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Mariah Re Ltd. v. American Family Mutual Ins. Co.

United States District Court, S.D. New York

September 30, 2014

MARIAH RE LTD., Plaintiff,

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For Mariah, Plaintiff Jonathan D. Cogan and Megha J. Charalambides, Kobre & Kim LLP, New York, NY.

For American Family, Defendant: Robert A. Kole, David S. Douglas, Jean-Paul Jaillet, and Jessica F. Pizzutelli, Choate Hall & Stewart LLP, Boston, MA.

For AIR and PCS, Defendants: Joel M. Cohen and Matthew B. Rowland, Davis Polk & Wardwell LLP, New York, NY.

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Opinion and Order

RICHARD J. SULLIVAN, United States District Judge.

Plaintiff Mariah Re Ltd. (" Mariah" ) -- a special purpose entity designed to provide reinsurance for severe weather events -- brings this action against Defendants American Family Mutual Insurance Co. (" American Family" ), ISO Services, Inc. (doing business as Property Claim Service, hereafter referred to as " PCS" ), and AIR Worldwide Corporation (" AIR" ) for breach of contract, breach of the implied covenant of good faith and fair dealing, unjust enrichment, conversion, tortious interference with contract, and declaratory judgment, in connection with losses sustained as a result of a storm that took place in the Midwest in April 2011. Now before the Court are Defendants' motions to dismiss pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. For the reasons set forth below, the Court grants Defendants' motions in their entirety.

I. Background

A. Facts

American Family is a mutual insurance company that, among other things, offers insurance coverage for its policyholders who " suffer losses resulting from severe weather events." (AC ¶ ¶ 1, 12.)[1] Mariah, a so-called " special purpose vehicle," was " established for the particular purpose of providing reinsurance ( i.e., insurance on insurance) to American Family for certain losses . . . [suffered] as a result of severe weather events." ( Id. ¶ 2.) In general terms, a special purpose vehicle (here, Mariah):

underwrites reinsurance upon payment of a premium by a ceding company [here, American Family]. Investors, in turn, pay funds into the [special purpose vehicle] . . . and the funds are then deposited into a trust. . . . These funds will be maintained by the trust for purposes of investment over the designated risk period. This principal is connected to a trigger event, the occurrence of which leads to indemnification from the trust and [special purpose vehicle] structure. Simply, an investor's return on investment depends on the occurrence or non-occurrence of the event specified within the risk period covered by the catastrophe bond. In the event a catastrophe does not occur, then the bondholder receives his principal and interest earned over the course of the risk period. Likewise, should a catastrophe occur within the risk period, the bondholders will indemnify the insurance company from the principal deposited to cover the loss insured against.

Todd V. McMillan, Securitization and the Catastrophe Bond: A Transactional Integration of Industries Through a Capacity-Enhancing Product of Risk Management, 8 Conn. Ins. L.J. 131, 140-41 (2001/2002).

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In order to collateralize and fund its reinsurance obligations to American Family, Mariah offered notes to investors and raised a total of $100 million for its principal. ( See AC ¶ ¶ 5, 15, 88, 109; see also Declaration of Jonathan D. Cogan, dated December 27, 2013, Doc. No. 33 (" Cogan Decl." ) Ex. A (" Offering Circular" ).)[2] Because Mariah's reinsurance obligations were tied to weather-related losses, the profitability of Mariah's investment depended on the occurrence or non-occurrence of certain severe weather events, and the way those events were reported. ( See AC ¶ ¶ 15-17.) Mariah's own prospectus readily acknowledged that " [i]nvesting in [these] notes is speculative and involves a high degree of risk," and further warned potential investors that " [t]he notes are . . . without recourse to [American Family] or any of its affiliates." (Offering Circular at 1.)

