Accident Insurance Company Inc v. US Bank National Association et al

Filing 223

ORDER AND OPINION DENYING 159 MOTION for Summary Judgment as to Plaintiff Accident Insurance Company, Inc.'s cause of action for civil conspiracy. Signed by Honorable J Michelle Childs on 3/22/2019. (asni, )

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF SOUTH CAROLINA
COLUMBIA DIVISION
Accident Insurance Company, Inc., a South )
Carolina Corporation,
)
)
Plaintiff,
)
v.
)
)
U.S. Bank National Association,
)
)
Defendant.
)
___________________________________ )
U.S. Bank National Association,
)
)
Third Party Plaintiff,
)
v.
)
)
Southport Lane Advisors, Southport
)
Specialty Finance, Administrative Agency )
Services, and Alexander Chatfield Burns, )
)
Third Party Defendants.
)
___________________________________ )

Civil Action No. 3:16-cv-02621-JMC

ORDER AND OPINION

Plaintiff Accident Insurance Company, Inc. (“AICI”) filed this action against Defendant
U.S. Bank National Association seeking monetary damages for breach of contract, breach of
fiduciary duty, negligence/gross negligence, negligent misrepresentation, and civil conspiracy
regarding a trust agreement. (ECF No. 154 at 21 ¶ 116–25 ¶ 141.)
This matter is before the court on U.S. Bank’s Motion for Summary Judgment on the basis
that AICI’s civil conspiracy claim fails as a matter of law. 1 (ECF No. 159.) AICI opposes U.S.
Bank’s Motion in its entirety. (ECF No. 174.) For the reasons set forth below, the court DENIES
U.S. Bank’s Motion for Summary Judgment on AICI’s claim for civil conspiracy.

1

The court observes that this Order only addresses U.S. Bank’s argument as to the civil conspiracy
claim. The court will address the remaining aspects of U.S. Bank’s Motion in a separate order(s).
1

I.

RELEVANT FACTUAL AND PROCEDURAL BACKGROUND

Starting in or about April 2013, AICI began participating in a fronted reinsurance program
(the “Program”) with Freestone Insurance Company (“Freestone”), formerly known as Dallas
National Insurance Company. (See ECF No. 154 at 5 ¶ 24 (explaining that in a fronted insurance
program, the reinsurer (here, Freestone) bears the actual risk of program performance and the
insurance company (here, AICI) receives a fee for allowing its name and paper to be used as the
front).) The Program was governed by a Program Agreement between AICI and Freestone. (See
ECF No. 159-5.) The Program Agreement required Freestone to establish a segregated bank or
trust account to secure its obligations. (See id. at 6 ¶ 12 (“So long as AIC[I] shall have any loss
exposure in respect of the Policies, there shall be established and maintained in a segregated bank
or trust account . . . established for the benefit of AIC[I]. . . one or more reserve funds for Policy
liabilities . . . to be funded by DNIC.”).) Therefore, on September 25, 2013, after AICI and
Freestone had been running their fronted reinsurance program for approximately five months, they
contracted with U.S. Bank through a Trust Agreement (ECF No. 159-4) to serve as the trustee for
the trust that was created to support their reinsurance relationship (the “Trust Account”). (ECF
No. 154 at 6 ¶ 26.)
The Trust Agreement, in which AICI is the Beneficiary, Freestone is the Grantor, and U.S.
Bank is the Trustee, provided in relevant part that:
WHEREAS, the Beneficiary desires the Grantor to secure payments
of all amounts at any time and from time to time owing by the
Grantor to the Beneficiary under or in connection with the
Reinsurance Agreements;
(ECF No. 159-4 at 2.)
Paragraph 2(b): The Assets shall consist only of cash (United States
legal tender) and Eligible Securities (as hereinafter defined). The
Trustee shall have no duty or responsibility with respect to the
qualification, character or valuation of the Assets deposited in the
2

