In re Commercial Money Center, Inc.

603 F.Supp.2d 1095

In Re: COMMERCIAL MONEY CENTER, INC., EQUIPMENT LEASE LITIGATION.

Case No. 1:02CV16000.

MDL Docket No. 1490.

This Order Relates To Case No. 02CV16010.

This Order Relates To Case No. 02CV16012.

This Order Relates To Case No. 02CV16014.

This Order Relates To Case No. 02CV16019.

This Order Relates To Case No. 02CV16020.

This Order Relates To Case No. 02CV16021.

This Order Relates To Case No. 02CV16022.

This Order Relates To Case No. 02CV16024.

This Order Relates To Case No. 03CV16002.

This Order Relates To Case No. 03CV16003.

This Order Relates To Case No. 03CV16004.

This Order Relates To Case No. 03CV16005.

This Order Relates To Case No. 03CV16006.

United States District Court, N.D. Ohio, Eastern Division.

March 11, 2009.

COPYRIGHT MATERIAL OMITTED

MEMORANDUM AND ORDER

KATHLEEN McDONALD O'MALLEY, District Judge.

The dispute in these actions centers around the Sureties' liability on various surety bonds issued in connection with certain transactions between the Banks¹ and Commercial Money Center, Inc. ("CMC"). CMC's business purportedly involved the leasing of equipment and vehicles to numerous lessees in exchange for lease payments. CMC then pooled the leases and sold them to institutional investors. Apparently, the majority of CMC's leasing business was a sham, and the Banks claim millions of dollars in losses from these transactions. The Banks now sue the Sureties to recover on the surety bonds associated with the transactions. The Sureties raise CMC's fraud as a defense to the Banks' claims and seek to rescind the surety bond transactions based on fraud in the inducement.²

These actions are before the Court upon the following motions for partial summary judgment:

1. Safeco Motion for Summary Judgment (02-16000, Doc. 2150)

Safeco Insurance Company of America ("Safeco") has moved for partial summary judgment against J.P. Morgan Chase Bank, N.A. ("Chase"); The Provident Bank ("Provident"); Federal Deposit Insurance Corporation ("FDIC"), as Receiver for NetBank FSB;³ CadleRock Joint Venture, L.P. ("CadleRock"); and certain Guardian/Diversity Entities ("Guardian Entities")⁴ (collectively, the "Banks," except where individual reference is intended), on the following grounds:

(a) Safeco seeks summary judgment on the Banks' claims for bad faith/ breach of the covenant of good faith and fair dealing. Safeco argues that California law bars a tort claim for bad faith in the context of a commercial surety contract.

(b) Safeco also seeks summary judgment on CadleRock's claims for punitive damages. Safeco argues that CadleRock acquired its rights in this litigation by assignment and that, under California law, claims for punitive damages are not assignable.

2. Royal Motion for Summary Judgment (02-16000, Doc. 2154)

Royal Indemnity Company ("Royal") moves for partial summary judgment against CadleRock on the following grounds:

(a) Royal seeks summary judgment on CadleRock's claims for bad faith/ breach of the covenant of good faith and fair dealing, for the same reasons set forth above relating to Safeco's motion for summary judgment.

(b) Royal seeks summary judgment as to CadleRock's claims for punitive damages, for the same reasons set forth above relating to Safeco's motion for summary judgment.

(c) Royal seeks summary judgment as to all of CadleRock's claims premised upon the Sale and Servicing Agreements ("SSAs"). Royal argues that, when CadleRock purchased its interests in three CMC lease pools from Sky Bank ("Sky"), the rights that CadleRock obtained did not include any rights under the SSAs.

3. AMICO Motion for Summary Judgment (02-16024, Doc. 52)

American Motorists Insurance Company ("AMICO") moves for partial summary judgment on the supplemental counterclaim of United Security Bank ("USB"), based on bad faith/breach of the covenant of good faith and fair dealing. As set forth above with respect to the summary judgment motions filed by Safeco and Royal, AMICO argues that California law does not recognize a tort claim for bad faith in the context of a commercial surety bond.

I. BACKGROUND

On September 12, 2006, the Court issued an Amended Revised Case Management Plan (02-16000, Doc. 1861), which set forth the procedure applicable to the filing of dispositive motions in these cases. The Amended Revised Case Management Plan provided that each party wishing to file a dispositive motion should file a Notification of Intent and Request for Leave to File Summary Judgment Motion ("Notification"). Pursuant to the Amended Revised Case Management Plan, each of the Sureties filed a Notification on November 17, 2006 seeking leave to file summary judgment motions on multiple issues. On December 19, 2007, the Court issued a ruling (Doc. 2138) disposing of various Notifications and granting the Sureties leave to file the summary judgment motions described above. The motions set forth above were filed on February 15, 2008, and are ripe for ruling.

