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Companion Property and Casualty Insurance Co. v. U.S. Bank N.A.

United States District Court, D. South Carolina, Columbia Division

May 27, 2016

Companion Property and Casualty Insurance Company n/k/a Sussex Insurance Company, Plaintiff,
U.S. Bank National Association, Defendant. U.S. Bank National Association, Third-Party Plaintiff,
Redwood Reinsurance SPC, Ltd.; Southport Specialty Finance; Southport Lane Advisers; Administrative Agency Services; Alexander Chatfield Burns, Third-Party Defendants.


         Companion Property and Casualty Insurance Company (“Companion”) filed this action against Defendant and Third-Party Plaintiff, U.S. Bank National Association (“U.S. Bank”), for (1) breach of contract - trust agreements, (2) breach of fiduciary duty, (3) negligence/gross negligence, (4) negligent misrepresentation, (5) equitable estoppel, and (6) violation of the South Carolina Unfair Trade Practices Act (“SCUTPA”), SC Code Ann. §§ 39-5-10 et seq. (2015). (See ECF No. 1.) U.S. Bank filed a Motion to Dismiss (ECF No. 16), and this court dismissed Companion’s claims against it except for the claims of breach of contract, breach of fiduciary duty, and negligent misrepresentation. (See ECF No. 41.)

         Now before the court are the Motions to Dismiss of Third-Party Defendants Southport Specialty Finance (“Southport”), Southport Lane Advisers (“SLA”), and Administrative Agency Services (“AAS”), (ECF No. 80), as well as the Motion to Dismiss of Third-Party Defendant Alexander Chatfield Burns, (ECF No. 83-1) (collectively, “Third-Party Defendants”) as to U.S. Bank’s third-party action against them for apportionment, contribution, and equitable indemnification.[1] (See generally ECF No. 50.) For the reasons stated herein, this court GRANTS IN PART and DENIES IN PART Third-Party Defendants’ Motions to Dismiss (ECF Nos. 80, 83). Specifically, the court dismisses U.S. Bank’s third-party claims of apportionment and equitable indemnification.[2]


         The District Court has subject matter jurisdiction over this action under 28 U.S.C. § 1332 (2012) because the parties are citizens of different states and the amount in controversy exceeds $75, 000.[3] (See ECF No. 50 at 2-9.)


         A. Companion’s Claims against U.S. Bank: Factual Background

         Companion participated in a fronted insurance program (the “Program”) with Redwood Reinsurance SPC, Ltd. (“Redwood”) and Dallas National Insurance Company (“Freestone”), two reinsurance companies. (ECF No. 1.) In a fronted insurance program, the reinsurer-here, Freestone and Redwood-bears the actual risk of program performance. (ECF No. 50 at 7.) The insurance company-here, Companion-receives a fee for allowing its name and paper to be used as the front. (Id.) As part of the Program, reinsurance collateral trusts established for Companion’s benefit under the reinsurance agreements secured Redwood’s and Freestone’s reinsurance obligations to Companion. (ECF No. 1 at 4.) According to U.S. Bank, the main purpose of these trusts was to provide liquid assets to satisfy the reinsurers’ reinsurance obligations in the event that the reinsurers became insolvent. (ECF No. 16-1 at 7.)

         Third-Party Defendant Burns founded Southport, [5] a New-York based private equity firm, and was at all times relevant to this action Southport’s beneficial owner, controlling person, and chief strategist. (ECF No. 50 at 11.) Affiliates of Southport acquired Redwood in 2012 and Freestone in 2013. (Id. at 12.) During the time of these acquisitions (the fall of 2012), U.S. Bank was substituted as a successor trustee on Companion’s reinsurance trust agreements with Redwood and Freestone. (Id. at 13.) U.S. Bank became trustee to Companion under two separate trust agreements: (1) the “Redwood Trust Agreement, ” between Redwood as Grantor, Companion as Beneficiary, and U.S. Bank as trustee; and (2) the “Freestone Trust Agreement, ” between Freestone as Grantor, Companion as Beneficiary, and U.S. Bank as trustee. (ECF No. 50 at 14.)

