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

Filing 232

ORDER AND OPINION denying 159 Motion for Summary Judgment as to Plaintiff Accident Insurance Company, Inc.'s estimated damages. Signed by Honorable J Michelle Childs on 4/11/2019.(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 Partial Summary Judgment (ECF
No. 159) seeking a court-imposed cap on AICI’s damages on the basis that its “actual damages, if
any, are a maximum of $2.44 million.”1 (ECF No. 159-1 at 36.) 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

1

The court observes that this Order only addresses U.S. Bank’s argument as to AICI’s damages.
The court has addressed the remaining aspects of U.S. Bank’s Motion in separate orders. (See
ECF Nos. 217, 223.)
1

Motion for Partial Summary Judgment as to AICI’s damages.
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
2

Trustee shall have no duty or responsibility with respect to the
qualification, character or valuation of the Assets deposited in the
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).)

3

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
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,

4

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
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

5

January 2, 2019. (ECF Nos. 174, 184.)
On February 19, 2019, the court heard oral argument from the parties on the instant Motion.
(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”

6

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.
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 partial summary
judgment on AICI’s alleged damages figure.
1.

The Parties’ Arguments
U.S. Bank first asserts it is entitled to partial summary judgment setting a damages cap for

AICI because U.S. Bank’s expert, Timothy H. Hart, demonstrated that AICI has not suffered any
actual damages. (See ECF No. 159-3.) As support for this assertion, U.S. Bank points out that
under the provisions of the Trust Agreement, AICI “incurs harm only to the extent there is a
collateral shortfall and it must make out-of-pocket payments for policy liabilities that should have
been secured.” (ECF No. 159-1 at 37 (citing Fin. Cas. & Sur., Inc. v. Zouvelos, 12 Civ. 3476
(AMD) (RLM), 2017 WL 1184106, at *17 (E.D.N.Y. Mar. 29, 2017) (where plaintiff alleged that
defendant mishandled and wrongfully depleted collateral, measuring damages by the amount of
collateral shortfall compared to plaintiff’s outstanding obligations to indemnitors); Isr. Disc. Bank
of N.Y. v. First State Depository Co., LLC, C/A No. 7237-VCP, 2013 WL 2326875, at *23-24, *27
(Del. Ch. May 29, 2013) (where plaintiff alleged the wrongful release and conversion of loan
collateral, measuring damages by amount of collateral shortfall compared to outstanding loan
balance)).) As a result, U.S. Bank argues that AICI’s “damages as of today are zero,” because it

7

“has not suffered any out-of-pocket losses and instead boasts a collateral cushion of at least $1.22
million.” (ECF No. 159-1 at 38.)
U.S. Bank next asserts that a damages cap is appropriate because Hart established that
AICI’s future damages, “if any, are a maximum of $2.44 million (excluding reductions for the
value of the Destra UIT and Camelot shares in the Trust Account).” (Id. at 36 (referencing ECF
No. 159-3 (“Based on my calculations, setting aside Accident’s failure to mitigate, the maximum
alleged damages that Accident may incur in the future from a lack of proper collateral ranges
between $1.09 million[] and $2.25 million.”)).) As support for Hart’s conclusion, U.S. Bank
specifies that to estimate future damages, the relevant factors are “(1) the known case reserves that
have been set aside to pay existing claims; and (2) IBNR, the anticipated payments to be made on
unreported claims.” (ECF No. 159-1 at 40.) In applying these factors to this case, U.S. Bank
asserts that AICI has “known case reserves of $2.22 million as of September 26, 2018” (id.), and
“[t]he only evidence in the record of IBNR is as of December 31, 2017—which does not account
for claims paid in 2018 and Accident’s updated case reserves.” (Id. at 41.) Therefore, U.S. Bank
argues that AICI’s “estimate of future damages” is based on speculation because “the highest
amount of actual damages going forward that Accident can demonstrate is $1 million.” (ECF No.
159-1 at 40–1; see also ECF No. 159-1 at 41 n.11 (“Collateral cushion of $1.22 million minus
known case reserves of $2.22 million equals []$1 million[].”).)
Citing to the Supplemental Expert Report (ECF No. 176-3) of its expert, Roy Strickland,
AICI argues that summary judgment is not warranted because it has suffered damages in the
amount of $8,451,595 “to a reasonable degree of accounting certainty.” (ECF No. 174 at 29.) In
support of its argument, AICI specifies that its estimate consists of the following categories of
damages: (1) “Lost Front Fee,” (2) “Fronting Program Losses incurred by AIC[I],” and (3)

