Jo Ann Howard and Associates, P.C. et al v. Cassity et al

Filing 1535

MEMORANDUM AND ORDER: IT IS HEREBY ORDERED that Plaintiffs' Motion to Strike National City Bank's Failure to Mitigate Damages Defense and Quash Its Subpoena [ECF No. 1437 ] is GRANTED. Signed by District Judge E. Richard Webber on May 9, 2014. (BRP)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MISSOURI
EASTERN DIVISION

JO ANN HOWARD &
ASSOCIATES, P.C., et al.,
Plaintiffs,
vs.
J. DOUGLAS CASSITY, et al.,
Defendants.

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Case No. 4:09CV01252 ERW

MEMORANDUM AND ORDER
This matter comes before the court upon “Plaintiffs’ Motion to Strike National City
Bank’s Failure to Mitigate Damages Defense and Quash Its Subpoena” [ECF No. 1437].
I.

BACKGROUND
This litigation arises out of an alleged scheme by the owners, directors, officers,

employees, attorneys, and consultants of three entities -- National Prearranged Services, Inc.
(“NPS”), Lincoln Memorial Insurance Company (“Lincoln”), and Memorial Service Life
Insurance Company (“Memorial”) -- to defraud funeral homes and consumers in the sale of preneed funeral service contracts, and to re-direct the funds received from the sale of those products
to other related entities and certain individual parties.
On April 8, 2008, the Texas Commissioner of Insurance placed Lincoln under a consent
order, finding, among other things, that Lincoln had failed to comply with certain laws and that
several states had suspended Lincoln’s certificate of authority, or otherwise prohibited Lincoln
from issuing policies within their borders. An arbitration proceeding arising out of a reinsurance

agreement between Lincoln and Hannover Life Reassurance Company of America (“Hannover”)
began on April 14, 2008.
Hannover, who had reinsured some of Lincoln’s insurance policies in exchange for
premium payments, sought in excess of $28 million for damages caused by Lincoln’s
misconduct. Lincoln asserted Hannover wrongfully accused Lincoln of fraud and other
deliberate misconduct, claimed the arbitration expenses had brought it to the brink of insolvency,
and contended Hannover should pay Lincoln over $50 million in compensatory damages.
Lincoln also sought $200 million in punitive damages on the basis of Hannover’s “grotesque
conduct” during the arbitration proceeding.
Several weeks after Lincoln was placed under the April 8, 2008 consent order, top
Lincoln officials refused to testify in the Hannover arbitration. The arbitration hearing concluded
on April 25, 2008, without any Lincoln witness testifying. The alleged scheme ultimately
resulted in causing the Texas Department of Insurance to declare the three defendant entities
insolvent, and to petition for an order of rehabilitation in a Texas state court.
On May 13, Lincoln entered into a “Rule 11 Agreement” with the Texas Department of
Insurance, consenting to receivership, an agreed Rehabilitation Order, and a permanent
injunction. On May 14, 2008, the Texas Receivership Court entered its Order, appointing the
Commissioner of Insurance for the State of Texas as Receiver for Rehabilitation
(“Rehabilitator”), finding Lincoln to be in a hazardous financial condition, and granting the
Rehabilitator all title to Lincoln’s property. The Texas Receivership Court issued an automatic
stay under Texas Insurance Code § 443.008, and entered a permanent injunction that, among
other things, enjoined arbitration against Lincoln, and prohibited persons or any other legal
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entities from making any claim, charge or offset against the defendant entities, their property, or
the Rehabilitator [ECF No. 925-8]. The Rehabilitator subsequently appointed Plaintiff Jo Ann
Howard & Associates, P.C., to serve as the Special Deputy Receiver (“SDR”) of NPS, Lincoln,
and Memorial. On September 22, 2008, the receivership court entered an order approving the
liquidation of Lincoln, and permanently staying the Hannover arbitration.
In the instant case, the SDR, has asserted, against numerous defendants, claims such as
violation of the RICO Act, 18 U.S.C. § 1962(d); breach of fiduciary duty; and gross negligence.
Other plaintiffs include national and individual state life and health insurance guaranty
associations. Plaintiffs’ Third Amended Complaint (“TAC”) names over forty defendants,
including Defendant National City Bank and PNC Bank (collectively referred to as “National
City”). In its Answer to Plaintiffs’ TAC, National City asserts, among others, the affirmative
defense that Plaintiffs failed to mitigate any damages they may have suffered [ECF No. 1018 at
93].
National City recently served Peter A. Scarpato with a subpoena, requesting production of
an unissued arbitration award from the 2008 arbitration proceeding between Hannover and
Lincoln [ECF Nos. 1437, 1437-1]. Mr. Scarpato was the umpire for the Hannover arbitration.
The requested award was never issued because the Texas Receivership Court permanently stayed
the arbitration matter, when it placed Lincoln into rehabilitation.
II.

