Usmoney Source, Inc. v. American International Speciality Lines Insurance , 288 F. App'x 558 ( 2008 )

[DO NOT PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
________________________ FILED
U.S. COURT OF APPEALS
No. 08-10686 ELEVENTH CIRCUIT
JULY 10, 2008
Non-Argument Calendar
THOMAS K. KAHN
________________________
CLERK
D.C. Docket No. 07-00682-CV-WSD-1
USMONEY SOURCE, INC., a Georgia corporation
d.b.a. Soluna First,
Plaintiff-Appellant,
versus
AMERICAN INTERNATIONAL SPECIALITY
LINES INSURANCE COMPANY, a Delaware corporation,
Defendant-Appellee.
________________________
Appeal from the United States District Court
for the Northern District of Georgia
________________________
(July 10, 2008)
Before CARNES, BARKETT and COX, Circuit Judges.
PER CURIAM:
The Plaintiff, USMoney Source, Inc. (“USMoney”), challenges the district
court’s order granting summary judgment in favor of the Defendant, American
International Specialty Lines Insurance Company (“American”), USMoney’s errors
and omissions insurer. The court found that, based on a coverage exclusion in the
policy, American was not obligated to defend and indemnify USMoney in an action
in United States District Court for the District of Nebraska that resulted in a judgment
against USMoney. USMoney appeals, argues that the exclusion does not apply, and
asks that we grant its motion for summary judgment. We reverse.
I. Background
USMoney filed a declaratory judgment action seeking indemnification from
American under a Mortgage Bankers/Mortgage Brokers Errors and Omissions Policy
for a judgment rendered against it in Nebraska (the “underlying action”). In the
underlying action, TierOne Bank Corp. (“TierOne”) sued USMoney to recover unpaid
loans TierOne advanced to USMoney under a Line of Credit Agreement. USMoney
used the loans to originate residential mortgages for sale on the open market.
TierOne filed suit after USMoney did not repay the loans within thirty days (as
required by the Line of Credit Agreement), in part because the loans were not secured
by a valid and enforceable first lien on each of the subject properties.1 TierOne
alleged that USMoney breached the Line of Credit Agreement, was negligent in its
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USMoney and TierOne were victims of an elaborate mortgage fraud scheme. At least two
individuals involved in the scheme have been criminally charged.
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submission of funding requests, and negligently misrepresented facts in the
submission of its funding requests. After a bench trial, the Nebraska district court
found in favor of TierOne on all of its claims, and entered judgment against
USMoney in the amount of $1,625,630.71.
After judgement was entered in the underlying action, the district court ruled
on the parties’ pending cross-motions for summary judgment, granting American’s
motion and denying USMoney’s motion. The court found that the errors and
omissions policy did apply, but that an exclusion for claims “arising out of defective
title” relieved American of its obligation to defend and indemnify USMoney.
USMoney appeals.
II. Discussion
The errors and omissions policy covers “any Claim(s) . . . for any Wrongful Act
of the Insured . . . but only if such Wrongful Act . . . occurs solely in the rendering of
or failure to render Professional Services . . . .” (R.1-10, Ex. 1 at 2.) “Wrongful Act”
is defined as “any actual or alleged breach of duty, neglect, error, misstatement,
misleading statement or omission committed solely in the Insured’s Professional
Services . . . .” (Id. at 3.) “Professional Services” is defined as “the origination, sale,
pooling and servicing of mortgage loans secured by real property.” (Id.) The
coverage exclusion at issue provides that the policy “does not apply to any
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Claim . . . arising out of any defective deed or title . . . .” (Id. at 3-4.) The issue on
appeal is whether TierOne’s claims arise out of any defective deed or title within the
meaning of this exclusion.
There is no shortage of Georgia cases discussing insurance policies with
exclusions for claims that “arise out of” a specified circumstance. As the district
court recognized, Georgia courts have essentially boiled down the “arising out of”
analysis to this: “[A] claim ‘arises out of’ a circumstance if, without the existence of
that circumstance, the claim could not exist.” (R.1-21 at 10.) Stated differently, “a
claim does not ‘arise out of’ a circumstance if, independent of that circumstance, the
claim could still exist.” (Id. at 13.)
