Accident Ins. Co. v. U.S. Bank N.A.

Accident Insurance Company, Inc., a South Carolina Corporation Plaintiff, v. U.S. Bank National Association, Defendant.

U.S. Bank National Association, Third-Party Plaintiff, v. Southport Lane Advisors, Southport Specialty Finance,Administrative Agency Services, and Alexander Chatfield Burns, Third-Party Defendants.

Civil Action No.: 3:16-cv-02621-JMC

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF SOUTH CAROLINA COLUMBIA DIVISION

July 3, 2019

ORDER AND OPINION

Plaintiff Accident Insurance Company, Inc. ("AIC") filed this action against Defendant U.S. Bank National Association ("U.S. Bank") seeking monetary damages for breach of contract, breach of fiduciary duty, negligence/gross negligence, negligent misrepresentation, and civil conspiracy regarding a trust agreement. (ECF No. 154 at 21 ¶ 116-25 ¶ 141.)

This matter is before the court pursuant to U.S. Bank's Motion in Limine to Exclude Testimony and Evidence Related to Punitive Damages, filed on June 11, 2019. (ECF No. 257.) AIC filed a Response in Opposition to the Motion on June 25, 2019. (ECF No. 262.) Upon its review, the court concludes that all of AIC's claims are subject to the jurisdiction of the Delaware Court of Chancery, and, for the reasons set forth below, GRANTS U.S. Bank's Motion in Limine to Exclude Testimony and Evidence Related to Punitive Damages (ECF No. 257).

I. JURISDICTION

This court has subject matter jurisdiction over this action pursuant to 28 U.S.C. § 1332, because the parties are citizens of different states and the amount in controversy exceeds $75,000.00, exclusive of interest and costs. (See ECF No. 154.) AIC 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.) U.S. Bank 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.) The court is satisfied the amount in controversy in this matter exceeds $75,000.00. (Id. at 2.)

II. ANALYSIS

The Trust Agreement at issue in this matter, in which AIC is the Beneficiary, and U.S. Bank is the Trustee, provides in relevant part that "[t]his Agreement shall be subject to and governed by the laws of the State of Delaware." (ECF No. 262-1 at 9 ¶ 13.) In the instant matter, the parties dispute whether AIC can be awarded punitive damages because if the case was properly heard in Delaware's Court of Chancery, it would not have jurisdiction to assess punitive damages. (ECF No. 257 at 1.)

A. The Parties' Arguments

1. U.S. Bank

In its Motion, U.S. Bank argues that AIC should be precluded from "offering any testimony, evidence, or argument concerning punitive damages because Delaware law prohibits the recovery of punitive damages on [AIC]'s claims." (ECF No. 257 at 1.) In support of this argument, U.S. Bank asserts that exclusive jurisdiction over AIC's equitable claims would lie withDelaware's Court of Chancery, and, absent express statutory authorization, the Court of Chancery has no jurisdiction to assess punitive damages. (Id. at 2 (citing Prospect St. Energy, LLC v. Bhargava, C/A No. N13C-08-203 WCC CCLD, 2016 WL 446202, at *6 (Del. Super. Ct. Jan. 27, 2016); Cardone v. State Dep't of Corr., C/A No. 3370-VCN, 2008 WL 2447440, at *11 (Del. Ch. June 4, 2008)).) U.S. Bank further asserts that AIC's breach of fiduciary duty claim would properly be heard in the Court of Chancery because it is the quintessential equitable claim. (Id. (citing Prospect St. Energy, LLC, 2016 WL 446202, at *4).)

Additionally, U.S. Bank argues that AIC's negligence claims would properly be heard in the Court of Chancery because, under Delaware law, negligence claims sounding in equity must be pursued in the Court of Chancery. (Id. at 3. (citing Prospect St. Energy, LLC, 2016 WL 446202, at *7).) Moreover, U.S. Bank asserts that AIC's other claims, including for breach of contract, would also properly be heard in the Court of Chancery because it would have the discretion to assume jurisdiction over the entire dispute under the equitable clean-up doctrine. (Id. at 3-4 (citing Getty Ref. & Mktg. Co. v. Park Oil, Inc., 385 A.2d 147, 149 (Del. Ch. 1978); Those Certain Underwriters at Lloyd's v. Nat'l Installment Ins. Servs., Inc., No. 19804-NC, 2007 WL 2813774, at *3 (Del. Ch. Feb. 8, 2007) ("[I]t is settled law that when equity obtains jurisdiction over some portion of the controversy it will decide the whole controversy and give complete and final relief, even though that involves the grant of a purely law remedy such as a money judgment.") (citation omitted)).)

