Bank of America, N.A. v. Old Republic Insurance Company

Filing 349

ORDER granting 277 MOTION FOR ADMINISTRATIVE RELIEF FOR A DECLARATION THAT OLD REPUBLIC IS PRECLUDED FROM USING EXTRINSIC EVIDENCE TO ALTER THE POLICYS TERMS. Signed by Senior Judge Graham Mullen on 3/6/2014. (eef)

UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF NORTH CAROLINA
CHARLOTTE DIVISION
BANK OF AMERICA, N.A.,
Case No.: 03:10-cv-00553-GCM-DSC
Plaintiff,
vs.
OLD REPUBLIC INSURANCE COMPANY,
Defendant.

ORDER GRANTING BANK OF
AMERICA, N.A.’S MOTION FOR
ADMINISTRATIVE RELIEF FOR A
DECLARATION THAT OLD
REPUBLIC IS PRECLUDED FROM
USING EXTRINSIC EVIDENCE TO
ALTER THE POLICY’S TERMS

This matter is before the Court upon Plaintiff Bank of America, N.A.’s Motion for
Administrative Relief for a Declaration That Old Republic is Precluded From Using Extrinsic
Evidence to Alter the Policy’s Terms. The motion was fully briefed and heard on February 4,
2014. For the reasons set forth below and on the record, the motion is GRANTED.
I.

BACKGROUND
This lawsuit is a diversity action involving an insurance policy issued by Old Republic

Insurance Company (“Old Republic”) to Bank of America, N.A. (“Bank of America”) to insure
certain home equity loans (“HELOANs”). Old Republic issued its T90 Policy (the “Policy”) in
July 2002 to insure Bank of America on the HELOANs against loss for borrower default. Bank
of America now seeks over $279 million in policy benefits arising from more than 4,400 claims.
On June 19, 2012, the Court established a Bellwether Trial Plan, under which Bank of
America’s claims as to twenty-four bellwether loans would be tried. Additional discovery
followed. On August 22, 2013, the Court held a hearing on five motions for partial summary

US_ACTIVE-116580563.1.doc

judgment filed by Bank of America. The Court granted all of Bank of America’s motions for
partial summary judgment at the hearing, followed by a written order on August 23, 2013.
Of relevance here, the Court granted the Motion for Partial Summary Judgment regarding
the Governing Terms of Old Republic’s Insurance Policy, including a holding set forth in the
Transcript that the Policy consisted of the four-page standard policy form and the accompanying
endorsements. The Court also granted the Motion for Partial Summary Judgment on Prohibition
on Use of New Information Not Known by the Bank’s Underwriters to Deny Coverage.
Trial on the pending bellwether loans was set to begin on November 12, 2013. On the
eve of the September 5, 2013, pre-trial conference, Old Republic stated that it would process the
remaining seventeen (17) bellwether loans for payment and asserted that its concession would
“moot” the trial date.

At the Pre-Trial Conference, Bank of America responded that Old

Republic’s payment would not “moot” the bellwether proceeding, which was intended to resolve
the both specific loans and certain legal and evidentiary disputes that applied to the larger loan
population. The Bank suggested that further motions be made to resolve evidentiary and legal
issues applicable to the remaining loan population, numbering in the thousands. In accordance
with the Court’s suggestion that these issues be raised through “administrative motions,” Bank of
America filed the present motion and three others.
The Court heard extensive oral argument on the administrative motions on February 4,
2014. The Court ruled from the bench after hearing oral argument, granting Plaintiff’s Motion
for Administrative Relief for a Declaration That Old Republic is Precluded From Using Extrinsic
Evidence to Alter the Policy’s Terms. The Court requested that counsel for Plaintiff prepare a
proposed order based upon the Court’s rulings in open court, circulate the proposed order to
opposing counsel and submit to the Court. Plaintiff complied with the Court’s request.

