508 F.3d 327 (6th Cir. 2007), 06-3767, Commercial Money Center, Inc. v. Illinois Union Ins. Co.

Docket Nº:06-3767, 06-4190, 06-4301, 06-4492.
Citation:508 F.3d 327
Party Name:COMMERCIAL MONEY CENTER, INC.; Commercial Servicing Corporation, Plaintiffs, Citibank, N.A.; JP Morgan Chase Bank, NA, Plaintiffs-Appellees, v. ILLINOIS UNION INSURANCE COMPANY, Defendant-Appellant.
Case Date:November 14, 2007
Court:United States Courts of Appeals, Court of Appeals for the Sixth Circuit

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508 F.3d 327 (6th Cir. 2007)

COMMERCIAL MONEY CENTER, INC.; Commercial Servicing Corporation, Plaintiffs,

Citibank, N.A.; JP Morgan Chase Bank, NA, Plaintiffs-Appellees,



Nos. 06-3767, 06-4190, 06-4301, 06-4492.

United States Court of Appeals, Sixth Circuit

November 14, 2007

Argued: Sept. 10, 2007.

Appeal from the United States District Court for the Northern District of Ohio at Cleveland Nos. 02-16007; 02-16009; 02-16000- Kathleen McDonald O'Malley, District Judge.

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Stephen A. Cozen, COZEN & O'CONNOR, Philadelphia, Pennsylvania, for Appellant.

Barry R. Ostrager, SIMPSON, THACHER & BARTLETT, New York, New York, for Appellees.


Stephen A. Cozen, Richard C. Mason, COZEN & O'CONNOR, Philadelphia, Pennsylvania, for Appellant.

Barry R. Ostrager, George S. Wang, SIMPSON, THACHER & BARTLETT, New York, New York, for Appellees.

Before: GUY, ROGERS, and McKEAGUE, Circuit Judges.


RALPH B. GUY, JR., Circuit Judge.

This case concerns one of a number of disputes transferred to the Northern District of Ohio as part of the multidistrict litigation captioned In re: Commercial Money Center, Inc. (CMC) Equipment Lease Litigation (No. 02-16000), which arose out of the collapse of CMC's equipment leasing business in what is alleged to have been a Ponzi-type scheme. When CMC filed for bankruptcy, the district court was left to sort out the claims and counterclaims of nearly twenty banking institutions and a half-dozen insurance companies arising out of various lease-backed transactions with CMC and CMC-related entities. These consolidated appeals involve the dispute between several parties to one such transaction--specifically, the dispute between Illinois Union Insurance Company on one hand, and Citibank, N.A., and JP Morgan Chase Bank, N.A., as trustee for Citibank, on the other, concerning Illinois Union's obligations under an insurance policy containing a negotiated Collateral Security Insurance Endorsement (Coverage E).1

On appeal, Illinois Union contends that the district court erred in finding, on a 12(c) motion for judgment on the pleadings:

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(1) that Illinois Union's policy was "in substance" a surety contract; (2) that Chase, as trustee for Citibank, was the obligee under that surety contract such that it was entitled to recover without regard to the alleged fraud of the principal obligor; and (3) that Illinois Union was precluded by the negotiated waiver of defenses from avoiding the obligations under the Policy on the grounds of fraudulent inducement. Second, Illinois Union argues that, even if correct on these issues of liability, the district court erred in calculating the damages by reference to the lease payments as opposed to the debt those payments secured. Finally, Illinois Union argues that the district court abused its discretion in denying the motion for leave to amend its pleadings. After review of the record and the arguments presented on appeal, we affirm in part, reverse in part, and remand for further proceedings consistent with this opinion.


CMC was purportedly in the business of leasing equipment and vehicles to numerous lessees in exchange for lease payments. It is alleged by the banks and insurance companies that the majority of CMC's lease business was a sham as many leases were nonexistent, nonperforming, or actually disguised usurious loans. Problems with the leases were apparently concealed by CMC's use of a Ponzi-type scheme in which early investors were paid with funds obtained from later investors. Overall, the banks advanced more than $400 million secured in some way by the lease payments, while the insurance companies provided assurances of payment on the leases. Most of the insurance companies issued explicit surety contracts called "Lease Bonds" that identified CMC as the obligee. Illinois Union, which was in the minority of insurers, issued insurance policies that included collateral security insurance coverage under varying endorsements.

