Union Planters Bank, N.A. v. Continental Casualty Co. , 478 F.3d 759 ( 2007 )

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
File Name: 07a0083p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
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X
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UNION PLANTERS BANK, N.A., now known as
Plaintiff-Appellant/Cross-Appellee, -
REGIONS BANK,
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Nos. 05-6094/6095
,
v. >
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Defendant-Appellee/Cross-Appellant, -
CONTINENTAL CASUALTY CO.,
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NATIONAL UNION FIRE INSURANCE CO.; ST. PAUL
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MERCURY INSURANCE CO.; and TWIN CITY FIRE
INSURANCE CO., -
Defendants-Appellees. -
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N
Appeal from the United States District Court
for the Western District of Tennessee at Memphis.
No. 02-02321—Samuel H. Mays, Jr., District Judge.
Argued: December 5, 2006
Decided and Filed: February 27, 2007
Before: SUTTON and GRIFFIN, Circuit Judges; COHN, District Judge.*
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COUNSEL
ARGUED: Douglas A. Black, WYATT, TARRANT & COMBS, Memphis, Tennessee, for
Appellant. Jeffrey S. Price, MANIER & HEROD, Nashville, Tennessee, H. Frederick Humbracht,
Jr., BOULT, CUMMINGS, CONNERS & BERRY, Nashville, Tennessee, for Appellees.
ON BRIEF: Douglas A. Black, Thomas R. Dyer, WYATT, TARRANT & COMBS, Memphis,
Tennessee, for Appellant. Jeffrey S. Price, John M. Gillum, Sam H. Poteet, Jr., MANIER &
HEROD, Nashville, Tennessee, H. Frederick Humbracht, Jr., BOULT, CUMMINGS, CONNERS
& BERRY, Nashville, Tennessee, Michael Keeley, John R. Riddle, STRASBURGER & PRICE,
Dallas, Texas, Michael G. McLaren, Vickie Hardy Jones, BLACK, McLAREN, JONES &
RYLAND, Memphis, Tennessee, for Appellees.
*
The Honorable Avern Cohn, United States District Judge for the Eastern District of Michigan, sitting by
designation.
1
Nos. 05-6094/6095 Union Planters Bank v. Cont’l Cas. Co., et al. Page 2
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OPINION
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SUTTON, Circuit Judge. Union Planters Bank suffered a multi-million-dollar loss stemming
from a mortgage lender’s fraud. Upon discovering the fraud, the bank notified its primary insurance
provider, Continental Casualty Co., and later notified its three excess-policy carriers: National
Union Fire Insurance Co., St. Paul Mercury Insurance Co. and Twin City Fire Insurance Co. When
the insurance providers disputed coverage, Union Planters filed this diversity action, seeking to
recover its losses, prejudgment interest and professional fees. Applying Tennessee law, the district
court granted (1) Union Planters’ motion for summary judgment against Continental Casualty and
(2) the excess carriers’ motions for summary judgment against Union Planters. We affirm.
I.
Mortgage bankers generate residential mortgages, which they frequently resell in the
secondary market. When mortgage bankers lack sufficient capital to originate a residential
mortgage, they often use warehouse lines of credit, which they obtain by offering as collateral the
underlying mortgage instruments. Once the mortgage bankers sell the mortgages on the secondary
market, they repay the warehouse lender, so that the commercial bank’s collateral rotates
continuously. Loans in the warehouse-lending industry may be “wet” or “dry”: wet when the lender
advances funds before it has in hand the original promissory note, mortgage and assignment of
mortgage; dry when the lender advances funds only after it possesses these documents.
In November 1999, Union Planters extended a $10 million warehouse line of credit to
Greatstone, a mortgage-banking company. Each time Greatstone needed to finance a new mortgage,
Union Planters advanced the funds for the mortgage through a “wet” transaction: Greatstone would
fax its loan-transfer requests to Union Planters; Union Planters would advance the funds to
Greatstone; and Greatstone would send the collateral documentation to Union Planters.
In June 2000, Union Planters increased Greatstone’s line of credit to $15 million; and in
February 2001, Union Planters increased the line of credit to $25 million. Between November 1999
and July 2001, Greatstone borrowed approximately $165 million from Union Planters through these
revolving credit transactions.
In August 2001, Greatstone stopped making payments to Union Planters and defaulted on
the loans. Union Planters soon discovered that Greatstone was at the center of an elaborate bank
fraud. Although Greatstone had generated many legitimate mortgages, it had done so in the end not
for legitimate purposes but for the purpose of obtaining information from individual applicants,
which it used to generate fraudulent mortgages by forging borrowers’ signatures on new loan forms.
