Northern States Power St. Paul Credit Union v. Cumis Insurance Society, Inc.
Filing
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MEMORANDUM OPINION AND ORDER granting defendant's 7 Motion for Judgment on the Pleadings (Written Opinion). Signed by Judge John R. Tunheim on August 9, 2013. (DML)
Northern States Power St. Paul Credit Union v. Cumis Insurance Society, Inc.
Doc. 19
UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
NORTHERN STATES POWER
ST. PAUL CREDIT UNION,
Civil No. 13-0385 (JRT/LIB)
Civil No. 13-0387 (JRT/LIB)
Plaintiff,
MEMORANDUM OPINION AND
ORDER GRANTING MOTIONS FOR
JUDGMENT ON THE PLEADINGS
v.
CUMIS INSURANCE SOCIETY, INC.
a/k/a CUNA Mutual Insurance Agency,
Inc.,
Defendant.
Amanda E. Prutzman, ECKBERG, LAMMERS, BRIGGS, WOLFF &
VIERLING, PLLP, 1809 Northwestern Avenue, Stillwater, MN 55082,
for plaintiff.
Bethany K. Culp and James S. Fuller, HINSHAW & CULBERTSON
LLP, 333 South Seventh Street, Suite 2000, Minneapolis, MN 55402, for
defendant.
These are two related insurance coverage disputes in which plaintiff Northern
States Power St. Paul Credit Union (“NSP”) seeks coverage under the “Mortgage
Recording Coverage” portion of an insurance policy issued by defendant CUMIS
Insurance Society, Inc. (“CUMIS”). When CUMIS denied coverage, NSP brought the
present actions seeking a declaratory judgment and bringing claims for breach of
contract, breach of the implied covenant of good faith and fair dealing, promissory
estoppel, equitable estoppel, and unjust enrichment.
Presently before the Court are
CUMIS’s motions for judgment on the pleadings on all of NSP’s claims. Because the
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Court finds that NSP’s contractual claims fail as a matter of law and that there is no basis
for equitable relief, the Court will grant CUMIS’s motions and dismiss NSP’s claims
with prejudice.
BACKGROUND
NSP commenced these two related insurance coverage actions against CUMIS in
Minnesota State court in January 2013. (See Civ. No. 13-385 (“Parks”), Notice of
Removal, Ex. 1 (“Parks Compl.”), Feb. 15, 2013, Docket No. 1; Civ. No. 13-387
(“Schantzen”), Notice of Removal, Ex. 1 (“Schantzen Compl.”), Feb. 15, 2013, Docket
No. 1.) On February 15, 2013, CUMIS removed the actions to this Court.
I.
THE PARKS LOAN
In May 2006, Jason Parks, a member of NSP, applied for a $153,261.50 loan from
NSP, offering a second mortgage on his California home as collateral. (Parks Compl.
¶¶ 6-7, Ex. A.) At no point in the application process did Parks inform NSP that his
property was encumbered by a $62,879.30 federal tax lien that was filed on May 30,
2006. (Id. ¶¶ 11, 14.) NSP’s loan officer had difficulty obtaining a full Owner and
Encumbrance Report on the out-of-state property. (Id. ¶ 9.) Nonetheless, because of
Parks’ reported income, NSP’s then-president approved the loan without a full Owner
and Encumbrance Report, which violated NSP’s standard operating procedure.
(Id.
¶¶ 15, 17.) NSP alleges that it would not have approved the loan if it had known that the
federal tax lien had priority over the second mortgage it received as collateral for the
loan. (Id. ¶¶ 19, 22.) Parks became delinquent on his loan on February 25, 2008. (Id.
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¶ 21.) NSP sent a Notice of Loss to CUMIS on November 7, 2011, and CUMIS denied
the claim. (Id. ¶¶ 22, 26.)
II.
THE SCHANTZEN LOAN
In April 2005, Mary Schantzen, a member of NSP, applied for a $30,000 loan
from NSP, offering a second mortgage on her home as collateral. (Schantzen Compl.
¶¶ 6-7.) Schantzen did not disclose a marital lien against her property in her loan
application, but the marital lien did appear on the title work NSP obtained from an
outside company, CU Title Services, Inc. (Id. ¶¶ 8-9.) The marital lien had second
priority behind the first mortgage on the property. (Id. ¶ 13.) NSP alleges that its loan
officer mistakenly approved the loan on the belief that its mortgage would be second in
priority behind the first mortgage, not third priority behind the first mortgage and the
marital lien.
