Citations
- 84 F. Supp. 2d 1226
Full opinion text
OPINION AND ORDER
BLACK, District Judge.
THIS MATTER comes before the Court for consideration of a number of motions filed by the parties. These motions include Defendant’s motion to dismiss on statute-of-limitations grounds (Doc. 25); Defendant’s motion to dismiss for lack of standing (Doc. 32); Defendant’s motion for partial summary adjudication dismissing the breach-of-trust claim (Doc. 39); Defendant’s motion for partial summary adjudication dismissing the gross-negligence claim (Doc. 79); Defendant’s motion for partial summary adjudication eliminating punitive damages as an issue in the case (Doc. 70); Defendant’s motion for partial summary judgment eliminating attorney’s fees as a possible award to Plaintiff (Doc. 75); and Plaintiffs motion for summary judgment on the merits and requesting a certain amount of damages as a matter of law (Doc. 44).
Facts
Meadowlark Insurance Company was an offshore insurer desiring to sell surplus lines of insurance in the United States. Toward that end, Meadowlark’s management contacted Sunwest Bank (“Defendant”) to set up a trust fund. This trust fund was necessary to allow Meadowlark to legally sell insurance in many states, including New Mexico. The purpose of the fund was to provide security and a means of paying off claims against Meadowlark, should the company not survive financially. The existence of the trust fund gave state regulators some assurance that Meadowlark would not simply sell insurance policies, pocket the proceeds, and move back offshore without paying the claims that might result from the sale of the policies.
To ensure that sufficient assets would be available to satisfy potential claims against Meadowlark, the terms of the written trust agreement stated that a minimum of $1,500,000 would be maintained in the trust at all times. This minimum asset level had to consist of three, and only three, types of assets: (1) cash in U.S. currency; (2) letters of credit; or (3) readily marketable securities. The agreement recited that Meadowlark had already transferred a minimum of $1,500,000 in qualifying assets to the trust.
In fact, at the time the trust agreement was signed, Meadowlark had transferred no assets to Defendant. Subsequently, when Meadowlark did transfer some assets, they were mainly assets not meeting the requirements of cash, letters of credit, or readily marketable securities contained in the trust agreement. Instead, the assets consisted of mortgages and other interests in real estate, which ostensibly had a total value of approximately $2,500,000. Despite the fact that these assets did not conform to the requirements of the trust agreement, Defendant accepted them into the trust. Defendant did not insist that qualifying assets be provided, or reject the nonconforming assets proffered by Meadowlark.
Unfortunately for Defendant and for Meadowlark’s policyholders, the principal players behind Meadowlark were involved in a moneymaking scheme rather than in operating a genuine insurance company. Meadowlark was never granted permission to operate in New Mexico. In addition, several of its principals were convicted on racketeering charges and sentenced to prison terms. Also, a Missouri court ordered Meadowlark into liquidation proceedings and appointed Plaintiff special deputy liquidator, on behalf of the Missouri insurance ■ commissioner. In the meantime, Defendant had gone to court in New Mexico to prevent Meadowlark’s principals from gaining control over the assets in the trust, and to allow the state court to determine whether those assets should be paid to claimants who had obtained judgments against Meadowlark. When Plaintiff discovered the existence of the trust fund in New Mexico, he moved to participate in the state-court proceedings. Defendant agreed that the assets of the trust should be turned over to Plaintiff, and the state-court proceedings ended.
After Plaintiff gained control of the trust assets, he began investigating the value of those assets. Plaintiff decided the assets, rather than being worth $2,500,000 as claimed, were worth much less. He began a process of finding buyers for the various assets. At this point, most if not all of the assets in the trust have been sold. After subtracting expenses, Plaintiff claims the actual worth of the assets is approximately $206,000. Plaintiff has sued Defendant for the difference between this amount and the $1,500,000 that, according to Plaintiff, would have been in the trust fund if Defendant had not breached the trust agreement. Plaintiff has raised a breach-of-trust claim and a gross negligence claim, and has agreed to dismiss a fraud claim that was originally pled.