8

“Fronting Program Extra Expenses incurred by AIC[I].” (Id. at 30.) AICI further argues that
because damages are “less about what the beneficiary lost and more about deterring . . . the
misconduct” (id. at 29), “Defendant’s arguments concerning lack of damages and the assertion
that damages should be capped, are without merit.” (Id. at 30.)
In its Reply, U.S. Bank argues that the court should not consider Strickland’s Supplemental
Expert Report because it violates Rule 26(a)(2), is the subject of two (2) pending Motions in
Limine (see ECF Nos. 176, 177), and contains new damages theories unsupported by the evidence.
(ECF No. 184 at 15–17.)
2.

The Court’s Review
The court observes that both AICI and U.S. Bank submitted experts’ reports addressing

damages issues and presenting different perspectives on AICI’s damages claims. (See ECF Nos.
159-3, 211-28.) In its Motion, U.S. Bank in essence seeks a ruling that its expert’s opinion as to
damages is more credible than the opinion offered by AICI’s expert.
Upon its review, the court observes that in applying Delaware law, as stipulated in the
choice-of-law provision of the Trust Agreement (see ECF No. 159-4 at 10 ¶ 13), it is apparent that
U.S. Bank is seeking resolution at summary judgment of an issue that generally is reserved for the
factfinder at trial, as demonstrated by the following:
It is thus apparent that, of necessity, the jury had to decide an issue of fact raised
by the conflict in the [] opinions given by the expert witnesses. In addition, since
the plaintiff’s experts relied upon the oral representations made to them by the
plaintiff, it is apparent that the jury had to determine the credibility of the plaintiff's
oral representations. If it found them not to be trustworthy, then there was no
evidence for the plaintiff on the issue of damages for personal injury. The resolving
of such a question lies solely within the province of a jury.
Debernard v. Reed, 277 A.2d 684, 685 (Del. 1971); e.g., Ateliers de la Haute-Garonne v. Broetje
Automation-USA Inc., C/A No. 09-598-LPS, 2011 WL 4351600, at *3 (D. Del. Sept. 16, 2011)
(“While recognizing the parties’ arguments and concerns, the Court concludes there is a sufficient
9

basis for the damages experts’ opinions, such that any shortcomings or deficiencies are issues of
weight and credibility—to be determined by the factfinder—rather than issues of admissibility. At
trial, the parties can challenge the damages experts’ opinions through cross examination and the
presentation of contrary evidence to assist the factfinder in determining the proper amount of
damages, if any, that should be awarded in this case.” (citing Daubert v. Merrell Dow Pharms.,
Inc., 509 U.S. 579, 596 (1993)); see also Sales Res., Inc. v. All. Foods, Inc., Nos. 4:08cv0732
TCM, 4:09cv0666 TCM, 2010 WL 5184943, at *31 (E.D. Mo. Dec. 15, 2010) (“Nothing in the
present record indicates that a damages award is not possible if Plaintiffs are successful in proving
at trial their claims and related damages. The parties’ disagreement on the amount and basis of
any such award are properly matters for resolution at trial.). The court further observes that even
if it excludes AICI’s Supplemental Expert Report, the parties’ damages figures are diametrically
opposed. (Compare ECF No. 159-3, with ECF No. 176-1.) Accordingly, the court is not persuaded
that U.S. Bank is entitled to a pre-trial cap on AICI’s damages.
V.

CONCLUSION

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

United States District Judge
April 11, 2019
Columbia, South Carolina

10