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Bancinsure, Inc. v. Highland Bank

United States District Court, Eighth Circuit

September 23, 2013

BancInsure, Inc., an Oklahoma corporation, Plaintiff and Counter-Defendant,
Highland Bank, a Minnesota banking corporation, Defendant and Counter-Claimant.

Joseph A. Nilan and Mark J. Johnson, Gregerson, Rosow, Johnson & Nilan, Ltd., for Plaintiff and Counter-Defendant.

Patrick H. O'Neill, Jr., Eric M. Laine, and Stephen M. Warner, O'Neill & Murphy, for Defendant and Counter-Claimant.




This matter is before the Court on the parties' cross motions for summary judgment. For the reasons set forth below, Plaintiff and Counter-Defendant BancInsure, Inc.'s Motion for Summary Judgment [Doc. No. 65] is granted, and Defendant and Counter-Claimant Highland Bank's Motion for Summary Judgment [Doc. No. 49] is denied.


This case arises from a declaratory judgment action between a bank and its insurer. The insurer, BancInsure, Inc. ("BancInsure"), seeks a declaration that Highland Bank's loss is not covered under the Financial Institution Bond that BancInsure issued to Highland Bank. (Compl. ¶¶ 44-46 [Doc. No. 1].) Highland Bank has counterclaimed for breach of contract, a declaratory judgment that it is entitled to coverage, and breach of good faith and fair dealing. (Countercl. ¶¶ 33-45 [Doc. No. 3].)

A. EAR and First Premier's Lease Agreement

On May 16, 2005, Equipment Acquisitions Resources, Inc. ("EAR") and First Premier Capital, LLC ("First Premier") entered into a lease agreement ("the Lease Agreement"), under which First Premier was to provide manufacturing equipment to EAR. (Lease Agreement, Ex. 2 to Aff. of Joseph A. Nilan [Doc. No. 58-2].) Stephen Alpeter, a Partner at First Premier, and Sheldon Player, President of EAR, executed the Lease Agreement. (Id.) As a condition precedent to the Lease Agreement, Player and Donna Malone-EAR's principals-executed personal guaranties with First Premier, unconditionally guaranteeing payment to First Premier of all obligations under the Lease Agreement. (Player & Malone Guaranties, Exs. 2 & 3 to O'Neill Aff. [Doc. No. 16-1].) Before entering the Lease Agreement, Mr. Alpeter testified that First Premier reviewed personal financial statements of Player and Malone, in addition to corporate and personal tax returns as part of its due diligence. (Alpeter Dep. at 197, Ex. 4C to O'Neill Aff. [Doc. No. 19-1].) On May 27, 2005, the Player and Malone Guaranties were executed, and First Premier kept the original documents in its possession. (Proof of Loss Narrative, Ex. 27 to O'Neill Aff. [Doc. No. 25-1].)

B. First Premier and Highland Bank's Agreement

In 2006, First Premier approached Defendant Highland Bank on EAR's behalf, seeking to borrow $3 million to finance the equipment lease. (Compl. ¶ 7 [Doc. No. 1].) The parties contemplated an arrangement by which Highland Bank would advance the $3 million acquisition cost of the equipment to First Premier, which would then advance the funds to the equipment vendor. (Id.) First Premier would retain title to the equipment, and EAR would lease the equipment from First Premier under a lease schedule. (Id. ¶ 8.) Highland Bank would receive payment of its lease financing through an assignment of the rental payments due to First Premier under the Lease Agreement. (Id.) As relevant here, First Premier assigned three schedules to Highland Bank: (1) schedule 005R in October 2006, in exchange for a payment of $2, 958, 830.64; (2) schedule 008 in April 2007, in return for $507, 523.40; and (3) schedule 009R in May 2007, in return for $527, 660.59. (Exs. 12-14 to Nilan Aff. [Doc. No. 58-7].)

In transferring First Premier's interest in each of the lease schedules, Highland Bank and First Premier signed one agreement-the "Collateral Assignment of Lease Payments and Equipment"-and made no oral agreements. (White Examination under Oath at 27-28, Ex. 37 to Nilan Aff. [Doc. No. 58-21].) Under this agreement, First Premier assigned the following to Highland Bank: the "rental payments due or to become due under the Lease, " and all of First Premier's "rights, title and interest in and to the personal property subject to the Lease." (Exs. 12-14 to Nilan Aff. [Doc. No. 58-7].) The agreement did not include an assignment of the guarantees pledged to First Premier by Sheldon Player and Donna Malone. (Id.)

Before entering the transactions, First Premier sent various financial documents to Highland Bank. (Proof of Loss Narrative at 2-3, Ex. 28 to Nilan Aff. [Doc. No. 58-14].) A credit presentation by Highland Bank, dated October 5, 2006, shows that Sheldon Player and Donna Malone had a tangible net worth of negative $4, 580, 000 and contingent liabilities of $38, 811, 683. (Ex. 15 at 5 to Nilan Aff. at 5 [Doc. No. 58-5].) This document also shows that Malone had a credit score below 660 and was "outside of HB's target market." (Id. at 1.) Another credit presentation by Highland Bank, dated January 10, 2007, shows that Player and Malone had a tangible net worth of negative $13, 134, 614 and contingent liabilities of $53, 500, 000. (Ex. 16 at 7 to Nilan Aff. [Doc. No. 58-9].)

