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COMMERCIAL FIN. SERV. v. GREAT AMERICAN INSURANCE COMPANY

August 5, 2005.

COMMERCIAL FINANCIAL SERVICES, INC., by Lloyd T. Whitaker, Trustee of the ABS Liquidating Trust, Representative and Attorney-in-Fact for Commercial Financial Services, Inc., Plaintiff,
v.
GREAT AMERICAN INSURANCE COMPANY OF NEW YORK, OHIO CASUALTY INSURANCE COMPANY, AND WESTCHESTER FIRE INSURANCE COMPANY, Defendants.



The opinion of the court was delivered by: ROBERT PATTERSON, Senior District Judge

OPINION AND ORDER

Defendants Great American Insurance Company of New York ("Great American") and Ohio Casualty Insurance Company ("Ohio Casualty"), joined by Westchester Fire Insurance Company ("Westchester Fire"), issuers of umbrella and excess liability insurance coverage to Plaintiff, Commercial Financial Services, Inc. ("CFS"), move to dismiss the First Amended Complaint ("Am. Complaint"), pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. For the reasons that follow, this motion is denied.

BACKGROUND

  The Am. Complaint, which was filed April 5, 2004, sets forth three causes of action: (1) breach of contract, (2) declaratory judgment, and (3) bad faith failure and refusal to pay. (Am. Compl. ¶¶ 55-71.) This action arises out of the failure of Defendants Great American and Westchester Fire to pay certain insurance claims, which CFS alleges were covered under the umbrella and excess insurance policies these carriers issued to CFS. (Id. ¶¶ 1, 3.) Defendants Great American and Ohio Casualty move to dismiss pursuant to Rule 12(b)(6) on the ground that the CFS "has failed to state a cause of action against [them] that can be supported in good faith under the law or facts." (Great American Mem. ("GA Mem.") at 1.) Defendant Westchester Fire moves to dismiss the Am. Complaint, pursuant to Rule 12(b)(6), "because CFS has failed to allege any cause of action under which relief may be granted in its favor." (Westchester Fire Mem. at 10.)

  A. The Amended Complaint*fn1

  1. Parties

  Plaintiff CFS is a corporation organized under the laws of the State of Oklahoma, with its principal place of business in Tulsa, Oklahoma. (Am. Compl. ¶ 9.) On December 11, 1998, CFS filed for protection in the United States Bankruptcy Court for the Northern District of Oklahoma and became a debtor and debtor-in-possession under the United States Bankruptcy Code. (Id.) Pursuant to the September 14, 2001 Order of the United States Bankruptcy Court for the Northern District of Oklahoma, which confirmed CFS's Second Amended Plan of Orderly Liquidation (the "Plan"), Lloyd T. Whitaker, a citizen of the State of Georgia, is the duly-appointed sole Trustee of the ABS Liquidating Trust, a trust established pursuant to that Plan. (Id. ¶ 10.) Prior to filing for bankruptcy protection, CFS was in the business of purchasing and selling non-performing loans and, at its peak, was the largest purchaser and servicer of defaulted credit card receivables in the world. (Id. ¶¶ 2, 21.)

  Defendant Great American is a New York corporation, has its principal place of business in Cincinnati, Ohio, and resides in New York.*fn2 (Id. ¶ 12.) Defendant Ohio Casualty, which is named as a Defendant because, "upon information and belief," it purchased the commercial lines of Great American in 1998, including the policy at issue in this matter, is an Ohio corporation, which resides in Ohio and has its principal place of business in Fairfield, Ohio. (Id. ¶¶ 8, 14.) Defendant Westchester Fire is a New York corporation, which resides in New York and has its principal place of business in Philadelphia, Pennsylvania. (Id. ¶ 16.)