LEGAL STANDARD
Rule 12(f) of the Federal Rules of Civil Procedure provides that courts “may strike from

a pleading an insufficient defense or any redundant, immaterial, impertinent, or scandalous
matter.” Fed. R. Civ. P. 12(f). Although district courts enjoy liberal discretion under the rule,
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striking a party’s pleadings is an extreme measure, and motions to strike are viewed with
disfavor and are infrequently granted. Stanbury Law Firm, P.A. v. I.R.S., 221 F.3d 1059, 1063
(8th Cir. 2000).
Where a defense is insufficient as a matter of law, it should be stricken to eliminate the
delay and unnecessary expense of litigating it at trial. See FDIC v. Collins, 920 F.Supp. 30, 33
(D. Conn. 1996); RTC v. Youngblood, 807 F.Supp. 765, 769 (N.D. Ga. 1992); FDIC v. Eckert
Seamans Cherin & Mellot, 754 F.Supp. 22, 23 (E.D.N.Y. 1990); Purex Corp., Ltd. v. Gen. Foods
Corp., 318 F.Supp. 322, 323 (D.C. Cal. 1970).
III.

DISCUSSION
In their Motion, Plaintiffs contend National City’s failure-to-mitigate-damages defense

should be stricken, and the subpoena served on the Hannover arbitration umpire should be
quashed, because National City’s actions challenge orders of the Texas Receivership Court,1 and
attack the Texas Department of Insurance’s actions after the agency declared NPS, Lincoln and
Memorial insolvent and the entities were placed in receivership [ECF No. 1437]. Plaintiffs state
the Court previously stuck affirmative defenses challenging the conduct of regulators, and
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The Court agrees that National City’s asserted defense basically constitutes a challenge
the receivership court’s orders. Significantly, the commencement of the original delinquency
proceeding automatically operated as a stay of the Hannover arbitration and other proceedings
against Lincoln, in accordance with the Texas Insurer Receivership Act’s purpose of
“protect[ing] the interest of insureds, claimants, creditors, and the public generally[.]” Texas
Insurance Code § 443.001. The automatic stay and permanent injunction enjoining arbitration
against Lincoln, resulted from an order issued on May 14, 2008, by the receivership court under
Texas Insurance Code § 443.008; and the permanent stay of the Hannover arbitration was
ordered by the receivership court when it issued its September 22, 2008 order approving the
liquidation of Lincoln. When the Texas Commissioner of Insurance was appointed as
Rehabilitator in the May 14, 2008 Order, and designated as Liquidator in the September 22, 2008
Order, he became an officer or agent of the receivership court, subject to its supervision, and he
owed a fiduciary duty to comply with the court’s orders.
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dismissed counterclaims brought by other defendants, because their counterclaims concerned
post-receivership conduct unrelated to Plaintiffs’ claims. They contend “[t]he Court should again
prevent a defendant from seeking to inject the conduct of regulators into this case in an attempt to
avoid or lessen the consequences of its misconduct.”
In its Response in Opposition, National City claims Plaintiffs wrongly seek to cut off its
inquiry into their decisions and actions during the course of the supervision, rehabilitation, and
receivership proceedings [ECF No. 1490]. National City argues the award is discoverable
because it directly concerns causation, a fundamental element of each of Plaintiffs’ two
remaining claims against National City. National City maintains Hannover’s conduct in pursuing
claims against Lincoln in the arbitration proceeding, and the SDR’s decision to abandon
Lincoln’s claims against Hannover, proximately caused Plaintiff’s alleged injuries.
National City further argues that, while Hannover’s claims against Lincoln were stayed
by operation of law, claims pursued by Lincoln were not; and it claims, whether the abandonment
of Lincoln’s claim against Hannover is viewed as an act by the SDR or the Texas Department of
Insurance, National City is still entitled to conduct discovery to prove the action was grossly
arbitrary and capricious, and a valid defense. It asserts Missouri law governs its ability to assert
its failure-to-mitigate defense, and it claims Plaintiff’s motion must be denied, because Plaintiff
has not cited any Missouri case law establishing the legal insufficiency of National City’s