(Id.)
NSP subsequently increased Schantzen’s loan to approximately
$80,000 in October 2006. (Id. ¶ 16.) Schantzen became delinquent on her loan on
December 15, 2009. (Id. ¶ 17.) NSP sent a Notice of Loss to CUMIS in July 2011, and
CUMIS denied the claim. (Id. ¶ 18.)
III.
THE INSURANCE POLICIES
CUMIS issued a credit union package of protection to NSP with a policy period
from February 1, 2011, to February 1, 2012.
(Parks Compl. ¶ 23; Answer, Ex. 1
(“Policy”) at 3, Feb. 22, 2013, Docket No. 4.) The Policy contains Mortgage Recording
Coverage, which is the subject of the present case. (Policy at 40-47.) The Policy’s
coverage clause provides as follows:
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We will pay you for your “loss” resulting directly from an “employee’s”
“error or accidental omission” which violates your established and enforced
operating procedures in preparing, recording or releasing your security
interest in “real estate” that is pledged as collateral on a loan.
We will pay for such “loss” only when you can document to us that the
“error or accidental omission” allowed . . . [a]nother entity to gain a
superior security interest in the collateral . . . .1
(Policy at 41.)
The Policy defines “loss” as “the lesser of” the following:
1. “Security value without error or accidental omission” less “security value
with error or accidental omission;” or
2. The principal balance of the loan secured by the “real estate,” plus
uncollected earned interest to the “date of loss.”
(Id. at 46.) The term “security value without error or accidental omission” is defined as:
[T]he market value of the “real estate” as of the “date of loss,” less . . . all
security interests that would have been superior in the absence of an
“employee’s” “error or accidental omission,” including but not limited to
tax liens and security interests recorded before the date of an “employee’s”
“error or accidental omission.”
(Id. at 47 (emphasis added).) When security value without error or accidental omission is
zero or negative, there is no covered loss. (Id.) The term “security value with error or
accidental omission” is defined, in relevant part, as the market value, less all security
interests that would have been superior in the absence of the error, less “[t]he decrease in
value by reason of an ‘employee’s’ ‘error or accidental omission’ resulting in . . .
1
In addition to providing coverage where the error allows another entity to gain a
superior security interest in the collateral, the Policy also provides coverage in three other
circumstances that NSP concedes are not present in this case. Those are where the error allows
(1) “[t]he mortgagor to transfer ownership of the collateral to another entity free of your security
interest”; (2) “[t]he mortgagor to obtain ownership of the collateral free of your security
interest”; or (3) “[t]he operation of bankruptcy laws to make your security interest
unenforceable.” (Policy at 41.)
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[a]nother entity gaining a superior security interest in the ‘real estate’ pledged as
collateral.” (Id. at 46 (emphasis added).)
The Policy provides coverage only when the date of loss occurs during the policy
period, and date of loss is defined as “the date as of which there has been no payment of
principal for 90 days.” (Id. at 44.) The Policy also provides that no legal action may be
brought against CUMIS unless the action is brought within three years after the date of
the loss. (Id. at 15.)
ANALYSIS
I.
STANDARD OF REVIEW
Reviewing a motion for judgment on the pleadings pursuant to Rule 12(c) of the
Federal Rules of Civil Procedure, the Court applies the same standard as under a motion
to dismiss pursuant to Rule 12(b)(6). Clemons v. Crawford, 585 F.3d 1119, 1124 (8th Cir.
2009). Therefore, when considering a motion for judgment on the pleadings under
Rule 12(c), the Court is required to “‘accept as true all factual allegations set out in the
complaint’ and to ‘construe the complaint in the light most favorable to the [plaintiff],
drawing all inferences in [the plaintiff’s] favor.’” Ashley Cnty., Ark. v. Pfizer, Inc., 552
F.3d 659, 665 (8th Cir. 2009) (quoting Wishnatsky v. Rovner, 433 F.3d 608, 610 (8th Cir.
2006)). Although a complaint need not contain “detailed factual allegations,” it must
contain sufficient factual allegations “to raise a right to relief above the speculative
level.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). In addition to the
pleadings, the Court may properly consider materials that are necessarily embraced by
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the pleadings. Enervations, Inc. v. Minn. Mining & Mfg. Co., 380 F.3d 1066, 1069 (8th
Cir. 2004).
