Federal Deposit Insurance Corporation v. Arch Insurance Company et al

Filing 186

ORDER granting in part and denying in part Defendants Lloyd's Syndicate Nos. 2987, 2000 and 382, Wuerttembergische Versicherung A.G. 202388900007's 120 Motion for Summary Judgment; denying FDIC's 174 Motion for Leave to File a Sur-Reply, signed by Judge Robert S. Lasnik. (SWT)

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1 2 3 4 5 6 7 8 9 10 11 12 13 UNITED STATES DISTRICT COURT WESTERN DISTRICT OF WASHINGTON AT SEATTLE _______________________________________ ) FEDERAL DEPOSIT INSURANCE ) CORPORATION, ) ) Plaintiff, ) v. ) ) ARCH INSURANCE COMPANY, et al, ) ) Defendants. ) _______________________________________) Civil Case No. C14-0545RSL ORDER GRANTING IN PART UNDERWRITERS AT LLOYD’S MOTION FOR SUMMARY JUDGMENT 14 15 This matter comes before the Court on “Defendants Those Certain Underwriters at 16 Lloyd’s, London Whose Names are Severally Subscribed to Excess Financial Institution Bond 17 No. 509/QA015607 (“The Excess Bond”) and Württembergische Versicherung A.G. 18 (Collectively, “Underwriters”) Motion for Summary Judgment.” Dkt. # 120. The Underwriters 19 are excess insurers on a financial institution blended policy issued to Washington Mutual Bank 20 (“WaMu”) starting in May 2006. They seek a summary determination (a) that their excess layer 21 has not been reached, (b) that the claimed losses are indirect and do not trigger coverage under 22 the terms of the policy, (c) that the policies do not cover fraudulent mortgages originated prior to 23 the policy period, and/or (d) that the claims for cost of funds, prejudgment interest, and 24 attorney’s fees fail as a matter of law . WaMu, the insured, collapsed in 2008, and the United 25 States Office of Thrift Supervision placed it into receivership with the Federal Deposit Insurance 26 ORDER GRANTING IN PART UNDERWRITERS AT LLOYD’S MOTION FOR SUMMARY JUDGMENT - 1 1 Corporation (“FDIC”). The FDIC is pursuing a claim for insurance coverage that WaMu made 2 in 2007. The FDIC opposes the Underwriters’ motion and requests that it be denied or, in the 3 alternative, that the Court defer ruling under Fed. R. Civ. P. 56(d)(2). 4 Summary judgment is appropriate when, viewing the facts in the light most favorable to 5 the nonmoving party, there is no genuine issue of material fact that would preclude the entry of 6 judgment as a matter of law. The party seeking summary dismissal of the case “bears the initial 7 responsibility of informing the district court of the basis for its motion” (Celotex Corp. v. 8 Catrett, 477 U.S. 317, 323 (1986)) and “citing to particular parts of materials in the record” that 9 show the absence of a genuine issue of material fact (Fed. R. Civ. P. 56(c)). Once the moving 10 party has satisfied its burden, it is entitled to summary judgment if the non-moving party fails to 11 designate “specific facts showing that there is a genuine issue for trial.” Celotex Corp., 477 U.S. 12 at 324. The Court will “view the evidence in the light most favorable to the nonmoving party . . . 13 and draw all reasonable inferences in that party’s favor.” Krechman v. County of Riverside, 723 14 F.3d 1104, 1109 (9th Cir. 2013). Although the Court must reserve for the jury genuine issues 15 regarding credibility, the weight of the evidence, and legitimate inferences, the “mere existence 16 of a scintilla of evidence in support of the non-moving party’s position will be insufficient” to 17 avoid judgment. City of Pomona v. SQM N. Am. Corp., 750 F.3d 1036, 1049 (9th Cir. 2014); 18 Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252 (1986). Factual disputes whose resolution 19 would not affect the outcome of the suit are irrelevant to the consideration of a motion for 20 summary judgment. S. Cal. Darts Ass’n v. Zaffina, 762 F.3d 921, 925 (9th Cir. 2014). In other 21 words, summary judgment should be granted where the nonmoving party fails to offer evidence 22 from which a reasonable jury could return a verdict in its favor. FreecycleSunnyvale v. Freecycle 23 Network, 626 F.3d 509, 514 (9th Cir. 2010). 