National Union Ins. Co. v. Holmes & Graven

• Court: U.S. District Court — District of Minnesota
• Writing for the Court: Erickson
• Citation: National Union Ins. Co. v. Holmes & Graven, 23 F.Supp.2d 1057 (D. Minn. 1998)
• Decision Date: 19 June 1998
• Docket Number: Civ. No. 3-96-1129(RHK/RLE).
• Parties: NATIONAL UNION INSURANCE COMPANY OF PITTSBURGH, PA., Plaintiff, v. HOLMES & GRAVEN, Chartered, James Holmes, Daniel Nelson, and Washington Housing & Redevelopment Authority, Defendants and Third-Party Plaintiffs, v. AMERICAN HOME ASSURANCE COMPANY, and Virginia Surety Company, Inc., Third-Party Defendants.

23 F.Supp.2d 1057

NATIONAL UNION INSURANCE COMPANY OF PITTSBURGH, PA., Plaintiff, v. HOLMES & GRAVEN, Chartered, James Holmes, Daniel Nelson, and Washington Housing & Redevelopment Authority, Defendants and Third-Party Plaintiffs, v. AMERICAN HOME ASSURANCE COMPANY, and Virginia Surety Company, Inc., Third-Party Defendants.

Civ. No. 3-96-1129(RHK/RLE).

United States District Court, D. Minnesota, Third Division.

June 19, 1998.

COPYRIGHT MATERIAL OMITTED

Ludwig Broderick Gartner, Jr., Heidi A. Schneider, Gartner & Schupp, Minneapolis, MN, Kenneth A. Sagat, Neil R. Morrison, for National Union Ins. Co. of Pittsburgh, PA.

Richard Bruce Allyn, Barbara Jeanne Haley, Robins Kaplan Miller & Ciresi, Minneapolis, MN, for Holmes & Graven, James Holmes and Daniel Nelson.

Charles A. Valente, Elizabeth S. McKelvey, Edward E. McNally, Rita M. Alliss, Altheimer & Gray, Chicago, IL, J. Michael Dady, Jeffery S. Haff, Dady & Garner, Minneapolis, MN, for Washington County Housing & Redevelopment Authority.

Ludwig Broderick Gartner, Jr., Heidi A. Schneider, Gartner & Schupp, Minneapolis, MN, Kenneth A. Sagat, Neil R. Morrison, for American Home Assurance Co.

Thomas Jerome Shroyer, Winfred S. Herzog, paul Joseph Yechout, Moss & Barnett, Minnepolis, MN, for Virginia Surety Co.

REPORT AND RECOMMENDATION

ERICKSON, United States Magistrate Judge.

I. Introduction

This matter came before the undersigned United States Magistrate Judge pursuant to a special assignment, made in accordance with the provisions of Title 28 U.S.C. § 636(b)(1)(B), upon the cross-Motions of the Plaintiff National Union Insurance Company of Pittsburgh, Pennsylvania ("National Union"), and of the Third-Party Defendant Virginia Surety Company, Inc. ("Virginia Surety"), for Summary Judgment.

A Hearing on the Motions was conducted on November 17, 1997, at which time National Union appeared by Heidi A. Schneider, Esq.; Virginia Surety appeared by W. Scott Herzog, Esq.; and no appearances were made by, or on behalf of, the remaining parties to this action.¹

For reasons which follow, we recommend that a final Judgment be entered which grants National Union's Motion in part, and Virginia Surety's Motion in part, as we conclude that neither insurer is obligated, under the terms of their respective policies, to indemnify the Defendants, Holmes & Graven, Chartered ("Holmes & Graven"), James Holmes ("Holmes"), and Daniel Nelson ("Nelson"), for the claims litigated, and ultimately settled, in Washington County Housing and Redevelopment Authority vs. Holmes & Graven, Chartered, James Holmes, and Daniel Nelson (Court File No. 82-C2-96-00252, Minnesota District Court for Washington County). We recommend that both Motions be denied insofar as each insurer has attempted to shift the duty to defend, and to indemnify, onto the other.

II. Factual and Procedural History

The cross-Motions were submitted on the parties' Stipulated Facts, which memorializes their agreement that the issues presented are properly resolved as a matter of law. Accordingly, the underlying facts, upon which are Recommendation is based, are not in material dispute.

National Union is a Pennsylvania corporation, which has its principal place of business in the State of New York; Virginia Surety is an Illinois corporation, which has its principal place of business in that State; and the Third-Party Defendant American Home Insurance Company ("American Home") is a New York corporation, which has its principal place of business in the State of New York. National Union and American Home are wholly owned subsidiaries of the American International Group.

Holmes & Graven was a Minneapolis law firm which had, among its clients, the Washington County Housing & Redevelopment Authority ("HRA"). Specifically, during the period of its retention, Holmes & Graven served as the HRA's general counsel with respect to all matters, including all municipal tax-exempt financing, which was undertaken by the HRA. In 1988, the HRA entered a municipal service agreement with the City of Cottage of Cottage Grove, Minnesota, which related to the building and development of a 180-unit, multifamily, housing development which became known as "Woodland Park."