For the reasons set forth herein, the motions of Safeco, Royal and AMICO (the "Sureties") for summary judgment are granted in part and denied in part. Safeco's motion for summary judgment against the Banks (Doc. 2150) is determined as follows:

(a) Safeco's motion for summary judgment on the Banks' claims for bad faith/breach of the covenant of good faith and fair dealing is granted as to all Banks except NetBank, and denied as to NetBank.

(b) Safeco's motion for summary judgment on CadleRock's claims for punitive damages is granted.

Royal's motion for summary judgment against CadleRock (Doc. 2154) is granted in its entirety, as follows:

(a) Royal's motion for summary judgment against CadleRock on CadleRock's claims for bad faith/breach of the covenant of good faith and fair dealing is granted.

(b) Royal's motion for summary judgment on CadleRock's claims for punitive damages is granted.

(c) Royal's motion for summary judgment as to CadleRock's claims premised upon the SSAs is granted.

AMICO's motion for summary judgment against USB (02-16024, Doc. 52) as to USB's claims based on bad faith/breach of the covenant of good faith and fair dealing is granted.

II. DISCUSSION

These cases have arisen in various jurisdictions, under a variety of procedural circumstances. Since the Sureties' summary judgment motions are grounded primarily on principles of California law, the Court must first determine the applicability of those principles to the cases under consideration. First, the Court examines the procedural posture of each group of cases to determine the applicable state choice of law rules. Second, the Court applies the relevant choice of law rules to determine the governing law for the bad faith claims asserted in each group of cases. Finally, the Court analyzes the relevant substantive law in order to determine the merits of the Sureties' motions.

A. Procedural Background

The motions currently before the Court relate to thirteen of the cases in this multidistrict litigation. These thirteen cases break down categorically by motion (i.e., each case relates only to one of the three pending summary judgment motions) and by jurisdiction of original filing.

In deciding conflict of law questions in diversity of citizenship cases, a federal court generally follows the choice of law rules of the state in which it sits. See Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487, 496, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941). Where venue has been transferred to a federal court sitting in a different state, however, such a transfer does not change the state substantive law applicable in a diversity case. "[W]here the defendants seek transfer, the transferee district court must be obligated to apply the state law that would have been applied if there had been no change of venue. A change of venue ... generally should be, with respect to state law, but a change of courtrooms...." Van Dusen v. Barrack, 376 U.S. 612, 639, 84 S.Ct. 805, 11 L.Ed.2d 945 (1964).

This rule also applies where a case is transferred for pretrial purposes pursuant to 28 U.S.C. § 1407. See SG Metals Indus. v. New Eng. Life Ins. Co. (In re New Eng. Mut. Life Ins. Co. Sales Practices Litig.), 236 F.Supp.2d 69, 74 (D.Mass. 2002). Accordingly, prior to determining the law applicable in each of the cases under consideration, the Court must consider the state of initial filing.

This inquiry is relatively simple with respect to the cases encompassed by the Royal and AMICO motions. The motion for summary judgment filed by AMICO (02-16024, Doc. 52) concerns only one case—02CV16024. That case was filed by AMICO in the Southern District of California and remained in the Southern District of California until its consolidation in this Court for pretrial purposes pursuant to 28 U.S.C. § 1407. With respect to AMICO's summary judgment motion, therefore, the Court will apply California choice of law rules to determine the governing substantive law.

Royal's summary judgment motion (02-16000, Doc. 2154) relates to three cases— 02CV16012, 02CV16019, and 02CV16022. The first of these cases, 02-16012, was filed by CadleRock's predecessor in interest in the Northern District of Ohio. Cases 02-16019 and 02-16022 were filed in Ohio state court by CadleRock's predecessors in interest and removed by Royal to the Northern District of Ohio. Ohio choice of law rules apply to determine the governing substantive law for each of these three cases.

With respect to the summary judgment motion filed by Safeco (02-16000, Doc. 2150), the inquiry is more complex. Safeco's summary judgment motion relates to nine cases in this consolidated litigation— 02CV16010, 02CV16014, 02CV16020, 02CV16021, 03CV16002, 03CV16003, 03CV16004, 03CV16005, and 03CV16006. Two of these actions were filed in Ohio state court and removed to the Northern District of Ohio. This includes 02-16020 (filed in state court by FirstMerit Bank, N.A., CadleRock's predecessor in interest), and 02-16021 (filed in state court by Provident). Additionally,...