24 25 // 26 ORDER GRANTING IN PART UNDERWRITERS AT LLOYD’S MOTION FOR SUMMARY JUDGMENT - 2 1 2 Having reviewed the memoranda, declarations, and exhibits submitted by the parties,1 the Court finds as follows: BACKGROUND 3 4 In the early 2000s, WaMu contracted with third parties to have them originate residential 5 real property mortgage loans which WaMu agreed to purchase. In March 2004, WaMu 6 discovered that a mortgage originated by CIP Mortgage Corporation was based on a 7 misstatement regarding the borrower’s income. Subsequent investigation revealed eleven CIP 8 loans that were based on false income statements. WaMu’s Correspondent Area Risk and Risk 9 Mitigation departments concluded “that the borrowers misrepresented their income and 10 employment.” Dkt. # 173-4 at 3. WaMu notified CIP of its findings and requested that it 11 repurchase the loans. CIP agreed to do so and fired the processor who originated the loans. At 12 approximately the same time, however, WaMu discovered that CIP’s 2003 net worth was less 13 than 1/10th what it had been in 2002, in large part due to a “huge distribution” to shareholders. 14 Dkt. # 99 at 40-41. On September 2, 2004, WaMu notified CIP that its selling privileges for 15 WaMu had been suspended. 16 17 18 Prior to September 2005, WaMu purchased three fraudulent loans from another mortgage company, Coastal Capital. On September 18, 2007, a defendant in a pending criminal matter notified WaMu that 19 over 100 of the mortgages originated by CIP for WaMu were actually unsecured. WaMu 20 conducted an investigation and found that CIP prepared fraudulent paperwork, including loan 21 applications, mortgages, notes, and title insurance, to make it look like a third party was 22 borrowing money that was secured by real property owned or controlled by CIP’s CEO. In fact, 23 the CEO and others involved in the fraud fronted just enough money to get through settlement, 24 25 26 1 This matter can be decided on the papers submitted. The Underwriters’ request for oral argument is DENIED. ORDER GRANTING IN PART UNDERWRITERS AT LLOYD’S MOTION FOR SUMMARY JUDGMENT - 3 1 then sold the loans to WaMu and pocketed the proceeds without ever recording the mortgage, 2 paying taxes, or purchasing insurance. The CEO and/or his companies would make monthly 3 payments on the loan so that they appeared legitimate. The properties that were supposedly 4 securing WaMu’s loan were often sold to end-users, thereby compromising WaMu’s position in 5 the chain of title. WaMu concluded that it had purchased 124 fraudulent loans for 6 $53,344,641.16. WaMu notified the Underwriters of the loss on July 18, 2008. 7 On April 11, 2014, the FDIC filed this litigation in its capacity as the Receiver for WaMu 8 against the third and fourth excess layer insurers. The FDIC alleged that it had covered losses of 9 over $25 million after reducing the claim by the amount recovered by third parties and its self- 10 insurance obligations. A more detailed calculation of the damages, including specific categories 11 of losses for which coverage is sought, was disclosed in November 2014 pursuant to Fed. R. Civ. 12 P. 26(a). The discovery cut off date is February 4, 2018. ANALYSIS 13 14 The parties agree that the underlying bond is to be interpreted under Washington law. 15 Insurance policies are construed “as contracts, giving them a fair, reasonable, and sensible 16 construction as would be given to the contract by an average person purchasing insurance.” Xia 17 v. ProBuilders Specialty Ins. Co., 188 Wn.2d 171, 181 (2017) (internal quotations marks 18 omitted).2 Undefined terms are given their plain and ordinary meaning and, if the policy 19 language is clear and unambiguous, it will be applied as written. Id. Where there is an ambiguity, 20 coverage provisions are liberally construed in favor of coverage while exclusions are strictly 21 construed against the insurer. Ross v. State Farm Mut. Auto. Ins. Co., 132 Wn.2d 507, 523 22 (1997). If an insured shows that the loss falls within the coverage provision, the insurer must 23 24 25 26 2 A fidelity bond is generally interpreted in the same manner as an insurance policy, with due consideration given to the requirements and purposes of any statute mandating the bond. Estate of Jordan by Jordan v. Hartford Acc. & Indem. Co., 120 Wn.2d 490, 497-98 (1993). ORDER GRANTING IN PART UNDERWRITERS AT LLOYD’S MOTION FOR SUMMARY JUDGMENT - 4 1 show that it is excluded by specific policy language. Moeller v. Farmers Ins. Co. of Wash., 173 2 Wn.2d 264, 272 (2011). 3 A. Ripeness 4 The Underwriters issued an insurance policy to WaMu in excess of $30 million in self- 5 insured retention and $75 million in four underlying policy layers. The Underwriters argue that, 6 although the first three layers of insurance coverage have been exhausted, the FDIC has $29 7 million in self insurance and the $20 million policy offered by Arch and National Union 8 remaining before the Underwriters could possibly have an obligation to pay under the policy. 9 They seek dismissal of the two claims the FDIC has asserted against them: breach of contract 10 and declaratory judgment. 