Great West Cas. Co. v. Travelers Indem. Co.

• Decision Date: 09 May 1996
• Docket Number: Civ. No. 94-5060.
• Citation: 925 F. Supp. 1455
• Court: U.S. District Court — District of South Dakota
• Parties: GREAT WEST CASUALTY COMPANY, a Nebraska corporation, and International Business & Mercantile Reassurance Company, an Illinois corporation, Plaintiffs, v. The TRAVELERS INDEMNITY COMPANY, a Connecticut corporation, Defendant.

925 F. Supp. 1455

GREAT WEST CASUALTY COMPANY, a Nebraska corporation, and International Business & Mercantile Reassurance Company, an Illinois corporation, Plaintiffs, v. The TRAVELERS INDEMNITY COMPANY, a Connecticut corporation, Defendant.

Civ. No. 94-5060.

United States District Court, D. South Dakota, Western Division.

May 9, 1996.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Gregory A. Eiesland, Quinn, Eiesland, Day & Barker, Rapid City, SD, for plaintiffs.

Roger W. Damgaard, Woods, Fuller, Schultz & Smith, Sioux Falls, SD, for defendant.

MEMORANDUM OPINION AND ORDER GRANTING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT

BATTEY, Chief Judge.

NATURE AND PROCEDURAL HISTORY

On August 19, 1994, plaintiffs commenced this lender liability action against defendant, specifically alleging claims of conversion (Count I), tortious interference with contractual relations (Count II), negligence (Count III), and breach of fiduciary duty (Count IV). On January 31, 1996, defendant filed a motion for summary judgment contending that the undisputed facts in the record fail to establish or rise to the level of actionable control to support plaintiffs' lender in control theory. On February 27, 1996, plaintiffs filed their brief opposing summary judgment asserting that there is a genuine issue of material fact as to whether defendant had exerted actionable control. Plaintiffs further contend that control is neither an element of, nor particularly relevant to, several of their causes of action.

The Court has jurisdiction under 28 U.S.C. § 1332.

FACTS

Plaintiff Great West Casualty Company (Great West) is a Nebraska corporation authorized to transact insurance business in South Dakota. Plaintiff International Business & Mercantile Reassurance Company (IB & MR) is an Illinois corporation also authorized to transact insurance business in South Dakota. IB & MR specializes in business failing to satisfy Great West's underwriting requirements. Defendant Travelers Indemnity Company (Travelers) is a Connecticut corporation authorized to transact business in South Dakota. First American Systems, Inc. (FAS) was an independent insurance agency which operated agencies in Rapid City (Kluthe & Lane Insurance Agency), Mitchell (First American Insurers), Sturgis (Bear Butte Insurance Agency), and Spearfish (First American Insurers). FAS was also the majority stockholder in North Wyoming Insurance Agency at Buffalo, Wyoming.

On May 1, 1987, Travelers and FAS entered into a loan agreement whereby Travelers loaned FAS $900,000 in exchange for a security interest in general intangibles, expiration and renewals, and other collateral of FAS.¹ See Defendant's Statement of Material Facts ¶¶ 17, 18. In the summer and early fall of 1988, Travelers had on several occasions contacted Edward James Smith, a Wisconsin businessman, about the prospect of Smith's purchasing FAS. See Plaintiffs' Statement of Material Facts ¶ 79. In the fall of 1988, Smith purchased a controlling interest in FAS through First American Holding Company of which he is the sole shareholder. Id. at ¶ 80. Smith borrowed approximately $300,000 from Travelers, which he and his wife Attracta O. Smith personally guaranteed. Id. at ¶ 81. Smith and his wife also assumed approximately 52 percent of the remainder of FAS's $900,000 obligation to Travelers. Id. Smith assumed the role of president of FAS, and John Hutson became FAS's executive vice-president and general manager on November 1, 1988. See Defendant's Statement of Material Facts ¶¶ 2, 3. Hutson as the manager of FAS became the contact person between Smith and Travelers. See Plaintiffs' Statement of Material Facts ¶ 84. FAS's board of directors consisted of Smith, his wife, and Hutson. See Defendant's Statement of Material Facts ¶ 6. At no time did Travelers own any stock in FAS, attend any shareholder meetings, vote or attempt to vote any stock of FAS, have any employees on FAS's board of directors, or have any employees who were officers of FAS. Id. at ¶ 7.

The loan agreement entered into by Travelers and FAS in May of 1987 was subsequently amended at the time Smith purchased a controlling interest in FAS through First American Holding Company. Id. at ¶ 22. The loan documents precluded FAS from selling any of its assets outside of the ordinary course of business absent Travelers' consent. Id. at ¶ 34. The documents further provided Travelers with significant commercial rights as a secured party, including reporting requirements and default provisions. Id. at ¶ 35. Pursuant to the agreements, a default occurs if "Travelers shall at any time in good faith deem itself insecure with respect to repayment under the Loan Agreement or Promissory Note." See Plaintiffs' Statement of Material Facts ¶ 86.

