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Jurupa Valley Spectrum, LLC v. National Indemnity Co.

June 29, 2007


The opinion of the court was delivered by: Denise Cote, District Judge


This Opinion addresses the issue of whether a beneficiary of surety bonds may bring a cause of action for bond payments against the reinsurer of the bond issuer. Finding that the plaintiff has failed to plead a direct cause of action to sue the reinsurer either pursuant to the reinsurance agreement or under New York Ins. Law §§ 1115 and 4118 ("Sections 1115 and 4118"), the defendants' motion to dismiss for failure to state a claim is granted.

Plaintiff Jurupa Valley Spectrum, LLC ("Jurupa") holds surety bonds issued by Frontier Insurance Company ("Frontier"), an insolvent entity in rehabilitation under the direction of the New York Insurance Department, Liquidation Bureau ("Department"). The defendants are National Indemnity Company ("NICO"), Frontier's reinsurer, and National Liability & Fire Insurance Company ("National Liability"), NICO's claims administrator. Plaintiff claims that it has a cause of action against NICO without joining Frontier, against whom all suits are enjoined, on three grounds: (1) the reinsurance agreement between Frontier and NICO both alone and in conjunction with Sections 1115 and 4118, (2) Sections 1115 and 4118 alone, and (3) NICO's assumption of Frontier's surety bond obligations. Jurupa's fourth and final claim is that National Liability intentionally interfered with NICO's performance of its contractual obligations. Jurupa seeks damages, interest, expenses, and fees, including reasonable attorney fees.

NICO and National Liability move to dismiss pursuant to Rule 12(b)(6), Fed. R. Civ. P., for failure to state a claim upon which relief may be granted and pursuant to Rule 12(b)(7) for failure to name Frontier as an indispensable party. They argue that 1) Jurupa lacks standing to bring a cause of action for breach of the reinsurance agreement; 2) NICO discharged its reinsurance obligations for Frontier surety claims; 3) Jurupa has no statutory cause of action under Sections 1115 and 4118, 4) National Liability cannot interfere with Jurupa's contract rights when no such rights exist; and 5) Frontier is an indispensable party to the action. For the reasons set forth below, it is unnecessary to reach this last issue.


The following facts are undisputed or taken from the complaint and the documents attached to it, unless otherwise noted.*fn1

A. The Construction Contract and Surety Bonds

Jurupa entered into a construction contract with Aaron Management, Inc. ("Aaron") on February 1, 1999, for Aaron to build a movie theater. The parties secured the contract with two surety bonds -- a "performance bond" and a "payment bond."

On March 17, Frontier executed the bonds, each in the amount of $6,285,000, with Aaron as principal and Jurupa as obligee. The surety bonds stated that if Aaron failed to perform according to the construction contract, Frontier would become liable for the immediate payment to Jurupa of all amounts due or to become due under the construction contract.

Aaron defaulted under the construction contract on August 6. On January 26, 2000, the plaintiff notified Frontier by letter of Aaron's defaults and demanded immediate payment of all money that remained due under the construction contract. Frontier has not made any payment to date. Jurupa sued Aaron in California Superior Court and obtained a default judgment on February 15, 2002. Aaron has not paid the judgment due to a lack of funds. On March 2, Jurupa sent Aaron a letter notifying it that the construction contract was formally terminated due to Aaron's lack of performance.

B. Reinsurance Agreement and Endorsement No. 1

Over a year after Frontier issued bonds protecting Jurupa, and months after Aaron defaulted on the construction contract, Frontier obtained reinsurance from NICO. On June 6, 2000, the U.S. Treasury Department reported that Frontier lost its eligibility to provide surety bonds. Thereafter, NICO and Frontier entered into a $490 million Aggregate Reinsurance Agreement ("Reinsurance Agreement"), signed on September 27, 2000, and effective as of July 1, 2000. Article 1 of the Reinsurance Agreement provided that NICO, the reinsurer, would pay policyholders and other claimants on "Covered Liabilities," defined as surety bonds issued by Frontier on or before December 31, 1999,*fn2 through a claims administrator.

Reinsurer, through the Claims Administrator, shall pay on behalf of the Reinsured any and all Ultimate Net Loss in relation to Covered Liabilities subject to the terms, conditions, exclusions and Aggregate Limit stated in this Reinsurance. . . . [T]he parties to this Reinsurance intend that Reinsurer, through the Claims Administrator, shall pay all amounts of Ultimate Net Loss due Insureds and other persons as and when due directly on behalf of the Reinsured in accordance with Article 16. (Emphasis supplied.)*fn3 In the event of Frontier's insolvency, Article 12 of the Reinsurance Agreement provided that the reinsurance under this Contract shall be payable directly by the Reinsurer to the company or to its liquidator, receiver or statutory successor, except as provided by Section 4118(a) of the New York Insurance Law or except (1) where the Reinsurer with the consent of the direct insured or insureds has assumed such policy obligations of the company as direct obligations of the Reinsurer to the payees under such policies and in substitution for the obligations of the company to such payees. (Emphasis supplied.) Article 14 of the Reinsurance Agreement explicitly refrained, however, from creating third party rights for parties holding Frontier-issued surety bonds.

Nothing in this Reinsurance, express or implied, is intended, or shall be construed to confer upon or give to any person, firm or corporation, (other than the parties hereto and their permitted assigns or successors) any rights or remedies under or by reason of this Reinsurance. On January 5, 2001, NICO and Frontier entered into Endorsement No. 1 to the Reinsurance Agreement ("Endorsement No. 1"), which amended the earlier agreement by providing that NICO would reinsure "any subject surety bond in-force [sic] as of December 31, 2000," regardless of when the loss under such bonds was "deemed to have occurred, been reported or discovered." Endorsement No. 1 further amended the Reinsurance Agreement by obligating NICO to reimburse Frontier for the total amount of "Covered Liabilities" remaining after reduction by other reinsurance.

C. Frontier's Financial Deterioration and the Administration Agreement

On February 13, 2001, a New York State Insurance Department Examiner issued a "Report on Examination of the Frontier Insurance Company as of December 31, 1999" ("Report"). This Report found that on December 31, 1999, the company's ...

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