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DISCUSSION
As a preliminary matter, Defendant objects to the proposed order submitted by Plaintiff,
asserting that it usurps the Court’s role of explaining its reasoning for its rulings. Defendant’s
argument is without merit. Courts, including this one, routinely ask prevailing counsel to
prepare proposed orders consistent with oral rulings. See e.g., Simpson v. Amylin Pharm., Inc., No.
1:11-CV-301, 2013 WL 1490267 (W.D.N.C. Apr. 11, 2013) (directing counsel for Plaintiff to prepare a
proposed order consistent with the court’s oral order and largely adopting the proposed order submitted);
Watterson v. Wilkinson, No. 3:09-CV-394, 2011 WL 810057, *2 (W.D.N.C. Mar. 2, 2011) (“The Court
directs that defense counsel prepare a proposed protective order for the Court’s signature and serve a copy
of the proposed order on the Plaintiff.”) Rudd v. Ikon Partners, LLC, No. 2:11-CV-00923, 2013 WL
53759, *1 (D. Utah Jan. 3, 2013) (“The Court ordered that counsel for defendant . . . prepare an Order
regarding the portion of Defendant’s Motions that was granted and ordered that Plaintiffs’ counsel
prepare an Order for the portion of the Defendants’ Motion that was denied.”); Mike v. Prof’l Clinical
Lab., Inc., 450 F. App’x 732, 735, n. 2 (10th Cir. 2011) (“When a court requests counsel for the
prevailing party to prepare a proposed order, or in this case a proposed opinion and order, all parties
should be aware of the request and counsel should serve a copy of the proposed opinion and order on
opposing counsel no later than when it is submitted to the court.”)

Such practice in no way requires

the Court to surrender its role as arbiter of the dispute. Defendant may rest assured that any
Order signed by this Court represents the independent judgment of the Court and is supported by
adequate evidence. In addition, the Court finds that all of Defendant’s objections to Plaintiff’s
proposed order are simply without merit.
Old Republic has also complained that Plaintiff’s motion is procedurally improper. The
Court rejects such argument. It is necessary and appropriate to rule on this motion at this time in

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the interest of moving this case towards a final resolution by facilitating the conduct of the trial,
particularly as to the arguments that can be made and the evidence that can be introduced.
As noted, this Court previously granted Bank of America’s Motion for Partial Summary
Adjudication, ruling that “Old Republic may not deny insurance coverage for loan default claims
under the T90 insurance policy based on information that was not known to the Bank’s
underwriters at the time of loan origination.” (Docket No. 263). Through its present motion, and
consistent with the ruling on partial summary judgment, Bank of America seeks an order
declaring that (1) Old Republic cannot deny coverage based on a purported borrower
misrepresentation that was unknown to Bank of America at origination; and (2) Old Republic
may not resort to extrinsic evidence to alter the unambiguous language of the T90 Policy (“the
Policy”). Old Republic opposes the motion, arguing that the Policy requires compliance with
objective credit criteria regardless of the existence of any borrower misrepresentation. Old
Republic also argues that the Policy is not a fully integrated agreement and that extrinsic
evidence, in the form of (1) a 2006 Term Sheet, (2) the parties’ course of dealing and (3) custom
and practice in the industry, is admissible either to construe the Policy or to supplement the
Policy with additional consistent terms.
Under North Carolina law, if “the terms of [a] policy are plain, unambiguous and
susceptible of only one reasonable construction, courts will enforce the contract according to its
terms.” ABT Bldg. Prods. Corp. v. Nat’l Union Fire Ins. Co. of Pittsburg, 472 F.3d 99, 115 (4th
Cir. 2004); Register v. White, 358 N.C. 691, 695, 559 S.E.2d 549, 553 (N.C. 2004). “Courts
must enforce the contract as written; they may not, under the guise of construing an ambiguous
term, rewrite the contract or impose liabilities on the parties not bargained for and found
therein.” Patel v. Scottsdale Ins. Co., 728 S.E.2d 394, 398 (N.C. Ct. App. 2012). The Court

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finds that the Policy herein is unambiguous as to those relevant provisions. The Policy at issue
here does not exclude coverage in the event of borrower or third-party fraud, does not contain
any representation or warranty that all insured loans objectively met certain underwriting criteria,
and does not include any language imputing the statements of borrowers and/or third parties to
Bank of America.
Old Republic acknowledges that the Policy does not allow it to deny coverage based
solely on information unknown to Bank of America at the time origination, including purported
borrower misrepresentations. Nevertheless, and despite the Court’s prior ruling (Docket No.
263), Old Republic contends that it still has the right to rescind coverage and/or deny claims
based on a purported violation of Old Republic’s Sanctioned Guidelines. In support of that
assertion, Old Republic maintains that, if it can show that the “actual” information about the
borrower, as developed through after-the-fact investigations or based on information outside the
loan file, takes the loan outside of certain agreed-upon underwriting criteria, it may rescind
coverage for the loan or deny a claim even if that information was not required, or not required
to be verified by Old Republic’s Sanctioned Guidelines. Moreover, Old Republic also contends
that the relief sought by Bank of America would preclude Old Republic from denying coverage
if the loan was an unreasonable credit risk. In support of this position, Old Republic asserts that
the Sanctioned Guidelines require compliance with objective credit criteria regardless of the
existence of any third-party misrepresentation. Specifically, Old Republic contends that the
insuring grant of the Policy provides for coverage against Loss arising from default by a
borrower in the repayment of Loans evidenced by “Eligible Notes,” and that an “Eligible Note”
must strictly comply with the agreed-upon credit criteria contained in the Sanctioned Guidelines.
However, these arguments are inconsistent with the Policy.

