Fireman's Fund Ins. v. Nat. Bank for Cooperatives

• Decision Date: 01 April 1994
• Docket Number: No. C 92-2667 BAC.,C 92-2667 BAC.
• Citation: 849 F. Supp. 1347
• Court: U.S. District Court — Northern District of California
• Parties: FIREMAN'S FUND INSURANCE CO., a California corporation, Plaintiff and Counterdefendant, v. NATIONAL BANK FOR COOPERATIVES, as successor-in-interest to the Texas Bank for Cooperatives, Defendant and Counterdefendant. And Intervening Plaintiffs and Counterdefendants.

849 F. Supp. 1347

FIREMAN'S FUND INSURANCE CO., a California corporation, Plaintiff and Counterdefendant, v. NATIONAL BANK FOR COOPERATIVES, as successor-in-interest to the Texas Bank for Cooperatives, Defendant and Counterdefendant And Intervening Plaintiffs and Counterdefendants.

No. C 92-2667 BAC.

United States District Court, N.D. California.

April 1, 1994.

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Paul E.B. Glad, Michael A. Barnes, Sonnenschein, Nath & Rosenthal, San Francisco, CA, for plaintiff.

James D. Rendleman, Hines & Rendleman, Napa, CA, Paul F. Miller, Lakewood, CO, for defendant.

David E. Bunim, Robert C. Nicholas, Haas & Najarian, San Francisco, CA, Mark Bonino, Ropers, Majeski, Kohn, Bentley, Wagner & Kane, Redwood City, CA, for intervenors.

ORDER

CAULFIELD, District Judge.

INTRODUCTION

The following motions are before the court: (1) Fireman's Fund's motion for summary judgment on its complaint and partial summary judgment on CoBank's counterclaim; (2) Federal Insurance Company's motion for summary judgment on its complaint and partial summary judgment on CoBank's counterclaim; (3) Interstate's motion for summary judgment; (4) CoBank's motion for partial summary judgment against Fireman's Fund.¹

For the reasons explained below: (1) Fireman's Fund's, Federal's, and Interstate's motions are GRANTED; and (2) CoBank's motion is DENIED.

BACKGROUND

Fireman's Fund commenced this action against National Bank for Cooperatives, successor-in-interest to the Texas Bank for Cooperatives (hereinafter "CoBank"), seeking declaratory relief to determine whether it is obligated to pay an arbitration award in favor of CoBank against its policyholder, a dissolved corporation known as XLS, Inc., the successor-in-interest to Lawrence Systems, Inc. Three insurance companies intervened. Those companies are Interstate, National Union, and Federal. CoBank filed a counterclaim.

In 1986, Lawrence Systems entered a Certified Inventory Control Service agreement ("Agreement") with Aldus Marketing Association and CoBank.² The Agreement required Lawrence to bond the fidelity and diligence of Aldus employees who issued certificates to CoBank certifying the quantity of certain inventory on Aldus's premises or otherwise under Aldus's control. The Agreement also obligated Lawrence to compensate CoBank for losses not to exceed $5,000,000 sustained as a result of CoBank's reasonable reliance upon a material inaccurate representation in the last outstanding certificate.

The Agreement required CoBank to furnish Lawrence with written instructions pertaining to the issuance of Inventory Certificates. The Agreement also obligated CoBank to use reasonably prudent efforts to liquidate the available collateral securing Aldus's loans, with proceeds of such a liquidation to be applied directly to the collateralized loans, before making or prosecuting any claims against Lawrence. By amendment dated June 1, 1987, Lawrence's bonding obligation under the Agreement was increased to a maximum of $10,000,000.

The certificates issued by Lawrence to CoBank pursuant to the Agreement were issued weekly and all certificates expressly canceled and superseded the previous certificate issued.

On January 13, 1992, Paul F. Miller, counsel for CoBank, wrote to James L. Jennings, President of Lawrence. His letter demanded $10,000,000 from Lawrence pursuant to the Agreement. In the letter, Mr. Miller stated that CoBank had:

suffered an Actual Loss as defined by the above agreement in the amount of $16,634,184.00. This loss resulted from reliance upon misrepresentations of both the quantity and value of inventory as reported on the Inventory Certificates submitted to the Texas Bank for Cooperatives by Mr. John C. Young.

Illustrative are the misrepresentations on Inventory Certificates numbered 1366, 1377, and 1399. Mr. Young reported the value of the peanuts at $.55 per pound on each certificate with the exception of certificate number 1366 wherein he reported the value of the peanuts in the Memphis, Texas warehouse at $.40 per pound. The proper and correct value as determined from Line P ASCS form 1007 is $.30 per pound, with the results being a misrepresentation of $534,335.00, $930,300.00, and $875,185.00 respectively.