         The Redwood Trust Agreement (ECF No. 50-1) and the Freestone Trust Agreement (ECF No. 50-2) (collectively the “Trust Agreements”) stated that Freestone and Redwood, as Grantors, would be making representations and warranties regarding the quality and sufficiency of the assets that they transferred for deposit in the trust accounts. (§ 1(c).) Specifically, by agreement, Redwood and Freestone would promise that the assets: (1) consisted only of “Eligible Securities”[6]as defined by contract; (2) were in such form that Companion could transfer and dispose of any assets without the consent of anyone else; and (3) at all times had a value sufficient to cover 125% of Redwood’s and Freestone’s respective reinsurance obligations. (Id.; see also Id. § 6.)

         Companion vested authority to administer the trust’s assets and make investment decisions in Redwood and Freestone, who then gave directions to U.S. Bank for investing the assets. (§§ 4(b)-(d) (requiring U.S. Bank to “execute Investment Orders as directed”).) In executing these orders, U.S. Bank was “authorized to follow and rely upon all instructions” pursuant to Redwood’s and Freestone’s authorized signatories-if U.S. Bank followed the instructions, it was not to incur liability for actions “in reliance in good faith on such instructions.” (Id. § 7(h).) Other provisions of the Trust Agreements specifically highlighting the parties’ responsibilities provided that:

Section 4(c): “From time to time, subject to Section 2 of this Agreement, [Redwood or Freestone] may direct [U.S. Bank] to substitute Assets of comparable value for other Assets presently held in the Trust Account with written notification to [Companion] of the substitute Assets. [U.S. Bank] shall comply with any such direction. Each time that [Redwood or Freestone] provides [Companion] with substitution direction it shall be considered a representation and warranty of [Redwood or Freestone] that (i) the substitute Assets are Eligible Securities or cash, and (ii) [U.S. Bank] has determined that the fair market value of the substituted Assets is not less than the fair market value of the Assets being replaced thereby.”
Section 7(b): “Before accepting any Asset submitted for deposit to the Trust Account, [U.S. Bank] shall determine that such Asset is in such form that [Companion] whenever necessary may, or [U.S. Bank] upon direction by [Companion] will be able to, negotiate such Asset without consent or signature from [Redwood or Freestone] or any person or entity other than [U.S. Bank] in accordance with the terms of this Agreement.”
Section 7(f): “[U.S. Bank] shall furnish to [Redwood or Freestone] and [Companion] a statement of all Assets in the Trust Account including their fair market value (1) as of the inception of the Trust Account and (2) as of the end of each calendar month . . . . Such statement shall be considered a certification of [U.S. Bank] that the fair market value of the Assets in the Trust Account is true and correct according to the best information and belief of [U.S. Bank].” (Freestone Trust Agreement)

         Moreover, the Trust Agreements provide that:

Section 7(i): “The duties and obligations of [U.S. Bank] shall only be such as are specifically set forth in this Agreement . . . and no implied duties or obligations shall be read into this Agreement against [U.S. Bank]. [U.S. Bank] shall not be liable except for its own negligence, willful misconduct or lack of good faith.”

         Finally, the Trust Agreements also provide that:

Section 7(l): “[U.S. Bank] shall not be responsible for the genuineness or value of any of the Assets or for the validity, perfection, priority or enforceability of liens in any of the Assets, whether impaired by operation of law or by reason of any action or omission to act on its part hereunder (except to the extent such action or omission constitutes negligence, willful misconduct or lack of good faith on the part of [U.S. Bank]), for the validity of title to the Asset, for insuring the Assets or for the payment of taxes, charges, assessments or liens upon the Assets.”

         As Grantors and parties of these Trust Agreements, Redwood and Freestone identified authorized signers, as referenced, supra, who could act for them with regard to each trust account. (ECF No. 50 at 17.) One of the authorized signers empowered to act was Michael Morrow, President and Chief Investment Officer of Third-Party Defendant SLA. (Id.)

