Arrowood Indem. Co. v. Hartford Fire Ins. Co.

• Decision Date: 30 March 2011
• Docket Number: No. C.A. No. 09–166–LPS.,C.A. No. 09–166–LPS.
• Citation: 774 F.Supp.2d 636
• Parties: ARROWOOD INDEMNITY COMPANY, f/k/a Royal Indemnity Company, Plaintiff/Counterclaim Defendant,v.HARTFORD FIRE INSURANCE COMPANY, Defendant/Cross–Claim Defendant/Counterclaim Plaintiff,andStudent Finance Corporation, Defendant/Counterclaim Defendant/Counterclaim and Cross–Claim Plaintiff.
• Court: U.S. District Court — District of Delaware

774 F.Supp.2d 636

ARROWOOD INDEMNITY COMPANY, f/k/a Royal Indemnity Company, Plaintiff/Counterclaim Defendant,

v.HARTFORD FIRE INSURANCE COMPANY, Defendant/Cross–Claim Defendant/Counterclaim Plaintiff,andStudent Finance Corporation, Defendant/Counterclaim Defendant/Counterclaim and Cross–Claim Plaintiff.

No. C.A. No. 09–166–LPS.

United States District Court, D. Delaware.

March 30, 2011.

Peter M. Gillon, Esquire and Geoffrey J. Greeves, Esquire of Pillsbury Winthrop Shaw Pittman LLP, Washington, D.C. Dennis A. Meloro, Esquire and Victoria W. Counihan, Esquire of Greenberg Traurig, LLP, Wilmington, DE, for Plaintiff.Arthur N. Lambert, Esquire; Daniel W. White, Esquire; and Christie M. Bird, Esquire of Frenkel Lambert Weiss Weisman & Gordon, LLP, New York, NY, Michael P. Migliore, Esquire, of Smith, Katzenstein & Jenkins LLP, Wilmington DE, for Defendant Hartford Fire Insurance Company.Charlene D. Davis, Esquire; Ashley B. Stitzer, Esquire; and Justin R. Alberto, Esquire of Bayard, P.A., Wilmington, DE, Sherilyn Pastor, Esquire and Craig W. Davis, Esquire of McCarter & English LLP, Newark, NJ, for Charles A. Stanziale, Jr., Chapter 7 Trustee for Student Finance Corp.

MEMORANDUM OPINION

STARK, District Judge:

Pending before the Court is a Motion For Summary Judgment (D.I. 72) filed by Defendant Hartford Fire Insurance Company, as well as a Motion For Partial Summary Judgment (D.I. 74) and a Motion To Strike Certain Documents Relied Upon By Defendant Hartford Fire Insurance Company In Its Motion For Summary Judgment And Opposition To Plaintiff's Motion for Summary Judgment (D.I. 93) filed by Plaintiff Arrowood Indemnity Company f/k/a Royal Indemnity Company. For the reasons discussed, Plaintiff's Motion To Strike will be granted in part and denied in part. Defendant's Motion For Summary Judgment will be denied, and Plaintiff's Motion For Partial Summary Judgment will be granted in part and denied in part.

BACKGROUND

I. Procedural Background

The bankruptcy case underlying the present action was initiated on June 5, 2002 by the filing of an involuntary petition for relief under Chapter 7 of the Bankruptcy Code naming Student Finance Corporation (“SFC”) as a debtor. ¹ On February 26, 2008, the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) modified the automatic stay imposed by 11 U.S.C. § 362 in connection with the SFC bankruptcy proceeding (D.I. 2, Ex. A), and on August 22, 2008, Plaintiff Arrowood Indemnity Company, f/k/a/ Royal Indemnity Company (“Royal”) initiated this adversary action against Defendants Hartford Fire Insurance Company (“Hartford”) and SFC in the Bankruptcy Court, Adv. No. 08–51398 (the “Adversary Proceeding”). (D.I. 1, Ex. B)

On September 29, 2008, Hartford filed a motion to withdraw the reference of the Adversary Proceeding pursuant to 28 U.S.C. § 157(d) (the “Withdrawal Motion”) with the Bankruptcy Court. ( See D.I. 3, Ex. I at ¶ 2 at 2) Thereafter, on February 17, 2009 the parties entered into the Stipulation to Withdraw Reference of Adversary Proceeding to United States Bankruptcy Court (the “Stipulation”). (D.I. 3, Ex. I) The parties agreed that upon approval of the Stipulation by this Court, the Withdrawal Motion would be resolved by the Stipulation, the reference of the Adversary Proceeding to the Bankruptcy Court would be withdrawn to this Court, and the record in the Adversary Proceeding would be transferred from the Bankruptcy Court to this Court. ( See id. at 2–3) In addition, the Stipulation also contained an agreed-upon expedited discovery schedule, schedule for dispositive motions, and proposed modified Rule 16 scheduling order. ( See id. at 3–5) The Adversary Proceeding was subsequently transferred to this Court on March 13, 2009. ( See D.I. 1, Hartford's Motion to Withdraw the Reference of the [ ] Adversary Proceeding Pursuant to 28 U.S.C. § 157(d); id. at 1–6, Transmittal Sheet for Withdrawal of Reference to the U.S. District Court for the District of Delaware; D.I. 2; D.I. 3; D.I. 4) Following a hearing on June 18, 2009, this Court granted an extension of time to complete discovery ( see D.I. 21; 6/19/09 Oral Order), and later entered Orders on July 1, 2009 (D.I. 27; D.I. 28) approving the parties' agreed-upon Amended Stipulation and Second Modified Rule 16 Scheduling Order ( see D.I. 26).