II.
DECLARATORY JUDGMENT AND CONTRACTUAL CLAIMS
In Count I, NSP seeks a declaratory judgment that the Policy provides coverage
for its claims. Count II alleges that CUMIS breached its contract with NSP when it
denied coverage for NSP’s claims.
Thus, the declaratory judgment and breach of
contract claims both turn on whether the Policy provides coverage for the claims at issue.
A.
Interpretation of Insurance Policies
The interpretation and application of an insurance policy is a question of law. Am.
Family Ins. Co. v. Walser, 628 N.W.2d 605, 609 (Minn. 2001). An insurance policy is a
contract to be judged by the application of the general principles of the law of contracts.
Waseca Mut. Ins. Co. v. Noska, 331 N.W.2d 917, 926 (Minn. 1983). Thus, in interpreting
a policy, the Court “must ascertain and give effect to the intentions of the parties as
reflected in the terms of the insuring contract.” Jenoff, Inc. v. N.H. Ins. Co., 558 N.W.2d
260, 262 (Minn. 1997). “[T]he terms of an insurance policy are to be given their ordinary
meaning, as well as the interpretations adopted in prior cases . . . .” Boedigheimer v.
Taylor, 178 N.W.2d 610, 613 (Minn. 1970). Moreover, the meaning of the policy is to be
determined by looking at the words and phrases of the contract in the context of the
contract as a whole, not in isolation. Eng’g & Constr. Innovations, Inc. v. L.H. Bolduc
Co., 825 N.W.2d 695, 705 (Minn. 2013).
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“Language in a policy is ambiguous if it is susceptible to two or more reasonable
interpretations.” Midwest Family Mut. Ins. Co. v. Wolters, 831 N.W.2d 628, (Minn.
2013). Any ambiguity regarding coverage is resolved in favor of the insured. Prahm v.
Rupp Constr. Co., 277 N.W.2d 389, 390 (Minn. 1979).
The burden of proof is on the
insured to show that a loss is covered under an insurance policy. See Eng’g & Constr.
Innovations Inc., 825 N.W.2d at 705.
B.
Declaratory Judgment and Breach of Contract
CUMIS contends that there is no coverage under the Policy for several reasons,
including that the decision to give a loan is not part of “preparing a security interest,” that
no other entity “gained a superior security interest” because of NSP’s employees’ errors,
and that there was no “loss” as it is defined by the Policy. CUMIS also contends that the
claim relating to the Parks loan was brought outside of the three-year window required by
the Policy. While a number of CUMIS’s arguments have potential merit, the Court will
focus on the requirement that another entity “gain” a superior security interest as a result
of an employee’s error. Even assuming that NSP suffered a “loss” under the Policy as
the result of an “error or accidental omission” by one of its employees in “preparing a
security interest,” the Court finds that there is no coverage as a matter of law because
under no reasonable interpretation of the word “gain” did another entity gain a superior
security interest as a result of NSP’s employees’ errors.
As noted above, in order to establish that there is coverage, NSP must demonstrate
that its employees’ errors “allowed . . . [a]nother entity to gain a superior security interest
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in the collateral.” Here, the tax lien on the Parks property and the marital lien on the
Schantzen property, which were both second in line behind first mortgages on the
respective properties, preexisted any errors committed by NSP employees and would
have enjoyed the same position with respect to the underlying property whether the errors
had occurred or not. The liens were both superior to NSP’s mortgages and there is
nothing an NSP employee could have done differently that would have changed the status
of the liens. The holders of the tax and marital liens did not “gain” a superior security
interest when NSP approved loans without realizing that those liens existed, thereby
becoming third in line. They were second in line before NSP approved the loans and
they were second in line after NSP approved the loans.
NSP claims that it would not have approved the loans if its employees had not
overlooked the tax lien or believed NSP’s second mortgage would be superior to the
marital lien. Thus, according to NSP, but for its employees’ errors, the other liens would
not have been superior to NSP’s mortgages because NSP’s mortgages would not have
existed underneath them. It is in this sense that NSP claims that the other liens gained a
superior security interest over NSP. While it is a creative attempt to construe the Policy’s
language in its favor, the Court finds that it would be unreasonable to conclude that the
holders of the tax and marital liens gained a superior security interest when their position
in line was not improved by NSP’s employees’ errors. An entity possessing a security
interest that has second priority gains nothing when another entity obtains a security
interest with third priority.