         Third-Party Defendant SLA was registered as an investment advisor with the Securities and Exchange Commission until March 31, 2014 and managed the asset allocation strategies for all of Southport’s companies, including Redwood and Freestone. (Id. at 4.) Third-Party Defendant Burns was the “Ultimate Control Person” and “Chief Strategist” for Third-Party Defendant SLA. (Id.) Through Morrow, Third-Party Defendant SLA had authority to “at all times act on behalf of, and as agent of” Redwood and Freestone based on “Investment Management Agreements” entered into with each of them. (Id. at 18.) Freestone and Redwood, “directly or through [Third-Party Defendant SLA], ” decided which assets to buy, which to sell, and in what amounts. (Id. at 37.)

         Between May 2013 and January 2014, U.S. Bank, as trustee, approved and permitted the substitution of assets for various investments for the Freestone and Redwood trust accounts. (Id. at 18-21.) Companion alleges U.S. Bank is liable because certain assets in the trust accounts violated the terms of the Trust Agreements. (ECF No. 1 at 7-10.) Specifically, Companion alleges certain Southport affiliate securities held in the trust accounts were not “Eligible Securities” under the Trust Agreements, were not freely negotiable, and/or had little to no value. (Id. at 12-18.) Companion makes these same allegations with regard to the acquisition of Destra Targeted Income Unit Investment Trusts (“Destra UITs”) for the trust accounts.[7] (Id.).[8]

         B. U.S. Bank’s Third-Party Action against Third-Party Defendants: Factual Background

         U.S. Bank, who managed the contribution of assets from May 2013 through January 2014 as Companion’s trustee, denies Companion’s claims. However, it argues that if Companion’s allegations are proven at trial, Third-Party Defendants are liable to Companion. (ECF No. 50 at 27.)

         First, U.S. Bank alleges Redwood and Freestone-either directly or through Third-Party Defendant SLA-directed U.S. Bank’s purchases of securities and other membership interests in various companies. (Id. at 18-21.) Companion now disputes these assets. (Id.) U.S. Bank alleges that Third-Party Defendant SLA provided a false representation regarding the values of the securities to be purchased-specifically, that the value of these securities and interests was “grossly overinflated.” (Id. at 20.)

         Southport affiliates controlled several of the companies that issued the membership interests. (Id. at 18-20.) Third-Party Defendant AAS was the “managing member” for some of these issuing companies. (Id. at 18 (stating that in that position, Third-Party Defendant AAS “executed multiple stock certificates in the names of Companion’s reinsurance trusts with Redwood and Freestone”).) Third-Party Defendant SSF, a wholly-owned Southport subsidiary, (id. at 4), was Third-Party Defendant AAS’s sole member, which means Third-Party Defendant SSF had the “exclusive and complete authority and discretion to manage Third-Party Defendant AAS’s business affairs.” (Id. at 4.) Third-Party Defendant Burns was Third-Party Defendant SSF’s sole director, sole authorized signatory, and “control person.” (Id. at 7-8.)

         Second, U.S. Bank alleges that Redwood and Freestone caused the Redwood and Freestone trust accounts to acquire Destra UITs from June 2013 through January 2014. (Id. at 21.) Companion also disputes these assets. (Id.) Southport established the Destra UITs, and Third- Party Defendant SSF contributed the underlying portfolio of securities for the UITs. (Id. at 22.) Third-Party Defendant Burns personally executed a series of contribution agreements that contained representations regarding the nature and value of the assets contributed to the Destra UITs. (Id. at 22.)

         Per another trust agreement, Third-Party Defendant AAS was the “administrative agent” for the Destra UITs. (Id.) As an administrative agent, Third-Party Defendant AAS was responsible for valuing the portfolio securities and for approving important decisions regarding the transfers of units. (Id. at 22-23.) U.S. Bank was not a party to that agreement, but its affiliate, “U.S. Bank Trust National Association, ” was a party. (Id. at 22.) U.S. Bank states that Third-Party Defendant AAS had “the most authority and duties with respect to the Destra UITs” (e.g., valuing the underlying assets, directing distributions, etc.) and that U.S. Bank’s affiliate, U.S. Bank Trust National Association, had limited duties. (Id. at 23-24.)