These sums are deemed material and were relied upon by the Texas Bank for Cooperatives when making the following extensions of credit: seven extensions of credit totalling $11,366,053.15 are listed.

According to the written instructions ... accepted by Lawrence ... John C. Young, the Lawrence bonded agent, was obligated to report the value of peanuts as shown on line P of ASCS form 1007. Mr. Young failed to adhere to these instructions and falsely certified to the value of the inventory. ... Aldus Marketing Association filed a voluntary petition for bankruptcy on September 30, 1988....

At the time of the petition, the outstanding advances to Aldus totalled $18,813,656.00. The post confirmation trustee has liquidated all inventory belonging to Aldus and applied the net proceeds against the out-standing unpaid advances owed to the Texas Bank for Cooperatives.

Allowing for all offsets and credits the unreimbursed balance owed to the Texas Bank for Cooperatives is thus the $16,634,184.00 quoted above.

(Exhibit A attached to Declaration of James Jennings in Support of Fireman's Fund's Motion).

On February 20, 1993, Mr. Miller wrote another letter to Mr. Jennings. Mr. Miller stated, in part:

As you acknowledged in your response letter, the inventory certificates did not report the peanuts as instructed in the instruction letter, i.e. the peanuts were reported at some value different from the line P value. The failure of Lawrence to accurately report the value of the peanuts is an act which caused confusion and misunderstanding as to the certification of goods and which caused and continues to cause confusion and misunderstanding as the inventory control services performed by Lawrence.

The above agreement made certain representations regarding the inventory certificates that constitute representations by Lawrence. Lawrence represented that the certificates and the peanut inventory had characteristics, ingredients, uses, benefits, or quantities which it did not have or that a person has a sponsorship, approval, status, affiliation, or connection which he does not.

* * * * * *

Lawrence represented that the inventory control services are of a particular standard, quality, or grade when they are of another. Lawrence represented that the inventory control services could be relied upon by a lender for the purpose of inventory financing. As facts have shown, the Texas Bank for Cooperatives could not and should not have relied upon the inventory control services provided by Lawrence.

* * * * * *

The specific complaint is that Lawrence has engaged in acts which constituted violations of § 17.46 of the Texas Business and Commerce Code, failed to report the inventory accurately, failed to follow the instructions set forth in the letter of July 26, 1986, and failed to compensate the Texas Bank for Cooperatives or the Co-Bank according to paragraph 1(b) of the inventory control agreement.

* * * * * *

This letter recites in detail the specific complaint of Aldus and the amount of actual damages and expenses incurred.

(Exhibit D to Jennings Declaration.)

On or about April 2, 1992, CoBank filed an arbitration demand with the American Arbitration Association ("AAA") against XLS. CoBank's demand for arbitration stated: "Nature of Dispute: Claims for Breach of Contract; Negligence; Negligent Supervision; Deceit by Bank Fraud; Unfair & Deceptive Trade Practices." (Exhibit A to Declaration of Paul Miller In Support of CoBank's Motion to Dismiss.) The arbitration was held in San Francisco on June 24 and June 25, 1992.

XLS informed the arbitrators that it would not appear at the hearing or be represented by counsel and XLS did not appear at the hearing. No party defended in the arbitration. The arbitration resulted in an award in favor of CoBank and against XLS for $10,000,000 plus costs and interest. In their Award of June 30, 1992, the arbitrators made the following relevant findings and conclusions:

7. Under the terms of the July 16 agreement, Lawrence agreed to bond the fidelity and diligence of appropriate members of Aldus' staff or other agents nominated by Aldus to, among other things, (1) issue certificates to the Bank certifying the quantity of inventory on Aldus' premises or otherwise under Aldus' control and reflecting values reported by Aldus or otherwise agreed with the Bank; and (2) comply with written instructions accepted from the Bank specifying the conditions pursuant to which Aldus could release inventory subject to the Bank's interest, and to allow no further withdrawal or other movement or physical disposition of the inventory except as specifically authorized by the Bank;

8. Under the agreement, Lawrence agreed to compensate the Bank for "actual loss" (as defined in the agreement) not to exceed five million dollars ($5,000,000) this was later raised to ten million dollars sustained as a result of the Bank's reasonable reliance upon a material inaccurate representation by bonded personnel on the latest certificate outstanding from time to time;

* * * * * *

13. In the arbitration proceeding, the claimant claimed damages for breach of contract, negligence, negligent supervision, deceit, unfair and deceptive trade practices under Texas law, and punitive damages.

14. In the period beginning July 16, 1986, and thereafter, Lawrence Warehouse Company failed to perform its obligations to provide services as specified in the contract.

15. CoBank suffered damages from such failure in the amount of seventeen million, seventy nine thousand, five hundred and ten dollars ($17,079,510).

16. The liability of XLS is limited to ten million dollars ($10,000,000) under the June 16, 1986, agreement, as

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