Standard of Review for Motions for Summary Judgment and for Partial Summary Adjudication
“Summary judgment is proper only if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” Quaker State Minit-Lube, Inc. v. Fireman’s Fund Ins. Co., 52 F.3d 1522, 1527 (10th Cir.1995) (quoting Fed.R.Civ.P. 56(c)). “All facts and reasonable inferences must be construed in the light most favorable to the nonmoving party.” Id. On a motion for summary judgment, the issue is “not whether [the court] thinks the evidence unmistakably favors one side or the other but whether a fair-minded jury could return a verdict for the plaintiff on the evidence presented.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). “Nevertheless, a jury question does not exist because of the presence of a mere scintilla of evidence; rather, there must be a conflict in substantial evidence to create a jury question.” Walker v. NationsBank of Florida, 53 F.3d 1548, 1555 (11th Cir.1995). Furthermore, motions for partial summary adjudication are governed by the same standards as motions for summary judgment. See Campbell v. Sonat Offshore Drilling, Inc., 979 F.2d 1115, 1118 (5th Cir.1992) (applying usual summary judgment standard to grant of partial summary judgment). The Court will consider Defendant’s motions and Plaintiffs motion in light of these standards.
Motion for Summary Judgment — Standing
Defendant maintains Plaintiff has no standing to bring a breach-of-trust or negligence action in this case. According to Defendant, Plaintiff stands in the shoes of Meadowlark, and can pursue only those claims belonging to the company. Also according to Defendant, the breach-of-trust and negligence claims belong to policyholders or claimants who have judgments against policyholders, because these are the individuals who were the beneficiaries of the trust set up by Meadowlark. Under this view of the case, Plaintiff, the statutory liquidator or receiver of Meadowlark, has authority only to collect actual, current assets belonging to Meadowlark and distribute them to the various claimants. Plaintiff may not, however, bring an action that actually belongs to individual claimants, simply because the action might ultimately benefit Meadowlark’s estate. Defendant argues this position both as a matter of trust/receiver law, and as a statutory argument based on the Missouri and New Mexico insurance-company-liquidation statutes.
This same argument has been raised in a number of cases involving insolvent insurers, claims against third parties, and liquidators or receivers of the insurers. In the vast majority of modem cases, the liquidator or receiver has been found to have standing to bring the claim, although the reasoning of the cases has differed. In Four Star Ins. Agency, Inc. v. Hawaiian Elec. Industries, Inc., 89 Hawai'i 427, 974 P.2d 1017, 1024-25 (1999), for example, the court held that a liquidator not only has standing to pursue such claims, but has exclusive standing to do so. This result was based on a statutory provision granting the liquidator power to prosecute actions on behalf of creditors, and on public policy grounds. The court reasoned that the purposes of the Hawai'i insurance liquidation statutes include ensuring equitable treatment of all creditors and the avoidance of preferences to one claimant or another. Granting exclusive standing to the liquidator to pursue actions belonging to creditors as a whole, or to the company, serves those purposes. Such exclusive standing allows the liquidator to marshall all available assets that may then be distributed evenly among the defunct insurance company’s creditors.
Similarly, in Corcoran v. Frank B. Hall & Co., Inc., 149 A.D.2d 165, 545 N.Y.S.2d 278, 281-83 (1989), the court held that the Superintendent of Insurance had exclusive standing to assert general creditor claims possessed by all of the insurance company’s creditors and policyholders. The court reached this result despite the lack of language granting the Superintendent power to prosecute actions on behalf of creditors. The court relied on the same public-policy and statutory-purpose grounds as those discussed in Four Star. See also Cordial v. Ernst & Young, 199 W.Va. 119, 483 S.E.2d 248, 256-57 (1996) (applying statutory language quite similar to New Mexico’s insurance-liquidation statute and holding that a special deputy receiver had standing to bring claims against accounting firm, on behalf of defunct insurer as well as insurer’s policyholders, creditors, and the public); Bonhiver v. Graff, 311 Minn. 111, 248 N.W.2d 291, 296-97 (1976) (holding, with no discussion, that receiver represents rights of creditors and therefore may bring an action against accountants despite the fact the damage was done by the fraud of the insurer’s own officers); cf. Merin v. Yegen Holdings Corp., 240 N.J.Super. 480, 573 A.2d 928, 933-37 (1990) (liquidator may prosecute claim on behalf of creditors and policyholders, if it is claim not personal to those entities; however, class-action notice procedures must be followed).
