JP Morgan Chase Bank, N.A. v. Safeco Ins. Co. of America

• Court: U.S. District Court — Northern District of Ohio
• Writing for the Court: James G. Carr
• Decision Date: 31 May 2012
• Docket Number: Case No. 02-16014
• Citation: JP Morgan Chase Bank, N.A. v. Safeco Ins. Co. of America, Case No. 02-16014 (N.D. Ohio May 31, 2012)
• Parties: JP Morgan Chase Bank, N.A. (Successor by Merger to Bank One, N.A.) Plaintiff v. Safeco Insurance Company of America, Defendant

JP Morgan Chase Bank, N.A. (Successor by Merger to Bank One, N.A.) Plaintiff

v.Safeco Insurance Company of America, Defendant

Case No. 02-16014

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF OHIO WESTERN DIVISION

Dated: May 31, 2012

ORDER

Pending are countermotions by plaintiff JPMorgan Chase Bank, N.A. (successor by merger to Bank One, NA)(Bank One)(Doc. 189) and defendant, Safeco Insurance Company of America (Safeco)(Doc. 188) on the issue of the putative dual agency of Michael Anthony.

Familiarity with the complex factual background of these cases is assumed. For detailed factual background, see earlier bench trial opinions, Case Nos. 02-16000, Doc. 2459 and 02-16014, Doc. 131(collectively, Bench Trial Opinions).¹ This Opinion sets forth only the limited universe of facts pertinent to this opinion.

For the reasons that follow, I grant Bank One's Motion for Partial Summary Judgment and deny Safeco's Motion for Partial Summary Judgment.

BACKGROUND

This case arises from lease bonds, through which defendant Safeco guaranteed payment of the income stream generated from leases from Commercial Money Center, Inc. (CMC) tolessees of equipment which CMC provided. CMC funded its own purchase of the equipment with loans. The Safeco bonds were part of the assurance given to those institutions that they would receive the income stream, which CMC assigned to them as security for the loans. Bank One was an assignee in several separate transactions of the income stream and, as well, the Safeco bonds.

In Bank One's instance, it first provided the funds to an intermediary, a "Guardian Entity."² The Guardian Entities acquired an interest in the CMC lease bonds and/or the income stream which those bonds guaranteed. To obtain the income stream from CMC, a Guardian Entity would provide funds to CMC, which, in turn, obtained the equipment and leased it to the lessees.

After issuance of the Safeco bonds, the parties to each transaction executed a Sale and Servicing Agreement (SSA). The SSA memorialized various rights and obligations, primarily pertaining to servicing of the leases.

CMC went defunct. Its lease stream dried up completely. Bank One now seeks to recover on the lease bonds. It also asserts other claims based on breach of Safeco's obligations under the SSAs. Safeco denied liability on the lease bonds, and asserts the affirmative defense of fraud in the inducement by CMC, which originally arranged for the lease bonds. Safeco seeks rescission of the bonds and the SSAs.

For purposes of these motions, all parties appear to agree as to the following essential facts. Anthony & Morgan Surety & Insurance Services, Inc. (A&M) was an independent lease broker. Michael Anthony was a principal of A&M. In connection with the CMC lease bond program, Safeco granted limited powers of attorney to Anthony and A&M, thereby authorizingAnthony to sign and issue lease bonds in favor of CMC. By separate letters, Safeco also granted Anthony authority to execute Sale and Servicing Agreements (SSAs) on behalf of Safeco. Pursuant to the Safeco powers of attorney and letters, Anthony executed each of the bonds and SSAs at issue in this case.

Throughout the relevant time period Anthony also had a close working relationship with CMC. Anthony received substantial commissions, amounting to approximately $3.75 million over the course of the CMC program, from CMC on the lease pool transactions. Although Safeco apparently was aware that Anthony was working on behalf of both CMC and Safeco, neither Anthony nor CMC disclosed to Safeco the existence or the magnitude of the commission payments received by Anthony from CMC.

DISCUSSION

A. Parties' Positions

Safeco asserts that Anthony's alleged status as a secretly compensated dual agent entitles it to avoid all payment on the bonds and SSAs. Safeco contends that, as its attorney-in-fact, Anthony assumed fiduciary duties to Safeco, including the duties of good faith and disclosure of all material facts. Safeco relies on basic California case law to support these propositions. See, e.g., Thompson v. Stoakes, 46 Cal. App. 2d 285, 289 (1st Dist. 1941)("It is elementary, of course, that an agent is duty bound to disclose to his principal all material facts and circumstances of the transaction handled by him; that the agent must exercise the utmost good faith; that he must acquire no secret interest adverse to his principal; that he cannot lawfully make a secret personal profit out of the subject of the agency."); Tran v. Farmers Group, Inc., 104 Cal. App. 4th 1202, 1213 (1st Dist. 2002)("an attorney-in-fact is an agent owing a fiduciary duty to the principal.").