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Under North Carolina law, Old Republic, as the drafter of the Policy, must clearly state
any conditions, exclusions or other coverage limitations.

Consequently, all limitations on

coverage, such as exclusions, must be clearly expressed or the terms of the Policy will be
construed in favor of coverage. See Herring v. Liner, 163 N.C. App. 534, 538, 594 S.E.2d 117,
120 (2004); New South Insurance v. Kidd, 114 N.C. App. 749, 753-55, 443 S.E.2d 85, 88 (1994).
The only provision in the Policy that addresses fraud or misrepresentation is Provisions and
Stipulation 10. There is no comparable provision for borrower or third-party misrepresentation.
If Old Republic intended to place the risk of misrepresentation on the policyholder (here, Bank
of America), then it could have provided expressly for that in the Policy or otherwise expressly
excluded it from coverage. Halter v. J.C. Penney Life. Ins. Co., 1:98-cv-938, 1999 U.S. Dist.
LEXIS 21386, *4-5 (M.D.N.C. Nov. 30, 1999).

It did not, and there is no principle of

construction that permits redrafting of the Policy after the fact.
Accordingly, this Court again concludes that Old Republic cannot deny coverage based
on a purported borrower misrepresentation, third-party misrepresentation, or any other
information unknown to Bank of America at the time of origination. Nor can Old Republic
attempt to show that a borrower was not a reasonable credit risk based on information outside the
loan file, or based on information that was not known to Bank of America or required to be
verified by Bank of America under the Sanctioned Guidelines.

Whether a loan was an

unreasonable credit risk based on information available to the Bank when the loan was
underwritten is a different inquiry that is not relevant to the present motion.
Old Republic also argues that the Policy is not a fully integrated agreement and thus,
extrinsic evidence (as noted, the 2006 Term Sheet, industry custom or practice or the parties’
course of dealing) is admissible to construe and/or add “consistent” terms to the Policy. Old

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Republic contends the 2006 Term Sheet is a separate contract between Bank of America and Old
Republic by which Bank of America gave a representation and warranty that “all insured loans
separately and collectively meet the previously approved and sanctioned program credit
guidelines and underwriting criteria.” Old Republic further contends that because the 2006 Term
Sheet involves “the same subject matter” as the Policy, the two documents must be construed
together. As far as industry custom or practice, Old Republic contends that it is entitled to offer
expert testimony about the relative ability of the lender and the credit insurer to detect “red flags”
or possible misrepresentations on a loan application to determine whether Bank of America
discharged its obligations under Provision & Stipulation 2. It also argues that the parties’
purported course of dealings show that Bank of America was responsible for the accuracy of all
information used in underwriting, including the information stated in the borrower’s loan
application.
First, the Court rejects Old Republic’s argument that the Policy is not fully integrated. It
is well established under North Carolina law that written agreements are presumed to be fully
integrated with respect to the terms they contain. Neal v. Marrone, 239 N.C. 73, 77, 79 S.E.2d
239, 242 (N.C. 1953); Root v. Allstate Ins. Co., 272 N.C. 580, 587, 158 S.E.2d 829, 835 (N.C.
1968). That is particularly true where a contract contains an integration clause, as the Policy
does here. Melvin v. Principi, No. 5:03-cv-968-FL, 2004 U.S. Dist. LEXIS 28464 at *18
(E.D.N.C. Dec. 2, 2004).1 The Court finds that the Policy is a fully integrated contract and was
intended to be a complete and exclusive statement of all the terms of the parties’ agreement.
Consistent with this finding, the Court also rejects Old Republic’s argument that it may
refer to extrinsic evidence (including but not limited to the 2006 Term Sheet, industry custom or
1

In FDIC v. Old Republic Ins. Co., No. 1:11-CV-371, 2012 WL 1309245 (N.D. Ohio, April 16, 2012), the United
States District Court for the Northern District of Ohio held that this same form policy (the T90 policy) contained an
integration or merger clause, limited additions to the policy through endorsements, and was fully integrated.