         As with the securities and ownership interests, U.S. Bank alleges Redwood and Freestone directed its purchases of units in the Destra UITs-directly or through Third-Party Defendant SLA-from June 2013 through January 2014 and provided a representation regarding the values of the units to be purchased. (Id. at 24-26.) In its action against U.S. Bank, Companion alleges the values of the units were overstated. (Id.) Third-Party Defendant AAS approved each sale and approved Companion as a unitholder. (Id.)

         C. U.S. Bank’s Third-Party Claims

         U.S. Bank alleges Third-Party Defendant SLA owed a duty of reasonable care to Companion and that if Companion’s allegations against U.S. Bank are proven as true, Third-Party Defendant SLA “acted negligently, grossly negligently, recklessly, willfully, knowingly, and wantonly in” both causing Companion’s reinsurance trusts to acquire the assets and in misrepresenting and overstating their value. (Id. at 28.) U.S. Bank also claims Third-Party Defendant SLA breached a fiduciary duty to Companion in managing the assets, and/or aided and abetted Redwood and Freestone in breaching their fiduciary duty to Companion by causing the trust accounts to acquire the assets. (Id. at 29.)

         U.S. Bank claims Third-Party Defendant SSF “negligently, grossly negligently, recklessly, willfully, knowingly, and wantonly” misrepresented the value and nature of the portfolio securities it contributed to the Destra UITs and the assets sold to the trust accounts. (Id. at 30.) On this basis, U.S. Bank claims Third-Party Defendant SSF procured Redwood and Freestone’s breaches of the Trust Agreements. (Id.) U.S. Bank also claims Third-Party Defendant SSF aided and abetted Redwood and Freestone’s breach of fiduciary duty to Companion. (Id. at 31.)

         As for Third-Party Defendant AAS, U.S. Bank claims that it “acted negligently, grossly negligently, recklessly, willfully, knowingly, and wantonly in”: (a) valuing the portfolio securities in the Destra UITs, (b) approving submission of the values to NASDAQ and Bloomberg (where the Destra UITs were listed and quoted, respectively), (c) approving the purchase and/or transfer of the units of the Destra UITs into the trust accounts, (d) approving Companion’s reinsurance trusts with Redwood and Freestone as unitholders, (e) entering into subscription agreements with Companion, and (f) selling and/or contributing certain of the securities into the trust accounts. (Id. at 31.) U.S. Bank also alleges Third-Party Defendant AAS “negligently, grossly negligently, recklessly, willfully, knowingly, and wantonly misrepresented” the value and nature of the portfolio securities and other security assets sold by Third-Party Defendant AAS to the trust accounts. (Id. at 32.) U.S. Bank further alleges Third-Party Defendant AAS tortiously interfered with Redwood and Freestone’s performance of the Trust Agreements and aided and abetted Redwood and Freestone’s breach of fiduciary duty to Companion. (Id. at 32-33.)

         In sum, U.S. Bank alleges that Third-Party Defendants SLA and Redstone “directed the conduct that underlies Companion’s claims.” (ECF No. 104 at 12.) U.S. Bank further alleges that Third-Party Defendants SSF and AAS “created the contested assets, provided valuations that Companion says were inflated, and sold or contributed the contested assets to the trusts.” (Id.) U.S. Bank names Third-Party Defendant Burns as a Third-Party Defendant since he allegedly “dominated and controlled” each of the other Third-Party Defendants and “directed or participated in all of the relevant conduct.” (Id.; ECF No. 50 at 33.) U.S. Bank alleges that “it was reasonably foreseeable, and [Third-Party Defendant] Burns should have known, did know, and/or intended, that Companion . . . would receive the asset valuations that [Third-Party Defendant] Burns originated in account statements and other communications directed to Companion” and that Third-Party Defendant Burns had a pecuniary interest in making representations regarding the assets. (Id.)

