Fed. Deposit Ins. Corp. v. Arch Ins. Co., Civil Case No. C14-0545RSL

FEDERAL DEPOSIT INSURANCE CORPORATION, Plaintiff, v. ARCH INSURANCE COMPANY, et al, Defendants.

Civil Case No. C14-0545RSL

UNITED STATES DISTRICT COURT WESTERN DISTRICT OF WASHINGTON AT SEATTLE

November 13, 2017

ORDER GRANTING IN PART UNDERWRITERS AT LLOYD'S MOTION FOR SUMMARY JUDGMENT

This matter comes before the Court on "Defendants Those Certain Underwriters at Lloyd's, London Whose Names are Severally Subscribed to Excess Financial Institution Bond No. 509/QA015607 ("The Excess Bond") and Württembergische Versicherung A.G. (Collectively, "Underwriters") Motion for Summary Judgment." Dkt. # 120. The Underwriters are excess insurers on a financial institution blended policy issued to Washington Mutual Bank ("WaMu") starting in May 2006. They seek a summary determination (a) that their excess layer has not been reached, (b) that the claimed losses are indirect and do not trigger coverage under the terms of the policy, (c) that the policies do not cover fraudulent mortgages originated prior to the policy period, and/or (d) that the claims for cost of funds, prejudgment interest, and attorney's fees fail as a matter of law . WaMu, the insured, collapsed in 2008, and the United States Office of Thrift Supervision placed it into receivership with the Federal Deposit Insurance Corporation ("FDIC"). The FDIC is pursuing a claim for insurance coverage that WaMu made in 2007. The FDIC opposes the Underwriters' motion and requests that it be denied or, in the alternative, that the Court defer ruling under Fed. R. Civ. P. 56(d)(2).

Summary judgment is appropriate when, viewing the facts in the light most favorable to the nonmoving party, there is no genuine issue of material fact that would preclude the entry of judgment as a matter of law. The party seeking summary dismissal of the case "bears the initial responsibility of informing the district court of the basis for its motion" (Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986)) and "citing to particular parts of materials in the record" that show the absence of a genuine issue of material fact (Fed. R. Civ. P. 56(c)). Once the moving party has satisfied its burden, it is entitled to summary judgment if the non-moving party fails to designate "specific facts showing that there is a genuine issue for trial." Celotex Corp., 477 U.S. at 324. The Court will "view the evidence in the light most favorable to the nonmoving party . . . and draw all reasonable inferences in that party's favor." Krechman v. County of Riverside, 723 F.3d 1104, 1109 (9th Cir. 2013). Although the Court must reserve for the jury genuine issues regarding credibility, the weight of the evidence, and legitimate inferences, the "mere existence of a scintilla of evidence in support of the non-moving party's position will be insufficient" to avoid judgment. City of Pomona v. SQM N. Am. Corp., 750 F.3d 1036, 1049 (9th Cir. 2014); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252 (1986). Factual disputes whose resolution would not affect the outcome of the suit are irrelevant to the consideration of a motion for summary judgment. S. Cal. Darts Ass'n v. Zaffina, 762 F.3d 921, 925 (9th Cir. 2014). In other words, summary judgment should be granted where the nonmoving party fails to offer evidence from which a reasonable jury could return a verdict in its favor. FreecycleSunnyvale v. Freecycle Network, 626 F.3d 509, 514 (9th Cir. 2010).

// Having reviewed the memoranda, declarations, and exhibits submitted by the parties,¹ the Court finds as follows:

BACKGROUND

In the early 2000s, WaMu contracted with third parties to have them originate residential real property mortgage loans which WaMu agreed to purchase. In March 2004, WaMu discovered that a mortgage originated by CIP Mortgage Corporation was based on a misstatement regarding the borrower's income. Subsequent investigation revealed eleven CIP loans that were based on false income statements. WaMu's Correspondent Area Risk and Risk Mitigation departments concluded "that the borrowers misrepresented their income and employment." Dkt. # 173-4 at 3. WaMu notified CIP of its findings and requested that it repurchase the loans. CIP agreed to do so and fired the processor who originated the loans. At approximately the same time, however, WaMu discovered that CIP's 2003 net worth was less than 1/10th what it had been in 2002, in large part due to a "huge distribution" to shareholders. Dkt. # 99 at 40-41. On September 2, 2004, WaMu notified CIP that its selling privileges for WaMu had been suspended.

Prior to September 2005, WaMu purchased three fraudulent loans from another mortgage company, Coastal Capital.