defense.
National City contends this Court already rejected Plaintiffs’ arguments when it denied a
motion asking the Court for an order protecting them from responding to certain document
requests made by National City [ECF No. 1064], and it urges the Court to do so again. National
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City asserts such an outcome “is so obviously correct that the [SDR] took the unusual and
improper additional step of circumventing this Court and obtaining a state court temporary
injunction from the Travis County District Court in Austin, Texas, in an attempt to bar National
City’s discovery of the document at issue – a fully prepared but unissued arbitration award.”
[ECF No. 1490 at 1]. National City contends discovery in this matter suggests the SDR chose to
block the issuance of the award because an arbitration award showing Hannover’s wrongdoing
caused Lincoln’s collapse would undermine Plaintiffs’ claims against the pre-need trusts in this
matter for losses due to trustee mismanagement. It argues the SDR’s failure to collect the award
may have proximately caused Lincoln’s demise, and the damages Plaintiffs seek from National
City.2
In their Reply, Plaintiffs contend National City has no cognizable defense, whether styled
as “failure to mitigate” or “loss causation,” based on the Hannover Arbitration. They argue
National Bank’s theory that the SDR could have split the arbitration and proceeded with only
Lincoln’s counterclaims, “defies law and logic.” Plaintiffs claim National City wrongly criticizes
this and other courts’ rulings for purportedly applying federal common law, and they contend
Missouri case law precludes National City’s purported defense, however styled, as there was no
causal connection between the damages caused by National City and the SDR’s post-receivership
actions, and it was completely reasonable for the SDR not to pursue Lincoln’s arbitration
counterclaims, because they were premised on the unfounded notion that Lincoln did nothing
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As an incidental matter, the Court notes the arbitration hearing concluded on April 25,
2008, without any Lincoln witness testifying, a circumstance not assuring confidence that any
forthcoming award would be favorable to Lincoln. Furthermore, it was entirely within the
receivership court’s authority over the arbitration proceeding to issue the injunction.
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wrong. They claim Missouri law prohibits discovery of arbitration proceedings, and they state no
basis for subpoenaing an arbitrator to release an unissued ruling exists.
In this case, the SDR asserts claims against National City for breach of fiduciary duty,
and negligence and gross negligence. These causes of action are created by Missouri law.
Accordingly, state law governs National City’s tort liability, and its ability to assert affirmative
defenses to Plaintiffs’ claims against it in this matter. See e.g., Resolution Trust Corp. v. Gibson,
829 F.Supp. 1103 (W.D. Mo. 1993). The task before this Court is to interpret and apply the
relevant rules of state law to determine how Missouri courts would dispose of the issue.
Essentially, National City’s mitigation-of-damages defenses seek to diminish, based upon
actions taken by the Texas Department of Insurance and the Texas Receivership Court, the
amount of any recovery from National City by Plaintiffs. In Missouri, the mitigation-ofdamages defense, also known as the rule of avoidable consequences, requires the party damaged
through the alleged breach by another of some legal duty or obligation, to make reasonable
efforts to minimize the damages incurred as a result of the defendant’s breach. Carpenters’ Dist.
Council of Greater St. Louis & Vicinity v. Commercial Woodworking & Contracting, Inc., 2012
WL 1025203 at * 6 (E.D. Mo. March 26, 2012) (citing Wolf v. Mo. State Training Sch. for Boys,
517 S.W.2d 138 (Mo. banc 1974)).
Although a plaintiff has a general duty to mitigate its damages under Missouri law, public
policy considerations weigh in favor of treating a regulatory agency differently than a typical
plaintiff in a civil case, when the agency is attempting to recover and collect assets. See Gibson,
829 F.Supp. at 1107-08; see also Mo. Rev. Stat § 374.040.1 (director of department of insurance
