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Everest National Insurance Co. v. Sutton

October 14, 2009


The opinion of the court was delivered by: Joel A. Pisano, U.S.D.J.


PISANO, District Judge.

Presently before the Court is a motion by Plaintiffs/Counterclaim-Defendants Everest National Insurance Company ("Everest National") and Everest Reinsurance Company (together, "Everest") and Counterclaim-Defendant Daryl K. Bradley (collectively with Everest, the "Counterclaim Defendants") to (1) dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6) or, in the alternative, for summary judgment on Defendant-Counterclaimant's ("Sutton") Fourth (civil conspiracy), Fifth (fraud) and Sixth (gross negligence) counterclaims; (2) dismiss the First (fraud in the inducement) and Second (duress) counterclaims pursuance to Rule 12(b)(6); (3) strike the Second (fraud in the inducement), Third (duress), Ninth (express terms of the guaranties) and Tenth affirmative (same) defenses pursuant to Rule 12(f). For the reasons below, Plaintiffs' motion is granted.

I. Background

The facts of this case are set forth in detail in the Court's Opinion dated August 11, 2008, therefore only the facts relevant to this motion are discussed here. This case arises out of a program developed by Centrix Financial LLC ("Centrix"),*fn1 a Colorado limited liability company, involving sub-prime automobile loans. The program was designed to provide insurance to lenders for borrowers' defaults on such loans originated and serviced by Centrix. The program was known as the Portfolio Management Program, through which Centrix arranged for insurers to provide default protection insurance ("DPI") to lenders. DPI protected lenders from deficiency loan balance losses resulting from a repossessed motor vehicle.

From 1998 until August 2003, DPI coverage was provided under the program by Lyndon Insurance Group, Inc. ("Lyndon"), not a party to this case. However, late in 2002, Centrix began to take steps to replace Lyndon as the DPI provider. In October 2002, Centrix initiated negotiations with Everest with the goal of having Everest replace Lyndon as the DPI insurer for the PMP.

At the time, Everest was authorized to write property and casualty insurance in the jurisdictions in which it was licensed, including Colorado and New York. As the entity that was going to provide DPI coverage, Everest National sought guidance from the Superintendent of the State of New York Insurance Department ("NYID") regarding the nature of the DPI insurance. Declaration of Anthony Del Guercio ("Del Guerci Decl."), Ex. A. In particular, Everest National asked the NYID whether the proposed insurance policy would constitute residual value insurance or financial guaranty insurance. While Everest National was licenced to write residual value insurance, it was not licensed to write financial guaranty insurance, nor as a multi-line property casualty insurer could it write such coverage. The NYID concluded that the proposed coverage, absent a bankruptcy order, did not constitute financial guaranty insurance and Everest National was permitted to write such coverage. Id.

Thereafter, the parties entered into a Program Administrator Agreement ("PAA"), which set forth the rights and obligations of the parties in connection with the underwriting and servicing of sub-prime loans and the DPI policy. In connection with the PAA, the parties entered into an Excess of Loss Reinsurance Agreement ("Reinsurance Agreement"). Under the Reinsurance Agreement, Founders Insurance Company Limited ("Founders") reinsured losses incurred by Everest in excess of a specified amount that arose under the DPI Policy. As also set forth in the PAA, Sutton (individually and as owner of WK Capital Advisors Inc.), Wilshire Partners (by Sutton), and Centrix Capital Management LLC (by Sutton) (collectively, the "Guarantors") executed guaranties in favor of Everest securing the obligations of Founders under the Reinsurance Agreement ("Guaranties").

On February 7, 2007, Everest filed its complaint in this matter asserting that each defendant breached their obligations under the guaranties. Everest moved for partial summary judgment seeking an order that the defendant Guarantors were required to fulfill an obligation incurred by Founders to post $70 million in security in an arbitration and ordering defendants to post the security. The Court granted Everest's motion.

Thereafter, defendants sought and were granted leave to amend their answer and counterclaims. An amended answer with counterclaims was filed on April 3, 2009 and this motion followed.

II. Analysis

A. Previously Asserted Counterclaims

In granting Plaintiff's earlier summary judgment and 12(b)(6) motions, the Court dismissed Sutton's original counterclaims for fraud in the inducement and duress. These same counterclaims are pled in the Amended Answer and Counterclaims ("Amended Answer") as the First and Second Counterclaims and are embodied in the Second and Third Affirmative Defenses. Each of these are accompanied by the notation that these counterclaims and defenses are being "Asserted Only to Preserve Reconsideration and/or Right to Appeal." Answer at 9, 22, 23. Despite the clarity of this disclaimer, Everest nevertheless has moved to dismiss the First and Second Counterclaims on the basis that the Court has previously dismissed them. In response to the motion, Defendants confirm that they are not seeking to re-assert or re-litigate the claims or defenses, and explain that the claims and defenses have only been included in the pleading to preserve them for potential reconsideration or appeal. Opp. Brf. at 23. In light of the express disclaimer in the pleading itself as well as Defendants' representations to ...

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