11 1. Breach of Contract 12 The Underwriters seek dismissal of the breach of contract claim on the ground that, 13 because the FDIC has not exhausted the Arch and National Union policy limits, it is not ripe for 14 adjudication. Liability typically attaches under excess policies “only after the primary coverage 15 is exhausted.” Diaz v. Nat’l Car Rental Sys., Inc., 143 Wn.2d 57, 63 (2001). In this case, the 16 excess policy specifically states that the “Underwriters’ liability to pay under this Policy shall 17 attach only when the Underlying Insurer(s) shall have paid or have been held liable to pay, the 18 full amount of the Underlying Limit(s) . . . .” Dkt. # 1-4 at 7. The insurers on the risk in the third 19 level of coverage, Arch and National Union, have denied coverage, and their liability has not yet 20 been established. The Underwriters correctly argue that their duty to indemnify has not yet been 21 triggered, much less breached. Because the undisputed facts show that there is no present duty to 22 indemnify, the FDIC’s breach of contract claim against the Underwriters is not ripe and will be 23 dismissed without prejudice. See Seattle Times Co. v. Nat’l Surety Corp., 2016 WL 3033498, at 24 *2-4 (W.D. Wash. May 27, 2016). 25 26 ORDER GRANTING IN PART UNDERWRITERS AT LLOYD’S MOTION FOR SUMMARY JUDGMENT - 5 1 2. Declaratory Judgment 2 The FDIC also seeks a number of declarations under 28 U.S.C. § 2201, in particular that 3 the Underwriters must cover all losses that WaMu suffered in excess of the applicable retention 4 limits as a result of the dishonest acts of its loan originators.3 The Underwriters argue that the 5 request for declaratory relief is not ripe because WaMu’s claimed losses do not, in fact, exceed 6 the remaining retained amounts and will never exceed those amounts. The Underwriters rely on 7 the following calculation: 8 $53.34 million sworn proof of loss 9 - $5.28 million recovered from third parties 10 $48.06 million outstanding value of claim 11 At the time the complaint was filed, there was $49 million in self-insurance and policy limits left 12 below the Underwriters’ fourth layer of excess coverage. Based on those numbers, the 13 Underwriters seek dismissal of the FDIC’s request for a declaration of coverage on the ground 14 that they are not currently, and will never be, on the risk. 15 Although there is no hard and fast rule, courts generally find that a claim against an 16 excess insurer is ripe for adjudication if there is a substantial, reasonable, and/or practical 17 likelihood that the dispute will trigger the excess policies. Warren v. Am. Bankers Ins., 507 F.3d 18 1239, 1241 (10th Cir. 2007); E.R. Squibb & Sons, Inc. v. Lloyd’s & Cos., 241 F.3d 154, 177-78 19 (2nd Cir. 2001); Century Indem. Co. v. Marine Group, LLC, 848 F. Supp.2d 1229, 1237 (D. Or. 20 2012); Ross Dev. Corp. v. Fireman’s Fund Ins. Co., 809 F. Supp.2d 449, 461-62 (D.S.C. 2011); 21 Tocci Bldg. Corp. of N.J. v. Va. Sur. Co., 750 F. Supp.2d 316, 321-22 (D. Mass. 2010). The 22 Underwriters’ calculation of damages is based primarily on a proof of loss submitted almost a 23 decade ago and a letter from the FDIC notifying the Underwriters that it had collected 24 25 26 3 To the extent the FDIC seeks a declaration that the Underwriters are obligated to immediately indemnify the FDIC for all such losses, the claim is premature for the reasons stated in Section A.1. ORDER GRANTING IN PART UNDERWRITERS AT LLOYD’S MOTION FOR SUMMARY JUDGMENT - 6 1 approximately $5.28 million from the loan originators as of the end of 2015. The Underwriters 2 ignore the allegation in the complaint that the FDIC has $25 million in losses and many of the 3 details the FDIC provided regarding its damages during discovery. The FDIC’s calculation of 4 damages contains additional elements beyond the total stated in the proof of loss and reduces the 5 gross third-party recoveries by the costs of obtaining them. The calculation is as follows: 6 $53,279,310.58 unpaid principle balance on 124 fraudulent loans 7 +$1,292,685.71 Claims Expenses recoverable under Insuring Agreement G 8 +$2,023,138.97 costs of borrowing the money used to purchase the loans 9 $56,595,135.26 10 - $5,022,648.97 net amount recovered from third parties 11 $51,572,486.29 outstanding value of claim 12 This total must be reduced by the $29 million self-insured retention and the $19,662,094.16 13 remaining under the Arch and National Union layer, leaving $2,910,392.13 against the 14 Underwriters’ policy. Thus, under the FDIC’s calculation, the losses directly resulting from the 15 loan originators’ fraud will exceed the retained and underlying limits by almost $3 million, 16 thereby triggering the fourth excess coverage layer. 