         With these underlying tort theories of liability, U.S. Bank alleges the following specific causes of action against Third-Party Defendants: 1) apportionment under S.C. Code. Ann. § 15-38-15 (2015); 2) contribution under S.C. Code § 15-38-10 (2015) “or other applicable grounds”; and 3) equitable indemnification.

         D. Procedural Posture

         Companion filed a Complaint in this court on March 20, 2015. (ECF No. 1). On May 18, 2015, U.S. Bank moved to dismiss that action, (see ECF No. 16), a motion this court granted in part and denied in part.[9] (See ECF No. 41.) After this court issued that Order, U.S. Bank filed a Third-Party Complaint (ECF No. 50) against Third-Party Defendants (as well as Redwood). Third-Party Defendants SLA, SSF, and AAS moved to dismiss U.S. Bank’s third-party action, (see ECF No. 80), under Fed.R.Civ.P. 12(b)(6) (2012). Third-Party Defendant Burns separately moved to dismiss U.S. Bank’s third-party action under both Rule 12(b)(6) and Fed.R.Civ.P. 12(b)(1) (2012). (ECF No. 83-1.) The court addresses Third-Party Defendants’ Motions to Dismiss below.


         A. Fed. R. Civ. P. 12(b)1) Motion to Dismiss

         A Rule 12(b)(1) motion for lack of subject matter jurisdiction raises the fundamental question of whether a court has jurisdiction to adjudicate the matter before it. Fed.R.Civ.P. 12(b)(1). “Federal courts are courts of limited subject matter jurisdiction, and as such there is no presumption that the court has jurisdiction.” Pinkley, Inc. v. City of Frederick, Md., 191 F.3d 394, 399 (4th Cir. 1999). Unless a matter involves an area of a federal court’s exclusive jurisdiction, a plaintiff may bring suit in federal court only if 1) the matter involves a federal question arising “under the Constitution, laws or treaties of the United States, ” 28 U.S.C. § 1331, or 2) “the matter in controversy exceeds the sum or value of $75, 000, exclusive of interest and costs, and is between citizens of different states, ” 28 U.S.C. § 1332(a)(1). In determining whether jurisdiction exists, the court is to “regard the pleadings’ allegations as mere evidence on the issue, and may consider evidence outside the pleadings without converting the proceeding to one for summary judgment.” Richmond, Fredericksburg & Potomac R.R. Co. v. United States, 945 F.2d 765, 768 (4th Cir. 1991) (citing Adams v. Bain, 697 F.2d 1213, 1219 (4th Cir. 1982)). “The moving party should prevail only if the material jurisdictional facts are not in dispute and the moving party is entitled to prevail as a matter of law.” Id. (citation omitted).

         B. Fed. R. Civ. P. 12(b)(6) Motion to Dismiss

         A Rule 12(b)(6) motion for failure to state a claim upon which relief can be granted “challenges the legal sufficiency of a complaint.” Francis v. Giacomelli, 588 F.3d 186, 192 (4th Cir. 2009) (citations omitted); see also Republican Party of N.C. v. Martin, 980 F.2d 943, 952 (4th Cir. 1992) (“A motion to dismiss under Rule 12(b)(6) . . . does not resolve contests surrounding the facts, the merits of a claim, or the applicability of defenses.”). To be legally sufficient, a pleading must contain a “short and plain statement of the claim showing that the pleader is entitled to relief.” Fed.R.Civ.P. 8(a)(2).

         A court should not grant a Rule 12(b)(6) motion unless it appears certain that the plaintiff can prove no set of facts that would support her claim and would entitle her to relief. Mylan Labs., Inc. v. Matkari, 7 F.3d 1130, 1134 (4th Cir. 1993). When considering a Rule 12(b)(6) motion, the court should accept as true all well-pleaded allegations and should view the complaint in a light most favorable to the plaintiff. Ostrzenski v. Seigel, 177 F.3d 245, 251 (4th Cir. 1999); Mylan Labs., Inc., 7 F.3d at 1134. “To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. The court may consider only the facts alleged in the complaint, which may include any documents either attached to or incorporated in the complaint, and matters of which the court may take judicial notice. Tellabs v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007).


