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A.M.Y. Property & Casualty Insurance Corporation v. Insurance Company of North America

United States District Court, S.D. Texas, Houston Division

February 28, 2018

A.M.Y. PROPERTY & CASUALTY INSURANCE CORPORATION, et al., Plaintiffs,
v.
INSURANCE COMPANY OF NORTH AMERICA, et al., Defendants.

          MEMORANDUM AND RECOMMENDATION

         Pending before the court[1] are Defendant Insurance Company of North America's (“INA”) Motion to Dismiss (Doc. 5) and Defendants Symetra Assigned Benefits Service Company (“SABSCO”) and Symetra Life Insurance Company's Motion for Partial Dismissal (“SLIC”)(collectively “Symetra Defendants”) (Doc. 28). The court has considered the motions, the responses, the replies, all other relevant filings, and the applicable law. For the reasons set forth below, the court RECOMMENDS that INA's motion be GRANTED and Symetra Defendants' motion be GRANTED IN PART AND DENIED IN PART.

         I. Case Background

         Plaintiffs A.M.Y. Property & Casualty Insurance Corporation (“AMY”) and RSL-3B-IL, Limited Partnership, (“RSL-3B LP”) filed this case against an issuer of three structured-settlement annuities and an owner of one of the three annuities, alleging that certain annuity payments were not made and others were expected not to be paid to the party to whom the right had been assigned pursuant to court-approved transfer orders. Plaintiffs asserted breach of contract, conversion, and wrongful offset and requested declaratory relief.

         A. Factual Background

         Relevant to the pending motions are facts related to certain factoring agreements and to certain business transactions.

         1. Factoring Agreements

         Rapid Settlement, Ltd., (“Rapid”) entered into three separate factoring agreements with structured-settlement annuitants.[2] RSL-3B-IL, Ltd., [3] became the assignee of Rapid Settlements, Ltd.'s rights in all three cases.[4] SAFECO Life Insurance Company (“SAFECO”), now SLIC, was the annuity issuer for each of the subject annuities.[5]

         As to one of the transfers, the one concerning the annuitant Jodie Koehler (“Koehler”), INA was the annuity owner.[6] In 1989, INA entered into a settlement agreement with Koehler and another individual with the same surname to resolve a lawsuit for personal injuries and damages that the Koehlers had filed against INA's insureds.[7] The settlement agreement provided for an immediate payment to the Koehlers and periodic payments to Koehler over a span of nearly twenty-seven years and allowed INA to purchase an annuity contract from SAFECO to fund INA's liability for the periodic-payment portion of the settlement.[8] The settlement agreement further provided that it was to “be binding upon and inure to the benefit of the executors, administrators, personal representatives, heirs, successors and assigns of each.”[9]Pennsylvania law governed the settlement agreement.[10]

         In December 2003, Koehler transferred and assigned to Rapid one periodic payment in the amount of $153, 500 due on August 4, 2016.[11] The transfer agreement between Koehler and Rapid granted Rapid:

an irrevocable Power of Attorney with full powers of substitution to do all acts and things that [Koehler] might do regarding the Periodic Payments and any and all rights [Koehler] has under the Settlement Agreement, including, without limitation, the power to endorse checks, drafts or other instruments, the power to alter, edit and change payment instructions and/or beneficiary designation and any other act which, in the sole discretion of [Rapid] as Assignor's Attorney-in-Fact, is necessary or expedient for [Rapid] to obtain all of the benefit of the bargain contemplated by this Agreement.[12]

         The transfer agreement also provided Rapid a security interest in the assigned payment, the right to file financing statements, and a lien on all of Koehler's periodic payments.[13] Koehler and Rapid agreed that the transfer agreement was to be binding upon and inure to the benefit of the parties thereto, as well as “their respective successors, heirs, legal representatives and permitted assigns.”[14] According to the terms, Rapid could assign its rights under the transfer agreement.[15] Texas law governed the transfer agreement.[16]

         In connection with Rapid's efforts to secure the required court approval of the transfer, Rapid, RSL-3B-IL, Ltd., INA, and SAFECO entered a stipulation.[17] Therein, INA and SAFECO agreed to abide by the stipulation and not to oppose the court petition to approve the transfer.[18] Further, INA agreed to direct SAFECO to forward the assigned payment to RSL-3B-IL, Ltd., as Rapid's assignee, and SAFECO agreed to make the assigned payment according to the terms of the stipulation.[19] The stipulation stated that, in the event that Rapid or RSL-3B-IL, Ltd., further assigned the transferred payment, neither INA nor SAFECO would be obligated to re-direct the payment to any person or entity other than RSL-3B-IL, Ltd.[20] The stipulation included a release clause and an indemnity clause inuring to the benefit of INA and SAFECO.[21] Pennsylvania law governed the stipulation.[22]

         On September 13, 2004, the Court of Common Pleas of Montgomery County, Pennsylvania, entered an order transferring Koehler's payment of $153, 500 due on August 4, 2016, to “Rapid and/or RSL-3B-IL, Ltd.”[23] The order stated that, at the direction of INA, SAFECO would forward the assigned payment to RSL-3B-IL, Ltd., and that all of Koehler's rights in connection thereto were assigned to Rapid and/or RSL-3B-IL, Ltd.[24] The order repeated that neither INA nor SAFECO would be obligated to redirect the payment or any portion thereof to any other person or entity should the payment be further assigned.[25] It also repeated the release and indemnity clauses of the stipulation.[26] In a letter dated October 12, 2004, INA directed SLIC to forward the Koehler payment to RSL-3B-IL, Ltd.[27]