1. The Reinsurance Scheme

Mariah separately contracted with American Family, PCS, AIR, Deutsche Bank Trust Company Americas (" DB Americas" ), and Deutsche Bank AG (" DB AG," and together with DB Americas, the " Banks" ), with each playing a different role in the reinsurance scheme (the " Reinsurance Scheme" ). (AC ¶ 17.) The Reinsurance Scheme is set forth in five documents, all dated November 15, 2010: (1) the Catastrophe Excess of Loss Reinsurance Agreement (the " Reinsurance Agreement" ), (2) the PCS License Agreement (the " PCS Agreement" ), (3) the Calculation Agent Agreement (the " AIR Agreement" ), (4) the Reinsurance Trust Agreement, and (5) the Indenture.[3] Because this dispute largely concerns the contracts that established the Reinsurance Scheme, the Court briefly provides an overview of the relevant agreements and their terminology before turning to the facts that give rise to the instant case.

Pursuant to the Reinsurance Agreement between Mariah and American Family, Mariah agreed to make reinsurance payments of up to $100 million to American Family in the event that severe weather events caused a contractually-prescribed amount of loss as computed by a particular set of formulas. ( Id. ¶ ¶ 15, 17.) Crucial to this dispute, Mariah's reinsurance obligations could increase -- though never exceeding $100 million -- if weather damage occurred in metropolitan areas, as opposed to more rural ones. ( See id. ¶ ¶ 28-31.) This distinction is " presumably to account for the higher level of damage and loss that would be sustained if storms impacted

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more heavily-developed and populated areas." ( Id. ¶ 30.)

Pursuant to the PCS Agreement, Mariah contracted with PCS -- a reporting agency that " performs a variety of services of interest to the property/casualty industry, principally relating to catastrophes affecting the industry" (PCS Agreement at C-1) -- to obtain a license to gain access to PCS's proprietary data. PCS was responsible for issuing Catastrophe Bulletins, which are reports that provide basic information about weather events and estimate corresponding weather-related losses on a state-by-state basis. ( See AC ¶ ¶ 18-20.)

As set forth in the AIR Agreement, Mariah retained AIR to calculate the amount that Mariah owed to American Family in reinsurance proceeds. ( See AC ¶ ¶ 26-34.) As part of the calculation process, AIR agreed to review the data provided by PCS and determine, on a state-by-state basis, whether any weather-related damage occurred in a " metro area." ( Id.) If so, the estimated loss for that state would be multiplied by a contractually-specified payout factor, known as the metro payout factor. ( Id.) Conversely, if AIR determined that weather-related damage in a certain state did not impact a metro area, the estimated loss for that state would be multiplied by a lower payout factor, known as the non-metro payout factor. ( Id.) Simply put, Mariah's liability would increase if the estimated loss in a given state was multiplied by the higher metro payout factor, as opposed to the lower non-metro payout factor. ( See id.) AIR agreed to set out its conclusion, including the metro versus non-metro designation, in a document referred to as an Event Report. ( See AIR Agreement at 3-4.)

Mariah entered into a Reinsurance Trust Agreement with American Family and DB Americas, and an Indenture with the Banks. (AC ¶ 17; Kole Decl. Ex. B.) Mariah established a Collateral Account for the deposit of the noteholders' principal and maintained a separate Reinsurance Trust Account from which payments would be made in the event that storm losses triggered liability under the Reinsurance Scheme. ( See Reinsurance Agreement at 24-25.) Along with the Reinsurance Agreement, the Reinsurance Trust Agreement and the Indenture govern funding of the Reinsurance Trust Account from the Collateral Account. ( See id.)

2. Catastrophe 42

Mariah alleges that from April 3 to 5, 2011, a storm hit the United States, striking a number of states including Kansas, a state covered by the Reinsurance Agreement. ( See AC ¶ ¶ 35-36.) On April 5, 2011, PCS posted a Catastrophe Bulletin (the " Original Bulletin" ) on its limited-access website, ISOnet PCS. ( See id. ¶ ¶ 25, 37-38.) The three-page Original Bulletin designated the storm as Catastrophe Serial No. 42 (" Catastrophe 42" ) and listed Kansas as one of the states impacted. ( See id. ¶ ¶ 37-38; id. Ex. 1.) Although the Original Bulletin did not provide specific geographic details about the storm's impact in Kansas, such as the cities or counties affected, the Original Bulletin did note that Catastrophe 42 " travers[ed] the Plains [and] sparked thunderstorms that pounded a swath from Kansas to Wisconsin . . . with howling winds and hail as large as baseballs." ( Id. Ex. 1) The Original Bulletin further indicated that " [t]his severe weather outbreak ranks as one of the top outbreaks of all-time in terms of the shear [ sic ] number of severe weather reports." ( Id.)