On September 18, 2007, a defendant in a pending criminal matter notified WaMu that over 100 of the mortgages originated by CIP for WaMu were actually unsecured. WaMu conducted an investigation and found that CIP prepared fraudulent paperwork, including loan applications, mortgages, notes, and title insurance, to make it look like a third party was borrowing money that was secured by real property owned or controlled by CIP's CEO. In fact, the CEO and others involved in the fraud fronted just enough money to get through settlement,then sold the loans to WaMu and pocketed the proceeds without ever recording the mortgage, paying taxes, or purchasing insurance. The CEO and/or his companies would make monthly payments on the loan so that they appeared legitimate. The properties that were supposedly securing WaMu's loan were often sold to end-users, thereby compromising WaMu's position in the chain of title. WaMu concluded that it had purchased 124 fraudulent loans for $53,344,641.16. WaMu notified the Underwriters of the loss on July 18, 2008.

On April 11, 2014, the FDIC filed this litigation in its capacity as the Receiver for WaMu against the third and fourth excess layer insurers. The FDIC alleged that it had covered losses of over $25 million after reducing the claim by the amount recovered by third parties and its self-insurance obligations. A more detailed calculation of the damages, including specific categories of losses for which coverage is sought, was disclosed in November 2014 pursuant to Fed. R. Civ. P. 26(a). The discovery cut off date is February 4, 2018.

ANALYSIS

The parties agree that the underlying bond is to be interpreted under Washington law. Insurance policies are construed "as contracts, giving them a fair, reasonable, and sensible construction as would be given to the contract by an average person purchasing insurance." Xia v. ProBuilders Specialty Ins. Co., 188 Wn.2d 171, 181 (2017) (internal quotations marks omitted).² Undefined terms are given their plain and ordinary meaning and, if the policy language is clear and unambiguous, it will be applied as written. Id. Where there is an ambiguity, coverage provisions are liberally construed in favor of coverage while exclusions are strictly construed against the insurer. Ross v. State Farm Mut. Auto. Ins. Co., 132 Wn.2d 507, 523 (1997). If an insured shows that the loss falls within the coverage provision, the insurer mustshow that it is excluded by specific policy language. Moeller v. Farmers Ins. Co. of Wash., 173 Wn.2d 264, 272 (2011).

A. Ripeness

The Underwriters issued an insurance policy to WaMu in excess of $30 million in self-insured retention and $75 million in four underlying policy layers. The Underwriters argue that, although the first three layers of insurance coverage have been exhausted, the FDIC has $29 million in self insurance and the $20 million policy offered by Arch and National Union remaining before the Underwriters could possibly have an obligation to pay under the policy. They seek dismissal of the two claims the FDIC has asserted against them: breach of contract and declaratory judgment.

1. Breach of Contract

The Underwriters seek dismissal of the breach of contract claim on the ground that, because the FDIC has not exhausted the Arch and National Union policy limits, it is not ripe for adjudication. Liability typically attaches under excess policies "only after the primary coverage is exhausted." Diaz v. Nat'l Car Rental Sys., Inc., 143 Wn.2d 57, 63 (2001). In this case, the excess policy specifically states that the "Underwriters' liability to pay under this Policy shall attach only when the Underlying Insurer(s) shall have paid or have been held liable to pay, the full amount of the Underlying Limit(s) . . . ." Dkt. # 1-4 at 7. The insurers on the risk in the third level of coverage, Arch and National Union, have denied coverage, and their liability has not yet been established. The Underwriters correctly argue that their duty to indemnify has not yet been triggered, much less breached. Because the undisputed facts show that there is no present duty to indemnify, the FDIC's breach of contract claim against the Underwriters is not ripe and will be dismissed without prejudice. See Seattle Times Co. v. Nat'l Surety Corp., 2016 WL 3033498, at *2-4 (W.D. Wash. May 27, 2016).

2. Declaratory Judgment

The FDIC also seeks a number of declarations under 28 U.S.C. § 2201, in particular that the Underwriters must cover all losses that WaMu suffered in excess of the applicable retention limits as a result of the dishonest acts of its loan originators.³ The Underwriters argue that the request for declaratory relief is not ripe because WaMu's claimed losses do not, in fact, exceed the remaining retained amounts and will never exceed those amounts. The Underwriters rely on the following calculation:

$53.34 million

sworn proof of loss

- $5.28 million

recovered from third parties

$48.06 million

outstanding value of claim

At the time the complaint was filed, there was $49 million in self-insurance and policy limits left below the Underwriters' fourth layer of excess coverage. Based on those numbers, the Underwriters seek dismissal of the FDIC's request for a declaration of coverage on the ground that they are not currently, and will never be, on the risk.

Although there is...