In 1990, and in connection with the Woodland Park development, Holmes & Graven prepared documentation, including bonds, a Trust Indenture between the HRA and the First Trust National Association, which served as the Trustee for the bonds ("the Trustee"), and a Legal Opinion, dated May 9, 1990, which the firm rendered in its capacity as the HRA's counsel. As pertinent here, Holmes & Graven expressed an opinion, in its Legal Opinion, that the financing documents, including the Mortgage, contained legally binding obligations upon the HRA, subject to the qualification that the firm was expressing "no opinion as to the right of the Trustee to obtain possession of the Premises (as defined in the Mortgage) prior to foreclosure and the running of the redemption period other than in compliance with Minn.Stat. § 559.17 and § 576.01, subd. 2 * * *." Exhibit B, at page 2.

During 1992, the revenues that remained, after the expenses which were associated with the Woodland Park development's debt servicing had first been satisfied, were insufficient to meet the complex's operating expenses, and the HRA, and the Trustee, reached a discord concerning each other's legal rights, and obligations, under the pertinent financing documents. As a result of this discord, in March of 1994, the HRA engaged Holmes & Graven to commence a Declaratory Judgment action, in State Court, in order to obtain a judicial declaration concerning the respective rights, and obligations, of the HRA, and of the Trustee, under the financing documents.

On or about May 12, 1994, the declaratory action was commenced in the Minnesota District Court for the Tenth Judicial District. In this action, the HRA sought "a declaration against * * * [the] Trustee that the HRA ha[d] no personal liability for any of the obligations under the [Trust] Indenture and ha[d] no obligation to use non-Project funds to fund operating shortfalls in the Project." Exhibit C, at page 4. On or about August 3, 1994, the Trustee interposed its Answer to the HRA's Complaint, and also asserted a Counterclaim against the HRA, in which the Trustee sought a declaration that, in accordance with Section 13 of the Mortgage document, the Trustee "[wa]s entitled, but not obligated, as agent of the HRA, to rent, lease, or let the Project, and collect Project revenues, with rights, powers, immunities, exoneration of liability, and rights of recourse and indemnity of Project possession on behalf of the HRA." Exhibit D, at pages 4-5. Stated in plain English, the Trustee sought a declaration that it had the right, under the Mortgage, to rent out, and collect the rents, for the apartments in the Woodland Park complex, and that it also had the right to take possession of the development.

The action came to Trial on January 18, 1995, and, on June 6, 1995, the Court issued its Findings of Fact, Conclusions of Law, Order, and Order for Judgment. With regard to the HRA's requested declaration — that the debts of the project were non-recourse with respect to the HRA — the Court made the following Findings of Fact:

1. That on May 9, 1990, [the HRA] issued $12,343,833.00 in Washington County Housing and Redevelopment Authority Governmental Housing Revenue Refunding Bonds ("Woodland Park Apartments Project"), Series 1990A and Series 1990B ("the Bonds") pursuant to the terms of a Trust Indenture dated May 1, 1990 ("the Indenture") between the HRA and [the Trustee].

2. The Bonds * * * are known as "assential function bonds" in that they were issued by the HRA to finance a project to be owned by the HRA, as contrasted with "conduit financing bonds" where the issuer loans the bond proceeds to a private developer who owns the project.

* * * * * *

5. The HRA's attorney, Daniel Nelson [an attorney with Holmes & Graven] was charged with drafting the financing documents in connection with the issuance of the Bonds. As a model, Nelson used documents provided by the underwriter for the Bonds, Downing & Co. ("Downing"). The model documents had been drafted by Butler & Binion, a law firm in Texas, and contained provisions with which Nelson was not familiar. The Butler & Binion documents were not drafted in connection with the issuance of essential governmental purpose housing bonds, but rather conduit financing bonds.

* * * * * *

11. In the execution draft of the Indenture, section 5.11 provides that:

"[I]f the total amount on deposit in the Tax Reserve Account shall not be sufficient to pay * * * taxes, payments in lieu of taxes, assessments, and premiums, the Issuer shall pay the excess amount of such taxes, payment in lieu of taxes, any other municipal charges, assessments, and premiums directly." [Author's emphasis].

12. During the drafting process, Nelson had modified Section 5.11 to include the statutory payment in lieu of taxes (PILOT) obligation and the HRA's obligation under the Municipal Service Charge Agreement. Throughout the various drafts, however, Nelson never made any change to the language of section 5.11 that if amounts on deposit with the Trustee were insufficient to meet PILOT, and the municipal services charge obligations, the HRA was obligated to pay such amounts "directly."

13. In the execution draft of the Indenture, Section 5.12 describes the Replacement Reserve Account, which provides funds to meet the costs of replacements or items of extraordinary maintenance which may be required to keep the Project in sound condition. This section provides that:

[I]f the total amount on deposit in the Replacement Reserve Account shall not be sufficient to pay all such repair and replacement costs when they become due, the issuer shall pay the excess amount of such costs directly. [Author's emphasis].

14. Throughout the various drafts, Nelson never made any...