An overview of Georgia cases involving similar policy exclusions illustrates
these principles. In Continental Casualty Co. v. H.S.I. Financial Service, Inc., 466
S.E.2d 4 (Ga. 1996), a lawyer, Page, was sued for fraudulent use of a client’s funds.
His law partners, Sevy and Henderson, were sued for negligent supervision. The
firm’s professional liability policy excluded coverage over claims “arising out of any
dishonest, fraudulent, criminal, or malicious act[s].” Id. at 5. After deciding that the
claim against Page clearly fell within the exclusion, the court considered whether the
exclusion encompassed the negligent supervision claim against Sevy and Henderson.
In holding that the claim fell within the exclusion, the court said, “[I]t is clear that
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[plaintiff’s] claim against Sevy and Henderson ‘arose out of’ Page’s actions, because
but for Page’s actions, there could be no claim against Sevy and Henderson.” Id. at
6. The court continued, “[T]he exclusionary clause is focused solely upon the genesis
of [plaintiff’s] claims—if those claims arose out of Page’s culpable conduct, as they
did, then coverage need not be provided.” Id. Thus because there could be no
negligent supervision claim against Sevy and Henderson without the excluded
circumstance, i.e., dishonest and fraudulent acts by a partner, the claim against Sevy
and Henderson “arose out of” the exclusion.
A case reaching the opposite result is Fireman’s Fund Insurance Co. v.
University of Georgia Athletic Association, Inc., 654 S.E.2d 207 (Ga. Ct. App. 2007),
cert. denied, No. 07-01227 (Ga. Mar. 10, 2008). In Fireman’s Fund, a University of
Georgia football player, Bryant, informed the University’s assistant athletic director,
Wilder, on October 21 that he wished to obtain school-sponsored disability insurance.
Wilder spent a several days soliciting quotes and attempting to procure insurance, yet
failed to do so before Bryant was paralyzed in a football game on October 25. Bryant
sued Wilder and the Athletic Association for breach of fiduciary duties, breach of
contract, and negligence based on the defendants’ failure to procure disability
insurance.
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The Association’s liability carrier maintained that Bryant’s claims were subject
to several exclusions in the University’s policy, including one for claims “arising out
of, in consequence of or in any way related to any Bodily Injury . . . .” Id. at 211.
According to the carrier, Bryant’s claims were “entirely predicated on his bodily
injury. In other words, ‘but for’ Bryant’s bodily injury, his claim against the
Association would have been unsustainable.” Id. at 213. The Georgia Court of
Appeals disagreed and found that Bryant’s claims did not fall within the exclusion.
It held that “the nexus between Bryant’s bodily injury and his claims against Wilder
and the Association is too attenuated to bring his claims within the ambit of the
bodily injury exclusion.” Id. at 213-14. The court observed that “Wilder’s and the
Association’s actionable breaches of fiduciary or contractual duties and/or duty of
ordinary care were complete” at the moment Bryant faced the hazards of playing
“football without the protection that would have been afforded by the disability
insurance he requested.” Id.Cotton States Mutual Insurance Co. v. Crosby, 260 S.E.2d 860 (Ga. 1979) is
also worth considering. In Crosby, a father sued two school district officials on
behalf of his minor daughter after she was raped at school. His complaint included
causes of action for negligent breach of duty to safeguard the school’s premises and
unlawful detention of the daughter after the rape. The school board’s liability policy
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included an exclusion “for any damages, direct or consequential, arising from bodily
injury.” Id. at 861.
The Georgia Supreme Court held that the first claim—negligent failure to
safeguard the premises—fell within the exclusion, but that the unlawful detention
claim did not. Speaking to the first claim, the court explained that “[i]n order for a
tort action to lie, there must be an injury to the plaintiff, i.e., some initiating event
which is the result of the defendant’s negligence and brings that wrongful conduct to
light.” Id. The court reasoned that the daughter’s rape was the initiating event, and,
consequently, the exclusion applied because “no right of recovery would exist at all
had the bodily injury not originally occurred.” Id. at 862. On the other hand, the
exclusion did not bar the unlawful detention claim because “[t]he damages sought by
the daughter for her unlawful detention by the defendant school officials are not
damages arising from bodily injury . . . .” Id. In other words, the plaintiff could
maintain an action for unlawful detention of his daughter even in the absence of
bodily injury to her.
