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Companion Property and Casualty Insurance Co. v. U.S. Bank National Association

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

November 3, 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; and AON Insurance Managers (Cayman) Ltd., Third-Party Defendants. Alexander Chatfield Burns, Fourth-Party Plaintiff,
U.S. Bank Trust National Association, Fourth-Party Defendant.


         This case concerns the loss of value in trust accounts that served as security for a reinsurance program occasioned by the substitution into those accounts of allegedly worthless and otherwise defective assets. More specifically, the case concerns which party or parties involved in the reinsurance program should bear that loss. Before the court is a motion by Third-Party Plaintiff U.S. Bank National Association (“U.S. Bank”) to dismiss the counterclaims of Third-Party Defendant Alexander Chatfield Burns (“Burns”) pursuant to Rule 12(b)(1) and Rule 12(b)(6) of the Federal Rules of Civil Procedure. (ECF No. 160.) For the reasons that follow, the court GRANTS the motion IN PART and DENIES it IN PART.


         Companion Property and Casualty Insurance Company (“Companion”) participated in a fronted insurance program (the “Program”) with Redwood Reinsurance SPC, Ltd. (“Redwood”) and Dallas National Insurance Company (“Freestone”), two reinsurance companies. In a fronted insurance program, the reinsurer-here, Redwood and Freestone-bears the actual risk of program performance. The insurance company-here, Companion-receives a fee for allowing its name and paper to be used as the front. 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.

         U.S. Bank was substituted as a successor trustee on Companion's reinsurance trust agreements with Redwood and Freestone under two separate trust agreements, the Redwood Trust Agreement and the Freestone Trust Agreement (collectively the “Trust Agreements”). The Trust Agreements named Redwood and Freestone, respectively, as grantors, U.S. Bank as trustee, and Companion as beneficiary. Under the terms of the Trust Agreements, “[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.” (ECF No. 50-2 § 4(c).) The Trust Agreements also stated that Redwood and Freestone would be making representations and warranties regarding the quality and sufficiency of the assets that they transferred for deposit in the trust accounts. Specifically, by agreement, Redwood and Freestone would promise that the assets: (1) consisted only of “Eligible Securities” 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.

         According to U.S. Bank's third-party complaint, Burns founded a number of corporate entities, to which U.S. Bank refers collectively as “Southport.”[2] U.S. Bank asserts that Burns was, at all times relevant to this action, Southport's beneficial owner, controlling person, and chief strategist. Affiliates of Southport acquired Redwood in 2012 and Freestone in 2013. U.S. Bank alleges that Southport Lane Advisors (“SLA”), named as a third-party defendant, managed the asset allocation strategies for all of Southport's companies, including Redwood and Freestone and that Burns was the “Ultimate Control Person” and “Chief Strategist” for SLA. (ECF No. 50 at 4.) U.S. Bank further alleges that SLA had authority “at all times [to] act on behalf of, and as agent of” Redwood and Freestone based on “Investment Management Agreements” entered into with each of them and that Freestone and Redwood, “directly or through [SLA], ” decided which assets to buy, which to sell, and in what amounts. (Id. at 18, 37.)

         On March 20, 2015, Companion filed a complaint in this court against U.S. Bank, alleging that, 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. Companion asserts that U.S. Bank is liable for these substitutions because certain assets in the trust accounts violated the terms of the Trust Agreements. 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. Companion makes these same allegations with regard to the acquisition of Destra Targeted Income Unit Investment Trusts (“Destra UITs”) for the trust accounts.

         Although U.S. Bank denies Companion's claims, it argues that, if Companion's allegations are proven at trial, Third-Party Defendants, including Burns, are liable to Companion. First, U.S. Bank alleges Redwood and Freestone-either directly or through SLA-directed U.S. Bank's purchases of securities and other membership interests in various companies and that SLA falsely represented the values of the securities to be purchased. 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. 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 SLA-from June 2013 through January 2014 and falsely represented the values of the units to be purchased.

         U.S. Bank filed a third-party complaint against Third-Party Defendants and specifically named Burns, alleging that he “dominated and controlled” each of the other Third-Party Defendants (ECF No. 50 at 33) and “directed or participated in all of the relevant conduct” (ECF No. 104 at 12). U.S. Bank alleges that “it was reasonably foreseeable, and Burns should have known, did know, and/or intended, that Companion . . . would receive the asset valuations that Burns originated in account statements and other communications directed to Companion” and that Burns had a pecuniary interest in making representations regarding the assets. (ECF No. 50 at 33.) With these underlying tort theories of liability, U.S. Bank asserted three specific causes of action against Burns and other Third-Party Defendants: (1) apportionment under S.C. Code. Ann. § 15-38-15 (2015); (2) contribution under S.C. Code § 15-38-10 (2015), et seq., or other applicable grounds; and (3) equitable indemnification. After Third-Party Defendants, including Burns, filed motions to dismiss (ECF Nos. 80, 83-1), the court dismissed U.S. Bank's claims for apportionment and equitable indemnification, leaving only its claim for contribution intact (ECF No. 118).

         Burns then filed an answer to U.S. Bank's third-party complaint as well as seven counterclaims against U.S. Bank. (ECF No. 139.) In his first counterclaim for contribution, Burns avers

In the event [Burns] is held liable to either [Companion or U.S. Bank], then he is entitled to contribution from U.S. Bank under the South Carolina Contribution Among Tortfeasors Act [S.C. Code Ann.] § 15-38-10 [(2015)] et seq. (“SCCATA”).
. . . . In the event that Companion pursues any right of action against [Burns] and proves those allegations true at trial or [Burns] were to discharge any common liability while this action is pending, then U.S. Bank would be liable to [Burns].

