Western Heritage Bank v. Federal Insurance Co., 031014 FED10, 13-2077

Docket Nº:13-2077
Opinion Judge:Mary Beck Briscoe Chief Judge.
Party Name:WESTERN HERITAGE BANK, f/k/a Mesilla Valley Bank; JERRY W. BELL, III; LUCINDA LOVELESS, Plaintiffs - Appellants, v. FEDERAL INSURANCE COMPANY, Defendant-Appellee.
Judge Panel:Before BRISCOE, Chief Judge, EBEL and PHILLIPS, Circuit Judges.
Case Date:March 10, 2014
Court:United States Courts of Appeals, Court of Appeals for the Tenth Circuit

WESTERN HERITAGE BANK, f/k/a Mesilla Valley Bank; JERRY W. BELL, III; LUCINDA LOVELESS, Plaintiffs - Appellants,



No. 13-2077

United States Court of Appeals, Tenth Circuit

March 10, 2014

(D.C. No. 2:11-CV-00630-MV-WPL) (D. N.M.).

Before BRISCOE, Chief Judge, EBEL and PHILLIPS, Circuit Judges.


Mary Beck Briscoe Chief Judge.

In this diversity action arising out of a denial of insurance coverage, Western Heritage Bank ("WHB") and two of its employees (collectively, "WHB parties") appeal the district court's grant of summary judgment to defendant Federal Insurance Company ("FIC"). They argue the district court erred in concluding FIC had no duty to defend the bank, or its employees, in an action which had been brought against them in state court. FIC opposes the policy interpretation of the WHB parties and also contends the district court's judgment can be affirmed on the alternative grounds that WHB colluded with the plaintiffs in the underlying state action both in their settlement and determination of damages. The WHB parties have also filed a motion to certify a question to the New Mexico Supreme Court.

We deny the motion to certify and affirm.


The instant action was brought by Western Heritage Bank and two of its employees, Jerry Bell and Lucinda Loveless, against FIC. The WHB parties filed a declaratory judgment action asking the court to rule that FIC owed them a duty to defend and indemnify for damages in an underlying Texas state court action brought by Hawkins Boulevard, LLC ("Hawkins"). The WHB parties also brought claims for bad faith and breach of the duties to investigate, defend, indemnify, and settle within the policy limits; a claim under the New Mexico Unfair Insurance Practices Act; and a claim under the Unfair Trade Practices Act.

Hawkins filed its suit against Mesilla Valley Bank ("Mesilla"), WHB's predecessor in interest, on January 24, 2008, in Texas state court. R. Vol. IV at 626; R. Vol. V at 656 (Original Hawkins Petition). Hawkins amended the petition several times, adding Loveless, Bell, and the Bank's attorneys as defendants. R. Vol. V at 663 (Second Amended Petition); id. at 686 (Third Amended Petition); id. at 703 (Fourth Amended Petition). The Fourth Amended Petition named as defendants only Mesilla, n/k/a WHB, and Jo Ann Miller. Id. at 703. The factual allegations in each petition are basically the same, but the most detailed petition is the Third Amended Petition.1 The defendants named in the Third Amended Petition were Mesilla, n/k/a WHB; current and former Bank officials: Jo Ann Miller, Joe H. Morales, Jerry Bell, Lucinda Loveless; and the Bank's outside counsel, Victor M. Firth and his firm, Firth Johnson Martinez. Id. at 686.2Hawkins' main allegation was that Mesilla, Morales, Loveless, Bell, Firth, and Firth's firm, prepared and executed on Hawkins' property "fraudulent Deeds of Trust purporting to encumber a non-existent 'Ground Lease' and all improvements to the Property with a security interest in favor of the Bank." Id. at 687-88.

The Hawkins lawsuit arose out of the business relationship between Mesilla and Lujo Corporation and Lujo Investments, Ltd. ("Lujo"). In August 2004, Lujo used a loan from Mesilla to renovate Hawkins' property in El Paso, Texas, for use as an El Pollo Loco restaurant. Hawkins' petition alleged that its lease with Lujo "contained express terms barring the use of the Lease and the improvements as collateral." Id. at 688. Hawkins contends that Mesilla's attorney, Firth, and his law firm were aware that the lease contained this restriction. In spite of this knowledge, the attorney and firm "prepared a fraudulent Deed of Trust purporting to encumber the 'leasehold and other interests' of LUJO in and to the Property and also encumbering 'all buildings and other improvements.'" Id. at 690. Ultimately, three such deeds were filed in the El Paso County records to secure Mesilla's liens.

Lujo vacated the Hawkins property in April 2007, but Mesilla's Deeds and liens were not released. Hawkins asked Mesilla to remove the encumbrances, but Mesilla refused to do so unless it was paid hundreds of thousands of dollars. The liens were ultimately released in October 2008. Hawkins alleged this delay resulted in lost business opportunities for a long-term lease with a new tenant. The Third Amended Petition brought claims for slander of title; tortious interference with Hawkins' Lease Agreement; tortious interference with expectant contracts and business relations; fraudulent claim against real property; breach of contract; and declaratory judgment.

Mesilla had purchased an insurance policy from FIC, No. 6801-4792, with a policy period of September 22, 2005 to June 30, 2008. This policy included several subparts with separate premiums. All parties agree that the Bankers Professional Liability ("BPL") section does not apply to this case. What the parties contest and what has become the focus of this litigation is the coverage of the Director and Officers Liability ("DOL") section.

The DOL section has three insuring clauses. Insuring Clauses 1 and 2 concern claims against an Insured Person, which "means any natural person who was, now is or shall become . . . a duly elected or appointed director, officer or the in-house general counsel of any Organization chartered in the United States of America. . . ." R. Vol. II at 177, 193. Insuring Clause 3 covers Loss that the Organization becomes legally obligated to pay because of an Organization Claim. Id. at 197. Organization Claim includes "a civil proceeding commenced by the service of a complaint . . . against the Organization for a Wrongful Act, including any appeal therefrom." Id. Organization means "those organizations designated in ITEM 5 of the Declarations of this Coverage Section." Id. at 181. ITEM 5 lists Mesilla Valley Bank, Inc. Id. at 176. The DOL section has a list of exclusions. For the purposes of this litigation, the exclusion that is at the center of the parties' dispute is 4.j., which excludes coverage "for Loss on account of any...

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