Bethel et al v. Darwin Select Insurance Company
Filing
36
AMENDED ORDER Denying 15 MOTION for Partial Summary Judgment filed by Charles E. Bethel, II, Jennifer Kalsow Frantz; Granting 9 MOTION for Summary Judgment filed by Darwin Select Insurance Company (Written Opinion). Signed by Senior Judge David S. Doty on 9/25/2012. (PJM)
UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
Civil No. 11-2242(DSD/FLN)
Charles E. Bethel II and
Jennifer Kalsow Frantz,
Plaintiffs,
AMENDED ORDER
v.
Darwin Select Insurance Company,
Defendant.
Adam P.F. Gislason, Esq. and Snyder, Gislason and
Frasier, LLC, 233 Park Avenue South, Suite 205,
Minneapolis, MN 55415, counsel for plaintiffs.
Amy J. Woodworth, Esq. and Meagher & Geer, PLLP, 33 South
Sixth Street, Suite 4400, Minneapolis, MN 55402, counsel
for defendant.
This matter is before the court upon the motion for summary
judgment by defendant Darwin Select Insurance Company (Darwin) and
motion for partial summary judgment by plaintiffs Charles E.
Bethel, II and Jennifer Kalsow Frantz.
Based on a review of the
file, record and proceedings herein, and for the following reasons,
the court grants the motion by Darwin.
BACKGROUND
This insurance-coverage dispute arises from Darwin’s refusal
to defend plaintiffs in a professional liability lawsuit. In 2005,
nonparty Trent C. Jonas formed Zen Title, LLC, a Minnesota-based
title insurance company.
Compl. ¶ 1.
Bethel and Frantz worked at
Zen Title, and each was a minority stockholder.
Id. ¶ 2.
From May
2006 to August 2007, Zen Title issued title insurance and received
and managed funds associated with mortgage financing on behalf of
United General Title Insurance Company (United General).
Id. ¶ 3.
In May 2007, Darwin issued professional liability insurance
(the Policy) to Zen Title.
See Gislason Aff. Ex. A.
The Policy
provided coverage for “loss and defense expenses ... from any claim
first made against the insured and reported to the insurer during
the policy period ... for a professional services wrongful act.”
Id. § I(A).1
A professional services wrongful act is defined as
any “[n]egligent act, error, omission, misstatement, misleading
statement, neglect or breach of duty.”
Id. § III(S)(1).
The
Policy, however, excluded coverage (Customer Funds Exclusion) for
any
loss and defense expenses, from any claim or
disciplinary proceeding based upon, arising
out of, directly or indirectly resulting from,
in consequence of, or in any way involving ...
any actual or alleged ... loss, disappearance,
pilferage or shortage of, or commingling or
improper use of, or failure to properly
segregate or safeguard, any client or customer
funds, monies or securities, including any
loss resulting from computer theft, computer
virus or any electronic transfer or from the
insolvency,
receivership,
bankruptcy
or
liquidation of any business or organization in
which the insured has placed or invested such
funds.
1
All defined terms are bolded and capitalized in the Policy.
For clarity and ease of reading, the court removes this emphasis.
2
Id. § IV(B)(6)(a) (emphasis added).
In August 2007, United General filed suit in Minnesota court
against,
among
others,
(Underlying Action).
Zen
Title,
Compl. ¶ 4.
Jonas,
Bethel
and
Frantz
On November 9, 2007, United
General filed a first amended complaint, alleging that “Zen [Title]
has failed to record (and pay associated recording fees for)
numerous residential mortgages ... [and] failed in at least nine
(9) instances to use escrowed funds ... to pay off refinanced
mortgages.”
Gislason Aff. Ex. B, ¶ 1.
Based on these claims,
United General alleged breach of contract; fraud, deceit, and
breach of fiduciary duties; conversion; deceptive trade practices;
replevin; and negligence. Id. ¶¶ 25-54. Zen Title notified Darwin
of the Underlying Action, and Darwin denied coverage.
On
February
18,
2009,
Bethel
and
Frantz
Id. ¶ 35.
entered
into a
settlement agreement with United General, agreeing to pay $100,000
and $500,000, respectively.
Gislason Aff. Ex. F.
Neither Bethel
nor Frantz “admit[ted] to any liability and in fact expressly
den[ied] the same.”
Id.