17 The Underwriters take issue with the admissibility and/or persuasiveness of some of 18 FDIC’s proof, arguing that the FDIC failed to amend its initial disclosures to reflect the numbers 19 presented in its opposition memorandum4 and that it has not proven the extent of or its 20 21 4 22 23 24 25 26 Rule 26(e)(1) requires parties to “supplement or correct” their initial disclosures as discovery progresses if additional or corrective information becomes available. The FDIC’s claim for “Claims Expenses” and costs of funds as part of its damage calculation has been disclosed. The Underwriters offer no support for their insistence that the initial disclosures be formally amended. Regardless, discovery is on-going, and the Court declines to exclude evidence under Rule 37 simply because defendants filed dispositive motions before all disclosures were due. Because the Underwriters’ request to strike or exclude is overruled, the FDIC’s motion to file a supplemental memorandum (Dkt. # 174) is DENIED as unnecessary. ORDER GRANTING IN PART UNDERWRITERS AT LLOYD’S MOTION FOR SUMMARY JUDGMENT - 7 1 entitlement to Claim Expenses and/or borrowing costs. In the context of this ripeness challenge, 2 the Court’s task is to ascertain whether the likelihood that the excess policies will be triggered is 3 sufficient to confer jurisdiction with respect to the request for a coverage declaration. That 4 standard is met here. The FDIC specifically alleged that it had over $25 million in insurable 5 losses in excess of the self-insured retention and the first three layers of coverage and has 6 produced evidence in support of its calculations. Even if the Court assumes for purposes of the 7 jurisdictional analysis that the costs associated with funding the loans, which total 8 $2,023,138.97, are not covered and/or not proven, the FDIC’s claimed loss still exceeds the 9 $48,662,094.16 in self-insurance and excess coverage still remaining. The Underwriters knew 10 since at least November 2014 that the FDIC intended to claim Claims Expenses under the policy. 11 Instead of seeking a determination regarding coverage for those expenses, the Underwriters 12 ignored their existence when filing their motion, preferring to focus only on the 2008 proof of 13 loss, one of many disclosures made during discovery, and the costs of funds claim. The 14 Underwriters cannot, in reply, seek a declaration regarding coverage that they avoided seeking in 15 their motion. 16 The FDIC has claimed and provided evidence that the dispute will trigger the fourth 17 excess layer. If the Underwriters believe that the FDIC’s expansive view of Claims Expenses is 18 incorrect, they may file an appropriate motion to limit the value of the claim. At this point, 19 however, there is a substantial likelihood that the policy will be triggered. The Court also finds 20 that the exercise of jurisdiction under the Declaratory Judgment Act promotes judicial economy 21 and the just, speedy, and comprehensive resolution of this dispute. Given the existence of an 22 actual case and controversy (as discussed above), the Underwriters’ continued participation and 23 concomitant ability to protect their interests is not unfair compared to the likely unfairness and 24 inefficiencies that would arise if they were dismissed. For these reasons, the court elects to 25 exercise its discretion to entertain declaratory relief. 26 ORDER GRANTING IN PART UNDERWRITERS AT LLOYD’S MOTION FOR SUMMARY JUDGMENT - 8 1 B. Definition of “Employee” and Causal Connection Between Fraud and Loss 2 For the reasons stated in the “Order Denying Defendants Arch Insurance Company’s 3 Motion for Summary Judgment,” of even date, the Underwriters’ adoption of the arguments 4 made by Arch and National Union are unavailing. 5 C. Cost of Funds Loss 6 The insurers agreed to indemnify WaMu for “[l]oss directly resulting from the dishonest 7 or fraudulent acts committed by an Employee . . .” with the intent to cause WaMu a loss 8 resulting in a financial benefit for themselves. Dkt. # 1-1 at 25. The Underwriters argue that the 9 expenses WaMu incurred to borrow the funds it used to purchase the fraudulent loans were not 10 directly caused by the loan originators’ fraud and do not satisfy the intent and financial benefit 11 elements of the coverage provision. In addition, the Underwriters argue that the FDIC has failed 12 to raise a genuine issue of material fact regarding whether WaMu actually sustained costs 13 associated with funding the loan purchases. Both arguments have merit. 