NETBANK V COMMERCIAL MONEY CENTER, INC.

Filing 139

ORDER that the Safeco Insurance Company of Americas Motion to Bifurcate 116 is GRANTED. FDICs Motion to Bifurcate the Trial 117 is DENIED. A bench trial on the reformation issue will commence on Nov. 28, 2011 at 9:00 AM. Royal Indemnity Company file a status report on the third-party claims by October 21, 2011. Signed by Judge Kent J. Dawson on 10/7/11. (Copies have been distributed pursuant to the NEF - ECS)

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UNITED STATES DISTRICT COURT

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DISTRICT OF NEVADA

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FDIC, AS RECEIVER OF NETBANK,
FSB,
Case No. 2:02-CV-01051-KJD-LRL

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Plaintiff,
ORDER

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v.

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SAFECO INSURANCE COMPANY OF
AMERICA,

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Defendant,
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ROYAL INDEMNITY COMPANY,
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Third-Party Plaintiff,
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v.
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A&M Select Insurance Services, Inc., et al,
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Third-Party Defendants.
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Before the Court is the Motion to Bifurcate Trial filed by Defendant Safeco Insurance

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Company of America (#116) and the Motion to Bifurcate the Trial filed by FDIC (#117). Safeco and

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FDIC filed responses (##128,129) and Safeco filed a reply (#134).

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I. Background

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This case comes before the Court on remand from a Multi-District Litigation (“MDL”) action

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before the Hon. Kathleen M. O’Malley in the Northern District of Ohio. Commercial Money Center

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(“CMC”), an equipment leasing company, obtained lease bonds from Safeco to guaranty payments

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from the lessee to CMC. CMC bundled the leases into a pool and assigned the rights to receive

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payment and the rights to make a claim on the lease bonds to various banks, including Netbank

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(“FDIC”) in exchange for an investment in CMC.1 Many sureties and banks were involved in these

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transactions and CMC, the sureties, and the banks entered into a Sale and Servicing Agreement in

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which the surety agreed to act as the servicer of the leases and appointed CMC as sub-servicer with

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the assent of the investor bank.

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In 2001 CMC stopped forwarding lease payments. FDIC attempted to claim on the lease
bond. Safeco determined that CMC had fraudulently induced Safeco to participate in the lease bond

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scheme and refused to pay FDIC’s claim on the bond. FDIC alleges breach of contract, breach of

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fiduciary duty, promissory estoppel, conversion, bad faith, breach of the covenant of good faith and

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fair dealing, fraud, and declaratory relief. Royal Insurance Company filed a third-party action against

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A&M Select Insurance Services, Inc. and Michael Anthony.

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Each of the bonds issued by Safeco contained an express waiver of fraud as a defense to

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payment. Before Judge O’Malley, FDIC took the position that Safeco is barred from raising fraud as

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a defense to payment. Safeco contended that, because the bonds originally named CMC as obligee,

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and the bonds were assigned by CMC to FDIC and other purchasers, the sureties were entitled to

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raise fraudulent inducement by CMC as a defense to payment because defenses that applied against

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an assignor would be as good against an assignee. FDIC argued that even if the bonds originally

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named CMC as obligee, the parties intended that FDIC and the other investor banks were the

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originally-intended obligees because, among other things, default under the bonds was triggered only

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by a default in payment to the investor banks who were the intended beneficiaries of any recovery

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thereunder.

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Federal Deposit Insurance Corporation (“FDIC”) is acting as receiver for Netbank in this action.

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Judge O’Malley held that the waivers in the bonds were enforceable as to the lessees and

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bond principals. She also ruled that whether or not fraud by CMC would be a defense to payment

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turned on the question of whether CMC was the original intended obligee. If CMC was the original

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intended obligee, Safeco could raise the defense of fraud. If FDIC was the original intended obligee,

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the fraud defense was waived. Since the bonds themselves only indicate CMC is the obligee, Judge

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O’Malley held that FDIC would have to prove the intent of the parties by reformation of the bonds.