has duty “generally to do and perform with justice and impartiality all such duties as are or may
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be imposed upon him by the laws regulating the business of insurance in this state and to perform
those duties . . . in such a manner as to be in the best interests [ ] and protect[ion of] the general
public, policyholders, insurance companies, and the officers, directors and stockholders
thereof[.]”); Craig v. Stacy, 50 S.W.2d 104, 106-07 (Mo. 1932) (recognizing special kind of
receivership for liquidation of insolvent banks, because they affect public welfare and involve the
rights of many individuals who are unable to adequately protect their interests; receiver
represents not only corporation, but also the creditors).
Considering the imposition of injunctive relief by the Texas court, Defendants’ flawed
reasoning concerning any likelihood of recovery, based on facts viewed most favorably to
Defendants, and after an examination of the public policy concerns underlying both Texas’ and
Missouri’s insurer insolvency codes, this Court is persuaded Plaintiff is entitled to relief under
Federal Rule of Civil Procedure 12(f). The best interests of the general public, policy holders,
creditors, and the insolvent insurers will be served by granting the requested relief. The public is
the intended beneficiary of the common law duty imposed upon officers and directors of
institutions entrusted to their care, and of a regulatory agency’s acts. Fed. Savings & Loan Ins.
Corp. v. Burdette, 718 F.Supp. 649, 662-63 (E. D. Tenn. 1989). The purpose of the Texas
Receivership Act is “to protect the interest of insureds, claimants, creditors, and the public
generally . . ..” Tex. Ins. Code § 443.001(e). “A receiver is the representative and protector of
the interests of all persons, including creditors, shareholders and others, in the property of the
receivership.” Jones v. Wells Fargo Bank, N.A., 666 F.3d 955, 966 (5th Cir. 2012) (internal
quotations and citation omitted). Likewise, a key objective of Missouri’s insurer insolvency
code, Missouri Revised Statutes §§ 375.1150 et seq., is to shore up confidence in the insolvent
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insurance company, because insurance companies exist and thrive on public confidence. A.W.
McPherson v. U.S. Physicians Mutual Risk Retention Grp., 99 S.W.3d 462, 480 (Mo. Ct. App.
2003). Under Missouri’s insurer insolvency statute, the Director of the Missouri Department of
Insurance has a duty to regulate insurance companies for the benefit of consumers. Id. at 467.
The Missouri and Texas statutory schemes for insurer rehabilitation and liquidation are
both designed to further the same governmental interest of orderly and equitable distribution of
insolvent insurers’ assets. Texas Insurance Code § 443.005 grants the Texas Commissioner of
Insurance the power to commence delinquency proceedings in Texas state courts. Likewise,
Missouri Revised Statute § 375.1165 grants the Director of the Missouri Department of
Insurance power to petition, upon certain grounds, a court for an order of rehabilitation for
troubled insurance companies. In accordance with both states’ statutory plans, the receivership
court thereafter appoints the Director (or Commissioner), and his successors, as rehabilitator, and
directs the rehabilitator to take possession of the insurer’s business and assets. Mo. Rev. Stat. §
375.1166; Tex. Ins. Code § 443.101. The purpose of both states’ insurer receivership acts is to
protect the interests of insureds, creditors, and the public generally. See Tex. Ins. Code §
443.001; Mo. Rev. Stat. § 375.1170.1 (“The rehabilitator shall take such action respecting the
pending litigation as he deems necessary in the interests of justice and for the protection of
creditors, policyholders, and the public.”).
Often, as occurred in this matter with the Texas Department of Insurance, the Director of
the Missouri Department of Insurance, as statutory receiver, will appoint a SDR who stands in
the shoes of the Director, to perform his duties. A.W. McPherson, 99 S.W.3d at 468. “Although
SDRs have the same powers as the Receiver, they do not have carte blanche; their administration
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is monitored by the supervising court, which must pre-approve many SDR actions, including . . .
abandoning the prosecution or defense of claims deemed unprofitable.” Id. The SDR, as