Greatstone then split the mortgages, sending the real mortgages to one bank and the forged ones to
another. All told, Greatstone received approximately $250 million from several banks by using
forged mortgage loans to procure advances—much of which the principals of the company took with
them when they fled to Costa Rica and became Costa Rican nationals, apparently beyond the reach
of American law.
All of the mortgage loans that Greatstone provided to Union Planters as collateral, as it
turned out, did not represent actual extensions of credit to the named borrowers. When Greatstone
defaulted, Union Planters was left with worthless collateral (i.e. the forged promissory notes,
mortgages and assignments of security interest) for $21,780,269 in advances and was left empty-
handed for an additional $3,203,102 in advances.
Nos. 05-6094/6095 Union Planters Bank v. Cont’l Cas. Co., et al. Page 3
Shorn of any hope of getting its money back from Greatstone, Union Planters turned to its
insurance carriers. Union Planters maintained a primary insurance policy with Continental Casualty
Co., one that provided the bank with coverage on a claims-made basis for certain types of
losses—not to exceed $25 million—reported between June 1999 and June 2002. Two types of
losses are relevant here: losses due to “forgeries,” see Continental Policy § E.I.3.a, and losses due
to “counterfeits,” see id. § E.I.3.c.
In addition to its primary insurance policy, Union Planters purchased three additional layers
of coverage from National Union Fire Insurance Co., St. Paul Mercury Insurance Co. and Twin City
Fire Insurance Co. (collectively, the “excess carriers”). Each of these policies incorporated the
terms and conditions of the Continental policy. And each policy provided Union Planters with a
supplemental $25 million layer of coverage—bringing Union Planters’ total insurance coverage to
$100 million.
The policies established the following order of coverage: Continental covered losses from
$0 to $25 million; National Union covered losses from $25 to $50 million; St. Paul covered losses
from $50 to $75 million; and Twin City covered losses from $75 to $100 million. Each policy
required Union Planters to notify the excess carriers of a claim at the same time it notified the
primary carrier (Continental) of a claim.
In a letter dated September 20, 2001, Union Planters notified Continental about Greatstone’s
default and the bank’s initial losses. After investigating the fraud and calculating its losses, Union
Planters provided Continental with a detailed proof of loss on February 15, 2002. On March 12,
2002, Union Planters claims that its agent sent a letter to the excess carriers about the loss, though
none of the carriers acknowledges receiving the letter. Continental repudiated Union Planters’
claims for coverage.
On May 1, 2002, Union Planters filed a diversity suit under Tennessee law in federal district
court seeking a “declaration of the rights and obligations of the parties under the various insurance
policies” and “any funds it may be due under those policies.” JA 920. All five parties moved for
summary judgment. The district court (1) granted Union Planters’ motion for summary judgment
against Continental; (2) granted the excess carriers’ motions for summary judgment against Union
Planters; and (3) denied the remaining motions for summary judgment. The parties subsequently
filed a number of post-judgment motions, which the district court resolved in June of 2005—by
among other things denying Union Planters’ requests for prejudgment interest and professional fees.
II.
On appeal, Union Planters challenges the grant of summary judgment in favor of the excess
carriers and the denial of its motions for prejudgment interest and professional fees, while
Continental cross-appeals the grant of summary judgment in favor of Union Planters. “We give
fresh review to a district court’s summary-judgment decision, applying the same familiar standard
that district courts apply.” Flaskamp v. Dearborn Pub. Schs., 385 F.3d 935, 940 (6th Cir. 2004).
A.
The first item on the parties’ agenda is whether the district court correctly determined that
Union Planters was entitled to coverage under § E.I.3.a of the company’s primary policy with
Continental. That provision says:
The Insurer shall indemnify the Union Planters Corporation Insureds
for Loss resulting directly from a Union Planters Corporation Insured
having in good faith:
Nos. 05-6094/6095 Union Planters Bank v. Cont’l Cas. Co., et al. Page 4
a. acted on an Original Financial Document which bears a Forgery or
Alteration upon which the Union Planters Corporation Insureds
relied;
...
Actual physical possession, and continued actual physical possession
if taken as collateral, . . . is a condition precedent to the Union
Planters Corporation Insured having acted in reliance upon the
Financial Document.
JA 641–43. To establish coverage under this section, Union Planters must show that (1) in good
faith (2) it acted on original financial documents that (3) contained a forgery upon which (4) the
bank relied, and (5) that the losses “resulted directly” from the bank’s reliance on the forgeries. The
policy defines a “forgery” as “[t]he signing of the name of another person . . . without authority with
intent to deceive,” JA 654, and defines “reliance” as requiring “continued” “[a]ctual physical
possession” of any collateral, JA 642-43.
