11333 Inc. v. Certain Underwriters at Lloyd's

Decision Date13 June 2017
Docket NumberNo. CV–14–02001–PHX–NVW,CV–14–02001–PHX–NVW
Citation261 F.Supp.3d 1003
Parties 11333 INCORPORATED, Plaintiff, v. CERTAIN UNDERWRITERS AT LLOYD'S, LONDON, et al., Defendants.
CourtU.S. District Court — District of Arizona

261 F.Supp.3d 1003

11333 INCORPORATED, Plaintiff,
v.
CERTAIN UNDERWRITERS AT LLOYD'S, LONDON, et al., Defendants.

No. CV–14–02001–PHX–NVW

United States District Court, D. Arizona.

Signed June 13, 2017


Jennifer Joan Axel, Jonathan Grant Brinson, Richard Michael Amoroso, Troy Blinn Froderman, Polsinelli PC, Phoenix, AZ, for Plaintiff.

Scott A. Salmon, Cavanagh Law Firm PA, Jamie Alexander Glasser, Julie Kristin Moen, Myles Patrick Hassett, Hassett Law Firm PLC, Phoenix, AZ, Alec H. Boyd, Clyde & Company US LLP, San Francisco, CA, for Defendants.

ORDER

Honorable Neil V. Wake, Senior United States District Judge

TABLE OF CONTENTS

I. FACTUAL BACKGROUND ...1008

A. The Fund and the Avocet Loan ...1008

B. HUB ...1009

C. The 08–09 E&O Policy's Terms ...1010

D. The Claim ...1012

E. This Action ...1013

II. LEGAL STANDARDS ...1013

A. Summary Judgment ...1013

261 F.Supp.3d 1008

B. Breach of Contract ...1014

C. Duty of Good Faith and Fair Dealing ...1015

D. Negligence ...1015

E. Exclusion of Expert Witnesses ...1015

III. ANALYSIS ...1016

A. Claims Against Underwriters ...1016

1. Insurance Claims ...1016

a. Mortgagee or Owner Interest ...1016

b. Investor’s Interest ...1017

c. Expiration of Coverage ...1018

d. Prejudice ...1018

e. Covenant of Good Faith and Fair Dealing ...1020

2. Punitive Damages ...1022

B. Claims Against HUB ...1022

1. Contract Claims ...1022

a. Breach of Contract ...1022

b. Breach of Covenant of Good Faith and Fair Dealing ...1024

2. Negligence and Professional Negligence ...1024

a. Statute of Limitations ...1024

b. Merits ...1025

C. Motions to Exclude Expert Witnesses ...1026

1. John McReynolds ...1026

2. Chandra Womack ...1026

3. Nigel Hughes ...1027

4. Peter Kochenburger ...1027

The plaintiff in this case, 11333 Incorporated ("11333"), seeks damages against defendants Certain Underwriters at Lloyd's, London ("Underwriters") and HUB International Insurance Services, Inc. ("HUB") based on the insurance 11333 believes it had or should have had when Hurricane Ike struck the Texas Gulf Coast in 2008. Before the Court are motions for summary judgment filed by Underwriters (Doc. 109) and HUB (Doc. 113), and a cross-motion for partial summary judgment filed by 11333 (Doc. 142). Also before the Court are four motions to exclude expert testimony. (Docs. 103, 106, 107, 120.) The Court now considers these and all accompanying briefing.1

I. FACTUAL BACKGROUND

The following facts are not in dispute except where otherwise noted.

A. The Fund and the Avocet Loan

Formerly known as "Investors Mortgage Holdings, Inc.," 11333 is a licensed mortgage broker incorporated in Arizona. (Doc. 110 at 2; Doc. 138 at 2.) The company arranges and services mortgage loans. (Doc. 109 at 5; Doc. 137 at 3.) On May 15, 2003, 11333 was designated as exclusive manager of IMH Secured Loan Fund, LLC ("the Fund"), a limited liability company that makes commercial and subdivision real estate loans. (Doc. 110 at 3; Doc. 138 at 3.) The Fund was owned by roughly 4,000 member investors. (Id. ) Until 2010, 11333 was a separate entity from the Fund. (Id. ) (The Fund acquired 11333 as a wholly owned subsidiary in 2010.2 See Doc. 110 at 19; Doc. 138 at 19.) In its capacity as the Fund's manager, 11333

had responsibility and final authority in almost all matters affecting the Fund's business. These duties include dealings with Members, accounting, tax and legal matters, communications and filings with regulatory agencies and all other
261 F.Supp.3d 1009
needed management and operational duties.