Receiver’s counsel, or as SDR, is an officer or agent of the court, and has a fiduciary duty to
comply with the supervising court’s orders. A.W. McPherson, 99 S.W.3d at 468; Tex. Ins. Code
§§ 443.101, 443.102. SDR, as Receiver’s employee, is also its agent and fiduciary. Id. Due to
its broad powers over the receivership estate, the SDR also is a fiduciary of all parties interested
in the receivership, and must undertake to care for the property and manage it for creditors. A.W.
McPherson, 99 S.W.3d at 468-69.
Significantly, both states’ insurance codes provide that the receiver and its SDR, when
acting with respect to the rehabilitation, enjoys immunity from any claim against them for any act
or omission committed in the performance of their functions and duties. See Mo. Rev. Stat. §§
375.1166.4 (official immunity when acting with respect to rehabilitation), 375.1182.5 (absolute
immunity when acting with respect to liquidation); Tex. Ins. Code §§ 443.011(c) (action or
inaction by department or insurance regulatory authorities in any state may not be asserted as
defense to claim by receiver), 443.014(c) (receiver, receiver’s assistants, and receiver’s
contractors are immune from suit and liability, both personally and in representative capacities,
for any claim for damage to or loss of property or personal injury or other civil liability caused by
or resulting from any alleged act, error, or omission . . . that arises out of or by reason of their
duties . . . or is taken at direction of receivership court, providing that alleged act, error or
omission is performed in good faith).
Given the similarity of the purposes of Texas’ and Missouri’s insolvent insurer statutes,
the fiduciary duties of their receivers to the general public established in both of those states’
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codes, and the states’ statutory schemes’ immunity provisions, the Court finds Missouri courts
would not permit National City to assert a mitigation-of-damages defense attacking the conduct
of a receiver in collecting the assets of a failed institution. Furthermore, the Court agrees that
Missouri case law likewise supports this finding, as the “efforts which [an] injured party must
make to avoid the consequences of the wrongful act or omission need only be reasonable under
the circumstances of the particular case.” Cook v. Lenetz, 764 S.W.2d 682, 683 (Mo. Ct. App.
1988). The Court finds it was not unreasonable for the SDR not to pursue Lincoln’s arbitration
counterclaims against Hannover, particularly as Lincoln’s claims were premised upon its
assertion that Hannover, not Lincoln, was the party that perpetuated a fraud.
When previously presented with the question whether corporate officers or directors
should be permitted to assert affirmative defenses based on the regulator’s actions in this matter,
this Court, noting the weight of authority holding regulators owed no duty to directors and
officers (the “no duty rule”), ruled the former officers and directors should not be allowed to
avoid liability on that basis [ECF No. 569]. On a prior occasion, the Court recognized the
underlying public policy rationale applied equally to the accountants or lawyers of insolvent
financial entities [ECF No. 1133]. The Court is persuaded that public policy weighs in favor of
the public not bearing the risk of any judgment errors by regulators or receivers. “In reaching its
decision, this court balanced the danger that the [agency] would never be held accountable if its
actions were, in fact, irresponsible, with the policy of not forcing the public to bear the losses for
errors in judgment.” Gibson, 829 F.Supp. at 1108. Accordingly, the Court finds National City’s
mitigation of damages defense also must be stricken.
This conclusion is supported by long-standing federal case law. “[N]othing could be
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more paradoxical or contrary to sound policy than to hold that it is the public which must bear
the risk of errors of judgment made by its officials in attempting to save a failing institution – a
risk which would never have been created but for defendants’ wrongdoing in the first instance.”
Burdette, 718 F.Supp. at 663. In FDIC v. Bierman, 2 F.3d 1424 (7th Cir. 1993), the Seventh
Circuit examined the FDIC’s duty as a receiver to replenish the insurance fund used to cover
