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Accident Insurance Company, Inc. v. U.S. Bank National Association

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

September 28, 2017

Accident Insurance Company, Inc., a South Carolina Corporation, Plaintiff,
U.S. Bank National Association and U.S. Bank Trust N.A., Defendants.


         Plaintiff Accident Insurance Company, Inc. (“Plaintiff”) filed this action against Defendant U.S. Bank National Association (“Defendant”) for: (1) breach of contract, (2) breach of fiduciary duty, (3) negligence/gross negligence, and (4) negligent misrepresentation.

         This matter is before the court on Defendant's Motion to Dismiss for Failure to State a Claim (“Motion to Dismiss”) pursuant to Federal Rule of Civil Procedure 12(b)(6). (ECF No. 11.) Plaintiff opposes Defendant's Motion, asserting it should be denied. For the following reasons, the court DENIES Defendant's Motion to Dismiss (ECF No. 11).


         The court has jurisdiction over this action pursuant to 28 U.S.C. § 1332. Plaintiff is organized and incorporated in the State of South Carolina, with its principal place of business in Lexington County, South Carolina. (ECF No. 1 at 1.) Defendant is a wholly owned subsidiary of U.S. Bancorp, and is a national chartered bank with its principal place of business and headquarters in the State of Minnesota. (Id.) U.S. Bank Trust (“USBT”)[1] is a wholly owned subsidiary of U.S. Bancorp and an affiliate of U.S. Bank. (Id.) Its principal place of business is in Wilmington, Delaware. (Id.) The amount in controversy in this matter exceeds $75, 000.00. (Id. at 2.)


         Plaintiff is an insurance company with its principal place of business in South Carolina. (ECF No. 1 ¶ 1.) In April 2013, Plaintiff and Freestone entered into a reinsurance contract known as the “Program Agreement.” (Id. ¶ 24; ECF No. 1-1.) Freestone, formerly known as Dallas National Insurance Company, was an indirect subsidiary of Southport Lane, L.P. (“Southport Lane”), a New York private equity firm owned and controlled by Alexander Chatfield Burns. (ECF No.1 ¶ 8-10; see also ECF No. 1-1 § 21.)

         The relationship between Plaintiff and Freestone is known as a fronted insurance program. (ECF No. 1 ¶ 24.) One company (here, Plaintiff) acts as the front, and all policies are issued in its name, but another insurer (here, Freestone) bears the risk of loss. (Id.; ECF No. 1-1.) Plaintiff received a fee for allowing its name and paper to be used as the front, but shifted to Freestone the insurance and financial risks under the policies. (ECF No. 1 ¶¶ 24, 26, 29; ECF No. 1-1 §§ 2, 4, 5, 8, 14, 15, 16.)

         To ensure that Freestone could make good on its coverage and to protect Plaintiff from having to pay claims, the Program Agreement required Freestone to supply collateral to secure its obligations. (ECF No. 1 ¶¶ 27-28; ECF No. 1-1 § 12.) State regulations generally require that assets serving as reinsurance collateral are liquid and marketable, allowing them to be converted quickly into cash to pay claims. (ECF No. 1 ¶ 28.) In September 2013, after Plaintiff and Freestone had been running their fronted insurance program for five months, they brought in Defendant to serve as the trustee on the trust (“AIC Trust”) that supported their reinsurance relationship. (ECF No. 1 ¶ 30.) Under the trust agreement, Plaintiff is the beneficiary, Freestone is the grantor, and Defendant is the trustee. (ECF No. 1-2 at 1.) Each party's rights and duties are set forth by contract. (Id. § 1(b).) The trust agreement is subject to and governed by Delaware law. (Id. § 13.)

         In March 2013, Freestone was acquired by Southport Lane (together with its affiliates and subsidiaries, “Southport”). (ECF No. 1 ¶ 9.) By 2014, Freestone was insolvent. (Id. ¶¶ 106-08.) At the beginning of Defendant's role as trustee in January 2014, the trust account contained only cash and other eligible securities, thereby adequately protecting Plaintiff's obligations. (Id. ¶ 35.) Specifically, the trust account contained assets valued at more than $9 million. (Id.) In January 2014, Defendant approved multiple transactions, including: (1) the substitution of assets for an investment in Camelot, and (2) the substitution of assets for an investment in the Destra Targeted Income Unit Investment Trust (“Destra UIT”). (Id. ¶¶ 37-39.) By February 28, 2014, the trust account held: (1) approximately $87.70 in cash, (2) the Destra UIT units purportedly worth $6, 891, 423.29, but worth substantially less, (3) the Camelot Shares purportedly worth $193, 000.00, and (4) the Cook County II series A municipal bonds valued at $2, 604, 408.05. (Id. ¶ 55.)

         On July 22, 2016, Plaintiff filed a Complaint for a jury trial against Defendant. (ECF No. 1.) Plaintiff alleges that Defendant breached various duties as trustee of the Destra UIT, and asserts claims for: (1) breach of contract (Count 1), (2) breach of fiduciary duty (Count 2), (3) negligence/gross negligence (Count 3), and (4) negligent misrepresentation (Count 8).[2] (Id.)

