Ace Am. Ins. Co. v. Bank of the Ozarks

Decision Date30 September 2014
Docket Number11 Civ. 3146 (PGG)
PartiesACE AMERICAN INSURANCE COMPANY, Plaintiff, v. BANK OF THE OZARKS, Defendant.
CourtU.S. District Court — Southern District of New York
MEMORANDUM OPINION & ORDER

PAUL G. GARDEPHE, U.S.D.J.:

This is a breach of contract and declaratory judgment action brought by Plaintiff ACE American Insurance Company ("ACE") arising out of Defendant Bank of the Ozarks' failure to honor ACE's draw request on a letter of credit issued by the Bank in favor of ACE. (Cmplt. (Dkt. No. 1) ¶ 1) Plaintiff has moved for summary judgment pursuant to Fed. R. Civ. P. 56. (Dkt. No. 57) For the reasons set forth below, Plaintiff's motion will be granted in its entirety.

BACKGROUND
I. THE BANK'S LETTER OF CREDIT

ACE is an insurance company organized under Pennsylvania law.1 (ACE's Statement of Undisputed Material Facts ("ACE R. 56.1 Stmt.") (Dkt. No. 59) ¶ 1) Between May1, 2006 and May 1, 2009, ACE issued general liability, automobile liability, and workers' compensation and employee liability policies to Affiliated Foods Southwest, Inc. ("AFS"). (Id. ¶¶ 4-5) In connection with these policies, ACE and AFS entered into a contract dated May 1, 2006 (the "Collateral Agreement"), in which AFS agreed to establish a "clean irrevocable evergreen letter of credit," naming ACE as beneficiary. (Id. ¶¶ 6, 43)

At the request of AFS, the Bank of the Ozarks (the "Bank") - a state-chartered bank organized under Arkansas law (id. ¶ 2) - issued a clean irrevocable evergreen letter of credit ("Letter of Credit") on June 1, 2008, in the amount of $1,376,998, naming ACE as beneficiary. (Id. ¶¶ 14, 18; see ACE Appendix (Dkt. No. 60-5), Ex. 4) The Letter of Credit is addressed to ACE, as beneficiary, and provides as follows:

By order of our client, Affiliated Foods Southwest, Inc., we hereby establish this Irrevocable Letter of Credit No. 0706035392 in your favor for an amount up to but not exceeding the aggregate sum of One Million Three Hundred Seventy Six Thousand Nine Hundred Ninety Eight Dollars ($1,376,998), effective immediately, and expiring at the offices of the Bank on June 1, 2009 unless renewed as hereinafter provided.
. . . .

Funds under this Letter of Credit are available to you against your sight draft(s), drawn on us, bearing the clause "Drawn under Credit No. 0706035392".

. . . .

This Letter of Credit sets forth in full the terms of our undertaking. Such undertaking shall not in any way be modified, amended or amplified by reference to any document or instrument referred to herein or in which this Letter of Credit is referred to or to which this Letter of Credit relates and any such reference shall not be deemed to incorporate herein by reference any document or instrument.

. . . .

We hereby agree with the drawers, endorsers and bona fide holders of drafts drawn under and in compliance with the terms of this credit that such drafts will be duly honored upon presentation to the drawee. The obligation of Bank of the

Ozarks under this Letter of Credit is the individual obligation of Bank of the Ozarks, and is in no way contingent upon the reimbursement with respect thereto.
. . . .

(ACE Appendix (Dkt. No. 60-5), Ex. 4 at 3-4; see ACE R. 56.1 Stmt. ¶ 27)2 The Letter of Credit further provides that, "[e]xcept as otherwise expressly stated herein, this credit is subject to and governed by the Laws of the State of New York and the 1993 revision of the Uniform Customs and Practice for Documentary Credits of the International Chamber of Commerce (Publication 500) [(the "UCP")] and, in the event of any conflict, the Laws of the State of New York will control." (ACE Appendix (Dkt. No. 60-5), Ex. 4 at 4; see ACE R. 56.1 Stmt. ¶ 28)

In connection with the Letter of Credit, AFS entered into an agreement (the "Customer Agreement") with the Bank. (ACE R. 56.1 Stmt. ¶ 32; see ACE Appendix (Dkt. No. 60-9), Ex. 8) Among other things, AFS agreed to immediately repay the Bank for any amounts paid by the Bank under the Letter of Credit. (ACE R. 56.1 Stmt. ¶ 35) AFS also agreed that its obligation to reimburse the Bank would not be affected by "any breach of any agreement between [AFS] and the Beneficiary of the Letter of Credit . . . , even if [the Bank] has received notice of same." (ACE R. 56.1 Stmt. ¶ 36; ACE Appendix (Dkt. No. 60-9), Ex. 8 at 4)

II. AFS'S BANKRUPTCY AND THE PARTIES' EARLIER LITIGATION

On May 5, 2009, AFS filed a Chapter 11 bankruptcy petition in the United States Bankruptcy Court for the Eastern District of Arkansas. (ACE R. 56.1 Stmt. ¶ 23) On July 17, 2009, AFS ceased all operations, and its bankruptcy case was later converted to a Chapter 7 liquidation proceeding. (Id. ¶ 24)