In a few cases, courts have determined that causes of action such as breach of fiduciary duty by an officer of the insurance company belong to the company rather than policyholders. These courts have therefore decided the receiver or liquidator had standing to prosecute the causes of action whether or not the action could have been brought on behalf of policyholders or other creditors. See, e.g., Long v. ILA Corp., 132 N.C.App. 587, 513 S.E.2d 812, 816-17 (1999); Foster v. Peat Marwick Main & Co., 138 Pa.Cmwlth. 147, 587 A.2d 382, 385 (1991).
The Court will follow the case law cited above and hold that Plaintiff, as the special deputy receiver or liquidator of Meadowlark, has standing to bring the breach-of-trust and negligence claims raised in this case. It is apparent that these claims, if successful, will benefit the estate of Meadowlark as a whole rather than any individual claimant. The claims are not designed to redress any individual injury suffered by a policyholder or creditor. Instead, they are intended to increase the assets available for division during the liquidation process. As a matter of public policy in general, and of statutory interpretation in particular, an insurance-company receiver or liquidator has standing to bring such claims. See Four Star; Corcoran; Cordial. Furthermore, the language of the trust agreement in this case appears to preclude any beneficiary of the trust from bringing the types of claims Plaintiff seeks to raise. This makes it more imperative that Plaintiff, as the representative of the public and of the claimants as a group, be afforded standing to raise the claims.
The Court also notes that the claims raised by Plaintiff in this case actually belong, at least in part, to Meadowlark. Even if Plaintiff does step into Meadowlark’s shoes, as Defendant contends, Plaintiff would have standing to raise the claims. Meadowlark’s position with respect to the trust is that of settlor. The trust was not an irrevocable trust, but only remained irrevocable for five years, after which the assets could revert to Meadowlark upon the occurrence of certain conditions. In addition, one purpose of the trust was to ensure that, should Meadowlark face financial difficulty, there would be sufficient assets available to pay off claimants, who would then not need to turn to Meadowlark itself for relief. Now that the trust apparently contains assets worth over $1,200,000 less than the minimum asset level of $1,500,000 that should have been allowable under the trust agreement, Meadowlark is exposed to more claims from claimants than would have been the case had the trust fund been fully funded. Plaintiffs claims, therefore, are designed at least in part to redress the injury suffered by Meadowlark when Defendant allowed the trust to be funded with nonconforming assets, and negligently failed to ascertain the true worth of the trust assets. Viewed in this light, the claims belong to Meadowlark itself, although other claimants may have an interest in the outcome of the claims. See Long; Foster, cf. Sanders v. Citizens Nat’l Bank of Leesburg, 585 So.2d 1064, 1065 (Fla.App.1991) (settlor of irrevocable trust who has retained no beneficial interest in trust res has no right of action against trustee for breach of trust); John T. Gaubatz, Grantor Enforcement of Trusts: Standing in One Private Law Setting, 62 N.C.L.Rev. 905 (1984) (discussing situations under which settlor has been held to have standing to sue trustee for breach of trust).
Defendant attempts to characterize the claims raised by Plaintiff as misrepresentation or fraud claims, and argues such claims are personal to the individual claimants. The court disagrees with this characterization. Plaintiff has expressly dismissed the fraud claims, and the issues remaining in this lawsuit are concerned only with the trust account itself rather than on any reliance that may have been placed on the existence of the trust account. Any recovery obtained in the ease will simply replace funds that would otherwise have been in the trust account, and will not compensate any individual for damages suffered due to fraud or misrepresentation.
In addition to the general argument that a receiver or liquidator of an insurer has no standing to bring claims such as these, Defendant argues, in effect, that Plaintiff is the wrong receiver or liquidator. Defendant maintains that New Mexico’s insurance-liquidation statute requires the New Mexico Superintendent of Insurance to bring suit in this case, because Meadowlark was domiciled in New Mexico. Defendant makes this argument even though, in the state-court proceedings, Defendant made no objection to the propriety of Plaintiff acting as receiver, and willingly turned over the trust assets to Plaintiff.
Defendant’s argument is as follows: (1) Meadowlark was domiciled in New Mexico, because it was an alien insurer and New Mexico was the state in which the “larger amount” of Meadowlark assets were held in trust; (2) the New Mexico insurance-company-liquidation statute requires that the receiver for an insurance company domiciled in this state be the New Mexico superintendent of insurance. See NMSA 1978, §§ 59A-41-7, 59A-41-18. Phrased in the terms used in this area of the law, Defendant’s position is that Plaintiff is an ancillary receiver for Meadowlark, because Meadowlark was not domiciled in Missouri; the New Mexico superintendent would be the domiciliary receiver, if he were to be appointed; and the domiciliary receiver, instead of the ancillary receiver, should be the one pursuing assets located in New Mexico, such as the cause of action against Defendant.