         A. Apportionment Claim under South Carolina Law

         In its Third-Party Complaint, U.S. Bank alleges:

To the extent any liability can be determined as belonging to U.S. Bank, which is denied, U.S. Bank asserts that the Third-Party Defendants possess an identifiable difference in the degree of fault. Pursuant to S.C. Code. Ann. § 15-38-15 et seq. the Court is to determine fault allocation as to Third-Party Defendants and/or any non-parties responsible for the damages alleged by [Companion]. U.S. Bank requests relief from any and all damages owed to [Companion] which resulted from the relative fault of the Third-Party Defendants and/or any responsible non-parties.

         (ECF No. 50 at 34.) S.C. Code. Ann. § 15-38-15 addresses “[l]iability of defendant responsible for less than fifty per cent of total fault; apportionment of percentages; willful, wanton, or grossly negligent defendant and alcoholic beverage or drug exceptions.”[11]

         1. Third-Party Defendants’ Arguments

         Third-Party Defendants contend that South Carolina law does not recognize an action for apportionment. (ECF No. 80 at 2, 9-10.) They explain that there is no reported case that recognizes an apportionment cause of action and that there is “nothing in the South Carolina Contribution Among Tortfeasors Act (“SCCATA”) to suggest a legislative intent to create this action.” (Id. at 2.) Third-Party Defendant Burns separately argues that according to the statute’s text, only after Companion elects to name more defendants “would U.S. Bank then have the right to seek apportionment of any verdict, by motion at the appropriate time.” (ECF No. 83-1 at 12.) Third-Party Defendant Burns further contends that the “right” referred to in § 15-38-15(D)[12] refers to a right to contribution and does not create a separate cause of action for apportionment. (ECF No. 111 at 6.)

         2. U.S. Bank’s Arguments

         U.S. Bank counters that South Carolina does recognize an apportionment cause of action, emphasizing that the SCCATA specifically references “apportionment” at § 15-38-15 and that Defendants overlook the significance of § 15-38-15(D) in creating that right. (ECF No. 104 at 18- 19.) Furthermore, in response to Third-Party Defendant Burns’s argument, U.S. Bank maintains that a “tortfeasor, ” as used in the statute, need not be a defendant and therefore that the provision “authorizes a defendant to assert a claim against a potential wrongdoer, even if the tortfeasor is not already in the suit.” (Id. at 19.)[13]

         3. Court’s Review

         The court first observes that U.S. Bank’s claim amounts to one of negligence per se. See Rayfield v. S.C. Dep’t of Corr., 374 S.E.2d 910, 915 (S.C. Ct. App. 1988) (“Negligence per se simply means the jury need not decide if the defendant acted as would a reasonable man in the circumstances. The statute fixes the standard of conduct required of the defendant, leaving the jury merely to decide whether the defendant breached the statute . . . .”). As both parties point out, a cause of action in South Carolina is “a primary right possessed by plaintiff, and a corresponding primary duty devolving upon the defendant; a delict or wrong done by the defendant which consists in a breach of such primary right, and duty.” Harth v. United Ins. Co., 221 S.E.2d. 102, 104 (S.C. 1975). In the context of negligence per se, the primary factor to determine whether a statute creates such a “primary right” is legislative intent, which “is determined primarily from the language of the statute.” Doe v. Marion, 645 S.E.2d 245, 248 (S.C. 2007).

         At the outset, this court finds it compelling that in over a decade since the passage of the SCCATA in 2005, not a single state or federal court in South Carolina has ever recognized apportionment, or “non-party fault allocation, ” as a cause of action under the SCCATA.[14] This is unsurprising, given that the statute‚Äôs plain text neither makes apparent that an ...

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