Berkley Reg'l Ins. Co. v. Greater E. Credit Union
| Decision Date | 21 February 2020 |
| Docket Number | 2:18-CV-00077-DCLC |
| Citation | 438 F.Supp.3d 857 |
| Parties | BERKLEY REGIONAL INSURANCE COMPANY, Plaintiff, v. GREATER EASTERN CREDIT UNION, Defendant |
| Court | U.S. District Court — Eastern District of Tennessee |
C. Adam Brinkley, Pro Hac Vice, John R. Riddle, Pro Hac Vice, Michael Keeley, Pro Hac Vice, Clark Hill Strasburger, Dallas, TX, Scott R. Brown, Frost, Brown, Todd LLC, Nashville, TN, for Plaintiff.
Mark S. Dessauer, Hunter, Smith & Davis, Kingsport, TN, for Defendant.
Clifton L. Corker, United States District Judge Plaintiff, Berkley Regional Insurance Company ("Berkley"), and Defendant, Greater Eastern Credit Union ("GECU") have each filed a Motion for Partial Summary Judgment [Docs. 32, 46] and supporting documents [Docs. 33, 34, 35, 47, 48, 49], pursuant to Rule 56 of the Federal Rules of Procedure. The parties have responded and replied to each motion, respectively [Docs. 57, 59, 64, 66]. Additionally, GECU filed a Supplemental Brief [Doc. 65] relating to Berkley's Motion for Partial Summary Judgment, to which Berkley then responded [Doc. 67]. These matters are now ripe for resolution.
In 2013, GECU applied for and Berkley issued a Financial Institution Bond for Credit Unions ("the Bond") [Doc. 1-3]. The Bond was a discovery bond, meaning that it covered any claim that was discovered during the period of the bond, including losses that occurred prior to the issuance of the Bond [Doc. 20, ¶ 38; Doc. 1-1, pg. 30]. On November 25, 2015, Sherry Allen, as CEO of GECU, signed an application to renew that Bond with Berkley [Doc. 1-4, Renewal Application; Doc. 33, pg. 5-6; Doc. 57, pg. 3]. In that application, Allen answered "No" to Question 97, which asked "Does any director or officer of the Credit Union or its holding company have any knowledge of any pending loss(es) or any information that could give rise to a claim(s) that could be covered under the Bond or the MPL policies?" [Doc. 1-4, pg. 10; Doc. 33, pg. 6; Doc. 57, pg. 3]. Based on that application and Allen's responses, Berkley renewed the Bond for a period from February 6, 2016 to February 9, 2019 [Doc. 1-1, the Bond; Doc. 33, pg. 5, Doc. 57, pg. 3]. This policy covered "loss resulting directly from dishonest acts committed by an Employee or Director, acting alone or in collusion with others, with the intent to cause the Insured to sustain such loss, or obtain an improper financial benefit for the Employee, Director or for any other person or entity." [Doc. 1-1, pg. 6; Doc. 33, pg. 5; Doc. 48, pg. 2].
In November 2017, GECU began an internal investigation into Sherry Allen for fraudulent transactions involving GECU [Doc. 33, pg. 4; Doc. 48, pg. 4-5]. As a result, GECU sent a Notice of Potential Loss to Berkley on November 30, 2017 [Doc. 33, pg. 4; Doc. 48, pg. 5]. After a full investigation by an accounting firm, GECU submitted a sworn Proof of Loss statement to Berkley, stating that Allen "took unauthorized funds from [GECU] over the course of several years" and claimed a total loss of $1,258,626.10 [Doc. 33, pg. 4-5; Doc. 48, pg. 8]. On May 1, 2018, the United States filed a criminal Information against Sherry Allen, charging her with Theft by Credit Union Officer of Employee and Attempted Tax Evasion [Doc. 33, pg. 5]. Allen plead guilty to embezzling money from GECU from 2011 to 2017 and was sentenced in September 2018 [Doc. 33, pg. 5; Doc. 48, pg. 10-13].
On May 16, 2018, Berkley filed its Complaint and Request for Declaratory Judgment asking the Court to find that the Financial Institution Bond, No. CUB 6008984-11 that it had issued to GECU was properly rescinded and is null and void ab initio [Doc. 1, pg. 8]. Berkley also requested an award of attorney's fees [Id. ]. Berkley attached the Bond, the Proof of Loss statement from GECU, and the Applications for the Bond. On May 17, 2018, Berkley sent GECU a letter rescinding the Bond and a check for $17,661.00, representing the amount that GECU paid as a premium for the Bond [Doc. 8-5]. On May 18, 2018, Berkley filed an Amended Complaint, which was identical to the original Complaint but included an attachment of Berkley's letter to GECU rescinding the Bond [Doc. 8].