USMoney argues that the present case is controlled by Fireman’s Fund and the
unlawful detention holding in Crosby. Specifically, it argues that “[a]ssuming the
titles were actually vested in the purported borrowers and TierOne had valid first
priority liens on the properties, TierOne would still have had valid claims against
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[USMoney] based upon its negligence and breach of contract in submitting forged
appraisals and fraudulent insured closing letters.” (Pl.’s Initial Br. at 13.) It maintains
that TierOne’s damages resulted as much from the forged appraisals and lack of
closing insurance as they did from the lack of valid title, because forged appraisals
and lack of closing insurance renders the mortgages unmarketable. (Id. at 15-17.)
American responds that Continental Casualty and the negligence holding in Crosby
controls. According to American, “the fraudulent closing letter and forged appraisal
would not have been necessary if USMoney had valid title to the property, because
the borrowers could have obtained a legitimate appraisal and a legitimate closing
letter. Both the letter and appraisal were needed to perpetuate a fraud that would
never have existed but for the lack of valid title to the property.” (Def.’s Br. at 6.) We
find that both parties are partially correct and hold that American is under a duty to
indemnify USMoney against two of TierOne’s claims—breach of contract and
negligent misrepresentation.
American must indemnify USMoney against these claims because the excluded
circumstance—defective title—was not necessary to them. In other words, these
claims did not “arise out of” the exclusion because TierOne could have maintained
those claims against USMoney even if USMoney had obtained valid first liens
securing the loans. For example, although the Nebraska district court found that
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USMoney breached the Line of Credit Agreement in part because it “failed to ensure
TierOne had a valid first lien on the real estate for which the loans at issue were made
. . .” (R.1-17, Ex. 1 at 6), it also found that USMoney breached the Agreement by
“submitt[ing] funding requests to TierOne with representations and covenants
containing false and inaccurate information . . .” (id.). Examples of false information
submitted by USMoney include the names and licensures of various closing
companies or their agents. Because USMoney breached the Agreement in ways
unrelated to defective title, the breach of contract claim does not “arise out of” the
exclusion.
Similarly, although the court found that USMoney negligently represented that
“the loans . . . were secured by valid first liens on the real estate . . .” (R.1-17, Ex. 1
at 9), it went on to list further negligent representations by USMoney (id.).
USMoney could have made these negligent representations even with good title, and
therefore, this claim does not “arise out of” defective title.
TierOne’s breach of contract and negligent misrepresentation claims resemble
the unlawful detention claim asserted in Crosby and the breach of fiduciary duty and
breach of contract claims in Fireman’s Fund. Because TierOne could maintain the
same causes of action even if the titles securing the loans were unblemished, the
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claims do not “arise out of” the excluded circumstance, i.e., defective title, and the
exclusion does not apply.
On the other hand, TierOne’s common law negligence claim does “arise out of”
the excluded circumstance, and therefore, is not covered. The essence of this claim,
as described by the District Court of Nebraska, is that USMoney breached its duty of
care to TierOne by its “failure to secure valid first liens on the real estate in the . . .
Loans while representing [USMoney] in fact secured valid first liens.” (R.1-17, Ex.
1 at 11.) Unlike the breach of contract and negligent misrepresentation claims,
TierOne could not have maintained the common law negligence claim against
USMoney in the absence of defective title; otherwise, USMoney would not have
breached its duty of care. Like the negligent supervision claim asserted in asserted in
Continental Casualty and the negligent securing of property claim in Crosby,
TierOne’s common law negligence claim is wholly dependent on the existence of
defective title. Therefore, the exclusion applies and American is under no duty to
indemnify USMoney against TierOne’s negligence claim.
III. Conclusion
American is obligated to indemnify USMoney against TierOne’s claims for
breach of contract and negligent misrepresentation, but not its claim for common law
negligence. The Nebraska court found that all of TierOne’s damages are attributable
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to both the contract claim and the negligent misrepresentation claim. Therefore, the
district court’s order granting summary judgment in favor of American is reversed.
The court’s order denying summary judgment to USMoney is reversed, and the case
is remanded to the district court with instructions to grant USMoney’s motion for
summary judgment.
REVERSED AND REMANDED.
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