469 A.2d 867 (Md. Ct. Spec. App. 1984), the plaintiffs
brought suit against Hughes for, inter alia, “rescission of . . . two [patent] contracts on the
ground of fraudulent inducement.”

Id. at 871.

The court said that “[a] plaintiff seeking

rescission must demonstrate that he acted promptly after discovery of the ground for rescission.
He must also show that he tendered to defendant all consideration and benefits received under
the contract immediately after notice of the ground for rescission,” or it will appear that he is
validating the contract and “‘he will be held to have waived his right to rescind.’”

Id. at 894

(quoting Lazorcak, 327 A.2d at 481) (other citations omitted). Noting that the plaintiffs “did not
move promptly to rescind the contracts after learning of the facts upon which they base their
claim for rescission,” and had “not returned or offered to return to Hughes any of the benefits
[totaling more than $150,000] received by Plaintiffs under the License Agreement and

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Amendment,” the court entered judgment for Hughes. Id. at 886 & 894. The appellate court
adopted the trial court’s reasoning and affirmed. Id. at 871.
More recently, in Benjamin v. Erk, 771 A.2d 1106 (Md. Ct. Spec. App. 2001), the Court
of Special Appeals reiterated that “‘[r]escission requires at a minimum that the party exercising a
right to rescind notify the other party and demonstrate an unconditional willingness to return to
the other party both the consideration that was given and any benefits received.’” Id. at 1120
(quoting Cutler v. Sugarman Org., Ltd., 596 A.2d 105, 111 (1991)); see Brown v. NVR, Inc., No.
PJM-10-1002, 2011 WL 2148793, at *5 (D. Md. May 31, 2011) (“Under Maryland common law,
a party that seeks to rescind a contract . . . must restore the status quo either by returning or by
offering to return whatever it has received under the contract.”) (emphasis added). The Benjamin
court observed that “‘Maryland decisions which have found that there was a waiver of the right
to rescind do so on the basis of an affirmative act of ratification of the contract or some other act
which evidences an intent to benefit from the transaction or which renders restoring the parties to
their original position impossible or difficult.’” Id. (quoting Merritt v. Craig, 746 A.2d 923 (Md.
Ct. Spec. App. 2000)).
Here, Endurance showed its “unconditional willingness to return” the premium to EPAI.
See Benjamin, 771 A.2d at 1120; Cutler, 596 A.2d at 111; Lazorcak, 327 A.2d at 481. As the
bankruptcy court noted,
In the July 27 Letter, Endurance unequivocally expressed to EPAI and the
Trustee its intent to rescind the Policy and restore the parties to the status quo. It
further expressed its intent to return the premium once the accounting was
complete . . . .
[I]n the July 27 Letter, Endurance did demonstrate an
unconditional intent to rescind and an unconditional willingness to return the
premium to the Debtor upon completion of the accounting. . . .

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Bankr. Ct. Dec. 19. Moreover, Endurance exercised its right to rescind the Policy and, in
accordance with the bankruptcy court’s directive, attempted to recover some of its expenses by
deducting them from the premium. See Kemp, 24 A.2d at 780. Because the expenses exceeded
the premium, Endurance had nothing to return. It is true that Finch, 469 A.2d at 894, provides
that failure to return immediately “all consideration and benefits received under the contract” is
tantamount to waiver. But Endurance did, in effect, return all that it received under the Policy:
Endurance received nothing under the Policy, as it spent more than it received for the premium.
See Kemp, 24 A.2d at 780 (stating that rescinding party must “return his benefits, and receive his
expenditures” to rescind the contract); Lazorcak, 327 A.2d at 482 (stating that the rescinding
party need not return the consideration if that party is entitled to “‘properly retain it irrespective
of the voidable transaction’”) (citation omitted); Gaver, 4 A.2d at 140 (stating that a party
seeking to rescind a contract need not return the consideration if the party is “entitled . . . to
retain the consideration”).
Further, this Court has said that a party may rescind a contract “by offering to return
whatever it has received under the contract.” Brown, 2011 WL 2148793, at *5. As noted, before
the bankruptcy court directed Endurance to deduct for attorney’s fees and the Bishop Report and
return any remaining premium, Endurance demonstrated its willingness to return what remained
of the premium. Additionally, Mr. Wunderlich testified that Endurance was prepared to refund
the premium “as soon as the trustee makes a demand for the money.” Wunderlich Dep. 116:18–
21. Appellants have not argued that they ever demanded the money. Nor have they pointed to
evidence in the record that they made such a demand. Therefore, this Court concludes that
Endurance did not waive its right to rescind the Policy, and the bankruptcy court properly
granted summary judgment in favor of Endurance and against Appellants.

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Accordingly, the bankruptcy court’s order granting summary judgment to Endurance will
be AFFIRMED.
IV.

CONCLUSION

In sum, Appellants’ Objection to the Bankruptcy Court’s April 25, 2013 Memorandum
and Order Resolving Remand is OVERRULED, and the Bankruptcy Court’s Memorandum of
Decision and Order granting summary judgment in favor of Endurance American Specialty
Insurance Co. is AFFIRMED. The Clerk shall REOPEN this case for purposes of this ruling.
Having entered this Memorandum Opinion and the accompanying Order, the Clerk shall CLOSE
this case.
A separate Order follows.

Dated: July 3, 2013

/S/
Paul W. Grimm
United States District Judge

lyb

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