On September 16, 2009, Zen Title initiated a declaratory
judgment action against Darwin in Minnesota court.
Ex. I.
See Doran Aff.
Bethel and Frantz intervened on November 16, 2010.
Gislason Ex. G.
See
On February 23, 2011, the declaratory judgment
action was dismissed for failure to prosecute, but the claims by
Bethel and Frantz were dismissed without prejudice.
3
Id. Ex. H.
On August 5, 2011, Bethel and Frantz initiated the present
action against Darwin in Minnesota court, alleging breach of
contract and breach of the duty of good faith and fair dealing.
Bethel and Frantz also seek a declaration that Darwin was obligated
to defend the Underlying Action.
Darwin timely removed and seeks
a declaration that it had no duty to defend.
Both parties move for
summary judgment.
DISCUSSION
I.
Standard of Review
“The court shall grant summary judgment if the movant shows
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); see Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986).
A fact is material only when its resolution affects the outcome of
the case.
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248
(1986). A dispute is genuine if the evidence is such that it could
cause a reasonable jury to return a verdict for either party.
See
id. at 252.
On a motion for summary judgment, the court views all evidence
and inferences in a light most favorable to the nonmoving party.
See id. at 255.
The nonmoving party, however, may not rest upon
mere denials or allegations in the pleadings but must set forth
specific facts sufficient to raise a genuine issue for trial.
4
See
Celotex, 477 U.S. at 324.
A party asserting that a genuine dispute
exists — or cannot exist — about a material fact must cite
“particular parts of materials in the record.”
56(c)(1)(A).
Fed. R. Civ. P.
If a plaintiff cannot support each essential element
of a claim, the court must grant summary judgment because a
complete
failure
of
proof
regarding
an
essential
necessarily renders all other facts immaterial.
element
Celotex, 477 U.S.
at 322-23.
II.
Breach of Contract
“An insurer’s duty to defend an insured is contractual.”2
Meadowbrook, Inc. v. Tower Ins. Co., 559 N.W.2d 411, 415 (Minn.
1997) (citation omitted).
An insurer has a duty to defend “when
any part of the claim against the insured is arguably within the
scope of protection afforded by the policy.”
Franklin v. W. Nat’l
Mut. Ins. Co., 574 N.W.2d 405, 407–08 (Minn. 1998).
To determine
whether a duty to defend exists, the court compares the allegations
“in the complaint and amended complaint in the underlying action
with the relevant language in the [insurance policy].”
Ross v.
Briggs & Morgan, 540 N.W.2d 843, 847 (Minn. 1995) (citations
omitted).
2
“The duty to defend is different from and broader than an
insurer’s duty to indemnify.” Murray v. Greenwich Ins. Co., 533
F.3d 644, 648 (8th Cir. 2008) (citing SCSC Corp. v. Allied Mut.
Ins. Co., 536 N.W.2d 305, 316 (Minn. 1995)).
5
Whether a duty to defend exists is a question of law.
See
Auto-Owners Ins. Co. v. Todd, 547 N.W.2d 696, 698 (Minn. 1996).
“The insurer claiming it has no duty to defend has the burden of
showing each claim asserted in the lawsuit clearly falls outside
the policy.”
Murray v. Greenwich Ins. Co., 533 F.3d 644, 648 (8th
Cir. 2008) (citing Jostens, Inc. v. Mission Ins. Co., 387 N.W.2d
161, 165 (Minn. 1986)).
“If the complaint alleges several causes
of action, and one of the claims, if established, would require the
insurer to indemnify, the insurer must provide a defense against
all claims.”
Id. (citation omitted).
Doubts as to the scope of
coverage are resolved in favor of the insured.
See Franklin, 574
N.W.2d at 407.
A.
Funds Invested in Business Entities
Plaintiffs argue that the Customer Funds Exclusion applies
only to funds that were invested with other business entities.
Specifically, plaintiffs argue that the amended complaint in the
Underlying Action does not allege that funds were invested in
another
business
organization,
and
thus
the
Customer
Funds
Exclusion does not apply.
In Minnesota the interpretation of an insurance policy is a
question of law.
609 (Minn. 2001).
Am. Family Ins. Co. v. Walser, 628 N.W.2d 605,
The court interprets an insurance policy in
accordance with general principles of contract construction, giving
effect to the intent of the parties.
