Westfield Insurance Company v. Talmer Bancorp

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
File Name: 13a0931n.06
No. 13-1057
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
FILED
Oct 30, 2013
WESTFIELD INSURANCE COMPANY, ) DEBORAH S. HUNT, Clerk
)
Plaintiff-Appellee, )
) ON APPEAL FROM THE UNITED
v. ) STATES DISTRICT COURT FOR THE
) EASTERN DISTRICT OF MICHIGAN
TALMER BANCORP, )
)
Defendant-Appellant. )
Before: COOK, GRIFFIN, and KETHLEDGE, Circuit Judges.
COOK, Circuit Judge. Secured creditor Talmer Bancorp, Inc. (“Bancorp”) appeals the
summary judgment granted to Westfield Insurance Company (“Westfield”) on Bancorp’s claim to
insurance proceeds that Westfield paid to the property owner alone, without naming Bancorp as joint
payee. Because the property owner’s fraud voided the policy coverage, Michigan law defeats the
bank’s dependent right to be paid proceeds, and we affirm.
I.
Milan 2000 Furnishings, Ltd. (“Milan”), a furniture retailer, obtained financing from Peoples
State Bank (“Peoples”), Bancorp’s predecessor-in-interest. As part of the financing arrangement,
Peoples acquired a security interest in Milan’s real estate and business inventory at Sass Road in
Chesterfield, Michigan. Peoples further required Milan to insure this collateral. Milan purchased
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a business-property insurance policy from Westfield that identified Peoples as a mortgagee on the
Sass Road warehouse and as a loss payee on its inventory.
In March 2008, Milan claimed that burglars vandalized the warehouse and stole inventory.
During Westfield’s investigation of the claim, Nick Rafoo, Milan’s principal, told Westfield that no
party held a security interest in the stolen inventory. Westfield, suspecting fraud, requested sworn
proof-of-loss statements (“POL”). Milan submitted separate POLs for the building and the
inventory. Though the building POL identified Peoples as a mortgagee, the inventory POL did not
identify the bank as a loss payee.
Westfield admits that a search of Milan’s insurance applications showed Peoples as loss
payee for the inventory and mortgagee for the warehouse. In January 2009, Westfield issued a check
to cover the damage to the real property jointly payable to Milan and Peoples. Westfield later
concluded its investigation and issued Milan a check to cover the stolen inventory without listing
Peoples as a joint payee.
After Peoples went into receivership, Bancorp—then named First Michigan Bank —acquired
its assets. It was Peoples’s successor, Bancorp, that raised the overlooked security interest in the
Milan inventory with Westfield, asking Westfield to reissue the check with it as a joint payee.
Westfield refused and filed a declaratory judgment action naming Bancorp, Rafoo, and Milan. With
respect to Bancorp, Westfield asked for a judgment declaring that Westfield owed no insurance
proceeds. Bancorp countered, seeking a declaration that Westfield owed Bancorp under the policy.
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As to Milan and Rafoo, Westfield asserted claims for breach of contract, fraud, unjust enrichment,
and constructive trust in connection with Milan’s fraudulent concealment of Peoples’ security
interest in the inventory.
On cross-motions for summary judgment filed by Westfield and Bancorp, the district court
first responded to Westfield’s argument that Bancorp lacked standing by concluding that Bancorp
properly acquired Peoples’ third-party beneficiary rights under the policy. Yet, the court went on
to rule that Westfield owed Bancorp nothing because Westfield could justifiably rely on Milan’s
fraudulent representation about the bank’s insurable security interest. With respect to Westfield’s
claims against Milan and Rafoo, the district court entered a consent judgment deeming the insurance
policy void and entering judgment against Milan for the amount of the insurance proceeds that
Westfield paid. Bancorp now appeals.
II.
We review the grant of summary judgment de novo, Kalich v. AT&T Mobility, LLC, 679
F.3d 464, 469 (6th Cir. 2012), affirming on any basis supported by the record, Angel v. Kentucky,
314 F.3d 262, 264 (6th Cir. 2002). Summary judgment is proper “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). The court must draw all reasonable inferences from the record in the
light most favorable to the non-moving party, and the court may only grant summary judgment
“[w]here the record taken as a whole could not lead a rational trier of fact to find for the non-moving
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party.” Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587–88 (1986)
(citation omitted).