         Breach of contract. In asserting breach of contract, Plaintiff alleges that Defendant accepted units of the Destra UIT without validating the Committee on Uniform Securities Identification Procedures (“CUSIP”)[3] numbers, and also did not properly document the transfer of the units to the trust account, in accordance with its obligations under Section 8(a) of the trust agreement requiring it adequately “account” for all assets. (Id. ¶¶ 116-17.) As a result, Plaintiff asserts, Defendant did not satisfy its contractual duty under Section 8(b) of the trust agreement requiring it to determine that the units were in a form such that Plaintiff could negotiate them without someone else's consent. (Id.; see also ECF No. 1-2 § 8(b).)

         Breach of fiduciary duty. In asserting breach of fiduciary duty, Plaintiff again alleges a breach of Section 8(b). (ECF No. 1 ¶ 122(a).) Plaintiff also faults Defendant for two alleged failures to disclose. First, Plaintiff asserts that Defendant failed to disclose the alleged relationship among USBT, Administrative Agency Services, LLC (“AAS”)[4], Burns, the Southport entities, Freestone, and the Destra Fund. (Id. ¶ 122(b).) Second, Plaintiff alleges that Defendant failed to disclose that the Destra UIT units “were valueless and did not constitute ‘Eligible Assets.'” (Id. ¶ 122(c).) Finally, Plaintiff alleges that Defendant incorrectly listed the Destra UIT units under the heading of “taxable bonds” on an account statement in January 2014. (Id. ¶ 122(d); see also ECF 11-2.)

         Negligence/Gross Negligence. In asserting negligence/gross negligence, Plaintiff repeats the allegations underlying its claim for breach of fiduciary duty, except that Plaintiff adds the adjectives “negligently, grossly negligently, recklessly, willfully, and wantonly.” (ECF No. 1 ¶ 126.)

         Negligent misrepresentation. In asserting negligent misrepresentation, Plaintiff again alleges that Defendant misrepresented the value of the Destra UIT units, the status of the Destra UIT units as “taxable bonds” and “Eligible Assets, ” and the alleged relationship among USBT, AAS, Burns, the Southport entities, Freestone, and the Destra UIT. (Id. ¶ 176(a)-(c).)

         On September 9, 2016, Defendant filed a Motion to Dismiss for Failure to State a Claim. (ECF No. 11.) On November 17, 2016, Plaintiff filed a response in opposition to Defendant's Motion. (ECF No. 42.) On December 23, 2016, Defendant filed a Reply to Plaintiff's response. (ECF No. 50.)


         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 Rule 12(b)(6) motion “should not be granted unless it appears certain that the plaintiff can prove no set of facts which would support its claim and would entitle it 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). “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 Atlantic 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. (citing Twombly, 550 U.S. at 556).

         IV. ANALYSIS

         In its Motion to Dismiss, Defendant seeks dismissal of the following claims: (1) breach of contract, (2) breach of fiduciary duty, (3) negligence/gross negligence, and (4) negligent misrepresentation. (ECF No. 11-1.)

         1. Breach of Contract (Count 1)

         Plaintiff asserts Defendant breached its contractual obligations to it by: (1) accepting the Destra UIT units in the trust account without validating the CUSIP numbers, and (2) by failing to properly document the transfer of the units to the trust account. (ECF No. 1 ¶ 117.) Defendant asserts that Plaintiff's allegation does not state a claim for breach of its “actual-and limited- obligations under the trust agreement.” (ECF No. 11-1 at 9.) In support, Defendant references the contract stating that Defendant has no duty or responsibility “with respect to the qualification, character, or valuation of the Assets; for the existence, genuineness or value of any of the Assets[5]; to determine whether any Assets are or remain Eligible Securities; or to determine if the value of the Assets satisfies Plaintiff's requirements.” (ECF No. 1-2 §§ 2(b), 5(c), 8(c), 8(1), 12(f).)

         Under Delaware law, a breach of contract claim arises from proof of the defendant's contractual obligation as well as proof that the defendant's failure to meet that obligation caused the plaintiff damage. Interim Healthcare, Inc. v. Spherion Corp., 884 A.2d 513, 548 (Del. Super. 2005). To defeat a motion to dismiss, a breach of contract complaint must allege: (1) the existence of a contract, (2) breach of an obligation imposed by the contract, and (3) resulting damage to the plaintiff. Micro Focus (US), Inc. v. Ins. Servs. Office, Inc., 125 F.Supp.3d 497, 500 (D. Del. 2015) (citing VLIW Tech., LLC v. Hewlett-Packard Co., 840 A.2d 606, 612 (Del. 2003)). In fact, “detailed factual allegation[s] concerning the extent and effect of the breach is not required by the plausibility standard” Rule 12(b)(6) imposes. Micro Focus (US), Inc., 125 F.Supp.3d at 501. Additionally, Defendant may not support its Motion by taking issue with Plaintiff's interpretation of the trust agreement's terms. Id. (explaining a defendant's dispute over a contract's meaning to be “a question for another day”).

         The Complaint sufficiently pleads all elements for breach of contract. Specifically, Plaintiff alleges Defendant accepted the Destra UIT units into the AIC Trust without the required pre-acceptance negotiability determination mandated by the trust agreement. (ECF No. 1 ¶¶ 47-48, 117.) Under the trust agreement:

Before accepting any Asset for deposit to the Trust account, [Defendant] shall determine that such Asset is in such form that [Plaintiff] whenever necessary may, or [Defendant] upon direction by [Plaintiff] will, negotiate such Asset without consent or signature from [Freestone] or any person or entity ...

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