(Id. at 35.)

         In the remaining counterclaims, Burns asserts that “[i]f U.S. Bank's allegations [that he dominated or controlled Redwood and/or Freestone] are proven true at trial, [Burns] may be deemed a beneficiary to Redwood['s] and Freestone's rights, ” “a beneficial owner of the property [that was held by Redwood and Freestone], ” “a party that relied to his detriment [on statements made by U.S. Bank to Redwood and Freestone] and from whom U.S. Bank became unjustly enriched, ” “a party to whom U.S. Bank owed a fiduciary duty [due to its special relationship of trust with Redwood and Freestone], ” and “a party to whom U.S. Bank owed a duty of reasonable care [in connection with its role as trustee of the Trust Agreements].” (Id. at 36, 38-42.) Based on these assertions, Burns alleges counterclaims for breach of contract, conversion, unjust enrichment, breach of fiduciary duty, negligence and gross negligence, and negligent misrepresentation. (Id. at 36-43.)

         On August 5, 2016, U.S. Bank filed the instant motion to dismiss Burns' counterclaims against it, pursuant to Fed.R.Civ.P. 12(b)(1) and (6). (ECF No. 160.) With respect to Burns' contribution counterclaim, U.S. Bank argues that, to the extent he seeks contribution for an underlying claim against him lodged by U.S. Bank, South Carolina law does not permit Burns to seek contribution from U.S. Bank for his liability to U.S. Bank. (ECF No. 160-1 at 5.) To the extent Burns seeks contribution from U.S. Bank for an underlying claim lodged against him by Companion, U.S. Bank argues that South Carolina law does not permit such a counterclaim because Companion has not filed a claim against Burns. (Id.) Accordingly, U.S. Bank argues that the contribution counterclaim should be dismissed, pursuant to Rule 12(b)(6), for failure to state a claim for which this court could grant relief.

         With respect to the remaining counterclaims, U.S. Bank argues first that Burns fails to overcome the prudential barriers to standing erected by Supreme Court precedent. (Id. at 6-11.) Specifically, U.S. Bank contends that Burns' counterclaims run afoul of the prudential standing rule that a claimant may not assert the rights or interests of third-parties. (Id. (citing Warth v. Seldin, 422 U.S. 490 (1975)).) Second, U.S. Bank argues that the doctrine of in pari delicto bars the counterclaims, as the counterclaims themselves demonstrate that Burns was as equally responsible as U.S. Bank for the alleged wrongdoing. (Id. at 12-13). Third, U.S. Bank argues that, because Burns attempts to enforce rights or interests belonging to Redwood and Freestone, each of the remaining counterclaims must necessarily fail on their merits under the substantive law and, thus, dismissal under Rule 12(b)(6) is appropriate. (Id. at 14-27.)


         “Challenges to the sufficiency of a counterclaim . . . under Rule 12 . . . motions are subject to the same rules as when they are directed toward an original complaint.” 6 Charles Alan Wright et al., Federal Practice and Procedure § 1407 (3d ed. 2011). Accordingly, the court assesses U.S. Bank's motion to dismiss Burns' counterclaims under the standards normally applied to such motions seeking to dismiss a plaintiff's complaint.

         A. Rule 12(b)(6) standard

         A motion to dismiss pursuant to Rule 12(b)(6) 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).

         “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)). This means that a complainant's factual allegations “must be enough to raise a right to relief above the speculative level, on the assumption that all the allegations in the complaint are true (even if doubtful in fact).” Twombly, 550 U.S. at 555-56 (citations omitted). When considering a motion to dismiss, the court should accept as true all well-pleaded allegations and should view the complaint in a light most favorable to the complainant. Ostrzenski v. Seigel, 177 F.3d 245, 251 (4th Cir. 1999); Mylan Labs., Inc. v. Matkari, 7 F.3d 1130, 1134 (4th Cir. 1993). Dismissal is appropriate if, even accepting well-pled allegations and viewing the complaint in the complainant's favor, the complaint could not state a legally cognizable claim for which the court could grant relief. See Edwards v. City of Goldsboro, 178 F.3d 231, 244 (4th Cir. 1999) (“[A] Rule 12(b)(6) motion should only be granted if, after accepting all well-pleaded allegations in the plaintiff's complaint as true and drawing all reasonable factual inferences from those facts in the plaintiff's favor, it appears certain that the plaintiff cannot prove any set of facts in support of his claim entitling him to relief.); c.f. Johnson v. City of Shelby, __U.S.__, 135 S.Ct. 346, 347 (2014) (per curiam) (explaining that Iqbal and Twombly plausibility standards are not always at issue).

         B. Rule 12(b)(1) standard

         A motion to dismiss 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, 191 F.3d 394, 399 (4th Cir. 1999). “In determining whether jurisdiction exists, the district 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. In a motion to dismiss pursuant to Rule 12(b)(1), “[t]he burden of establishing subject matter jurisdiction rests with the [complainant].” Demetres v. E.W. Constr., Inc., 776 F.3d 271, 272 (4th Cir. 2015).

         III. ANALYSIS

         A. Contribution counterclaim

         In his contribution counterclaim, Burns alleges that he is entitled, under South Carolina law, to contribution from U.S. Bank in the event he is found liable to Companion or U.S. Bank. (ECF No. 139 at 35.) U.S. Bank moves to dismiss the counterclaim, arguing that, whether it is premised on Burns' liability ...

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