  2. Facts

  CFS obtained a number of insurance policies to protect itself from the risks associated with its business through a local Tulsa insurance agency, Chandler, Frates & Reitz, now known as CFR, Inc. ("Chandler Frates"). (Id. ¶ 22.) In the fall of 1995, Chandler Frates first obtained primary coverage for CFS from American International Specialty Lines Insurance Company ("AISLIC") in the form of a policy of Bankers Professional Liability Insurance (the "BPL Policy"). (Id. ¶¶ 3, 23.) On October 4, 1997, AISLIC issued the BPL Policy number 244-04-01, and on October 4, 1998, issued a renewal of the BPL Policy number 244-34-23, which had an aggregate coverage limit of $5 million. (Id. ¶ 26.) The BPL Policy covered CFS for claims arising out of its rendering or failure to render professional services, which, as defined by the BPL Policy, included "[t]he servicing of any loan, lease or extension of credit." (BPL Policy No. 244-34-23, Endorsement 1, attached as Ex. 12 to Pl.'s App. Vol. II, submitted Jan. 21, 2003 ("Pl.'s App. Vol. II").)

  Great American issued CFS an umbrella insurance policy, number UMB 8-52-26-68-05, with a $50 million aggregate limit for the policy period from March 5, 1998 to March 5, 1999, which did not list the BPL Policy as underlying insurance. (Am. Compl. ¶ 27.) In May of 1998, Great American "reissued" policy number UMB 8-52-26-68-06 to CFS, with a policy period from May 14, 1998 to March 5, 1999 (the "Reissued Policy"), which stated its limits of "$50,000,000 Each Occurrence, $50,000,000 General Aggregate (Where Applicable) and $50,000,000 Products-Completed Operations Aggregate." (Id. ¶ 28.) "On information and belief," Chandler Frates stated that the reason for the Reissued Policy was to reflect the addition of CFS Kids, a daycare center, and CFS Camp to the policy. (Id.) This Reissued Policy provides that in the event of exhaustion, the policy will continue in force as "underlying insurance but for no broader coverage than is available under this policy." (Id. ¶ 29.)

  The Great American policy issued for the March 5, 1998 to March 5, 1999 period limited "underlying insurance" to policies "shown in the Declarations or endorsed to this policy," while the Reissued Policy defines "Underlying Insurance" as "the insurance coverage provided under the policies shown in the Schedule of Underlying Insurance, or any additional policies agreed to by us in writing. . . ."*fn3 (Id. ¶ 30 (emphasis in original and internal quotation marks omitted).) The Great American policies expressly exclude liability for any claims

  arising out of or related to any actual or alleged act, error, omission, mistake or breach of duty, by or on behalf of any "Insured" in the performing or failure to perform banking or fiduciary services, or in giving financial, economic or investment advice, or out of the rendering of or failure to render any investment, advisory or management services. . . . (Pl.'s App. Vol. II Ex. 15, Reissued Policy, Financial Institutions Limitation ¶ 3.)

  Also, in the section "Professional Liability Coverage-Following Form," the following is expressly excluded:
Any liability for, caused by, arising out of, or in connection with the rendering of or failure to render any professional service, except to the extent that such insurance is provided by a policy listed in the Schedule of Underlying Insurance, and for no broader coverage than is provided by such policy.
(Pl.'s App. Vol. II Ex. 15, Reissued Policy, Professional Liability Coverage-Following Form (emphasis added).) Great American's Reissued Policy does not include the BPL Policy on its Schedule of Underlying Insurance. (See Pl.s' App. Vol. II Ex. 15, Reissued Policy, Schedule A-Schedule of Underlying Insurance.)

  Westchester Fire issued an excess and umbrella insurance policy, number HXA-645856-0 ("Westchester Fire Policy"), with a policy period April 7, 1998 to March 5, 1999, which defines "underlying insurance . . . as liability as provided by Great American Insurance Company." (Id. ¶ 35; Pl.'s App. Vol. II Ex. 13, Westchester Fire Policy.) The Westchester Fire Policy "follows form" to the Great American policies and "provides stated limits of $50,000,000 for Each Occurrence and $50,000,000 Aggregate (Where Applicable) excess of the underlying Great American $50 million limits." (Am. Compl. ¶ 35.)