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The Court’s conclusion that the Policy unambiguously does not provide coverage
is supported by the Policy’s definition of “security value with error or accidental
omission.” That term is defined as:
[T]he market value of the “real estate” as of the “date of loss,” less:
1. All security interests that would have been superior in the absence of an
“employee’s” “error or accidental omission,” including but not limited to
tax liens and security interests recorded before the date of an
“employee’s” “error or accidental omission;” and
2. The decrease in value by reason of an “employee’s” “error or accidental
omission” resulting in . . . [a]nother entity gaining a superior security
interest in the “real estate” pledged as collateral . . . .
(Policy at 7 (emphasis added).) This definition demonstrates that the Policy separates
superior security interests like preexisting tax liens or marital liens from other security
interests that later become superior because of an employee’s mistake.
Because the Court finds that it is unambiguous that no other entity gained a
superior security interest as a result of NSP’s employees’ errors, the Court will grant
CUMIS’s motion for judgment on the pleadings on NSP’s declaratory judgment claim
and breach of contract claim. Further, while extrinsic evidence sometimes provides
insight into the intent of parties to an insurance contract, see Piper Jaffray Cos. v. Nat’l
Union Fire Ins. Co. of Pittsburgh, Pa., 967 F. Supp. 1148, 1154 (D. Minn. 1997), the
Court will not consider such evidence in this case because the Policy’s language
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unambiguously does not provide coverage, see Adzick v. UNUM Life Ins. Co. of Am., 351
F.3d 883, 887 (8th Cir. 2003).2
C.
Implied Covenant of Good Faith and Fair Dealing
NSP contends that CUMIS is liable for “breach of duty of good faith and fair
dealing” because it “fail[ed] to honor the Policy and fail[ed] to pay NSP for its loss under
the Policy.” (Parks Compl. ¶¶ 34-38; Schantzen Compl. ¶¶ 29-33. “Under Minnesota
law, every contract includes an implied covenant of good faith and fair dealing . . . .”
In re Hennepin Cnty. 1986 Recycling Bond Litig., 540 N.W.2d 494, 502 (Minn. 1995).
Minnesota courts have allowed plaintiffs in insurance cases to advance breach of contract
and breach of the implied covenant claims simultaneously based on the same conduct.
See Columbia Cas. Co. v. 3M Co., 814 N.W.2d 33, 37 (Minn. Ct. App. 2012).
“To allege an implied covenant claim the [plaintiff] need not first establish an
express breach of contract claim . . . .” In re Hennepin Cnty., 540 N.W.2d at 503.
However, the implied covenant “does not extend to actions beyond the scope of the
underlying contract.”
Id.
The implied covenant “serves only to enforce existing
contractual duties, and not to create new ones.” Watkins Inc. v. Chilkoot Distributing,
Inc., __ F.3d __, 2013 WL 3368442, at *5 (8th Cir. July 8, 2013).
Although the contours of the implied covenant of good faith and fair dealing are
not thoroughly developed, see Columbia Cas. Co., 814 N.W.2d at 40 (“We need not
2
The Court need not rule on the alternative grounds on which CUMIS contends it is
entitled to judgment on the pleadings because the Court’s conclusion that no other entity gained
a superior security interest as a result of NSP’s employees’ errors is dispositive.
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determine whether Minnesota’s recognition of the implied covenant of good faith and fair
dealing is limited to unjustifiable hindrance of a party’s performance under the
contract.”), the Court finds that NSP’s claim fails as a matter of law. NSP’s sole
allegation is that CUMIS failed to act in good faith because it did not pay NSP for its
losses. NSP points to no other actions or omissions by CUMIS that might amount to a
breach of the implied covenant.
NSP’s claim is premised entirely on the assumption that it was entitled to coverage
under the Policy, but the Court concluded above that NSP’s losses are not covered by the
Policy as a matter of law. It would be incongruous to find that CUMIS failed to act in
good faith simply because CUMIS failed to provide coverage when CUMIS was correct
that the claim was not covered by the Policy. Therefore, the Court will grant CUMIS’s
motion for judgment on the pleadings on NSP’s implied covenant of good faith and fair
dealing claim.
III.
