The USCC Servs. v. Young Am.

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USCC Services, LLC, et al., Appellants, The Pep Boys - Manny, Moe & Jack, Plaintiff, v. Young America, LLC, Defendant, Endurance Risk Solutions Assurance Co., Respondent.

No. A23-1982

Court of Appeals of Minnesota

August 5, 2024

This opinion is nonprecedential except as provided by Minn. R Civ. App. P. 136.01, subd. 1(c).

Hennepin County District Court File No. 27-CV-21-12627

Jeffrey D. Klobucar, Jeffrey R. Mulder, Aram V. Desteian James C. Kovacs, Bassford Remele, P.A., Minneapolis, Minnesota (for appellants)

Paulette S. Sarp, Jessica Hutchinson, Hinshaw & Culbertson LLP, Minneapolis, Minnesota (for respondent)

Considered and decided by Wheelock, Presiding Judge; Connolly, Judge; and Ede, Judge.

WHEELOCK, Judge

Appellants each obtained a judgment against an insured defendant in separate district court proceedings for breach of fiduciary duty based on the defendant mishandling funds that it held in trust for appellants. Appellants then initiated garnishment proceedings against respondent insurer to collect on the underlying judgments, and respondent asserted counterclaims for declaratory judgments that its insurance policy with the defendant did not cover appellants' claims. The garnishment claims were consolidated, and appellants and respondent filed cross-motions for summary judgment. The district court denied appellants' motions for summary judgment and granted respondent's motion for summary judgment because each of the insured defendant's breaches of its fiduciary duty to appellants fell within one or more of the policy's exclusions. We affirm.

FACTS

Prelitigation Events

Appellant USCC Services LLC, through its affiliate U.S. Cellular, provides cellular telephone and internet services. Appellant Motorola Mobility LLC provides mobile products and services. The defendant in the underlying actions, Young America LLC, was a marketing-services company that provided a wide variety of services to its clients, which included appellants. As relevant to this appeal, Young America administered programs and services, including rebates, refunds, incentives, and prepaid-product programs, that involved remitting payments to its clients' customers. Young America's clients funded the programs and services by advancing "program funds" to Young America that Young America then used to make payments to its clients' customers. Young America's business relationships with its clients were governed by master services agreements (MSAs). Appellants' MSAs included terms governing Young America's use of the program funds and requiring its maintenance of certain types of insurance.

In 2020, Young America became insolvent and ceased business operations. When appellants learned of this, they contacted Young America for an update on the status of their program funds, but Young America notified appellants that it could not locate the program funds. At that time, Young America should have had $493,757.19 in program funds from Motorola and $1,020,669.25 in program funds from USCC.

Young America initiated insolvency proceedings in the form of an assignment for the benefit of its creditors. Appellants recovered nothing in those proceedings.

Appellants' Underlying Lawsuits Against Young America

Appellants then brought individual lawsuits against Young America.^[1] Appellants alleged in their complaints that Young America breached its fiduciary duty based on three wrongful acts: (1) commingling program funds with other clients' funds and its own assets; (2) making preferential payments to its personnel while on the verge of insolvency rather than preserving assets for the benefit of appellants as its creditors; and (3) canceling its insurance policy with Lloyd's of London, which appellants contended likely would have provided coverage for their claims.

Young America did not answer the complaints, and appellants notified Young America's insurer, respondent Endurance Risk Solutions Assurance Co., of their claims and Young America's failure to respond. Appellants also warned Endurance that if Endurance failed to respond within 30 days, they intended to move for default judgments and would initiate garnishment proceedings against Endurance to collect on the judgments based on Endurance's insurance policy with Young America. Endurance did not defend Young America against appellants' lawsuits or respond to their communications, and appellants each moved for summary judgment against Young America.

The district court that presided over USCC's lawsuit granted summary judgment to USCC because it determined that Young America breached its fiduciary duty under express-trust and resulting-trust theories.^[2] It ordered Young America to pay USCC $1,020,669.25 to repay the funds that Young America failed to hold in trust for USCC. The district court that presided over Motorola's lawsuit granted summary judgment to Motorola pursuant to Minn. R. Gen. Prac. 115.06 because it concluded that, by failing to respond, Young America did not oppose Motorola's complaint or motion for summary judgment. It ordered Young America to pay Motorola $493,757.19 to repay the funds that Young America failed to hold in trust for Motorola.