On July 9, 2018, GECU filed its Answer and Counterclaim against Berkley for breach of contract and bad faith [Doc. 14]. GECU also sought to interplead with the Court the amount returned to GECU as a refund for the premium paid.1 On July 17, 2018, Berkley filed an Answer to the Counterclaim [Doc. 19] and also filed a Second Amended Complaint [Doc. 20], adding a claim for Reverse Bad Faith in response to GECU's Counterclaim. GECU answered the Second Amended Complaint on July 31, 2018.
On April 29, 2019, Berkley filed its Motion for Partial Summary Judgment [Doc. 32], memorandum of support [Doc. 33], and affidavits of support [Docs. 34, 35]. It claims that it properly rescinded the Bond pursuant to T.C.A. § 56-7-103 and Tennessee common law and that the Bond should be declared void ab initio based on a false answer given by Allen on the renewal application that increased its risk of loss. Therefore, Berkley seeks summary judgment on its claim for declaratory judgment and reverse bad faith on the part of GECU, as well as on GECU's counterclaims for breach of contract and bad faith.
On June 21, 2019, GECU filed its own Motion for Partial Summary Judgment [Doc. 46], memorandum of support [Doc. 47], statement of material facts [Doc. 48], and affidavit of support [Doc. 49], arguing that Allen's fraudulent answer on the application for renewal cannot be imputed to GECU and therefore, rescission is not proper. As such, it argues that Berkley breached the contract by refusing to pay the amount of the loss and rescinding the bond. GECU also seeks summary judgment on Berkley's claim for reverse bad faith and an award of attorney's fees [Doc. 46, pg. 2].
Each party responded and replied to the respective motions with corresponding arguments. These motions come down to whether or not Berkley's rescission of the Bond was proper. If so, then Berkley is entitled to an entry of declaratory judgment. If not, GECU's claim of breach of contract must prevail. Therefore, the Court will consider the arguments made in these motions and respective responses together as one.
Under Fed.R.Civ.P. 56(a), "[t]he court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Ultimately, the court must decide "whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law." Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 251-52, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). The burden of proving that no genuine dispute of fact exists is strictly upon the moving party. Celotex Corp. v. Catrett , 477 U.S. 317, 330 n.2, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). As such, the court must consider the evidence and "draw all reasonable inferences in favor of the nonmoving party." National Satellite Sports, Inc. v. Eliadis, Inc. , 253 F.3d 900, 907 (6th Cir. 2001) (citing Matsushita Elec. Indus. Co. v. Zenith Radio Corp. , 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986) ).
However, once the moving party has presented sufficient evidence to support summary judgment, the nonmoving party "must point to evidence in the record upon which a reasonable finder of fact could find in its favor." Machoka v. City of Collegedale , No. 1:17-CR-203-TAV-CHS, 2019 WL 1768861, at *3 (E.D. Tenn. Apr. 22, 2019) (citing Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986) ). The nonmoving party "may not rest upon mere allegation or denials of his pleading but must set forth specific facts showing that there is a genuine issue for trial." Anderson , 477 U.S. at 256, 106 S.Ct. 2505. Specifically, the alleged factual dispute must be material. Anderson , 477 U.S. at 248, 106 S.Ct. 2505.
T.C.A. § 56-7-103 (emphasis added). This means that in order to void a policy, the insurance company must prove (1) that the insured made a written or oral misrepresentation and (2) that statement was made with actual intent to deceive or that it increased the risk of loss. See Certain Underwriters at Lloyd's Subscribing to Policy No. LTP000034 , 2000 WL 977354, *3 (6th Cir. July 5, 2000) ; State Farm General Ins. Co. v. Wood , 1 S.W.3d 658, 661 (Tenn. Ct. App. 1999). The Sixth Circuit and the Tennessee Court of Appeals have held "[a] misrepresentation in an application for insurance increases the insurance company's risk of loss if it naturally and reasonably influences the judgment of the insurer in making the contract." Yarnell v. Transamerica Life Ins. Co. , 447 F. App'x 664, 674 (6th Cir. 2011) (quoting Lane v. Am. Gen. Life and Acc. Ins. Co. , 252 S.W.3d 289, 295-96 (Tenn. Ct. App. 2007) ). Further, "determining whether a particular misrepresentation increases an insurance company's risk of loss is a question of law for the court." Yarnell , 447 F. App'x at 674 (quoting Smith v. Tenn. Farmers Life Reassurance Co. , 210 S.W.3d 584, 589 (Tenn. Ct. App. 2006) ).
In this case, Berkley argues that Allen, as CEO of GECU and its agent for purposes of applying for the Bond renewal, made a written...
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