The Court finds that even if New Mexico should be considered the domiciliary state for Meadowlark, the result sought by Defendant wduld be contrary to principles of full faith and credit and judicial economy, as well as the purposes behind the Uniform Insurers Liquidation Act, which has been adopted in New Mexico. NMSA 1978, §§ 59A-41-17 to -23. A Missouri court has appointed Plaintiff receiver for Meadowlark, and liquidation proceedings have been ongoing in Missouri for some time. New Mexico courts are required to give the Missouri court’s orders full faith and credit, or at minimum to enforce them as a matter of comity. See, e.g., Underwriters Nat’l Assurance Co. v. North Carolina Life and Accident and Health Ins. Guaranty Ass’n, 455 U.S. 691, 102 S.Ct. 1357, 71 L.Ed.2d 558 (1982); Herstam v. Bd. of Directors of the Silvercreek Water and Sanitation Dist., 895 P.2d 1131, 1134 (Co.App.1995) (injunction issued by one state in a receivership proceeding was entitled to full faith and credit); Arroyo v. Chesapeake Ins. Co., 209 Pa.Super. 174, 224 A.2d 101, 103 (1966) (full faith and credit requires recognition of title and authority of Maryland Insurance Commissioner by Pennsylvania court); cf. 1 Lee R. Russ and Thomas F. Segalla, Couch on Insurance 3d, § 5:37 (1997) (“As a general rule, a court’s decree approving the rehabilitation plan for an insolvent insurer domiciled in its state has a res judicata effect upon out of state policy holders.”). No reason for denying the Missouri order such treatment has been provided to the Court.
In addition, in the prior state proceedings, the New Mexico superintendent had an opportunity to assert his rights as domiciliary receiver. The superintendent was a party to those proceedings, and was given an opportunity to take control of the trust. Instead, when Plaintiff became a party to the case and requested that the trust be turned over to him, as Meadowlark’s receiver, the superintendent did not object. Neither the superintendent nor Defendant argued that the superintendent, not Plaintiff, was the proper entity to control the trust under New Mexico law. Neither argued that the superintendent should be considered the domiciliary receiver, with superior rights to Meadowlark’s New Mexico-based assets than the rights possessed by Plaintiff, an ancillary receiver. See Credit Managers Ass’n v. Kennesaw Life & Accident Ins. Co., 809 F.2d 617, 622 (9th Cir.1987) (insurance commissioner may acquiesce in another’s appointment as receiver). In essence, the superintendent declined to assert its ability to be appointed domiciliary receiver, and Defendant failed to take any action to either object to Plaintiffs assertion of rights as a receiver, or to attempt to force the superintendent to assume such obligations.
The situation in this case, therefore, is as follows. There is an out-of-state, ancillary receiver and an ongoing receivership or liquidation proceeding. This receiver is ready, willing, and able to assert claims on behalf of Meadowlark’s estate, claims that may ultimately benefit Meadowlark’s policyholders, creditors, and other claimants. The supposedly “proper” receiver, the superintendent, has declined to exercise his rights under the insurers liquidation statute, and New Mexico’s statute is silent as to what should occur if the superintendent does so. Defendant, which had a full and fair opportunity in a prior proceeding to litigate the issue of whether Plaintiff was authorized to assume control of New Mexico assets belonging to Meadowlark, failed to take that opportunity. Finally, if Defendant prevails on this issue a new receivership proceeding must commence, in New Mexico, in which the superintendent will have to request appointment as domiciliary receiver.