Safeco argues that Anthony's receipt of compensation from CMC rendered Anthony CMC's agent as well as Safeco's. Based on these facts, Safeco contends, Anthony was an undisclosed dual agent, entitling Safeco to rescission. In support of this proposition, Safeco relies on Gordon v. Beck, 196 Cal. 768, 771-72 (1925), in which the Court stated:

It is well settled in this state that a principal who has no notice or knowledge of the duplicity of his agent may at his option be relieved from the obligations of the contract as against his opposing principal who had notice or knowledge of such dual agency, either by affirmative action in rescinding the contract or by interposing such dual agency as a defense in an action to enforce the contract. . . . [N]ot even an innocent third party, who is also the principal of the same agent, may be allowed voluntarily to retain benefits or advantages which come to him only through the act of his agent and as the result of that agent's perfidy to his other principal . . . .

Safeco also cites Vice v. Thacker, 30 Cal. 2d 84, 90 (1947):

Where an agent has assumed to act in a double capacity, a principal who has no knowledge of such dual representation . . . may avoid the transaction. Actual injury is not the principle upon which the law holds such transaction voidable; rather, the law holds it voidable in order to prevent the agent from putting himself in a position where he will be tempted to betray his principal . . . . *** It makes no difference that the principal was not in fact injured, or that the agent intended no wrong or that the other party acted in good faith; the double agency is a fraud upon the principal and he is not bound. . . .'

See also McConnell v. Cowan, 44 Cal. 2d 805, 809-10, citing Vice, 30 Cal. 2d at 90.

Safeco points out that, based upon the principles outlined in these cases, the motive of the alleged dual agent is irrelevant, as is the motive of the other principal. Safeco argues, accordingly, that Anthony's divided loyalties entitle Safeco to rescind the lease bonds and SSAs even if Anthony acted in good faith and without fraudulent intent.

Safeco apparently acknowledges that it knew of Anthony's representation of CMC while also acting as Safeco's attorney-in-fact. Safeco urges, however, that the critical nondisclosurewas not the fact of the dual representation, but the fact and amount of CMC's payments to Anthony. In this regard, Safeco, citing Huijers v. DeMarrais, 11 Cal. App. 4th 676, 686 (2d Dist. 1992), argues that "it is not enough to disclose only the fact of dual representation. The agent must also disclose all facts which would reasonably affect the judgment of each party in permitting the dual representation.") See also TV Events & Mktg. v. AMCON Distrib. Co., 526 F. Supp. 2d 1118, 1134 (D. Haw. 2007)(although defendants were aware that agent had worked for plaintiffs in the past, and had continued to work for plaintiffs, neither plaintiff nor the agent disclosed to defendants that the agent had received commissions in connection with the transaction at issue).³

The cases Safeco cites from both California and elsewhere stand for the proposition that "when an agent acts for adverse principals with the acquiescence of each, he has a bounden duty to act with fairness to each, and is bound to disclose to each all facts which he knows or should know would reasonably affect the judgment of each in permitting such dual agency." Anderson v. Thacher, 76 Cal. App. 2d 50, 68 (2d Dist. 1946); see also Restatement (3d) of Agency, § 8.06, cmt. c (principal's consent to agent's acquisition of a material benefit in connection with a transaction may be secured only where agent makes "full and fair disclosure."). Safeco further asserts that "it is not enough for the agent to put the principal upon inquiry, but must disclose such material facts as are unknown to the principal and as will enable him to form a reasonably correct opinion and conclusion as to his best interest." McNeill v. Dobson-Bainbridge Realty Co., 184 Tenn. 99, 106 (1946); see also Wendt v. Fischer, 243 N.Y. 439, 443 (1926)("[i]f dual interests are to be served, the disclosure to be effective must lay bare the truth, without ambiguityor reservation, in all its stark significance.").

Safeco has cited only a Georgia appellate case (Spratlin, Harrington & Thomas, Inc. v. Hawn, 116 Ga. App. 175 (1967)), in support of its argument that Anthony had to disclose the existence and extent of the compensation from CMC. In that case defendants retained the plaintiff agency to obtain a loan commitment to finance a shopping mall. The plaintiff agency told defendants in a letter that it represented two prospective lenders. Plaintiff submitted defendants' loan application to the lender, and agreed with the lender that Plaintiff would receive a finder's fee and servicing fee at closing. The court held that plaintiff's failure to reveal that it would receive a fee from the lender was omission of a "pertinent and possibly vital fact." Id. at 182. In the absence of such disclosure, the Court declined to hold "that the defendants 'knew' of the dual agency so as to, in effect, waive the protection of the 'dual agency' rule." Id. Accordingly, defendants could rescind the contract and avoid payment of plaintiff's commission.

In response, Bank One argues that...