Hartford and Royal both filed their Motions For Summary Judgment on January 27, 2010. Royal filed its Motion To Strike on February 24, 2010.

II. Factual BackgroundA. The Parties

Royal is a Delaware corporation with its principal place of business in Charlotte, North Carolina. (D.I. 1, Ex. B ¶ 3)

Hartford is a Connecticut corporation licensed to do business in Delaware. ( Id. ¶ 4) Hartford sells insurance policies providing coverage for numerous types of risk, including losses arising out of employee fraud and dishonesty. ( Id. ¶ 5)

SFC was a Pennsylvania corporation with its principal place of business in Delaware. ( Id. ¶ 6) SFC was a provider and servicer of student loans originated by commercial truck driving schools. ( Id.) From the late 1990's through early 2000's, Royal issued eleven separate credit risk insurance policies to SFC. ( Id. ¶ 23)

B. The Allegations

The parties' dispute stems from a Financial Institution Bond (the “Bond”) issued by Hartford to SFC in January 2002. The Bond, covering the period from January 31, 2002 through January 31, 2003, is a fidelity bond which protects the insured against losses resulting from certain dishonest and fraudulent acts of its officers and employees. ( Id. ¶ 26) Student Finance was forced into involuntary bankruptcy in June 2002 and, in July 2002, Royal provided notice to Hartford that it was making a claim under the Bond. (D.I. 76, Ex. 11, Sept. 2009 Bogdan Dep. at 36–37) In 2003, Hartford closed its file on Royal's claim due to inactivity. (Sept.2009 Bogdan Dep. at 126–27) In March 2008, following the Bankruptcy Court's granting Royal relief from the automatic stay, Royal submitted proof of loss under the Bond to Hartford. (D.I. 76, Ex. 19) Hartford denied Royal's claim on August 19, 2008. ( Id. Ex. 22)

Aside from these basic facts, much else is disputed about the relevant events, both before and after initiation of the SFC bankruptcy proceeding. Royal contends that SFC's business plan, though ultimately unsustainable, was legitimate. (D.I. 75 at 9–10) According to Royal, SFC was the victim of fraudulent acts committed by Andrew Yao (“Yao”), its sole shareholder. ( Id. at 10) Specifically, Royal alleges that “Yao caused SFC and its affiliated companies to place or acquire thousands of student loans that failed to meet SFC's underwriting guidelines,” and that “Yao's plan was to disguise these poor quality loans as performing loans in order to sell them to investors through securitizations, using Royal as the unwitting ultimate guarantor.” (D.I. 1, Ex. B ¶¶ 33–34) Royal also alleges that Yao was misappropriating corporate funds for his own personal use. ( Id. ¶ 42)

According to Hartford, SFC was a fraudulent enterprise—specifically, a Ponzi scheme organized with the purpose of defrauding its lenders, investors, and insurers. (D.I. 73, at 1) Hartford contends that SFC perpetuated this scheme by making “forbearance payments” without the knowledge or request of the student borrowers, with the intent of masking actual default rates. ( Id. at 4–5) Hartford also notes that, in the six years between SFC's involuntary bankruptcy filing and the commencement of this action, the Trustee and Royal have consistently characterized SFC as a fraudulent enterprise, despite their disclaimer of that position here. ( Id. at 2)

C. The Claims

Royal maintains that it suffered significant losses as a result of Yao's fraudulent acts or dishonesty, and that it is entitled to recover jointly with SFC on such losses pursuant to the Bond. (D.I. 1, Ex. B ¶¶ 56, 58) As a result of Hartford's denial of coverage, Royal filed the instant action. By its Adversary Complaint, Royal asserts the following claims against Hartford and SFC: declaratory judgment (Count I); breach of contract (Count II); and reformation (Count III).

Hartford asserts sixteen affirmative defenses, alleging inter alia, that: (i) the Bond does not cover fraudulent acts of the insured (First Affirmative Defense); (ii) SFC was the alter ego of Andrew Yao, and that any fraud committed by him is imputed to SFC (Third Affirmative Defense); (iii) Hartford did not receive notice of loss within 30 days of SFC's discovery of the alleged loss, as required by the Bond (Sixth Affirmative Defense); (iv) Hartford did not receive proof of loss as required by the Bond (Seventh Affirmative Defense); (v) Royal is not a named insured under the Bond and is barred from bringing any action under the Bond (Eighth Affirmative Defense); (vi) the action is untimely under the suit limitations provision of the Bond (Ninth Affirmative Defense); (vii) the Bond is void ab initio (Twentieth Affirmative Defense); (viii) that the Bond is subject to rescission (Twenty–First and Twenty–Second Affirmative Defenses); and (ix) recovery is barred because SFC made fraudulent and material misrepresentation in applying for the Bond (Twenty–Third Affirmative Defense). Hartford also asserts four counterclaims against Royal: that the bond is void ab initio (First Counterclaim); that the Bond is subject to rescission on contractual and common law bases (Second and Third Counterclaims); and that recovery under the Bond is barred because SFC made fraudulent and material misrepresentation in applying for the Bond (Fourth Counterclaim).

The Trustee asserts the following four counterclaims/cross-claims against Royal and Hartford, respectively: declaratory judgment (Count I); breach of contract (Count II); breach of the implied covenant of good faith and fair dealing (Count III); and turnover of the property of the estate pursuant to 11 U.S.C. § 542(a) (Count IV).

MOTION TO STRIKE

By its Motion to...