Continental does not challenge Union Planters’ good faith, the existence of original financial
documents or the existence of forgeries on those documents. It argues that the bank fails to satisfy
the other three requirements: (1) that it relied on the forged documents; (2) that it continually,
actually and physically possessed forged documents; and (3) that its losses resulted directly from
its reliance on the forgeries.
In one sense, it seems clear that Union Planters relied on the forgeries, continually possessed
the forged collateral and incurred losses directly as a result of its reliance on the forged documents.
The bank extended a revolving line of credit to Greatstone; as a condition of that line of credit, the
bank required Greatstone to provide collateral; the bank maintained a pool of collateral—namely,
the forged documents that it received from Greatstone—to secure the revolving line of credit; and
there is no reason for doubting that the bank never would have extended this credit had it known that
Greatstone could not tender legitimate collateral for the revolving line of credit.
Complicating the matter is the fact that the bank rarely, if ever, possessed the collateral for
each new mortgage at the time it extended each new advance. That is because the bank was engaged
in a “wet” warehouse line of credit by which each advance of funds preceded the receipt of new
collateral for that advance. If we look at each loan transaction by itself, then, it might be said that
Union Planters did not rely on each forged loan document before advancing funds because it
advanced the money connected to each piece of collateral before it received the collateral. But the
lending relationship between the bank and Greatstone does not permit us to look at each transaction
by itself. It was a revolving line of credit, not a one-loan-at-a-time arrangement. And the very
nature of a revolving line of credit is to permit the borrower to obtain access to the funds more
promptly and, in the case of a “wet” warehouse line of credit, to obtain the funds first with the
collateral immediately to follow—effectively permitting the last loan’s collateral to back up the next
loan’s advance. It is a commonplace practice, and Continental has not argued otherwise. It also is
an efficient practice because it saves the bank from having to attend each residential house closing
before immediately releasing additional funds.
Nor does the policy by its terms preclude coverage under these circumstances. The policy
says only that the bank must rely on the forged documents in advancing funds. It does not say that
the bank’s reliance has to relate only to funds connected to a particular piece of collateral; it thus
does not exclude from coverage an entire category of revolving lines of credit—namely a “wet”
warehouse line of credit.
Nos. 05-6094/6095 Union Planters Bank v. Cont’l Cas. Co., et al. Page 5
Two rules for construing insurance contracts under Tennessee law cement this conclusion.
“To exclude coverage, exclusion clauses must be drafted in clear and unambiguous terms.”
Travelers Ins. Co. v. Aetna Cas. & Sur. Co., 491 S.W.2d 363, 367 (Tenn. 1973). And ambiguous
terms in an insurance policy must be “construed against the insurer.” Id. That this policy does not
unambiguously exclude this form of reliance (or otherwise wholly exempt from coverage this
commonplace form of residential-loan financing) and that Continental is the insurer (and drafter of
the policy to boot) both support the district court’s decision.
Once Union Planters’ permissible reliance on the revolving collateral is established, there
is little room for debate about the “continued actual physical possession” and “loss resulting directly
from” requirements of the policy. The bank possessed the collateral until each loan had been paid.
And the losses directly resulted from loans extended on the basis of a pool of forged collateral. See
White v. Methodist Hosp. South, 844 S.W.2d 642, 648 (Tenn Ct. App. 1992) (defining “proximate
cause” as “the procuring and efficient cause of the plaintiff’s damage or injury . . . indicat[ing]
nearness in causal relation” but not necessarily “the last act, the one nearest to the injury or damage,
or the sole cause”); Am. Nat’l Prop. & Gas Co. v. Gray, 803 S.W.2d 693, 695 (Tenn. Ct. App. 1990)
(noting that the definition of “direct cause” incorporates the overlapping concepts of “proximate
cause” and “efficient cause”).
Continental resists the conclusion that the losses resulted directly from the forgeries on the
ground that the real cause was Union Planters’ “commercially unreasonable” conduct, which
included the bank’s failures: to verify the information on the loans; to investigate Greatstone’s
credit; to inquire into the alleged property purchases; and to follow the procedures in its agreement
with Greatstone. See Continental Br. at 48–53; Continental Reply Br. at 24–26. The problem with
this argument, however, is that each of these allegations at most establishes negligence on Union
Planters’ part, and negligence will not suffice to defeat coverage. See First Nat’l Bank of Fort
Walton Beach v. U.S. Fid. & Guar. Co., 416 F.2d 52, 57 (5th Cir. 1969) (“Had negligence been
intended as a good defense to payment . . . it should have been set out in the agreement.”); cf.