bank losses allegedly caused by the bank’s officers and directors, and, in light of clear
congressional intent for the FDIC to exercise its discretion in efforts to do so, concluded FDIC
had no duty mitigate damages attributed to those individuals by seeking other avenues of relief.
Id. at 1439-40.
Following a 1994 decision in which the Supreme Court considered the tort liability of
attorneys who provided services to a bank that was subsequently placed in receivership, a split
developed among district courts, as to whether affirmative defenses could be raised against a
receiver. See O’Melveny & Meyers v. FDIC, 512 U.S. 79 (1994). In O’Melveny, the Supreme
Court held that state law governed the imputation of corporate officers’ knowledge to a
corporation asserting causes of action created by state law, and determined that corporate
officers’ knowledge could be imputed to the FDIC suing as a receiver. Id at 84-87. O’Melveny
did not address whether state law affirmative defenses, such as mitigation of damages, could be
asserted against the FDIC, and expressly said, “[t]he rules of decision at issue here . . . affect only
the FDIC’s rights and liabilities, as receiver, with respect to primary conduct on the part of
private actors that has already occurred.” Id. at 88. Nevertheless, post O’Melveny, district courts
have reached differing conclusions as to whether affirmative defenses could be asserted against a
receiver’s action seeking recovery of a troubled institution’s assets. Compare FDIC v.
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Oldenburg, 38 F.3d 1119, 1122 (10th Cir. 1994) (“[W]hen the FDIC sues to recover on the assets
of a failed financial institution, the responsible officers and directors of such institution may not
assert the affirmative defenses of contributory negligence and mitigation of damages against the
FDIC.”); FDIC v. Mahajan, 2013 WL 3771419 at *2 (N.D. Ill. July 16, 2013) (while postO’Melveny split among district courts evidences its effect on “no duty rule,” court was not
“powerfully convinced” that relationship between O’Melveny and Bierman was so clear that it
should go against binding precedent barring mitigation-of-damages defense against FDIC based
on its conduct as receiver); FDIC v. Raffa, 935 F.Supp. 119 (D. Conn. 1995) (rejecting
affirmative defenses, including mitigation of damages, which asserted either some duty was
owed and breached by FDIC, or which challenged FDIC’s discretionary decisions); Resolution
Trust Corp. v. Moskowitz, 1994 WL 16190856 at *6 (D. N.J. Aug. 12, 1994) (noting O’Melveny
did not address defenses implication pre- or post-receivership actions of the receiver, and holding
RTC has no duty to officers, directors of failed institution, or institution’s retained professionals);
Resolution Trust Corp. v. Sands, 863 F.Supp. 365 (N.D. Tex. 1994) (neither the holding nor
reasoning of O’Melveny calls into question the rulings and rationale of Fifth Circuit precedent
holding the FDIC is not subject to affirmative defense of failure to mitigate damages when it sues
former directors and officers in its corporate capacity to recover losses sustained by insolvent
financial institution); with FDIC v. Skow, 741 F.3d 1342 (11th Cir. 2013) (determining FDIC was
unentitled to partial summary judgment as it had failed to demonstrate existence of established
and long-standing common law rule barring defendants’ affirmative defenses); FDIC v. Ornstein,
73 F.Supp.2d 277 (E.D. N.Y. 1999) (no duty rule abrogated); Resolution Trust Corp. v. Liebert,
871 F.Supp. 370 (C.D. Calif. 1994) (stating it respectfully disagreed with majority position that
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“no duty” rule applied to post-Financial Institutions Reform, Recovery, and Enforcement Act
(“FIRREA”) suits, and concluding no duty rule abrogated by O’Melveny). The Court concludes
finding a duty on behalf of a regulatory agency that would relieve National City of liability for
misconduct would not comport with the agency’s duty to the general public and the insurance
funds it is charged to protect, or with the congressional scheme of the insolvent insurer statutes in
Missouri or Texas.
The Court finds National City’s failure-to-mitigate-damages defense is legally insufficient
as a matter of law. See FDIC v. Coble, 720 F.Supp. 748, 750 (E.D. Mo. Sept. 18, 1989) (defense