The financing transactions took four basic forms: (1) some banks purchased the income stream directly from CMC; (2) some banks purchased the income stream from third parties who purchased from CMC; (3) some banks lent funds to third parties who purchased the income stream from CMC or its related entities; and, finally, (4) several banks purchased notes from CMC special purpose entities that were secured by and to be repaid from the income stream from the leases. The transaction in this case fell under this last category and was essentially a "securitization" of the lease payments.

Specifically, CMC sold pools of leases to its special purpose entity, CMC Lease Funding 2000-220, LP (Lease Funding), 2 and Lease Funding issued notes under the terms of an Indenture to Chase, as Trustee for Citibank, that were secured by and to be repaid from the lease payments. Under the Sales and Servicing Agreement (SSA) entered into between CMC as "Seller," Lease Funding as "Issuer," Chase as "Trustee," and Illinois Union as both "Credit Insurer" and "Servicer," the leases were conveyed from CMC to Lease Funding, Lease Funding confirmed its pledge of a security interest in the lease payments to the note holders, and Commercial Servicing Corporation (CSC), a CMC-related entity, was identified as an approved "Sub servicer" for the leases. The SSA and the Indenture required issuance of the credit insurance, in which the Indenture granted a further security interest.

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Illinois Union had provided property and casualty insurance for CMC's leasing business, but had declined to provide collateral security insurance in the past. Illinois Union alleges that CMC continued to solicit such coverage and that Illinois Union relented based on representations that Illinois Union now contends were materially false. Although the collateral security insurance issued by Illinois Union varied in language, we are concerned with the endorsement negotiated with the heavy involvement of counsel for Citibank. That Collateral Security Insurance Endorsement--issued on the same date that the Indenture and SSA were executed--named "CMC Lease Funding 2000-220, LP" as the "Insured" and Chase as trustee for "the holders of notes issued under the Indenture" as the "Additional Insured/Loss Payee." Illinois Union has also alleged that several written indemnity agreements were executed in its favor by CMC, CMC entities, and CMC principals Anita and Sterling Pirtle.

After the transaction closed on January 18, 2001, additional notes were issued under the Indenture, those notes were secured by additional leases, and those leases were added to the Schedule A of the Policy. Chase stopped receiving payment in full in December 2001, and Chase's claims under the Policy were denied by Illinois Union. Among the host of lawsuits spawned by the collapse of the leasing business were CMC's action against Illinois Union, Illinois Union's counterclaims seeking rescission and adding Chase as a party, and Chase/Citibank's action against Illinois Union and others including CMC, Lease Funding, and CSC. Bankruptcy filings followed, and cases from all over were consolidated and transferred to the United States District Court for the Northern District of Ohio.

Illinois Union's Second Amended Counterclaims sought, in pertinent part, rescission of the Policy and the SSA for fraud, as well as declaration that preexisting losses were not covered and that the Policy was void as against public policy. (Counterclaims 7, 8, and 9). Illinois Union specifically alleged that CMC made material misrepresentations that induced it to issue collateral security insurance. Those misrepresentations included: that the underlying leases were valid; that strict underwriting guidelines were used in granting the leases; that an independent third party was retained to verify the leases; that the lease default rates were below certain levels; that losses from defaults were minimized by repossession and releasing of equipment; and that no claims had been made for defaults on the leases. Some of these representations were also the subject of CMC's written warranties in the SSA. It is alleged that a significant number of the leases were either nonexistent or in default even before Illinois Union issued the Policy.

Coordination of the proceedings led to the filing in January 2003 of a collective motion by all of the banks for judgment on the pleadings against all of the sureties and insurers that sought rescission on the grounds of fraud. That consolidated motion was granted in part and denied in part in two orders entered on August 19, 2005. In the "Lead Opinion," the district court addressed the banks' claims against the sureties that had issued Lease Bonds and concluded, inter alia, that additional evidence would be necessary to determine whether the banks were the true intended obligees despite the express designation of CMC as the obligee. The second order, on the other hand, pertained specifically to the claims of the seven banks seeking to recover from Illinois Union (IU Order). The district court not only concluded that all of the insurance policies were in essence

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surety contracts under which the banks were the intended obligees, but also singled out the transaction with Chase/Citibank as most clearly providing a suretyship for the benefit of Chase/Citibank and for waiver of Illinois Union's defenses.

The district court's conclusions led Chase and Citibank to seek entry of final judgment against...

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