Thereafter, in connection with Catastrophe 42, PCS successively published three loss estimates before issuing, on November 2, 2011, the " Final Estimate of Insured Property Damage" report (the " Final Estimate" ).

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( Id. ¶ ¶ 39-42.) In the Final Estimate, PCS estimated that Kansans suffered $710 million in Catastrophe 42-related damage, and stated that " [t]his estimate is . . . fully developed [and n]o further surveys will be conducted." ( Id. ¶ 43.)

On the very next day, November 3, 2011, PCS provided additional " detailed information regarding the purported impact of [Catastrophe 42] within Kansas." ( Id. ¶ ¶ 54-55.) PCS posted this information on ISOnet in what amounted to a two-page insertion to the three-page Original Bulletin. ( See id ; id. Ex. 5.) This insertion consisted of a three paragraph summary of Catastrophe 42 in Kansas ( e.g., " Severe storms brought hail up to hen egg size and 70 mph winds to parts of East-Central Kansas." ), and a table listing cities and towns in Kansas ( e.g., Delia, Leavenworth, and Overland Park), their respective populations, the type of weather event that impacted that location ( e.g., hail or wind), and the severity of the weather event ( e.g., diameter of hailstones and speed of wind gusts). ( Id. Ex. 5.) Thus, the combination of the Original Bulletin's content plus the information in the Kansas-specific insertion was the equivalent of a five-page document when printed in hard copy (the " Revised Original Bulletin" ). ( See id.) The content of the Original Bulletin was otherwise unchanged. ( Id.) According to Mariah, unlike the practice with prior Catastrophe Bulletins, PCS did not notify its ISOnet subscribers via email about the issuance of the Revised Original Bulletin. ( See id. ¶ ¶ 60, 62-63.)

On November 23, 2011, AIR issued an Event Report (the " November 23, 2011 Event Repot" ) using the data contained in the Revised Original Bulletin. ( Id. ¶ 75.) Because some of the locations listed in the Revised Original Bulletin were in metro areas in Kansas, AIR classified Kansas's $710 million in losses as metro losses and made its calculations using the higher metro payout factor. ( Id. ¶ ¶ 81-85.) According to the Amended Complaint, if PCS had not issued the Revised Original Bulletin, AIR would have classified these same Kansas losses as non-metro losses, and applied the lower non-metro payout factor in its calculations. ( See id.) Ultimately, AIR considered the Kansas losses and the losses in other states and determined that Mariah was responsible for the maximum $100 million in reinsurance funds, which resulted in a 100% loss of Mariah's principal, effectively wiping out the vehicle. ( See id. ¶ ¶ 75-88; see also id. Ex. 5.)

On January 3, 2012, American Family sent a letter to DB Americas, requesting that DB Americas " wire transfer [$100 million in reinsurance funds] from the Reinsurance Trust Account to American Family's account . . . ." ( Id. ¶ 109.) In the letter, American Family noted that Mariah's investors objected to AIR's $100 million calculation and its use of the Revised Original Bulletin. ( See Cogan Decl. Ex. K at 1-2.) Nonetheless, the letter further stated that there was " no basis for withholding, delaying or otherwise impeding the release of [$100 million] from the Reinsurance Trust Account to American Family." ( Id. at 1; see also AC ¶ 109.) After DB Americas transferred the funds, American Family terminated the Reinsurance Agreement with Mariah. ( See Cogan Decl. Ex. L.) American Family has rejected Mariah's request to return the funds. ( See AC ¶ ¶ 7, 112, 125.)

B. Procedural History

Mariah is in voluntary liquidation. Accordingly, Mariah brings this case by and through Geoffrey Varga and Jess Shakespeare, who were appointed as the Liquidators of Mariah on May 1, 2013. (See AC ¶ 11.) Mariah commenced this action on July 3, 2013 by filing a complaint. (Doc. No. 1.)

