Marble Bridge Funding Group, Inc. v. Euler Hermes American Credit Indemnity Co.
Docket: Case No. 5:12-cv-02729-EJD
Court: District Court, N.D. California; December 1, 2016; Federal District Court
The court issued an order partially granting and partially denying Euler Hermes American Credit Indemnity Company’s motion for summary judgment in a case involving commercial financing known as factoring. Marble Bridge Funding Group (MBFG) serves as a factor, providing accounts receivable financing, while Euler sells trade insurance to protect sellers against non-payment from debtors. MBFG claims that it was misled by Euler into purchasing accounts receivable invoices from Nature’s Own, which was later revealed to be fraudulent. Euler, having insured Nature’s Own's accounts receivable, subsequently denied MBFG's claims after the fraud was exposed.
Federal jurisdiction is established under 28 U.S.C. § 1332. The court found that while many of Euler’s arguments were valid, not all were sufficient to warrant a complete summary judgment in its favor. Euler, a Maryland insurance company licensed in California, had issued two nearly identical credit insurance policies for Nature’s Own, the first starting on November 1, 2010, and renewed on November 1, 2011. The policies covered credit losses due to non-payment by approved buyers, specifically excluding subsidiaries or affiliated corporations.
The policies defined "Covered Products" as those explicitly listed in the Declaration, which included various pharmaceutical and natural products. Coverage was contingent upon the actual shipment and delivery of these products, with specific definitions for "Dispatched" and "Delivery" related to the control and risk of loss during the transaction. The court’s decision reflects a nuanced evaluation of the merits of both parties' arguments regarding the insurance coverage and the contractual obligations involved.
MBFG entered into a Receivables Purchase Agreement with Nature's Own on June 22, 2011, purchasing certain accounts receivable. Following this, Nature's Own requested an endorsement to the First Policy on July 3, 2011, to designate MBFG as a beneficiary, which was formalized through a 'Bank/Lender Policy Beneficiary Endorsement.' This Endorsement granted MBFG rights under the First Policy, allowing it to file claims and receive loss payments typically owed to Nature's Own. The Endorsement remained effective through policy renewals unless a written release was provided. Richard Wallace was identified as the sole member of Nature's Own, and Anette Zimmerman, who signed the credit insurance policy application, was revealed to be a fictitious name for Marsha Kay Holloway. It was discovered that the invoices purchased by MBFG were fraudulent, created to extract funds from MBFG.
In subsequent events, Euler canceled credit limits for many of Nature's Own's buyers in late February 2012. MBFG filed claims against the Second Policy on March 7, 2012, for these buyers, but Euler denied coverage on May 24, 2012. MBFG initiated a lawsuit against Nature's Own Pharmacy LLC and its principals on April 12, 2012, and later filed an action against Euler on May 29, 2012, subsequently amending the complaint on September 12, 2014.
The legal standard for granting summary judgment requires no genuine dispute of material fact and entitlement to judgment as a matter of law, with the moving party bearing the initial burden of proof. If the moving party meets this burden, the non-moving party must present specific evidence to demonstrate a genuine dispute of fact. Mere suggestions of controversy or speculative testimony are insufficient to prevent summary judgment.
When a moving party meets its burden under Rule 56(c), the opposing party must present admissible evidence to create a genuine issue of material fact, beyond merely demonstrating metaphysical doubt. If the non-moving party fails to do so, the moving party is granted summary judgment. MBFG has filed ten claims against Euler, including fraud-related allegations and violations of RICO. Euler seeks summary judgment on the first eight claims, arguing that MBFG lacks permission to assert the RICO claims.
The elements for California's intentional misrepresentation include: a misrepresentation, knowledge of its falsity, intent to defraud, justifiable reliance, and damage. Negligent misrepresentation requires showing that the defendant lacked reasonable grounds for believing the statement was true. Fraudulent concealment necessitates the concealment of a material fact by a defendant with a duty to disclose, intent to defraud, the plaintiff's unawareness, and resulting damage.