is insufficient if, as a matter of law, it cannot succeed under any circumstances; defense is
immaterial if it bears no essential relationship to claim for relief). In Missouri, the failure-tomitigate-damages defense requires a showing that the plaintiff’s behavior was causally related to
the damages the plaintiff claims the defendant caused. See MAI 4.01, 32.29. Here, Plaintiff’s
allegations of negligence and breach of fiduciary duty asserted against National City concern
actions taken by National City prior to the date the Texas Receivership Court appointed the
Receiver. National City’s affirmative defense concerns actions or omissions by the Receiver, or
the SDR as his agent, after that date. National City takes the position that the transaction under
consideration is the movement of Lincoln toward insolvency. However, Lincoln’s insolvency is
not the crux of the plaintiffs’ claims. The TAC’s claims concern alleged breaches of fiduciary
duties owed by officers and directors of National City in their management of certain Lincoln
pre-need trust accounts, which led to specific losses on these accounts. The transaction at issue
here is the specific actions or inactions of discrete individuals causing losses in identified trust
accounts:
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As a direct and proximate result of [the trustee defendants’ failures, breaches of
fiduciary duties, and negligent and grossly negligent conduct], the Rico
Defendants . . . were able to manipulate trust assets and siphon millions of dollars
from the NPS pre-need trusts, such that the trusts lacked sufficient assets to
provide consumers their pre-paid funeral services.
[ECF No. 916 at 184, 186]. National City’s failure-to-mitigate damages defense does not relate
to the transaction at issue in the TAC. Furthermore, Lincoln would have been able to assert these
same claims against National City, even if Lincoln had managed to remain solvent. Because
National City’s affirmative defense is not causally related to the damages Plaintiffs claims
National City caused, it must be stricken. See Coble, 720 F.Supp. at 750; Earll v. Consol.
Aluminum Corp., 714 S.W.2d 932, 935 (Mo. Ct. App. 1986).
Here, as in failed savings institutions, the receiver’s ability to recover assets, or damages
for wrongdoing, quickly and efficiently, is important to the public. See Burdette, 718 F.Supp. at
663. Considering all of the circumstances of this case, receivership proceedings initiated to
perform these functions will not be encumbered by a court order legitimizing a proffered
mitigation of damages defense; particularly, not at the behest, or on the behalf, of an alleged
wrongdoer attempting to reduce the receiver’s recovery. Id. at 663-64.
Plaintiffs additionally contend National City’s subpoena violates the order of the Texas
Receivership Court [ECF No. 925-8]. This Court agrees. See Tex. Ins. Code 443.008
(commencement of delinquency proceeding operates as stay of continuation of judicial,
administrative, or other action or proceeding against the insurer, including an arbitration
proceeding commenced before delinquency proceeding); Mo. Rev. Stat. § 435.014 (arbitration
proceedings regarded as settlement negotiations; arbitrators may not be subpoenaed or otherwise
compelled to disclose any matter disclosed in the process of conducting the arbitration).
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The most recent case management order was filed in this case on April 16, 2013. Fact
discovery ends June 1, 2014. National City’s attempt to pursue a collateral action at this stage of
the case, based on a mitigation-of-damages defense as a wrongdoer attempting to reduce the
receiver’s recovery, will not be permitted. Thus, the Court also finds the subpoena served on
Mr. Scarpato, seeking the unissued Hannover arbitration award, should be quashed. Because
such discovery could be relevant only to the stricken mitigation-of-damages defense, a request
seeking such information properly should be denied. See Oppenheimer Fund, Inc. v. Sanders,
437 U.S. 340, 352 (1978). The Court will grant Plaintiffs’ Motion.
Accordingly,
IT IS HEREBY ORDERED that “Plaintiffs’ Motion to Strike National City Bank’s
Failure to Mitigate Damages Defense and Quash Its Subpoena” [ECF No. 1437] is GRANTED.
Dated this 9th

day of May, 2014.

E. RICHARD WEBBER
SENIOR UNITED STATES DISTRICT JUDGE

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