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Thereafter, on October 18, 2013, Mariah filed the Amended Complaint asserting breach of the PCS and AIR Agreements, breach of the implied covenant of good faith and fair dealing in the PCS, AIR, and Reinsurance Agreements, unjust enrichment, conversion, tortious interference with the Indenture, and declaratory judgment. Mariah seeks the withdrawal of the Revised Original Bulletin, the issuance of an Event Report that does not consider the Revised Original Bulletin, the return of the amount of principal deposited in Mariah's name under the Reinsurance Trust Agreement, monetary damages, and attorneys' fees. On November 20, 2013, Defendants filed motions to dismiss on the grounds that Mariah had failed to state claims on its various causes of action. (Doc. Nos. 23, 26.) The motions were fully briefed on January 14, 2014.

II. Legal Standard

To survive a motion to dismiss pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, a complaint must " provide the grounds upon which [the] claim rests." ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007); see also Fed.R.Civ.P. 8(a)(2) (" A pleading that states a claim for relief must contain . . . a short and plain statement of the claim showing that the pleader is entitled to relief . . . ." ). Plaintiffs must allege " enough facts to state a claim to relief that is plausible on its face." Bell A. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). " A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). In reviewing a Rule 12(b)(6) motion to dismiss, a court must accept as true all factual allegations in the complaint and draw all reasonable inferences in favor of the plaintiff. ATSI Commc'ns, 493 F.3d at 98. However, that tenet " is inapplicable to legal conclusions." Iqbal, 556 U.S. at 678. Thus, a pleading that offers only " labels and conclusions" or " a formulaic recitation of the elements of a cause of action will not do." Twombly, 550 U.S. at 555. If the plaintiff " ha[s] not nudged [its] claims across the line from conceivable to plausible, [its] complaint must be dismissed." Id., 550 U.S. at 570.

III. Discussion

The parties appear to agree that New York law should apply. The applicable contracts contain choice-of-law clauses that designate New York law ( see AF Mem. at 9 n.5; PCS-AIR Mem. at 11 n.5), and the parties rely solely on New York law in their papers as to all causes of action. See Network Enters., Inc. v. Reality Racing, Inc., No. 09-cv-4664 (RJS), 2010 WL 3529237, at *4 n.6 (S.D.N.Y. Aug. 24, 2010) (" Where the parties' briefs assume that New York law controls, such implied consent is sufficient to establish choice of law." ) Accordingly, the Court will apply New York law with respect to all of Mariah's claims.

A. Contract-Based Claims

Mariah asserts a variety of theories in support of its claims for breach of contract and breach of the implied covenant of good faith and fair dealing. Specifically, Mariah alleges that (1) PCS breached three different provisions of the PCS Agreement and the implied covenant of good faith and fair dealing incorporated therein ( see AC ¶ ¶ 89-98); (2) AIR breached section 3(a)(i) of the AIR Agreement and the implied covenant of good faith and fair dealing incorporated therein ( see id. ¶ ¶ 100-04); and (3) American Family breached the implied covenant of good faith and fair dealing contained within the Reinsurance

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Agreement ( see id. ¶ ¶ 114, 116). Reduced to their essence, all of Mariah's contract claims turn on whether it was improper for PCS to insert -- and for AIR and American Family to rely on -- the two-pages of information added to the Original Bulletin. Notwithstanding Mariah's attempt to characterize the insertion as somehow nefarious (the pleadings refer to the document as the " Falsified Inception Bulletin" and repeatedly make conclusory assertions as to Defendants' fraudulent intent), it bears repeating that the Revised Original Bulletin is nothing more than the Original Bulletin plus a two-page insertion describing the storm's geographic impact in Kansas.

To state a claim for breach of contract under New York law, " a plaintiff must plead and prove: (1) the existence of a contract; (2) a breach of that contract; and (3) damages resulting from the breach." Nat'l Mkt. Share, Inc. v. Sterling Nat'l Bank, 392 F.3d 520, 525 (2d Cir. 2004). An " essential requirement" to stating the claim is alleging a " specific provision" that was breached. Orange Cnty. Choppers, Inc. v. Olaes Enters., Inc., 497 F.Supp.2d 541, 554 (S.D.N.Y. 2007). Additionally, factual allegations showing damages are essential: " In the absence of any allegations of fact showing damage, mere allegations of breach of contract are not sufficient to sustain a complaint." Lexington 360 ...

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