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II. Analysis

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A. Legal Standard for Bifurcation

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Rule 42(b) of the Federal Rules of Civil Procedure authorizes the court to order a separate

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trial of any claim when separation is the interest of judicial economy, will further the parties’

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convenience, or will prevent undue prejudice. Fed.R.Civ.P. 42(b). The decision to bifurcate is

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committed to the sound discretion of the trial court. Hirst v. Gertzen, 676 F.2d 1252, 1261 (9th

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Cir. 1982). Bifurcation is particularly appropriate when resolution of a single claim or issue could be

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dispositive of the entire case. See O’Malley v. United States Fidelity and Guaranty Co., 776 F.2d

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494, 501 (5th Cir.1985) (bifurcation was proper when resolution of breach of insurance contract

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claim effectively disposed of plaintiff’s bad faith claim against insurance company). Where legal

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and equitable claims do not share common facts, bifurcation is appropriate. Dollar Systems, Inc. v.

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Avcar Leasing Systems, Inc., (9th Cir. 1989) 890 F.2d. 165, 170-171.

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B. Bifurcation

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In the MDL actions venued in her court, Judge O’Malley conducted a bench trial on the

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“threshold, and potentially determinative, issue of who the parties intended to be the original obligee

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on the Lease Bonds issued by the Sureties in the CMC transactions.” (Trial Template Dkt. #101-1 at

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18.) Here, as in those cases, the parties agree that the equitable claim for reformation should be tried

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separately from the other issues. However, FDIC believes that the breach of contract and bad faith

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claims, along with Safeco’s defense of fraudulent inducement, should be tried to a jury prior to a

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bench trial on reformation. According to FDIC, if the jury found for FDIC on its breach of contract
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claims, there would be no need for reformation. Safeco believes that the reformation claim should be

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tried first. Safeco argues that the jury cannot properly determine whether Safeco’s defenses are

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legitimate without a decision by the Court on who the intended obligee under the bonds is.

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The Court agrees with Safeco and will follow the process used in Judge O’Malley’s court. If

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at the bench trial, the Court determines that FDIC succeeded to the rights of CMC when the bonds

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were assigned, then Safeco can properly assert defenses based on the alleged fraud by CMC. If

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FDIC’s argument prevails and the contract is reformed to state that FDIC was the original intended

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obligee, then the Court will proceed on the breach of contract and other claims before the jury.

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Accordingly, the Court will hold a bench trial on the reformation issue on November 28, 2011.

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Subsequent proceedings, if needed, will take place after the Court renders its decision on the

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reformation issue.

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C. Bifurcation of Jury Trial

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Safeco also request that the Court bifurcate the breach of contract claims from the claims

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related to mishandling of the claim, including bad faith and breach of the covenant of good faith and

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fair dealing claims. According to Safeco, trying these claims together would cause undue prejudice

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to Safeco. Safeco’s Motion for Summary Judgment on the claim handling issues is pending before

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the Court. The Court will determine whether bifurcation of the breach of contract issue and claim

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handing issue is appropriate after resolution of Safeco’s Motion for Summary Judgment.

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D. Third-Party Action

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Royal Indemnity Company has indicated that it seeks to have its claims against A&M Select

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Insurance Services, Inc. and Michael Anthony tried by a jury. (See Dkt. #113.) However, A&M and

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Mr. Anthony have not appeared in this Court. Royal Indemnity Company is ordered to file a status

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report by October 21, 2011 on the status of the third-party claims.

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III. Conclusion

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IT IS HEREBY ORDERED that the Safeco Insurance Company of America’s Motion to
Bifurcate (#116) is GRANTED
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IT IS FURTHER ORDERED FDIC’s Motion to Bifurcate the Trial (#117) is DENIED.

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IT IS FURTHER ORDERED that a bench trial on the reformation issue will commence on

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Nov. 28, 2011 at 9:00 AM.
IT IS FURTHER ORDERED that Royal Indemnity Company file a status report on the
third-party claims by October 21, 2011.
DATED this 7th day of October 2011.

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_____________________________
Kent J. Dawson
United States District Judge

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