Trust Account, except to determine whether the Assets are in such
form that the Beneficiary, or the Trustee upon direction by the
Beneficiary, may whenever necessary negotiate any such Assets
without consent or signature from the Grantor or any other person
or entity.
(ECF No. 159-4 at 3 ¶ 2(b).)
Paragraph 5(b): The Grantor may direct the Trustee to accept
substitute Assets for other Assets held in the Trust Account.
(Id. at 4 ¶ 5(b).)
Paragraph 5(c): The Grantor represents and warrants that each
Investment Order or Asset substitution will involve an investment
in Eligible Securities satisfying the requirements of Applicable Law
regarding investments in the Trust Account. The Trustee has no
responsibility for determining whether any Assets invested pursuant
to an Investment Order or Asset substitution are made in Eligible
Securities that comply with the requirements of Applicable Law
regarding investments in the Trust Account.
(Id. ¶ 5(c).)
Paragraph 8(a): The Trustee shall furnish to Grantor and Beneficiary
an accounting of all Assets in the Trust Account upon its inception
and thereafter at intervals no less frequent than as of the end of each
calendar month. Such accounting shall include a statement of all
Assets in the Trust Account and shall be given as soon as []
practicable, but in no event later than fifteen (15) days after such
date.
(ECF No. 159-4 at 5 ¶ 8(a).)
Paragraph 8(b): Before accepting any Asset for deposit to the Trust
Account, the Trustee shall determine that such Asset is in such form
that the Beneficiary whenever necessary may, or the Trustee upon
direction by the Beneficiary will, negotiate such Asset without
consent or signature from the Grantor or any person or entity other
than the Trustee in accordance with the terms of this Agreement.
(Id. ¶ 8(b).)
Paragraph 12(f): The term “Eligible Securities” shall mean and
include certificates of deposit issued by a United States bank and
payable in United States legal tender and securities representing

3

investments of the types specified in subsections (1), (2), (3), (4),
(6), (8) and (10) of Section 1404(a) of [] New York Insurance Law;
provided, however, that no such securities shall have been issued by
a Parent or a Subsidiary of either the Grantor or the Beneficiary.
Any deposit or investment direction by Grantor shall constitute a
certification by Grantor to the Trustee that the Assets so deposited,
or to be purchased pursuant to such investment directions, are
Eligible Securities under Applicable insurance Law, and the Trustee
shall be entitled to rely on Grantor's representation.
(Id. at 9 ¶ 12(f).)
Paragraph 13: This Agreement shall be subject to and governed by
the laws of the State of Delaware.
(Id. at 10 ¶ 13.) From the inception of the Trust Account, U.S. Bank sent monthly account
statements to AICI. (See, e.g., ECF Nos. 159-7–159-14.)
At the start of U.S. Bank’s role as Trustee, the Trust Account did not hold any assets until
December 2013, when Freestone deposited approximately $9.4 million in municipal bonds (New
Mexico State Hospital Equipment Loan and Port of Seattle, Washington Revenue Refunding
Intermediate Series A) into the Trust Account. (ECF No. 159-7.) In mid-January 2014, Freestone
sold the aforementioned municipal bonds in the Trust Account and purchased units of Destra
Targeted Income Unit Investment Trust (“Destra UIT”) and membership interests in Camelot
Assets Holding, LLC (“Camelot”). (ECF No. 159-8.) In February 2014, Freestone withdrew $2.5
million of the Destra UIT and replaced it with approximately $2.6 million of municipal bonds
(Cook County II Refunding Series A). (ECF No. 159-9.) Then in March 2014, Freestone
deposited another $2.7 million of municipal bonds (Kentucky State Property and Buildings
Commission Revenues Refunding Project Number 76 and Virginia St Hsg Dev Auth
Commonwealth Mtge Series C) as additional collateral. (ECF No. 159-10.) As of March 31, 2014,
the Trust Account held Destra UIT with a face value of approximately $6.9 million; Camelot shares
of $193,000; and municipal bonds of approximately $5.3 million. (Id.) “In April 2014, Freestone