Appellants' Lawsuits Against Endurance

Appellants initiated garnishment proceedings against Endurance to collect on the judgments based on Endurance's insurance policy with Young America. Endurance asserted that the policy did not cover the judgments; appellants then supplemented their original complaints against Young America to add garnishment claims against Endurance. Endurance opposed appellants' garnishment claims and asserted counterclaims seeking declaratory judgments that the policy does not cover the judgments.

The proceedings were consolidated, and appellants and Endurance brought cross-motions for summary judgment. Endurance argued that its policy with Young America did not provide coverage for appellants' judgments because they were excluded by three separate provisions of the insurance policy: the contractual-liability exclusion, the conduct-and-illegal-profit exclusion, and the professional-services exclusion. The district court determined that each of Young America's three wrongful acts fell within one or more of the exclusions. Thus, the district court denied summary judgment to appellants and granted summary judgment to Endurance, issuing a declaratory judgment that the Endurance policy did not cover appellants' judgments.

USCC and Motorola appeal.

DECISION

Appellants challenge the district court's grant of summary judgment in favor of Endurance, arguing that Endurance's insurance policy covers appellants' underlying judgments because no exclusions apply to Young America's wrongful acts that caused appellants' damages. Appellants also argue that the concurrent-cause doctrine applies here so that Young America's three wrongful acts-commingling funds, making preferential payments, and canceling its Lloyd's insurance policy-can be considered separately under each exclusion.

"We review a district court's summary judgment decision de novo. In doing so, we determine whether the district court properly applied the law and whether there are genuine issues of material fact that preclude summary judgment." Riverview Muir Doran, LLC v. JADT Dev. Grp., LLC, 790 N.W.2d 167, 170 (Minn. 2010) (citation omitted). Summary judgment is appropriate when "there is no genuine issue as to any material fact and the movant is entitled to judgment as a matter of law." Minn. R. Civ. P. 56.01. "[T]he interpretation of insurance contract language is a question of law as applied to the facts presented." Meister v. W. Nat'l Mut. Ins. Co., 479 N.W.2d 372, 376 (Minn. 1992). When the material facts are undisputed, we independently review the district court's interpretation of the contract. Id.

To determine whether contract language is clear or ambiguous, we construe words and phrases according to their plain and ordinary meaning and read words in the context of the contract as a whole, giving effect to the intent of the parties. Elm Creek Courthome Ass'n v. State Farm Fire & Cas. Co., 971 N.W.2d 731, 736 (Minn.App. 2022), rev. denied (Minn. May 17, 2022). If the contract language is clear and unambiguous, it must be enforced as written. Id. at 736-37. But when contract language is subject to more than one reasonable interpretation, it is ambiguous, and we construe the ambiguity against the insurer and in favor of coverage. Econ. Premier Assurance Co. v. W. Nat'l Mut. Ins. Co., 839 N.W.2d 749, 754 (Minn.App. 2013).

In a dispute between an insurer and an insured, "[t]he initial burden of demonstrating coverage rests with the insured; the burden of establishing the applicability of exclusions rests with the insurer." Domtar, Inc. v. Niagara Fire Ins. Co., 563 N.W.2d 724, 736 (Minn. 1997).^[3] We interpret exclusions narrowly, construing them strictly against the insurer. Travelers Indem. Co. v. Bloomington Steel & Supply Co., 718 N.W.2d 888, 895, 896 (Minn. 2006). "Once the insurer shows the application of an exclusion clause, the burden of proof shifts back to the insured" to establish the applicability of any exceptions to the exclusion. Smith v. State Farm Fire & Cas. Co., 656 N.W.2d 432, 436 (Minn.App. 2003) (quotation omitted). Because Endurance does not dispute that appellants' claims are covered absent an exclusion, we must determine whether Endurance has shown that any exclusions apply, and if so, whether appellants have shown that any exceptions to those exclusions apply.

I. The concurrent-cause doctrine does not apply.

We begin by addressing appellants' argument that, pursuant to the concurrent-cause doctrine, the policy provides coverage so long as (1) at least one of the wrongful acts is not excluded and (2) the wrongful...