Aschenbrenner v. U.S. Fid. & Guar. Co., 292 U.S. 80, 86 (1934). Consistent with this case law and
consistent with the terms of the policy, Continental indeed concedes that negligence is not sufficient
to defeat coverage. Continental Reply Br. at 24.
Flagstar Bank, FSB v. Federal Insurance Co., No. 05-70950, 2006 WL 3343765 (E.D. Mich.
Nov. 17, 2006), does not alter this conclusion. There, the district court held that the bank’s
acceptance of worthless collateral, not the presence of forged signatures, directly caused the losses
and thus precluded coverage. See id. at *6, *12–13. But the collateral the bank received in that case
was entirely fictitious: the named borrowers were never customers of the mortgage lender; no
permanent lender ever purchased any of the mortgage loans; and even if the loans had borne
legitimate signatures, they still would have been worthless. Here, by contrast, the named borrowers
were customers of Greatstone; permanent lenders purchased some of the loans; and if the loans had
borne legitimate signatures, they would have had value.
Continental next argues that Union Planters failed to mitigate its damages. But this is just
a variation on its theme that the bank’s alleged negligence should defeat coverage, which is not the
case under Tennessee law. Here, Greatstone actively concealed its breach from Union Planters, and
once the bank discovered the fraud it took appropriate action. Continental does not point to any
cases that limit the bank’s recovery under these circumstances, and several cases point in the
opposite direction. See Morgan, Olmstead, Kennedy & Gardner Inc. v. Schipa, 585 F. Supp. 245,
248 (S.D. N.Y. 1984) (holding that the failure to mitigate defense was “insufficient as a matter of
law” to the extent that it was “grounded upon plaintiff’s negligent conduct”); see also Willever v.
Sovereign Bank, 42 Pa. D. & C. 4th 562, 575 n.5 (Pa. Com. Pl. 1998) (rejecting defendant’s failure-
to-mitigate argument because the opportunities to mitigate were concealed from the plaintiff); Sec.
Nat. Bank v. Recreational Dimensions, Inc., 1991 Mass. App. Div. 21, 22 (“The defendants’ failure
Nos. 05-6094/6095 Union Planters Bank v. Cont’l Cas. Co., et al. Page 6
to discover the . . . breach of contract at an earlier date did not constitute a failure to mitigate
damages once the breach was discovered.”).
Continental next argues that, if Union Planters prevails, the bank should not be permitted
to recover its final $2 million in losses. This argument, however, merely reprises the reliance
argument: Because Union Planters never received any collateral for the final $2 million in advances,
the argument goes, these losses do not qualify under the policy. So long as the policy permits
coverage for a “wet” warehouse line of credit, as we conclude it does, the policy does not preclude
the bank from obtaining coverage for these last $2 million in losses.
All of this goes to show why Union Planters’ losses qualify as a matter of law under the
coverage restrictions in § E.I.3.a of its primary policy. Union Planters therefore is entitled to
summary judgment against Continental for the $24,983,371 in losses that it suffered due to
Greatstone’s fraud—less the nearly $12 million that Continental has already paid to Union Planters
for non-Greatstone-related losses.
B.
The next issue is whether the district court properly granted the excess carriers’ motions for
summary judgment rejecting Union Planters’ claims against them as a matter of law. Each of the
excess carriers’ supplemental insurance policies included a provision requiring “simultaneous
notice” of any claim made under the primary coverage policy. See JA 692 (National Union); see
also JA 696 (St. Paul), JA 980e (Twin City). The district court held that Union Planters did not
satisfy this requirement, and we agree.
The “simultaneous notice” provision of the National Union policy is representative. It reads
in relevant part:
[Union Planters] shall, as a condition precedent to the right to receive
coverage under this policy, give written notice to[] [National Union]
simultaneously with any notice given under . . . the primary policy.
JA 692 (emphasis added). Under this provision, whenever Union Planters gave Continental “any
notice” of a claim under the primary policy, it had to give National Union simultaneous, written
notice “as a condition precedent . . . to receive coverage.” Tennessee law does not give courts
latitude to excuse compliance with notice provisions in insurance policies. Pope v. Leuty & Heath,
PLLC, 87 S.W.3d 89, 94–95 (Tenn. Ct. App. 2002); see also Blackman v. U.S. Cas. Co., 103 S.W.
784, 786 (Tenn. 1906).