EQUITABLE CLAIMS
In addition to its declaratory judgment and contractual claims, NSP brings three
equitable claims – promissory estoppel, equitable estoppel, and unjust enrichment. The
equitable claims are premised entirely on the assumption that CUMIS has failed to
comply with the terms of the Policy by denying coverage in the present case. There are
no factual allegations beyond the denial of coverage to support any of the three claims.
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A.
Promissory Estoppel
Under Minnesota law, the elements of promissory estoppel are (1) a clear and
definite promise; (2) the promisor intended to induce reliance and such reliance occurred;
and (3) the promise must be enforced to prevent injustice. Ruud v. Great Plains Supply,
Inc., 526 N.W.2d 369, 372 (Minn. 1995). “Where facts are not in dispute . . . , whether
they rise to the level of promissory estoppel presents a question of law. Martens v. Minn.
Mining & Mfg. Co., 616 N.W.2d 732, 746 (Minn. 2000). “[P]romissory estoppel only
applies where no contract exists.” Banbury v. Omnitrition Intern., Inc., 533 N.W.2d 876,
881 (Minn. Ct. App. 1995) (citing Sacred Heart Farmers Co-op Elevator v. Johnson, 232
N.W.2d 921, 923 n.1 (Minn. 1975)).
NSP alleges that the Policy constituted a promise by CUMIS to cover losses
pursuant to the terms set forth in the Policy. In other words, NSP explicitly alleges that
its contract with CUMIS contains the promise it seeks to enforce. NSP does not allege
that CUMIS made any relevant promises other than those contained in the Policy.
Because NSP’s promissory estoppel claim is premised entirely on its existing contract
with CUMIS, the Court will grant CUMIS’s motion for judgment on the pleadings on
NSP’s promissory estoppel claim. Banbury, 533 N.W.2d at 881.
B.
Equitable Estoppel
Under Minnesota law, a claim for equitable estoppel must satisfy three elements:
“(1) that promises or inducements were made; (2) that [plaintiff] reasonably relied upon
the promises; and, (3) that [plaintiff] will be harmed if estoppel is not applied.” Hydra-
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Mac, Inc. v. Onan Corp., 450 N.W.2d 913, 919 (Minn. 1990). NSP alleges that the
Policy was a representation that CUMIS would conduct business with NSP pursuant to
the terms as set forth therein. As with NSP’s promissory estoppel claim, the equitable
estoppel claim is premised on the erroneous assumption that CUMIS has failed to adhere
to the terms of the Policy by denying coverage. Because the Court concluded above that
NSP’s assumption is incorrect and there is, in fact, no coverage, the Court will grant
CUMIS’s motion to dismiss NSP’s equitable estoppel claims. Cf. Shannon v. Great Am.
Ins. Co., 276 N.W.2d 77, 78 (Minn. 1979) (“The doctrine of estoppel may not be used to
enlarge the coverage of an insurance policy.”)
C.
Unjust Enrichment
Under Minnesota law, “[t]o establish an unjust enrichment claim, the claimant
must show that the defendant has knowingly received or obtained something of value for
which the defendant in equity and good conscience should pay.” Caldas v. Affordable
Granite & Stone, Inc., 820 N.W.2d 826, 838 (Minn. 2012) (internal quotation marks
omitted). NSP’s unjust enrichment claim is premised solely on CUMIS’s refusal to
provide coverage for NSP’s claims in the present case. Because the Court has concluded
that there is no coverage under the Policy for the claims, there is no injustice in CUMIS
retaining premiums and refusing to provide coverage for the claims. Equity does not
require that CUMIS provide coverage beyond the terms of the Policy. Therefore, the
Court will grant CUMIS’s motion to dismiss NSP’s unjust enrichment claim.
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ORDER
Based on the foregoing, and all the files, records, and proceedings herein, IT IS
HEREBY ORDERED that:
1.
Defendant’s motion for judgment on the pleadings [Docket No. 6] in Civil
No. 13-0385 is GRANTED.
2.
Defendant’s motion for judgment on the pleadings [Docket No. 7] in Civil
No. 13-0387 is GRANTED.
3.
Plaintiff’s claims in Civil No. 13-0385 and Civil No. 13-0387 are
DISMISSED WITH PREJUDICE.
LET JUDGMENT BE ENTERED ACCORDINGLY.
DATED: August 9, 2013
at Minneapolis, Minnesota.
____s/
____
JOHN R. TUNHEIM
United States District Judge
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