2. AIC

In its Opposition to U.S. Bank's Motion, AIC asserts that it should be allowed to recover punitive damages based on § 198 of the Restatement (Second) of Trusts, which provides that a trust beneficiary's breach of fiduciary duty claim is legal, and not equitable, if the trustee has aduty to pay money immediately and unconditionally to the beneficiary. (ECF No. 262 at 3 (citing Restatement (Second) of Trusts §§ 197 and 198 (1959)).) AIC contends that its trust agreement required U.S. Bank to immediately transfer the assets at issue in the litigation, absolutely and unequivocally, to the beneficiary. (Id.) Therefore, AIC asserts that the exception would be applied in this case and its claims would be considered as legal rather than equitable.¹ (Id. at 3-4.)

Furthermore, AIC argues that it can still seek punitive damages in this court for breach of fiduciary duty. (Id. at 4.) In support of this argument, AIC asserts that federal procedural law is controlling and, therefore, Delaware procedural law foreclosing an award of punitive damages based on the jurisdiction of the Court of Chancery is inapplicable. (Id. at 4-5.) To this point, AIC states that it is seeking money damages and such a remedy is legal in nature. (Id. at 5.) Thus, AIC surmises that it is allowed to seek punitive damages under federal procedural law. (Id.)

Additionally, AIC argues that the clean-up doctrine is applied as a matter of judicial discretion and asserts that the Court of Chancery would not apply the doctrine in this case. (Id. at 6.) In this regard, AIC asserts that the court may refuse to apply Delaware law relating to punitive damages if its application is offensive to the public policy of South Carolina and prejudicial to the general interests of its citizens. (Id. at 8. (citing Rauton v. Pullman Co., 191 S.E. 416, 422 (S.C. 1937)).) AIC contends that South Carolina holds trustees to the highest of fiduciary obligations and protects its citizen beneficiaries by providing a wide range of remedies against a trustee who fails to meet its obligations. (Id. at 8-9.) Accordingly, AIC asserts that the court should apply the public policy exception in this case. (Id.)

Finally, AIC argues that the choice-of-law provision of the trust agreement is too narrowto be applicable to its tort claims. (ECF No. 262 at 9.) AIC contends that in Charleston Marine Containers, Inc. v. Sherwin-Williams Co., the United States District Court for the District of South Carolina concluded that a choice-of-law provision, similar to the provision in AIC's trust agreement, could be interpreted either to include or to not include tort claims. (Id. at 10 (citing Charleston Marine Containers, Inc., 165 F. Supp. 3d 457, 469 (D.S.C. 2016)²).) AIC asserts that the choice-of-law provision in its trust agreement is narrowly worded like the provision in Charleston Marine Containers, Inc., however, the agreement does not contain any other qualifiers that would extend the scope of the provision. (ECF No. 262 at 12.) Therefore, AIC asserts that the choice-of-law provision should not apply to its tort claims. (Id. at 9.)

B. The Court's Review

In a diversity suit, federal courts must apply the rules of the forum state when addressing choice-of-law questions. See Erie R. Co. v. Tompkins, 304 U.S. 64, 78 (1938). South Carolina choice-of-law rules dictate that the court must apply the law specified in a contract. See Bannister v. Shepherd, 4 S.E.2d 7, 9 (S.C. 1939); Livingston v. Atl. Coast Line R.R. Co., 180 S.E. 343, 345(S.C. 1935). In the instant case, the trust agreement between the parties indicates that it shall be subject to and governed by the laws of the State of Delaware. (ECF No. 262-1 at 9 ¶ 13.) Despite the aforementioned provision, AIC argues that Delaware law does not control the resolution of the instant dispute.

Upon its review, the court observes that AIC is correct that "federal courts sitting in diversity apply . . . federal procedural law." (ECF No. 262 at 4-5 (citation omitted).) However, while AIC fails to cite to any case law specifying either what federal procedural law or how it would require this court to allow punitive damages, numerous other courts have expressly concluded that state law governs the issue of whether punitive damages are permitted. See, e.g., Buchwald v. Renco Group, 539 B.R. 31, 53 (S.D.N.Y. 2015) ("The availability of punitive damages on state claims in federal courts is generally governed by state law under Erie.") (citing Browning-Ferris Indus. of Vt., Inc. v. Kelco Disposal, Inc., 492 U.S. 257, 278-79 (1989)); Jenkins v. Immedia, Inc., C/A No. 13-cv-00327-CMA-KLM, 2019 WL 1875501, at *5 (D. Colo. April 25, 2019) (holding that state substantive law applied to Plaintiff's claim for punitive damages in assessing whether punitive damages were permitted); Ayres v. AG Processing, Inc., 04-2060-DJW, 2015 WL 1799261, at *3 (D. Kan. July 22, 2005) ("Under the Erie doctrine, federal courts sitting in diversity apply state substantive law and federal procedural law. The issue of whether punitive damages are permitted is governed by state substantive law."). Therefore, the court concludes that the application of Delaware law is appropriate in precluding an award of punitive damages based on the jurisdiction of the Delaware Court of Chancery. Cf. Buchwald, 539 B.R. at 54 ("The Court will not...