Liability for aiding and abetting an intentional tort involves knowing about the tortious conduct and providing substantial assistance. Because MBFG bears the evidentiary burden at trial, Euler must demonstrate MBFG's inability to prove these claims. If Euler does so, MBFG must then produce evidence that could allow a reasonable juror to rule in its favor. Euler contends that there is no material dispute regarding the knowledge element for MBFG's claims of intentional misrepresentation, fraudulent concealment, and aiding and abetting fraud, and the court concurs.
To establish a claim for deceit through intentional misrepresentation, a plaintiff must demonstrate that the defendant knew the representation was false or acted recklessly regarding its truth. For fraudulent concealment, the plaintiff must show the defendant was aware of undisclosed facts unknown to the plaintiff. Aiding and abetting requires that the defendant had actual knowledge of the specific primary wrong they assisted. Knowledge in fraud claims is a factual question that may be proven by circumstantial evidence. It is noted that individuals involved in fraudulent activities are unlikely to confess their knowledge of the fraud.
In the case presented, MBFG provides circumstantial evidence suggesting that Euler was aware of a fraudulent scheme involving Nature’s Own around the time MBFG became a beneficiary of the First Policy in July 2011 and during its renewal in November 2011. This evidence includes:
1. An article received by Euler Vice President John Steel in April 2010 regarding prior criminal fraud by Holloway, who also used a company listed as a buyer on Euler policies.
2. A claim from Factor King related to defaults by buyers, including Nature’s Own, which led to litigation against Euler.
3. Internal communications among Euler employees expressing doubts about Holloway’s businesses and concerns about underwriting irregularities, with indications of potential fraud.
4. Claims related to Equipack, another company listed as a buyer on the Nature’s Own policy, where there were simultaneous defaults by buyers linked to both policies.
These elements collectively suggest Euler's awareness of the fraudulent activities associated with the policies it underwrote.
MBFG highlighted a September 2011 phone call between Euler Assistant General Counsel Deborah Stuehrmann and Florida State Attorney General Phil Hanson, who was investigating Marsha Kay Holloway and her boyfriend Greg Winters in relation to US Hay and possibly Factor King. Despite MBFG's extensive evidentiary references, they do not substantiate a reasonable inference that Euler was aware of the Nature’s Own fraudulent scheme prior to canceling credit limits in February 2012. MBFG attempted to link Holloway to Nature’s Own and a fictitious individual, Annette Zimmerman, but provided no evidence of Euler's knowledge connecting Holloway—previously implicated in fraud—to Zimmerman, whom Euler only recognized as an affiliate of Nature’s Own. The conversation between Stuehrmann and Hanson did not establish this connection, as Hanson’s inquiry involved Holloway and U.S. Hay Direct, not Nature’s Own directly. The relationship between Nature’s Own and U.S. Hay Direct does not imply Euler knew Holloway and Zimmerman were the same person. Consequently, MBFG's assertion that Euler renewed the First Policy despite having information about a fraud connection is unsupported. Additionally, references to Holloway's past fraud with International Air Cargo and Euler’s suspicions do not effectively link her to Nature’s Own or Zimmerman. The evidence primarily indicates Euler may have mistakenly approved credit limits rather than demonstrating knowledge of a larger fraudulent scheme. Claims related to U.S. Hay Direct and the Factor King lawsuit do not imply fraud at the time they were made, and MBFG's portrayal of the Factor King lawsuit as indicative of a fraudulent scheme lacks evidentiary backing. Euler employees' doubts regarding underwriting information about a different company do not support an inference of knowledge about the Nature’s Own scheme or a connection between Holloway and Zimmerman. Overall, the evidence fails to corroborate MBFG’s claims that Euler had prior knowledge of fraud involving Nature’s Own and its affiliates.
MBFG has failed to provide sufficient evidence demonstrating that Euler was aware of any fraudulent activities related to the Nature’s Own scheme, which is necessary to substantiate claims of intentional misrepresentation, fraudulent concealment, and aiding and abetting fraud. Consequently, Euler is entitled to summary judgment on these claims.