4

entered receivership with the Delaware Insurance Commissioner as Receiver” (see ECF No. 1591 at 16) and “the Fronting Program was terminated and went into run-off.” (Id.; see also ECF No.
159-51 at 23:8714–88:21.) In the April 1, 2014 to April 30, 2014 account statement to AICI, U.S.
Bank reported that “the net asset value of the Destra Targeted Income Unit Investment Trust . . .
as ‘N/A’ . . . [and] the Market Value/Price for the Destra units . . . is uncertain and should not be
relied upon for any purpose.” (ECF No. 159-11 at 4.)
As a result of the foregoing asset distortion, AICI filed a Complaint against U.S. Bank on
July 22, 2016, alleging claims for breach of contract, breach of fiduciary duty, negligence/gross
negligence, negligent misrepresentation, and violation of Section 10(b) and Rule 10(b)-5 of the
Securities Exchange Act of 1934, 15 U.S.C. §§ 78a–78jj. (ECF No. 1 at 21 ¶ 115–30 ¶ 181.) After
the court denied its Motion to Dismiss (ECF No. 65), U.S. Bank answered the Complaint and filed
a counterclaim against AICI for contractual indemnification. (ECF No. 74.) AICI answered U.S.
Bank’s counterclaim on November 22, 2017. (ECF No. 89.)
While the parties were engaged in discovery, the court granted AICI leave on July 23,
2018, to file a First Amended Complaint alleging claims against U.S. Bank for breach of contract,
breach of fiduciary duty, negligence/gross negligence, negligent misrepresentation, and civil
conspiracy. (ECF No. 154 at 21 ¶ 116–25 ¶ 141.) After answering the Amended Complaint and
filing counterclaims against AICI for contractual indemnification (ECF No. 155), U.S. Bank
moved for summary judgment on November 2, 2018. (ECF No. 159.) AICI filed a Response
Memorandum in Opposition to Defendant’s Motion for Summary Judgment on December 13,
2018, to which U.S. Bank filed a Reply Memorandum in Support of Summary Judgment on
January 2, 2019. (ECF Nos. 174, 184.)
On February 19, 2019, the court heard oral argument from the parties on the instant Motion.

5

(ECF No. 216.)
II.

JURISDICTION

This court has subject matter jurisdiction over this action, pursuant to 28 U.S.C. § 1332,
because the parties are citizens of different states and the amount in controversy exceeds
$75,000.00, exclusive of interest and costs. (See ECF No. 154.) AICI is an insurance company
organized under the laws of South Carolina with its principal place of business in Lexington
County, South Carolina. (ECF No. 154 at 1 ¶ 1.) U.S. Bank is a national banking association with
its principal place of business in Minneapolis, Minnesota. (Id. ¶ 2; see also ECF No. 155 at 2 ¶
2.)
III.

LEGAL STANDARD

Summary judgment should be granted “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). A fact is “material” if proof of its existence or non-existence would affect the disposition
of the case under the applicable law. Anderson v. Liberty Lobby Inc., 477 U.S. 242, 248–49 (1986).
A genuine question of material fact exists where, after reviewing the record, the court finds that a
reasonable trier of fact could return a verdict for the nonmoving party. Newport News Holdings
Corp. v. Virtual City Vision, 650 F.3d 423, 434 (4th Cir. 2011).
In ruling on a motion for summary judgment, a court must view the evidence in the light
most favorable to the non-moving party. Perini Corp. v. Perini Constr., Inc., 915 F.2d 121, 12324 (4th Cir. 1990). The non-moving party may not oppose a motion for summary judgment with
mere allegations or denial of the movant’s pleading, but instead must “set forth specific facts”
demonstrating a genuine issue for trial. Fed. R. Civ. P. 56(e); see Celotex Corp. v. Catrett, 477
U.S. 317, 324 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252 (1986); Shealy v.

6

Winston, 929 F.2d 1009, 1012 (4th Cir. 1991). All that is required is that “sufficient evidence
supporting the claimed factual dispute be shown to require a jury or judge to resolve the parties’
differing versions of the truth at trial.” Anderson, 477 U.S. at 249.
IV.

ANALYSIS

In this matter, the parties dispute whether U.S. Bank is entitled to summary judgment on
AICI’s claim for civil conspiracy.
1.

The Parties’ Arguments
In support of its Motion, U.S. Bank argues that as to the three co-conspirators identified in

the First Amended Complaint–U.S. Bank Fund Services, U.S. Bank Trust, and the Southport
entities (see ECF No. 154 at 24 ¶ 138)–AICI “has not alleged and cannot prove any underlying
wrongs that would support imposing secondary liability on [Defendant] U.S. Bank.” (ECF No.
159-1 at 32–33.) Specifically, as to the allegations of conspiracy involving the Southport entities,
U.S. Bank argues that the conspiracy claim fails because AICI’s main evidence relies on two
government investigations–“(1) a 2015 Consent Order between U.S. Bank and the Office of the
Comptroller of the Currency (the “OCC Consent Order”); and (2) a 2018 Deferred Prosecution
Agreement between U.S. Bancorp, the parent of U.S. Bank, and the Office of the United States
Attorney for the Southern District of New York (the “DPA”)–which neither reference, mention,
or connect U.S. Bank to the Southport entities or their principal, Alexander Chatfield Burns. (ECF
No. 184 at 9–10.) U.S. Bank further argues that AICI’s remaining evidence of a conspiracy
involving Southport is either “unsupported or contradicted” by other sparse evidence offered by
AICI. (Id. at 10–11.)
U.S. Bank next argues that because U.S. Bank Trust and U.S. Fund Services are whollyowned subsidiaries of U.S. Bank (see ECF No. 159-47), AICI’s civil conspiracy claims involving