FAS sold insurance products for approximately 25 to 30 companies, including the parties to this litigation. See Defendant's Statement of Material Facts ¶ 10. FAS served as plaintiffs' general agent for the purpose of procuring applications and proposals for various classes of insurance, for the collecting and receiving of premiums paid on such insurance, and for the payment of such premiums to plaintiffs after their collection. See Plaintiffs' Statement of Material Facts ¶ 1. Pursuant to numerous agency contracts entered into with plaintiffs, the monies received by FAS for premiums or otherwise were to be held in trust, maintained in a segregated account, and paid to plaintiffs not later than 45 days following the last day of the month in which the transactions occurred. See Plaintiffs' Complaint ¶ VII. From 1992 through 1994, plaintiffs' share of FAS's total premium business was a little under 10 percent of FAS's total premium business. See Defendant's Statement of Material Facts ¶ 14. During the 1992 through 1994 time frame, FAS also acted as Travelers' general agent for the sale of Travelers' property and casualty financial services products. Id. at ¶ 8. Travelers' share of FAS's total premium business was at its highest in the 20 percent range, and declined to less than 10 percent by May of 1994 when FAS filed its voluntary Chapter 7 petition in bankruptcy. Id. at ¶ 11-13.

FAS collected all of its revenue and receipts, including premiums from hundreds of policyholders, and deposited them in FAS's commingled general accounts. Id. at ¶¶ 86, 90, 92. FAS made disbursements from its general accounts, including payments to the parties of this action. Id. at ¶ 91. The only signatures necessary for the disbursement of funds was that of FAS personnel. Id. at ¶ 88. Travelers was never a signatory on any of FAS's bank accounts. Id. at ¶ 87.

In 1992 Travelers' representatives conducted various cost-related studies with regard to FAS's business. Id. at ¶ 93. Based on the information obtained from the study, Travelers recommended that FAS reduce its acquisition costs including gross commissions and fringe benefits paid to its agents. Id. at ¶ 94. See also Plaintiffs' Statement of Material Facts ¶ 12. It is undisputed that FAS personnel decisions were made by FAS. Travelers did not dictate to FAS which employees to hire, fire, promote, transfer, or demote. See Defendant's Statement of Material Facts ¶¶ 100, 101. Furthermore, on a day-to-day basis, Travelers did not mandate to FAS what company payables or operating expenses to pay and which not to pay. Id. at ¶ 59. Although there is no evidence in the record indicating that Travelers ordered FAS to implement the recommended changes, Travelers' status as both a major creditor and client of FAS was undoubtedly a contributing factor in Smith's instruction to Hutson to design and implement a plan to reduce acquisition costs. Id. at ¶ 95. In June of 1992, FAS implemented a plan to reduce its acquisition costs. Id. at ¶ 96. Even though Smith contended that the reduction of acquisition costs was a good business decision in light of the fact that it brought FAS's expenses in line with the rest of the insurance community, the reduction contributed to the departure of several FAS employees which in turn affected the overall financial viability of FAS. Id. at ¶¶ 98, 99.

From 1992 through 1994, Travelers became involved in several meetings for the purpose of influencing the sale of some or all of FAS's agencies due to a decline in FAS's financial status. In April of 1992, Smith suggested in a letter to Travelers that the financial problems FAS was experiencing could possibly be remedied by: (1) the sale of his controlling interest to Hutson; (2) the sale of the property and casualty business of the Kluthe & Lane Agency in Rapid City to Donita Haley, the manager for Kluthe & Lane Insurance; or (3) the sale of the property and casualty business of the Kluthe & Lane Agency to Cummings & Roll Agency, headquartered in Rapid City. See Letter from Edward James Smith, President of FAS, to Joe Simao, Jr., Travelers' manager of agency finance (April 16, 1992) (Plaintiffs' Exhibit 31 attached to Deposition Transcript of Joe Simao, Jr., found at Exhibit 1 of Travelers' Supplemental Record in Support of Motion for Summary Judgment). Smith, Hutson, and Travelers' personnel met to discuss the potential sale to Hutson; however, Hutson decided not to purchase Smith's interest in FAS because of FAS's financial instability. See Deposition Transcript of John Hutson at 94; Deposition Transcript of Joe Simao, Jr. at 87-89. In the late spring, early summer of 1992 Haley and Travelers' personnel met in Rapid City to discuss the possible purchase of FAS by Haley and a group of FAS managers. See Plaintiffs' Statement of Material Facts ¶ 20. Prior to the commencement of the meeting, Travelers instructed Haley that it did not want Hutson to know about the meeting due to the fact that she was a competing purchaser with Hutson. Id. at ¶ 21.

On June 4, 1992, Travelers' manager of agency finance, Joe Simao, Jr., circulated an electronic mail message to eleven Travelers' employees advising them of the potential sale of...