In addressing the negligent misrepresentation claim, Euler contests its first element, asserting that MBFG lacks admissible evidence of a legally actionable statement. However, the record contradicts this assertion. Negligent misrepresentation requires a positive assertion of falsehood made without reasonable grounds for believing it to be true. Moreover, misleading half-truths can qualify as positive assertions. MBFG argues that by extending credit limits to Nature’s Own buyers, Euler implied their creditworthiness, despite knowing some were under criminal investigation or had defaulted on previous policies. Evidence indicates that several buyers listed in Euler's policies were also associated with Nature’s Own and had defaulted, with some involved in litigation against Euler. Furthermore, Euler was informed about the criminal investigations concerning certain buyers prior to renewing the First Policy. This evidence, while insufficient for other fraud claims, is adequate for a reasonable juror to deduce that Euler knowingly approved unqualified buyers under the Nature’s Own policy. Euler's argument that credit extensions do not constitute qualifying assertions is rejected, as professional opinions can be viewed as factual representations in certain contexts.
A statement presented as an opinion may be deemed a positive assertion of fact if it reflects a deliberate affirmation rather than a casual belief. When a party claims to have superior knowledge or expertise, and a plaintiff reasonably relies on that information, the representation can be considered a material fact. In this case, Euler's Nature's Own Policies indicate that Euler granted coverage and credit limits based on its superior knowledge of the buyers. The definitions within the Policies clarify that a 'Buyer' is a legal entity approved for coverage, and the 'Credit Limit' is the maximum coverage allowed for each Buyer, suggesting that Euler investigates insured buyers before approval. This creates a reasonable basis for Marble Bridge to rely on Euler's representations, leading to a triable issue of fact that precludes summary judgment on MBFG's negligent misrepresentation claim.
Regarding MBFG’s claims for declaratory relief and breach of contract, MBFG seeks a determination of coverage under the Policies and alleges that Euler breached the Second Policy by failing to pay claims and not providing notice of credit limit cancellations. Euler contends it is entitled to summary judgment on both claims, which the court agrees with. The burden initially lies with the insured to prove that an event constitutes a claim under the policy, with the insurer then required to show any exclusions. The elements for a breach of contract claim in California require proof of the contract, the plaintiff's performance or excuse for nonperformance, the defendant's breach, and resulting damages. Euler can challenge the sufficiency of evidence, leaving MBFG with the burden of proof at trial.
The Policies' coverage is contingent upon the delivery of 'Shipments of Covered Products,' which requires that products be delivered from Nature’s Own to its buyers to trigger coverage. Evidence shows that no such deliveries occurred, thereby failing to meet the policy terms.
MBFG acknowledges that one of its experts determined there is no coverage under either policy for its claim due to a lack of goods, shipments, or deliveries to buyers, resulting in no material fact dispute regarding MBFG's claim for declaratory relief. Consequently, MBFG is not entitled to coverage under the First or Second Policy. MBFG's arguments for coverage based on an offer from Euler to return premium payments to Nature’s Own, and its claim of equitable estoppel due to a lack of evidence regarding Euler's knowledge of the Nature’s Own scheme, are deemed unpersuasive. As there is no coverage, MBFG’s claims for breach of contract and breach of the covenant of good faith and fair dealing are legally insufficient, leading to Euler being granted summary judgment on these claims and the declaratory relief claim.
Regarding the UCL claim, it has two aspects: it is connected to the prior claims and alleges that misappropriated funds were funneled to Euler through premiums and fees. However, the UCL allows only injunctive relief and restitution, and MBFG has not provided evidence of any funds paid to Euler that could warrant a restitution order. Thus, Euler is entitled to summary judgment on the UCL claim as well.
The RICO claims are dismissed because they were filed without proper stipulation or court leave, violating Federal Rule of Civil Procedure 15, which requires written consent or court permission for amendments after the initial amendment period.
The court's order grants Euler’s Motion for Summary Judgment in part and denies it in part, specifically denying it concerning MBFG's claim for negligent misrepresentation while granting it on all other claims. MBFG's RICO claims are stricken, and its objections and motion to strike are denied. The record also notes the timing of a Request for Beneficiary document dated July 15, 2011, which is undisputed by MBFG.