On October 22, 2009, ACE filed a complaint against the Bank in this District alleging that it had not honored proper draw requests totaling $143,006.76. (ACE R. 56.1 Stmt. ¶ 57; see Ace Am. Ins. Co. v. Bank of the Ozarks, No. 09 Civ. 8938 (LAK), 2010 WL 1257327, at *1 (S.D.N.Y. Mar. 18, 2010)) After ACE filed that action, however, the Bank paid the draw requests that were the subject of the parties' dispute. (ACE R. 56.1 Stmt. ¶ 59) The Bank then moved to dismiss or, in the alternative, for a transfer to the Eastern District of Arkansas. (Id. ¶ 60)

Judge Kaplan dismissed ACE's breach of contract claim as moot, except to the extent it sought interest. (Id. ¶ 61) Judge Kaplan also dismissed ACE's declaratory judgment claim, based on his belief that the Bank would elect to terminate the Letter of Credit, thereby rendering declaratory relief unnecessary. (Id. ¶ 63) Judge Kaplan observed, however, that "it is quite clear that there is a real disagreement between Ace and the Bank[,]" and that "[w]hile there are no outstanding draw requests, it seems likely . . . , in all the circumstances [,] that the brushfire that has broken out three times likely would erupt in flames again were there sufficient time." (Id. ¶ 62) The Bank elected not to terminate the Letter of Credit, however, and it remains in effect. (Id. ¶ 65)

III. ACE'S MARCH 16, 2011 DRAW REQUEST

On March 16, 2011, ACE submitted a draw request to the Bank in the amount of $100,000. (Id. ¶ 78) The Bank received the draw request the following day. (Id. ¶ 80) In accordance with the terms of the Letter of Credit, the draft bore the clause "Drawn under Credit No. 0706035392," and was signed by an ACE officer. (Id. ¶ 81) The Bank has refused to honor the draw request, however. (Id. ¶ 86)

On March 31, 2011, the Bank sent a letter to ACE acknowledging receipt of the sight draft but refusing to honor it. (ACE R. 56.1 Stmt. ¶ 86) The Bank, stated that it wasrefusing to honor the draw request because (1) "ACE [had] not submitted any supporting documentation to the Bank"; (2) "the amount requested was for a settlement of a claim made pursuant to an automobile policy"; and (3) ACE had not submitted documentation "evidencing that relief from the bankruptcy estate was granted to consummate the settlement, evidencing whether the bankruptcy estate agreed to the settlement amount, or evidencing that the bankruptcy court approved the settlement." (ACE Appendix (Dkt. No. 60-27), Ex. 26 at 3-4; see ACE R. 56.1 Stmt. ¶ 86)

Because many of the Bank's arguments in response to ACE's motion require an understanding of the contracts and events underlying ACE's draw request, the Court will now describe the circumstances of that draw request.

A. The Underlying Insurance Contracts

ACE issued an automobile liability policy to AFS (the "Automobile Policy") that became effective on May 1, 2008, and which had a term of one year. (ACE Appendix (Dkt. No. 60-6), Ex. 5 at 3, 6; see id. (Dkt. No. 60-7), Ex. 6 at 2 (stating that the Automobile Policy "covers from 05/01/2008 to 05/01/2009 12:01 am")) The Automobile Policy provides that ACE "will pay all sums an 'insured' legally must pay as damages because of 'bodily injury' or 'property damage' to which this insurance applies, caused by an 'accident' and resulting from the ownership, maintenance or use of a covered 'auto.'" (ACE Appendix (Dkt. No. 60-7), Ex. 6 at 13) Under the Automobile Policy, AFS's bankruptcy or insolvency does not relieve ACE of its obligations under the Automobile Policy. (Id. at 19)

As set forth in a notice of election prepared by ACE and a deductible endorsement that was attached to the Automobile Policy at its inception (Id. at 6, 37-38), the Automobile Policy was subject to a $100,000 deductible. (ACE R. 56.1 Stmt. ¶ 7; see ACE Appendix (Dkt. No. 60-7), Ex. 6 at 37) Thus, ACE's "obligation to pay damages under [the Automobile Policy]applies only to the amount of 'losses' and 'allocated loss adjustment expenses' in excess of [$100,000]." (ACE Appendix (Dkt. No. 60-7), Ex. 6 at 37)

Under the Automobile Policy, ACE "may investigate and settle any claim or 'suit' as [it] considers] appropriate." (ACE R. 56.1 Stmt. ¶ 38) In this regard, the deductible endorsement provides - in Item 4 - that ACE "will have the right at [its] sole discretionf ] . . . [t]o pay any amounts within the Deductible Per Accident to settle any claim or 'suit.'" (Id. ¶ 39; ACE Appendix (Dkt. No. 60-7), Ex. 6 at 37) Moreover, under the deductible endorsement, the parties agreed that ACE "will pay all sums the 'insured' becomes legally obligated to pay within the Deductible Per Accident" (ACE Appendix (Dkt. No. 60-7), Ex. 6 at 37), and that AFS "shall promptly reimburse [ACE] for any sums [ACE] may have paid under Item 4." (Id.; ACE R. 56.1 Stmt. ¶ 40)

B. The Collateral Agreement

As noted above, ACE and AFS also entered into a Collateral Agrement, which required AFS to establish a "clean irrevocable evergreen letter of credit," naming ACE as beneficiary.3 (ACE R. 56.1 Stmt. ¶¶ 6, 43) The Collateral Agreement provides that, "[a]s security for payment of the Insured's Obligation, the Insured will provide to the Company, as beneficiary thereof, a clean irrevocable evergreen letter of credit . . . issued by a bank or other financial institution acceptable to the Company, and in an amount and form,...

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