14 With regards to loans, the financial institutions’ fidelity bond covers only direct losses 15 resulting “from dishonest or fraudulent acts committed by an Employee with the intent to cause 16 the Insured to sustain such loss and which results in a financial benefit for the Employee . . . .” 17 Dkt. # 1-1 at 25. The FDIC does not allege, nor is there any evidence that would give rise to a 18 reasonable inference, that the loan originators intended to cause WaMu to suffer the claimed 19 loss, i.e, the cost of funds loss. Whether WaMu borrowed money in order to purchase one or 20 more loans from CIP or whether it used its own money to make the purchases is unclear, but 21 there is no reason to believe that CIP cared one way or the other. The Underwriters expressly 22 pointed out the lack of evidence regarding an issue on which the FDIC has the burden of proof, 23 and the FDIC has failed to come forward with evidence showing that there is a genuine issue of 24 material fact regarding the loan originator’s intent. In these circumstances, the FDIC cannot 25 avoid summary judgment by claiming that it was the Underwriters’ burden to prove a lack of 26 ORDER GRANTING IN PART UNDERWRITERS AT LLOYD’S MOTION FOR SUMMARY JUDGMENT - 9 1 2 intent. The Underwriters also point out that there is no evidence showing that WaMu actually 3 incurred any borrowing costs associated with the purchase of the 124 loans. The FDIC offers a 4 declaration showing only that banks in WaMu’s position could choose to fund loan purchases by 5 borrowing: there is no evidence that WaMu actually did so. A bank can choose to make an 6 investment using its own funds, using its depositors’ funds, or using funds it borrowed for that 7 express purpose. In the first scenario, there would be no additional outlay of cash and any costs 8 associated with the use of the funds would be appropriately characterized as an opportunity cost. 9 In the second scenario, the funds were, presumably, already on deposit with the bank and were 10 entitled to a pre-determined interest rate regardless of whether the funds were invested. In the 11 last scenario, the costs of borrowing might give rise to losses that would not otherwise have been 12 incurred related to the funding of the fraudulent loans. We have no information regarding 13 WaMu’s actual funding choices, however. The FDIC simply multiplies the outstanding balance 14 on the loans by an amalgamated “Cost of Funding Earning Assets,” which is apparently the total 15 interest expense WaMu paid on all deposits and other borrowed money as a percentage of its 16 average earning assets during the time it held the fraudulent loans. The FDIC makes no effort to 17 show how WaMu actually funded the purchase of the loans or to calculate the actual costs 18 thereof. It cannot go to a jury based on nothing more than averages and speculation. 19 D. Prejudgment Interest 20 Under Washington law, a court may award prejudgement interest if a claim is 21 “liquidated,” meaning that the evidence allows the computation of damages with exactness, 22 without recourse to opinion or discretion. Weyerhaeuser Co. v. Commercial Union Ins. Co., 142 23 Wn.2d 654, 685 (2000). It is undisputed that the Underwriters have no liability under the policy 24 at present. This is not simply a defense against the FDIC’s claim, but an acknowledgment that 25 there are no amounts past due on which interest could accrue. The Court declines to dismiss the 26 ORDER GRANTING IN PART UNDERWRITERS AT LLOYD’S MOTION FOR SUMMARY JUDGMENT - 10 1 claim for prejudgment interest, however. If Arch and National Union were to pay their policy 2 limits during the course of this litigation and the Underwriters continued in their refusal to 3 provide coverage, a verdict in the FDIC’s favor could include a time-limited award of 4 prejudgment interest. 5 E. Attorney’s Fees 6 7 The Court reserves the issue of whether the FDIC may recover attorney’s fees from the Underwriters under Olympic S.S. Co., Inc. v. Centennial Ins. Co., 117 Wn.2d 37 (1991). 8 9 For all of the foregoing reasons, the Underwriters’ motion for summary judgment (Dkt. 10 # 120) is GRANTED in part and DENIED in part. The FDIC’s claim for recovery of the costs of 11 borrowing the funds used to purchase the fraudulent loans is DISMISSED. The remaining claims 12 may proceed. The FDIC’s motion for leave to file a sur-reply (Dkt. # 174) is DENIED. 13 14 Dated this 13th day of November, 2017. 15 A 16 Robert S. Lasnik United States District Judge 17 18 19 20 21 22 23 24 25 26 ORDER GRANTING IN PART UNDERWRITERS AT LLOYD’S MOTION FOR SUMMARY JUDGMENT - 11

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