First Premier also sent certified copies of the original guaranties to Highland Bank. (Proof of Loss Narrative, Ex. 28 at 5 to Nilan Aff. [Doc. No. 58-14].) The copy of the Malone guaranty bore a stamp stating, "THIS IS A CERTIFIED COPY OF THE ORIGINAL, " next to which Mr. Alpeter wrote his initials and the date, October 17, 2006. (Certified Copy of Malone Guaranty, Ex. 8 to O'Neill Aff. [Doc. No. 21-1].) The certified document represented to Highland Bank that the original document was in First Premier's possession. (Alpeter Dep. at 75, Ex. 38 to Nilan Aff. [Doc. No. 58-22].) Highland Bank did not see or inquire about the original Malone guaranty. (Id. at 199-200; White Examination under Oath at 45-46, Ex. 37 to Nilan Aff. [Doc. No. 58-21].)

In addition, Highland Bank received UCC Financing Statements, an invoice, and a certificate of acceptance that a security interest had been recorded in the collateral delivered under the First Premier/EAR lease agreement. (Ex. 4 to O'Neill Aff. [Doc. No. 62-2].) Highland Bank also received an invoice, dated July 27, 2006, regarding an inspection of machinery and equipment located at EAR. (Ex. 5 to O'Neill Aff. [Doc. No. 62-3].)

Before closing any of the three loans, Highland Bank did not contact EAR, Player, or Malone. (White Examination under Oath at 27, Ex. 37 to Nilan Aff. [Doc. No. 58-21].) Highland Bank did not inspect the equipment securing the transactions or determine its liquidation value. (Id. at 52-53.) It also did not conduct a background check on Player or Malone, or ask First Premier to do the same. (Berglund Dep. at 26, Ex. 42 to Nilan Aff. [Doc. No. 58-26].) First Premier recalls that it informed Highland Bank about Sheldon Player's prior conviction for lease fraud. (Id. at 25-26; Alpeter Dep. at 144, Ex. 38 to Nilan Aff. [Doc. No. 58-22].) Nonetheless, Highland Bank proceeded with all three transactions.

From January 2007 until September 2009, EAR made all payments due under the lease schedules, which amounted to more than $2.6 million in lease payments to Highland Bank. (Exs. 29-31 to Nilan Aff. [Doc. No. 58-15]; Lange Dep., Ex. 40 at 43-44 to Nilan Aff. [Doc. No. 58-24].) On June 25, 2008, Highland Bank sold a percentage of its interest in schedule 005R to Ridgedale State Bank, transferring a 64.855% interest in future payments on schedule 005R. (Participation Certificate and Agreement, Ex. 32 to Nilan Aff. [Doc. No. 58-16].) In return, Ridgedale paid Highland $1.5 million. (Id.) According to Highland Bank's Proof of Loss, Highland Bank later acquired Ridgedale State Bank. (Proof of Loss Narrative at 6 n.2, Ex. 28 to Nilan Aff. [Doc. No. 58-14].)

C. EAR's Fraud and Highland Bank's Actions

In September 2009, EAR stopped making its lease payments. (Compl. ¶ 33 [Doc. No. 1].) Highland Bank investigated the default and learned, among other things, that the leased equipment did not actually exist, and the equipment purportedly purchased was pledged to multiple lenders. (Id. ¶ 34.) Highland Bank also discovered that the guaranty provided by Donna Malone was likely forged. (Id. ¶ 37.) After EAR's default, Highland Bank moved its loans to non-accrual status. (Ex. 24 to Nilan Aff. [Doc. No. 58-12].) On October 23, 2009, EAR filed for Chapter 11 Bankruptcy. (Proof of Loss Narrative, Ex. 28 at 10 to Nilan Aff. [Doc. No. 58-14].) By December 2009, Highland Bank determined that the loans were uncollectible and executed a "Loan Charge Off Request" for $2, 011, 618.30. (Ex. 25 to Nilan Aff. [Doc. No. 58-12].)

In January 2010, Highland Bank filed suit against First Premier in Minnesota state court, alleging that First Premier was in default of the representations, warranties, and covenants under the Assignment Agreement. (Ramsey County Compl., Ex. 43 to Nilan Aff. [Doc. No. 68-1].) Highland Bank obtained judgment against First Premier, but has been unable to collect on its judgment. (Lange Dep. at 70, Ex. 40 to Nilan Aff. [Doc. No. 58-24].) By September 2010, Malone had filed for bankruptcy, declaring assets of $5, 400 and liabilities in excess of $100 million. (Summary of Schedules, Ex. 33 at 8 to Nilan Aff. [Doc. No. 58-17].)

D. The Financial Institution Bond, Highland Bank's Settlement Award, and This Litigation

Before entering into the Assignment Agreement, Highland Bank and BancInsure entered into a Financial Institution Bond, under which BancInsure agreed to indemnify Highland Bank for certain losses arising from a variety of exposures, such as forgery and counterfeiting. (Insuring Bond, Ex. A to Compl. [Doc. No. 1-1].) In January 2011, Highland Bank submitted a Proof of Loss to BancInsure, claiming that the insuring bond covered Highland Bank's losses relating to the First Premier/EAR equipment lease financing. (Compl. ¶ 35 [Doc. No. 1].) Highland Bank submitted a total claim of $2, 011, 618.30, the loss it incurred from the three loans. (Id. ¶ 38.) In its Proof of Loss submission, Highland Bank contended that the loss was covered under Insuring Agreement ...

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