Given the foregoing, two things are apparent. First, it would be contrary to the purposes of the Uniform Insurers Liquidation Act (“UILA”) to make it more difficult for the assets of Meadowlark to be collected and disbursed equitably to persons with valid claims. See Murphy v. Ambassador Ins. Co., 195 N.J.Super. 274, 478 A.2d 1243, 1247 (1984) (UILA was adopted to reduce conflicts and difficulties created by the liquidation of multistate insurance companies; statute must be read with common sense). Since the New Mexico statute is silent as to what should occur if the only active receiver is an out-of-state, ancillary receiver, the statute is no bar to Plaintiffs standing in this case. See Garamendi v. Ryles, 204 Ga.App. 747, 420 S.E.2d 633, 635 (1992) (where UILA did not prohibit recognition of action of receiver appointed in non-reciprocal state, and recognition would serve purposes of UILA, assets of defunct insurer should be controlled by non-reciprocal trustee rather than local trustee). Second, the principle of judicial economy would be grievously violated if Plaintiff is not allowed to pursue this case. It makes little sense to decline, at this point in the proceedings, to allow Plaintiff to assert control over New Mexico assets, especially since Defendant failed to object to such control when it had an opportunity to do so, much earlier in the state proceedings.
Defendant makes one final argument against Plaintiffs standing in this case. Defendant raises the specter of potential double Lability, if Plaintiff is allowed to bring this action and then individual beneficiaries of the trust are allowed to pursue their own claims. Defendant and Plaintiff have both acknowledged that the trust agreement prohibits individual beneficiaries from bringing such actions for breach of trust. Nevertheless, Defendant points out that there is nothing to stop the beneficiaries from bringing meritless lawsuits in violation of the trust agreement’s terms. This argument is specious. The possibility that frivolous breach-of-trust actions will be brought in addition to Plaintiffs claims in this case is not a reason to deny standing to Plaintiff, the proper entity to bring this action.
Motion for Summary Judgment — Statute of Limitations
Defendant argues the statute of limitations has run on Plaintiffs claims. Defendant and Plaintiff agree the six-year limitations period for actions based on a written contract applies to the breach-of-trust claims in this case. See NMSA 1978, § 37-1-3. Defendant maintains the breach of trust, if it occurred at all, happened when the trust was first established, and cites case law indicating an action for breach of contract accrues on the date of the breach. Plaintiff raises a number of arguments in opposition to the motion. However, the simplest answer is that an action for breach of trust accrues upon the date of injury resulting from that breach or at the time the beneficiary first knows of an injury resulting from the breach, not necessarily from the date of the breach itself. See, e.g., Harris Trust Bank of Arizona v. Superior Court, 188 Ariz. 159, 933 P.2d 1227, 1231 (1996) (action for breach of trust accrues when beneficiary knew or should have known of breach); Malachowski v. Bank One, Indianapolis, 590 N.E.2d 559, 564 (Ind.1992) (action for breach of trust accrues and statute of limitations begins to run when beneficiary knew or could have discovered that an injury had been sustained as a result of the trustee’s actions). In other words, no cause of action accrues and the limitations period cannot begin to run until, at minimum, the breach of trust has caused some injury. See also Zamora v. Prematic Service Corp., 936 F.2d 1121, 1123 (10th Cir. 1991) (noting that in New Mexico, cause of action for breach of contract accrues at the time of injury resulting from the breach).
In this case, no injury occurred immediately upon the breach of trust. The injury, if any, caused by Defendant’s alleged breach occurred only when qualified beneficiaries of the trust were unable to fully satisfy their claims against Meadowlark, because there were not sufficient assets in the trust to reach the minimum asset level of $1,500,000 that was supposed to be in the trust. In other words, if the breach-of-trust action brought by Plaintiff belongs to Meadowlark, Meadowlark did not suffer an injury until it was first unable to pay intended beneficiaries of the trust, it became clear the intended benefi-dañes were owed sums exceeding the assets in the trust, and it became clear the trust held assets worth less than $1,500,-000. Similarly, if the breach-of-trust action is being brought on behalf of the beneficiaries, those beneficiaries did not suffer an injury until they were unable to satisfy their claims against Meadowlark, and they discovered the assets in the trust were worth less than $1,500,000. In either event, although the exact date upon which the cause of action accrued is unclear, it is undisputedly within the six-year limitations period the parties have agreed applies to this case.
Motion for Partial Summary Adjudication — Breach of Trust Claim
Defendant has filed a motion directed at the merits of Plaintiffs breach-of-trust claim. As discussed below, Defendant makes a number of arguments attempting to demonstrate that Plaintiffs claim is without merit as a ,matter of law.
Defendant’s first contention is that Plaintiffs remedies, if he represents the beneficiaries of the trust, are limited by the trust agreement. The trust agreement provides that no policyholder or third-party claimant shall have any cause of action against Defendant, except