Iberiabank Corp. v. Ill. Union Ins. Co.

• Decision Date: 18 March 2020
• Docket Number: No. 19-30190,19-30190
• Citation: 953 F.3d 339
• Parties: IBERIABANK CORPORATION, Plaintiff - Appellant v. ILLINOIS UNION INSURANCE COMPANY ; Travelers Casualty & Surety Company of America, Defendants - Appellees
• Court: U.S. Court of Appeals — Fifth Circuit

953 F.3d 339

IBERIABANK CORPORATION, Plaintiff - Appellant

v.ILLINOIS UNION INSURANCE COMPANY ; Travelers Casualty & Surety Company of America, Defendants - Appellees

No. 19-30190

United States Court of Appeals, Fifth Circuit.

FILED March 18, 2020

James Christopher Martin, Esq., Traci S. Rea, Esq., Reed Smith, L.L.P., Pittsburgh, PA, Loretta Gallaher Mince, Esq., James Richard Swanson, Attorney, Fishman Haygood, L.L.P., New Orleans, LA, Michael Patrick Yingling, Reed Smith, L.L.P., Chicago, IL, for Plaintiff-Appellant.

Albert Kirk Gasperecz, Esq., Adams & Reese, L.L.P., New Orleans, LA, Scott Stirling, Edward P. Gibbons, Walker, Wilcox, Matousek, L.L.P., Chicago, IL, for Defendant-Appellee ILLINOIS UNION INSURANCE COMPANY.

Thomas J. Judge, Jason C. Reichlyn, Dykema Gossett, P.L.L.C., Washington, DC, Richard Evan Baudouin, III, Esq., Matthew Joseph Farley, Attorney, Krebs Farley & Dry, P.L.L.C., New Orleans, LA, for Defendant-Appellee TRAVELERS CASUALTY & SURETY COMPANY OF AMERICA.

Before WIENER and HIGGINSON, Circuit Judges.^*

STEPHEN A. HIGGINSON, Circuit Judge:

This case turns on the scope of professional liability insurance policies issued to IberiaBank Corporation ("IberiaBank"). In late 2017, IberiaBank entered into an $11,692,149 settlement ("DOJ Settlement") with the United States Department of Justice ("DOJ"), under which it acknowledged that it provided mortgage certifications to the Department of Housing and Urban Development ("HUD") that did not meet all HUD requirements. The DOJ Settlement also resolved claims arising from a whistleblower qui tam action alleging violations of the False Claims Act ("FCA"). IberiaBank filed a claim with its primary and excess liability insurance providers, Illinois Union Insurance Company ("Chubb")¹ and Travelers Casualty and Surety Company of America ("Travelers") (collectively, "the Insurers"), requesting coverage for the DOJ Settlement. The Insurers denied IberiaBank’s claim, arguing that it was not covered by IberiaBank’s professional liability insurance policies with the Insurers ("the Policies"). IberiaBank sued the Insurers for breach of contract. The district court granted the Insurers’ motions to dismiss, finding that the Policies provide no plausible claim for relief. IberiaBank appealed. We AFFIRM.

I. FACTUAL BACKGROUND

A. HUD’s Direct Endorsement Lenders Program

The Federal Housing Administration ("FHA"), an agency within HUD, insures approved lenders against defaults on certain mortgage loans for single-family homes. 12 U.S.C. § 1708. The FHA insures loans only for individuals who fit its risk profile. Previously, HUD oversaw the "very staff-intensive and time-consuming" process of ensuring that the FHA insured lower-risk loans, which involved confirming that the borrowers insured by the FHA had sufficient credit. Delegation of Insuring Authority to Direct Endorsement Mortgages, 62 Fed. Reg. 30222-01, 30222 (June 2, 1997). To alleviate HUD of this burden, Congress authorized HUD to delegate the task of insuring mortgages using a Direct Endorsement Program ("DE Program"). Id. ; 12 U.S.C. § 1715z-21 ; Departments of Veterans Affairs and Housing and Urban Development, and Independent Agencies Appropriations Act, 1997, Pub. L. No. 104-204, § 427, 110 Stat. 2874 (1996). Under the DE Program, Direct Endorsement Lenders ("DE Lenders") agree to use HUD’s mortgage underwriting standards when approving borrowers for home loans. DE Lenders analyze the credit risk of each borrower using HUD’s guidelines, and then certify to HUD that approved borrowers meet HUD’s underwriting standards. The FHA then insures the DE Lender in the event the insured borrower defaults. DE Lenders submit a formal certification to the FHA declaring that the mortgage complies with all HUD underwriting requirements.

IberiaBank is a DE Lender. As a DE Lender, IberiaBank collects its customary fees from borrowers as compensation for originating the loans.