(Doc. 142 at 3 (internal quotation marks omitted).) Loans made by the Fund "were selected for the Fund by 11333 from loans originated by 11333," and the Fund relied on 11333's "performance in obtaining, underwriting, processing, making and brokering loans to [the Fund], and determining the financing arrangements for borrowers." (Id. ) By 11333's account, when it would originate a loan for the Fund, it would obtain the borrower, process the loan application, and broker the loan to the Fund. (Id. ) The Fund would then fund the loan when it closed. (Id. )

On April 28, 2006, the Fund made an $18 million mortgage loan to Avocet Oceanfront Villas, LP ("Avocet"), a subdivision land developer. (Doc. 110 at 6; Doc. 138 at 5). 11333 contends (though both defendants dispute) it "originated" the loan before the Fund "purchased" it by virtue of making it to Avocet.3 (Doc. 142 at 7; Doc. 110 at 7.) Avocet used the loan to obtain and develop 146 acres for a subdivision on the Bolivar Peninsula, a strip of oceanfront land in Galveston, Texas ("the Avocet Property"). (Doc. 113 at 4.) Pursuant to its loan agreement, Avocet purchased an insurance policy from Evanston Insurance Company ("the Evanston Policy") covering any buildings on the property, which was only one house used as a sales office. (Doc. 110 at 7; Doc. 138 at 8.) Avocet's Evanston Policy, which did not include coverage for flood or wind damage, listed both the Fund and Investors Mortgage Holdings, Inc. (11333's former name) as "additional insured" parties. (Doc. 114–1 at 101.)

Over the next year Avocet proceeded to clear out lots, pave roads, install sewers and underground electrical wiring, and construct the single house used as a sales office. (Doc. 109 at 6.) In 2007 Avocet stopped paying its premiums on the Evanston Policy, lost its insurance coverage, and defaulted on its mortgage loan. (Doc. 109 at 6.) The Fund foreclosed on April 8, 2008, perhaps through 11333 as its manager. (Doc. 110 at 9; Doc. 138 at 11; Doc. 138–11 at 20.) The Fund then deeded the Avocet Property to a subsidiary called IMH Special Asset NT 139, LLC ("NT 139"), which the Fund had created roughly two weeks before the foreclosure. (Doc. 109 at 6; Doc. 142 at 7.) The Fund would often create distinct subsidiaries to manage specific assets in order to shield the rest of the company from any liability the asset might later produce. (Doc. 111–1 at 93.) NT 139 accordingly assumed and retained ownership of the Avocet Property.

B. HUB

At some point in time (it is unclear from the record when), 11333 reached out to HUB, an insurance broker, to obtain insurance for "11333's business operations." (Doc. 143 at 4; Doc. 148 at 2.) Both parties provide a cryptic narrative about how exactly their relationship progressed. From what it seems, the parties first interacted in 2007, when HUB procured for 11333 a "Mortgage Bankers/Brokers Errors and Omissions" policy ("E&O Policy") from Underwriters. (Doc. 111–1; Doc. 113 at 5; Doc. 142 at 4.) The date on which the policy was first purchased is unclear from the record, though likely it was in May of 2007. See Doc. 138–11 at 24.

261 F.Supp.3d 1010

From there the chronology gets murkier yet. By 11333's account, at some unspecified point in time it provided HUB with a copy of the Confidential Private Placement Memorandum, a document given to the Fund's investors describing the Fund's operations and explaining 11333's involvement as the manager. (Doc. 142 at 4; Doc. 143 at 4.) The record, however, reveals that 11333's only evidence that HUB had this document was the assumptions and speculations of a single witness. See Doc. 136–1 at 45–47. A close reading of the record does not show any testimony supporting 11333's assertion. But as discussed below, even if there were such evidence, it would not affect the outcome of the present motions.

The E&O Policy was the only coverage HUB ever obtained for 11333. (Doc. 142 at 14.) The policy named 11333 (under its former name) as the principal insured and did not name the Fund or NT 139 as insureds. (Doc. 110 at 13–14; Doc. 138 at 17–18.) The policy had an initial effective date of May 23, 2007, and extended to May 23, 2008. (Doc. 138–11 at 25.) 11333 signed an application to renew the policy for a one-year period and submitted it to Underwriters on May 27, 2008. (Doc. 113 at 5–6.) The renewed policy (the "08–09 E&O Policy") became effective on June 22, 2008, and remained in effect until June 22, 2009. (Doc. 113 at 5.) The 08–09 E&O Policy is the only policy at issue in this case.

C. The 08–09 E&O Policy's Terms

The Mortgage Bankers/Brokers Errors and Omissions Insurance here covers the mortgage broker for diverse losses and liabilities, including employee dishonesty, theft or loss of documents, forged checks and documents, counterfeit currency, fraudulent mortgages, computer crime, computer viruses, at least six types of loss from mortgage errors and omissions, some kinds of theft by principals of the insured, defense expenses for officers and directors, and more. (Doc. 111–1.) At issue in this lawsuit are two types of the mortgage errors and omissions coverage. One is for certain losses resulting from the insured mortgage broker's negligent failure to obtain adequate coverage for "Fire and Extended Coverage insurance" and "Flood insurance." (Doc. 111–1 at 17–18.) The other protects only the insured in limited...

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