6
Thommes v. Milwaukee Ins.
Co., 641 N.W.2d 877, 879 (Minn. 2002). The court gives unambiguous
language its plain and ordinary meaning, and construes ambiguous
language against the drafter and in favor of the insured.
Id. at
880; Nathe Bros., Inc. v. Am. Nat’l Fire Ins. Co., 615 N.W.2d 341,
344 (Minn. 2000).
Language is ambiguous if “reasonably subject to
more than one interpretation.”
Columbia Heights Motors, Inc. v.
Allstate Ins. Co., 275 N.W.2d 32, 34 (Minn. 1979).
However, the
court “guard[s] against invitations to find ambiguity where none
exists.”
Metro. Prop. & Cas. Ins. Co. v. Jablonske, 722 N.W.2d
319, 324 (Minn. Ct. App. 2006) (citation and internal quotation
marks omitted).
The Customer Funds Exclusion contains an operative clause and
a list of examples that are excluded from coverage.3
Aff. Ex. A, § IV(B)(6)(a).
See Gislason
The last example in the Customer Funds
Exclusion exempts coverage for any loss resulting from “insolvency,
receivership,
bankruptcy
or
liquidation
of
any
business
or
organization in which the insured has placed or invested such
funds.”
Id.
Plaintiff argues that the language “business or
3
The operative clause and examples are separated by the word
“including.”
“It is hornbook law that the use of the word
‘including’ indicates that the specified list ... that follows is
illustrative, not exclusive.” P.R. Mar. Shipping Auth. v. ICC, 645
F.2d 1102, 1112 n.26 (D.C. Cir. 1981); see also Christensen v.
Harris Cnty., 529 U.S. 576, 583 (2000) (noting that expression of
one example does not suggest exclusion of others when context does
not indicate exhaustive list). As a result, the court does not
consider the examples contained in the Customer Funds Exclusion to
be an exhaustive list.
7
organization in which the insured has placed or invested such
funds” applies to the entire Customer Funds Exclusion and not to
only
those
losses
resulting
bankruptcy or liquidation.”
from
“insolvency,
receivership,
The court disagrees.
The last antecedent rule explains that qualifying words and
phrases usually apply only to the words or phrases immediately
preceding or following them, and not to others that are more
remote.
Barnhart v. Thomas, 540 U.S. 20, 26 (2003).
And “[w]hile
[the last antecedent rule] is not an absolute and can assuredly be
overcome by other indicia of meaning ... construing a [contract] in
accord with the rule is quite sensible as a matter of grammar.”
Id. (citation and internal quotation marks omitted).
Use of this
canon of construction is sensible given that under plaintiffs’
interpretation, a loss would be excluded if the funds are placed or
invested in another business entity, but not if they are kept by
the insured. Such a conclusion is illogical. See Brookfield Trade
Ctr. v. Cnty. of Ramsey, 584 N.W.2d 390, 394 (Minn. 1998) (citation
omitted) (explaining that court “will not construe the terms [of a
contract] so as to lead to a harsh and absurd result”).
As a
result, the last antecedent rule counsels against plaintiffs’
interpretation.
Plaintiffs next argue that their interpretation is proper
because the additional policy exclusions contained in the same
subparagraph all pertain to losses resulting from money invested in
8
other business entities.
(d).
See Gislason Aff. Ex. A, § IV(B)(6)(b)-
Even if plaintiffs’ assertion was true, the court would not
consider such extrinsic evidence; the Customer Funds Exclusion is
not ambiguous. See Phelps v. Commonwealth Land Title Ins. Co., 537
N.W.2d
271,
274
(Minn.
1995)
(“Where
the
intention
of
the
legislature is clearly manifested by plain unambiguous language ...
no construction is necessary or permitted.”); Horodenski v. Lyndale
Green Townhome Ass’n, 804 N.W.2d 366, 371 (Minn. Ct. App. 2011)
(citation
omitted)
(noting
that
statutory
and
interpretation follow the same rules of construction).
contract
Therefore,
the Customer Funds Exclusion is not limited to funds placed or
invested in other business entities.4
B.
“arising out of”
Plaintiffs next argue that Darwin had a duty to defend because
the
amended
complaint
contains
a
claim
for
negligence.
Specifically, plaintiffs argue that the Customer Funds Exclusion
does not encompass negligence claims, and thus Darwin had a duty to
defend all claims in the amended complaint.