Though Westfield vouches in its appellate briefing for the district court’s rationale, we affirm
on the alternative basis Westfield pressed—that by falsely eliding the bank’s insurable interest on
the sworn POL, policyholder Milan voided coverage under the policy’s terms.
Milan’s admitted fraud forecloses Bancorp’s right to recovery under Michigan law because,
unlike mortgagees, the policy gives loss payees such as Peoples no independent right of recovery
if the insured breaches the policy’s terms. (Compare R. 1-2, Policy at 61, with id. at 45.) Instead,
under the policy’s loss payable provision, “the lienholder is simply an appointee to receive the
insurance fund to the extent of its interest, and . . . a breach of the conditions of the policy by the
insured w[ill] prevent recovery by the lienholder.” Foremost Ins. Co. v. Allstate Ins. Co., 486
N.W.2d 600, 602 (Mich. 1992); see also Gallant v. Lake States Mut. Ins. Co., 369 N.W.2d 205, 207
(Mich. Ct. App. 1985) (explaining that, under this type of loss payable provision, “[i]f the policy is
not collectible by the insured, . . . the loss payee also cannot recover”). Accordingly, because the
policy grants Peoples no independent right of recovery, Milan’s breach voiding the policy forecloses
any recovery by Bancorp.
Bancorp does not dispute that Milan breached the conditions of the policy by fraudulently
concealing the bank’s insurable security interest. The policy provides that it “is void if [the insured]
. . . at any time, intentionally conceal[s] or misrepresent[s] a material fact concerning . . . [its]
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interest in the Covered Property; or . . . [a] claim under this policy.” The policy language thus
encompasses Milan’s fraudulent completion of the POL under oath. Under Michigan law, an
insured’s false swearing on a POL may bar recovery if the insurer establishes four elements: (1) the
insured made a misrepresentation; (2) the misrepresentation was material; (3) the insured knew the
representation was false or made it recklessly; and (4) the insured made the representation with the
intention of deceiving the insurer. Rayis v. Shelby Mut. Ins. Co., 264 N.W.2d 5, 8 (Mich. Ct. App.
1978); see also J.C. Wyckhoff & Assocs. v. Standard Fire Ins. Co., 936 F.2d 1474, 1484 (6th Cir.
1991) (noting that the insurer need not show that it relied on the misrepresentations to assert a valid
defense of false swearing). Westfield satisfies all four elements because Milan admitted in the
consent judgment that “despite [Milan’s] knowledge of [Peoples’s] security interest . . . , it failed
to identify [Peoples] on the [POL] as a loss payee,” and that “[Milan] intentionally concealed and/or
misrepresented [Peoples’s] interest in the business personal property proceeds on the [POL].”
Bancorp has also admitted the materiality of this misrepresentation.
Still, Bancorp balks at the consent judgment—entered only between Westfield and
Milan—serving as the vehicle for voiding Milan’s (and thereby Bancorp’s) right to coverage.
[(Appellant Br. at 2, 34.)] Yet given that Bancorp’s coverage rights “can only be derived” from
Milan’s coverage, Van Buren v. St. Joseph Cnty. Vill. Fire Ins. Co., 28 Mich. 398, 405 (1874), the
fraud admissions in the consent judgment extinguish Bancorp’s derivative coverage. Moreover,
despite its status as a party to the case, Bancorp failed to object, appeal, or set aside the consent
judgment. See Firefighters Local Union No. 1784 v. Stotts, 467 U.S. 561, 590-91 (1984) (Stevens,
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J., concurring) (explaining that a consent judgment constitutes “a final judgment binding upon those
who had notice and opportunity to object” and that consent judgments, “like any other final
judgment of a district court, [are] immediately appealable.”). In sum, Bancorp may not recover any
insurance proceeds under the policy due to Milan’s fraud.
III.
For these reasons, we AFFIRM.
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