  On Wednesday, December 9, 1998, an employee of Chandler Frates sent a fax to CFS ("December fax"), with the subject line "RE: Excess Umbrella Policy #HXA-645856-0," which is the Westchester Fire Policy, and attached "a copy of the excess policy" and a document bearing the title, "Commercial Financial Services, Inc. Schedule of Underlying Policies" (the "Chandler Frates Schedule"). (Id. ¶ 31; Pl.'s App. Vol. II Ex. 16.) The Chandler Frates Schedule lists the BPL Policy for October 4, 1997-1998 and October 4, 1998-1999 under this title, along with other policies. (Am. Compl. ¶ 31; Pl.'s App. Vol. II. Ex. 16.) The fax, in relevant part, states:
I've attached a copy of the excess policy for you. I know you probably can't read it very well so I'll put the original in the mail to you. I've also attached a copy of the information I came up with for the Umbrella and Excess Umbrella carriers regarding underlying policy information. This is not a complete list of all of your policies-only the liability policies that the Umbrella's [sic] would go over."
(Pl.'s App. Vol. II Ex. 16) The December fax also includes the address for Westchester Fire. (Id.) The December fax and the Chandler Frates Schedule were maintained in CFS's records in a binder with the original of the Westchester Fire policy. (Am. Compl. ¶ 31.)

  Earlier in December 1998, Nations Bank, now known as Bank of America, filed a lawsuit against CFS, and on December 9, 1998, a North Carolina state court issued an ex parte temporary restraining order in favor of Bank of America with respect to approximately $66 million in CFS assets. (Id. ¶ 37.) In addition, on December 10, 1998, the holders of CFS Senior Notes declared their notes to be in default, accelerated their debt, and declared their intention to file an involuntary bankruptcy petition against CFS. (Id.) On Friday, December 11, 1998, CFS filed for protection in the United States Bankruptcy Court for the Northern District of Oklahoma. (Id. ¶ 2.)

  On December 14, 1998, Cooney, Rikard & Curtin, Inc. ("CRC"), the wholesale agency through which Chandler Frates had obtained the Great American policies, "on information and belief" faxed a letter and forwarded a copy of the Chandler Frates Schedule to Great American.*fn4 (Id. ¶ 32.) The Amended Complaint alleges that the fax lines on the copy of the Chandler Frates Schedule indicate that Chandler Frates had sent the schedule to CRC on December 4, 1998. (Id.) The December 14, 1998 letter states:
Attached please find a copy of correct underlying information. Other than changing policy numbers and dates, I really don't see anything except the CGL on Security Guards and Bankers Professional Liability. I assume you can not include the Bankers Professional but what about the security guard. Please let me know.
(Id. ¶ 32; Pl.'s App. Vol. II Ex. 17.) The response, if any, from Great American is not known. (Am. Compl. ¶ 32.)
  As to the relationship between Great American and Chandler Frates, the Am. Complaint alleges:
On information and belief, [Chandler Frates] was permitted to act as Great American's agent. Notwithstanding any language in its formal contract documents to the contrary, [Chandler Frates] had actual and apparent authority to bind Great American, agree to a schedule of underlying insurance, and forward such information to CFS. Great American did not communicate directly with CFS on insurance issues, but allowed [Chandler Frates] to countersign policies and to communicate all information regarding Great American's insurance to CFS. [Chandler Frates'] Chairman Jack H. Allen, Jr. signed numerous binders and other policy documents as Great American's "Authorized Representative." Upon information and belief, an affiliated Great American company website identifies [Chandler Frates] as one of its Tulsa agents.*fn5
(Id. ¶ 33.)

  The Am. Complaint alleges that the "Great American Reissued Policy, by virtue of the December 1998 fax and [Chandler Frates] Schedule, included the BPL Policy as `underlying insurance' at the time when claims covered by the BPL Policy were made ...


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