B. The Allegations Against IberiaBank and Settlement with the DOJ

In 2015, a former IberiaBank employee and a then-current IberiaBank employee ("the Relators") brought a whistleblower qui tam action on behalf of the United States against IberiaBank, alleging that IberiaBank violated the FCA during its participation in the DE Program.² The Relators alleged that IberiaBank was non-compliant with HUD’s underwriting requirements. Specifically, the Relators alleged that IberiaBank (1) improperly paid commissions to underwriters; (2) provided false loan certifications to HUD; (3) improperly certified compliance with HUD regulations; and (4) failed to report defective or fraudulent loans. As a result of this conduct, the Relators alleged that IberiaBank caused the FHA to pay insurance claims that it would not have paid if IberiaBank had conducted appropriate underwriting due diligence. The whistleblower qui tam action alerted the DOJ to potential wrongdoing by IberiaBank and, in April 2017, the DOJ informed IberiaBank of potential liabilities under the FCA.

The DOJ and IberiaBank entered into a Settlement Agreement on December 12, 2017, under which IberiaBank agreed to pay $11,692,149. In the Settlement Agreement, IberiaBank acknowledged that it certified certain mortgages to HUD that were ineligible for FHA insurance under HUD’s guidelines. IberiaBank also acknowledged that it paid "incentive payments to underwriters and others who performed underwriting activities." Further, IberiaBank acknowledged that it did not disclose the existence of these incentive payments to HUD, despite certifying that it had ceased paying incentives to underwriters as of 2010. Finally, IberiaBank acknowledged that it failed to comply with HUD’s self-reporting requirements when it became aware of loans that involved possible fraud or serious underwriting violations. However, IberiaBank did not acknowledge liability and "reserve[d] the right to contest the use or application of [the Settlement Agreement] in any future litigation." As a result of the DOJ Settlement, the FCA counts in the qui tam action were dismissed and the DOJ waived its right to pursue the remaining common law claims. After the DOJ Settlement, IberiaBank submitted a claim under the Chubb policy and, in the event its claim exceeded Chubb’s coverage, submitted a claim under the excess Travelers policy as well. The Insurers denied coverage, giving rise to this lawsuit.

C. The Insurance Policies and IberiaBank’s Claim

IberiaBank held two banker’s professional liability insurance policies—a primary policy and an excess policy. First, IberiaBank held a primary policy with a limit of $10,000,000 from Chubb. IberiaBank also held an excess policy with a limit of $5,000,000 from Travelers. The excess Travelers policy adopts the relevant language from the primary Chubb policy and, therefore, the analysis applicable to the Chubb policy applies to the Travelers policy.

The Insuring Clause of the Policies states:

The Insurer³ shall pay on behalf of the Insureds⁴ Loss⁵ which the Insureds become legally obligated to pay by reason of any Claim first made by a third party client of the Company against the Insureds during the Policy Period or any applicable Discovery Period for any Wrongful Acts⁶ in rendering or failing to render Professional Services, if such Wrongful Acts take place prior to the end of the Policy Period.

The Policies define "Professional Services" as:

[S]ervices performed by or on behalf of [IberiaBank] for a policyholder or third party client of [IberiaBank]. The Professional Services must be performed pursuant to a written contract with such policyholder or client for consideration inuring to the benefit of [IberiaBank].

Based on their interpretation of the terms "Professional Services" and "client," the Insurers interpreted the Policies to exclude IberiaBank’s claim and, therefore, denied it.

In response to the Insurers’ denial of IberiaBank’s claim, IberiaBank sued, alleging breach of contract. IberiaBank argued that the DOJ Settlement "fell squarely within the Policies’ broad insuring agreement for professional liability coverage because the Policies covered claims by a client for wrongful acts in rendering ‘Professional Services.’ " IberiaBank argued that it provided "Professional Services" to HUD when it underwrote mortgages as a DE Lender, and that the government (acting as IberiaBank’s "third party client") claimed IberiaBank committed wrongful acts when rendering those services, bringing the DOJ Settlement within the Policies’ Insuring Clause. The Insurers moved to dismiss, arguing that (1) the DOJ Settlement does not relate to "Professional Services" provided by IberiaBank, and (2) the government is not IberiaBank’s "client."

On February 13, 2019, the district court granted the Insurers’ motions to dismiss for failure to state a claim because (1) the government is not IberiaBank’s "client" under the DE Program and (2) IberiaBank did not provide "Professional Services" to the government in its role as a DE Lender. The district court then entered an order dismissing IberiaBank’s lawsuit against the Insurers. We affirm.

II. PRELIMINARY ISSUES

A. Jurisdiction and Applicable Law

This court has appellate jurisdiction under 28 U.S.C. § 1291 and diversity jurisdiction under 28 U.S.C. § 1332. In a diversity case, this court must apply state substantive law. As Louisiana’s choice-of-law rules dictate and as the parties agree, Louisiana law applies to the interpretation of the insurance policies here, which were issued in Louisiana. Am. Int’l Specialty Lines Ins. Co. v. Canal Indem. Co. , 352 F.3d 254, 260 (5th Cir. 2003) ("Louisiana choice of law rules dictate ... that in [an] action involving the interpretation of insurance policies issued in Louisiana, Louisiana substantive law governs."). When determining Louisiana law, this court first looks to "the final decisions of the Louisiana Supreme Court" and, absent guidance, we make an Erie guess to determine "how [the Louisiana Supreme Court] would resolve the issue if...