7

these entities fail because U.S. Bank “cannot conspire with its wholly-owned subsidiaries.” (ECF
No. 159-1 at 32, 34 (citing, e.g., In re Transamerica Airlines, Inc., No. Civ.A. 1039-N, 2006 WL
587846, at *6 (Del Ch. Feb. 28, 2006) (“[A] corporation generally cannot be deemed to have
conspired with its wholly owned subsidiary, or its officers and agents.”)).)
Finally, U.S. Bank argues that AICI has failed to present any evidence that U.S. Bank had
an explicit agreement or a “meeting of the minds” with any of the three entities cited “to perform
unlawful acts in order to withhold trust assets.” (Id. at 32.) In this regard, U.S. Bank asserts that
AICI “cannot point to any document or testimony that supports, in the slightest, the notion that
U.S. Bank reached ‘explicit agreement’ with any Southport entity (much less its wholly-owned
subsidiaries, U.S. Bank Trust and Fund Services) to withhold assets from Accident.” (Id. at 35.)
Citing to Delaware case law and this court’s Order allowing it “to amend the Complaint to
include a cause of action for civil conspiracy” (see ECF No. 142 at 11), AICI opposes the Motion
for Summary Judgment arguing that it has properly asserted an actionable tort by the alleged coconspirators because “U.S. Bank, its lines of business and affiliates, as well as Burns and his
Southport entities knowingly pursued tortious conduct in transactions leading to and including the
funding/misuse of the trust assets.” (ECF No. 174 at 25.) AICI further argues that it has
demonstrated “many instances of [Defendant] U.S. Bank working with U.S. Bank Trust and the
Southport entities to sell the valuable assets held in trust, with Plaintiff having no knowledge of
these illegal transfers.” (Id.) Moreover, AICI argues that its evidence does not either need to meet
an “elevated burden of proof for civil conspiracy” or “require an explicit agreement.” (Id. at 26.)
Finally, AICI argues that under Delaware case law, “Defendant [U.S. Bank] can be held liable for
the actions of Burns and Southport” and entities with common ownership can conspire illegally
with one another. (Id. at 27 (citing, e.g., Allied Capital Corp. v. GC-Sun Holdings, L.P., 910 A.2d

8

1020, 1036, 1038 n.37, 1044–45 (Del. Ch. 2006)).
In Reply, U.S. Bank argues as follows that the Allied Capital decision is not contrary to its
arguments:
First, the weight of Delaware authority holds that parent entities cannot conspire
with wholly-owned subsidiaries. Second, the reasoning of Allied Capital Corp.
supports application of the rule against intra-corporate conspiracies. In Allied
Capital Corp., the court declined to adopt a per se rule holding that a parent entity
and wholly-owned subsidiary could not conspire as a matter of law in favor of a
context-specific application. 910 A.2d at 1037, 1040-41. However, the court
recognized “[t]he bona fide concern [] that every breach of contract, tort or other
case involving a controlled subsidiary will become a vehicle to sue controllers.” Id.
at 1040. The court further recognized that the rule against intra-corporate
conspiracies would often apply when a parent and subsidiary “share common
economic interests.” Id. at 1042. Accident has presented no evidence that the
economic interests of U.S. Bank Trust or Fund Services diverged from the
economic interests of U.S. Bank. Accordingly, even under the reasoning of Allied
Capital Corp., the rule that a parent entity cannot conspire with its wholly-owned
subsidiary should apply.
(ECF No. 184 at 13.)
2.