Viewing the facts in the light most favorable to Union Planters, it provided notice to
Continental on February 15, 2002. By its own admission, Union Planters provided written notice
to National Union in a letter dated March 12, 2002—25 days after it notified Continental. We agree
with the district court that, whatever simultaneous notice means, it does not mean a 25-day delay.
See D. Ct. Op. at 20.
Union Planters contends that we should excuse non-compliance with the notice requirement
because no one was prejudiced by the delay. In making this argument, the bank relies on Alcazar
v. Hayes, 982 S.W.2d 845, 856 (Tenn. 1998), which created an exception to the general rule that
insurance-policy notice provisions should be strictly enforced. See Blackman, 103 S.W. at 786.
Alcazar held that an insured’s failure to provide notice gives rise to a “rebuttable presumption” of
prejudice, one that may be rebutted by “competent evidence that the insurer was not prejudiced by
the insured’s delay.” 982 S.W.2d at 856.
Nos. 05-6094/6095 Union Planters Bank v. Cont’l Cas. Co., et al. Page 7
Alcazar, however, does not announce an across-the-board exception to the general
rule—either by its terms or by its rationale. The case arose in the context of an occurrence-based
policy. Such policies, the court observed, frequently amount to “contract[s] of adhesion,” and
enforcement of the rule in that setting would produce an “undeserved windfall” for insurers. Id. at
851 (internal quotation marks omitted). Consistent with this rationale, the Tennessee courts have
limited the application of this exception to occurrence-based policies. See Pope, 87 S.W.3d at 94–95
(“[O]ur Supreme Court has never applied the rationale of Alcazar to a claims-made policy.”); cf. Am.
Justice Ins. Reciprocal v. Hutchinson, 15 S.W.3d 811, 816–17 (Tenn. 2000) (applying the Alcazar
exception to cover an occurrence-based policy on the reasoning that the industry’s policies were also
contracts of adhesion).
In this instance, the contracts were entered into by sophisticated parties, and there is no
evidence that Union Planters was prevented from negotiating this provision or any other with the
excess carriers. The policies, moreover, amount either to claims-based policies (“This is a claims
reported policy,” the primary policy says, JA 51) or to quasi-claims-based policies, both of which
place a premium on notice and discovery because they “appl[y]” only “to claims reported during
the Policy Period,” JA 62 (emphasis added). In either event, they are not occurrence-based policies,
which require only the root of the claim to occur during the life of the policy.
Union Planters also has not offered a good explanation for certifying this question to the
Tennessee Supreme Court. Union Planters of course chose to bring this case in a federal rather than
a state forum in the first instance, and it did not raise the issue of certification until the federal
district court had ruled against it on this point. Nor do we face a situation in which there is an
absence of guidance from the Tennessee courts on the Alcazar question. As we have shown, the
Tennessee lower court decisions since Alcazar do not support the bank’s interpretation, the
Tennessee Supreme Court’s decisions since Alcazar imply that Alcazar did not create an across-the-
board exception to compliance with the notice requirements in an insurance policy and the
underlying rationale of Alcazar does not extend to claims-based policies. Under these
circumstances, we favor resolving this issue of Tennessee law just as the bank initially presumed
we would when it filed this action and just as it presumed the district court would when it filed its
summary judgment papers.
C.
Tennessee law permits courts to award prejudgment interest “as permitted by the statutory
and common laws of the state . . . in accordance with the principles of equity.” Tenn. Code Ann.
§ 47-14-123. While some States make such awards mandatory, see, e.g., Hi-Mill Mfg. Co. v. Aetna
Cas. & Sur. Co., 884 F. Supp. 1109, 1112 (E.D. Mich. 1995), Tennessee commits them to the
discretion of trial judges, see Myint v. Allstate Ins. Co., 970 S.W.2d 920, 927 (Tenn. 1998). The
primary insurance policy defines “loss” as the “loss of funds or property owned by [Union Planters],
but not loss of use of funds or property.” JA 655 (emphasis added). As the district court observed,
an award of prejudgment interest is one that compensates a deserving party for “loss of the use” of
its funds—precisely the sort of loss excluded by the plain language of the policy. The district court
considered this policy language, weighed the equities and refrained from awarding prejudgment
interest. Because the trial court permissibly exercised its discretion, we will not second guess its
judgment on this score.
One final point. We need not reach Union Planters’ claim for professional fees and expenses
under the policy. In view of our conclusion that the excess carriers are not liable and in view of the
fact that Union Planters’ existing losses will exhaust the limit of the Continental policy, Union
Planters could not collect any award of such expenses and fees.
Nos. 05-6094/6095 Union Planters Bank v. Cont’l Cas. Co., et al. Page 8
III.
For these reasons, we affirm.