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practice, or the parties’ course of dealing) in order to construe the Policy, add additional
“consistent” terms to the Policy, or otherwise alter the unambiguous terms of the Policy. It is
well established that extrinsic evidence is inadmissible to alter the terms of a fully integrated and
unambiguous agreement. First-Citizens Bank & Trust Co. v. 4325 Park Road Assoc., Ltd., 133
N.C. App. 153, 156, 515 S.E.2d 51, 54 (N.C. Ct. App. 1999). Also, North Carolina law does not
permit a party to alter a Policy’s allocation of the risk of borrower fraud by relying on a
document (here, the 2006 Term Sheet) that was unilaterally drafted years after the Policy was
issued.

To allow such a result would be inconsistent with North Carolina’s fundamental

insurance principles. Wachovia Bank & Trust Co. v. Westchester Fire Ins. Co., 276 N.C. 348,
354, 172 S.E.2d 518, 522 (N.C. 1970).
Further, as to industry custom and usage evidence, North Carolina law is well
established:
A custom or usage may be proved in explanation and qualification of the terms of
a contract which otherwise would be ambiguous, … but evidence of a usage or
custom is never admitted to make a new contract or to add a new element to one
previously made.
E.L. Roofing Co. v. State, 82 N.C. App. 216, 223, 346 S.E.2d 515, 520 (1986) (quoting Lester
Bros., Inc. v. J.M. Thompson, 261 N.C. 210, 218, 134 S.E.2d 372, 378 (1964). Similarly, Old
Republic’s attempt to alter the unambiguous policy by the parties’ purported course of dealing
fails under North Carolina law. See Hickory Orthopaedic Centers, P.A. v. Nicks, 179 N.C. App.
281, 289, 633 S.E.2d 831, 836 (2006).
Nor does the 2006 Term Sheet constitute a valid amendment to the Policy. By its terms,
the Policy may only be amended as follows:
Amendments to this Policy may be made only after written approval by the
Company and only by an endorsement signed on behalf of the Company by its
President, Vice President, or Secretary, and countersigned by a duly authorized
representative of the Company.
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T90 Policy, Provision & Stipulation 9, as amended by endorsement effective July 1, 2002. The
2006 Term Sheet is not an “endorsement” and does not otherwise comply with P&S 9, as
amended.
Even if the Court accepted Old Republic’s argument that the Policy is a partially
integrated contract, Old Republic’s argument still would fail. First, although Old Republic
characterizes the 2006 Term Sheet as a binding contract between it and Bank of America, it is
not. By its terms, the 2006 Term Sheet is a “proposal” signed by Bank of America and an entity
called “Old Republic Insured Credit Services, Inc.” that was required to be submitted “to the
carrier for final approval and policy execution.” The 2006 Term Sheet does not suggest any
intent to bind Bank of America and Old Republic to an enforceable agreement. See, e.g., Cobra
Capital, LLC v. RF Nitro Commc'ns, Inc., 266 F. Supp. 2d 432, 437 (M.D.N.C. 2003) (finding
that proposal’s express terms, including description of document as a “proposal” and statement
that its terms were “subject to the approval” of plaintiff, demonstrated that it was not intended by
the parties to be a binding contract). Second, the term that Old Republic is attempting to add to
the Policy through the use of this and other extrinsic evidence – a representation and warranty as
to the objective accuracy of all information used in underwriting – is inconsistent with the
unambiguous language of the Policy itself.

Thus, Old Republic is not attempting to add a

“consistent additional term” to the Policy. Rather, it is attempting fundamentally to re-write the
Policy’s allocation of risk through the introduction of extrinsic evidence. This argument is
contrary to North Carolina law.
II.

ORDER
Based on the arguments presented in open court and documents submitted into the record,

and the reasons articulated above and for good cause shown, the motion is hereby GRANTED
and it is HEREBY ORDERED that (1) Old Republic cannot deny coverage based on a purported
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borrower misrepresentation that was not known to Bank of America’s underwriters at the time of
origination; and (2) Old Republic cannot use extrinsic evidence of the 2006 Term Sheet, industry
custom or usage or course of conduct of the parties to alter the unambiguous terms of the Policy.
IT IS SO ORDERED.
Signed: March 6, 2014

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