The Court’s Review
“Civil conspiracy requires the combination of two or more persons for an unlawful purpose

or for the accomplishment of a lawful purpose by unlawful means, which conspiracy results in
damages.” In re Asbestos Litig., C/A No. 16-308-LPS-SRF, 2017 WL 6334980, at *6 (D. Del.
Dec. 12, 2017) (citing Nutt v. A.C. & S. Co., 517 A.2d 690, 694 (Del. Super. Ct. 1986)). Under
Delaware common law, the elements for a claim of civil conspiracy are as follows: “(1) a
confederation or combination of two or more persons 2; (2) an unlawful act done in furtherance of
2

“A ‘confederation or combination’ of people for purposes of a civil conspiracy claim means that
there is a ‘meeting of the minds between or among such persons,’ and that ‘meeting of the minds’
relates to the allegedly improper object or course of conduct to be accomplished.” Wayman Fire
Prot., Inc. v. Premium Fire & Sec., LLC, C.A. No. 7866-VCP, 2014 WL 897223, at*24 (Del Ch.
Mar. 5, 2014) (quoting Microsoft Corp. v. Amphus, Inc., C.A. No. 8092-VCP, 2013 WL 5899003,
at *15 (Del. Ch. Oct. 31, 2013)). “To prove a conspiracy, however, it is not necessary that there
be an express agreement.” Empire Fin. Servs., Inc. v. Bank of N.Y. (Del), 900 A.2d 92, 97 (Del.
2006).
9

the conspiracy 3 ; and (3) damages resulting from the action of the parties to the conspiracy.”
MacQueen v. Union Carbide Corp., C/A No. 13-831-LPS-CJB Consol., 2018 WL 2729122, at *3
(D. Del. June 6, 2018) (citing, e.g., AeroGlobal Capital Mgmt., LLC v. Cirrus Indus., Inc., 871
A.2d 428, 437 n.8 (Del. 2005)). “Civil conspiracy is not an independent cause of action in
Delaware, but requires an underlying wrong which would be actionable absent the conspiracy.”
In re Asbestos Litig., 2017 WL 6334980, at *6 (citing, e.g., Phoenix Canada Oil Co. v. Texaco,
Inc., 560 F. Supp. 1372, 1388 (D. Del. 1983)).
Upon its review, the court observes that AICI’s evidence demonstrates a triable issue of
fact regarding whether U.S. Bank was part of a combination of two or more entities, that carried
out an unlawful act in furtherance of such combination thereby causing AICI damages.
Specifically, the court is persuaded that viewing the evidence in the light most favorable to AICI,
AICI has set forth specific evidence of communications between U.S. Bank (including its
subsidiaries) and the Southport entities that the trier of fact–which in a bench trial is the court–
could infer a nefarious agreement to utilize the value-deficient Destra UITS as an eligible asset for
the Trust Account. (See, e.g., ECF Nos. 211-17, 211-21.) These communications are deemed
sufficient because the Delaware appellate courts have not required plaintiffs alleging civil
conspiracy to demonstrate either an express agreement or any direct evidence. See Empire Fin.
Servs., Inc. v. Bank of N.Y. (Del), 900 A.2d 92, 97 n.16 (Del. 2006) (“[T]he conspirators’
‘agreement need not be expressed in words and may be implied and understood to exist from the
conduct itself.’” (quoting Restatement (Second) of Torts § 876(a) cmt. a)).
As to the remaining elements of a civil conspiracy claim, the court finds that breach of

3

“Although the elements of a claim for civil conspiracy are flexible, it is essential that there be an
underlying wrongful act, such as a tort or a statutory violation.” Tani v. FPL/Next Era Energy,
811 F. Supp. 2d 1004, 1025 (D. Del. 2011) (citing Empire Fin. Servs., 900 A.2d at 97.
10

fiduciary duty in Delaware is an independent tort that can give rise to a civil conspiracy claim, see,
e.g., OptimisCorp v. Waite, C.A. No. 8773-VCP, 2015 WL 5147038, at *56 (Del. Ch. Aug. 26,
2015) (observing that breach of fiduciary duty claims can form the basis of civil conspiracy), and
AICI has set forth sufficient facts to support a damages verdict in its favor. For these reasons, the
court denies U.S. Bank’s Motion for Summary Judgment as to AICI’s claim for civil conspiracy.
V.

CONCLUSION

Upon careful consideration of the record and the parties’ arguments, the court DENIES
Defendant U.S. Bank National Association’s Motion for Summary Judgment as to Plaintiff
Accident Insurance Company, Inc.’s cause of action for civil conspiracy. (ECF No. 159.)
IT IS SO ORDERED.

United States District Judge
March 22, 2019
Columbia, South Carolina

11