Darwin responds that
the correct inquiry is not what causes of action were asserted in
4
Plaintiffs, in a one sentence argument relegated to a
footnote, also argue that a contrary interpretation would render
two other exclusions redundant. See Gislason Ex. A, § IV(A)(1)(2). The court disagrees.
9
the amended complaint, but whether these claims “arise out of”
United General’s allegation that plaintiffs wrongfully diverted
funds.
“The phrase ‘arising out of’ has been given broad meaning by
Minnesota courts.” Murray v. Greenwich Ins. Co., 533 F.3d 644, 649
(8th Cir. 2008).
“[T]he policy term ‘arising out of’ means
originating from, or having its origin in, growing out of, or
flowing from.”
Associated Indep. Dealers, Inc. v. Mut. Serv. Ins.
Cos., 229 N.W.2d 516, 518 (Minn. 1975) (citation and internal
quotation marks omitted).
In other words, “‘[b]ut for’ causation,
a cause and result relationship, is enough to satisfy the [‘arising
out of’] provision[] of the policy.”
Brockway,
411 N.W.2d
13,
16
Progressive Cas. Ins. Co. v.
(Minn. Ct.
App.
1987)
(citation
omitted).
Plaintiffs argue, however, that the Customer Funds Exclusion
only exempts claims arising out of the improper use of “client or
customer funds, monies, or securities.”
§ IV(B)(6).
Gislason Aff. Ex. A.,
Because the amended complaint contained allegations
that Bethel and Frantz failed to record mortgage
and closing
documents, plaintiffs argue that coverage was owed. See id. Ex. B,
¶¶ 18-20, 49-54.
Darwin responds that such a piecemeal parsing of
United General’s amended complaint is improper.
The court agrees.
In determining the scope of the “arising out of” policy
language, the court should not “attempt to ‘isolate’ events for
10
coverage
purposes,”
but
rather
should
intentional plan’ of the insured.”
“look
to
the
‘overall
Auto-Owners Ins. Co. v. Todd,
547 N.W.2d 696, 699 (Minn. 1996) (citation omitted).
In the
Underlying Action, United General alleged that Bethel and Frantz
“deliberately chose to delay the recordings so as to benefit from
the pool of cash escrowed for the purpose of paying recording
fees.”
Gislason Aff. Ex. B, ¶ 19; see id. ¶ 1 (“[United General]
terminated Zen when it discovered that Zen had failed to record
(and
pay
associated
mortgages.”).
recording
fees
for)
numerous
residential
In other words, the failure to record mortgage and
closing documents was “inextricably linked” to the improper use of
funds.
Auto-Owners Ins. Co., 547 N.W.2d at 699.
“But for” the
plaintiffs’ failure to pay recording fees and properly use escrowed
funds, there would have been no claim. Therefore, summary judgment
in favor of Darwin is warranted.
III.
Duty of Good Faith and Fair Dealing
“Under Minnesota law, every contract includes an implied
covenant of good faith and fair dealing requiring that one party
not ‘unjustifiably hinder’ the other party’s performance of the
contract.”
In re Hennepin Cnty. 1986 Recycling Bond Litig., 540
N.W.2d 494, 502 (Minn. 1995) (citations omitted).
allege a breach based on Darwin’s refusal to defend.
Plaintiffs
Compl. ¶ 63.
As already explained, plaintiffs’ claim for breach of contract
11
fails,
and
no
coverage
was
owed
in
the
Underlying
Action.
Therefore, plaintiffs’ duty of good faith and fair dealing claim
fails, and summary judgment is warranted.
IV.
Declaratory Judgment
Both parties seek a declaration of their rights under the
Policy. As already explained, Darwin had no duty to defend and, in
turn, no duty to indemnify plaintiffs.
Therefore, a declaratory
judgment in favor of Darwin is warranted.
CONCLUSION
Accordingly, based on the above, IT IS HEREBY ORDERED that:
1.
Plaintiffs’ motion for partial summary judgment [ECF No.
15] is denied; and
2.
Defendant’s motion for summary judgment [ECF No. 9] is
granted.
LET JUDGMENT BE ENTERED ACCORDINGLY.
Dated:
September 25, 2012
s/David S. Doty
David S. Doty, Judge
United States District Court
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