         The other two annuitants, Thomas Purcell (“Purcell”) and Janice Scott (“Scott”) also entered factoring agreements.[28] In February 2004, the Superior Court of New Jersey, Middlesex County, entered an amended order of transfer concerning certain payments from Purcell to Rapid, and Rapid further assigned the payments to RSL-3B-IL, Ltd.[29] On March 1, 2007, the Civil County Court of Harris County, Texas, entered an amended order of transfer concerning certain payments from Scott to RSL-3B-IL, Ltd.[30]

         On July 20, 2016, the attorney for Symetra Defendants notified AMY that they were executing on a judgment in their favor “entered against RSL-3B-IL, Ltd./Rapid Settlements Ltd. by applying an offset” to a $20, 000 Scott payment due on July 15, 2016, and to the $153, 500 Koehler payment due on August 4, 2016.[31] On December 28, 2016, Stewart Feldman (“Feldman”), in his role as chief executive officer of RSL Funding, LLC, sent a demand letter to INA regarding the Koehler payment.[32] “Another demand letter was sent on March 27, 2017[, ] demanding payment of the sums outstanding.”[33]

         2. Business Transactions

         Beginning in 2003, a series of assignments and financing transactions moved the rights to the annuity payments among various entities.[34] In 2003, AMY made a loan to RSL-3B LP[35] that was “modified, amended, and extended from time to time.”[36] The loan documents included “security agreements and [Uniform Commercial Code (“UCC”)]-1 and UCC-3 financing statements covering the Koehler, Scott, and Purcell [a]ssigned [p]ayments.”[37] RSL-3B LP “represented and warranted its right to grant the security interest in the covered collateral[, ] which consisted of all personal property now owned or hereafter acquired.”[38]

         In 2004, RSL-3B LP obtained a loan from Amegy Bank, NA, (“Amegy”) and pledged a security interest in the Koehler, Scott, and Purcell payments.[39] “The original Amegy loan and security interest went through various extensions, restructures, and assignments involving different lenders, ultimately being assigned to Green Bank, NA[, ] and to IberiaBank.”[40] The bank “lenders maintained a continuous lien against the Koehler, Scott, and Purcell [a]ssigned [p]ayments as noticed and disclosed by UCC-1 financing statements and continuations.”[41]

[In 2008], FinServ Casualty Corp. (“FinServ”) entered into a participation agreement with [AMY] involving the loan to RSL-3B [LP], which was reflected by filing a UCC-1 financing statement. Thereafter, the loan was split into two loans with a separate loan for FinServ, which has been modified, amended and extended from time to time with attendant security agreements and UCC-1 filings. RSL-3B [LP] made substantially similar, if not identical, representations and warranties to FinServ.[42]

         In April 2012, RSL-3B LP “transferred and assigned its ownership interest in the Koehler, Scott, and Purcell [a]ssigned [p]ayments[] to RSL 2012-1, LP[, ]” and notified Symetra Defendants of the assignment.[43]

         In February 2016, the banks assigned the lien and related portion of RSL-3B LP's loan obligation in the Koehler, Scott, and Purcell payments to AMY and FinServ.[44] In March 2016, AMY and FinServ foreclosed on their interests in the Koehler, Scott, and Purcell payments and purchased the payments at a public auction.[45]As of January 1, 2017, AMY and FinServ merged, leaving AMY as the successor organization.[46]

         B. Procedural Background

         On March 28, 2017, one day after the second demand letter was sent, Plaintiffs filed the complaint in this action.[47] Plaintiffs alleged breach of contract, conversion, and wrongful offset against INA and Symetra Defendants.[48] Plaintiffs also sought declarations that:

(i) after properly foreclosing its security interests and purchasing the collateral at auction, [AMY] is the rightful owner and proper recipient of the Koehler, Scott, and Purcell [a]ssigned [p]ayments; (ii) INA (and [SLIC]) are both obligated to make the Koehler [a]ssigned [p]ayment to [AMY] but have failed to do so; (iii) SABSCO and [SLIC] are both obligated to make the Scott and Purcell [a]ssigned [p]ayments to [AMY] as they come due.[49]

         In lieu of an answer, INA filed its pending motion to dismiss.[50] On August 14, 2017, the court held a hearing on INA's motion, at which time Plaintiffs clarified that they “are not asserting the conversion or set off claims against INA.”[51]Plaintiffs explained that the request in their response to INA's motion, which was presented in the alternative, sought leave to amend only in order to dismiss those claims against INA.[52] The court instructed Plaintiffs to “[a]mend now” if they thought that “something . . . need[ed] to be corrected.”[53]

         Defendants Symetra requested and received additional time to respond to Plaintiff's complaint and, after the completion of briefing on INA's motion, filed their pending motion for partial dismissal and answered Plaintiffs' complaint.[54] Plaintiffs requested and received an extension to respond to Symetra Defendants' motion, responding on September 20, 2017.[55] Symetra Defendants filed a replied soon thereafter.[56]

         II. Dismissal Standard

         Rule 12(b)(6) allows dismissal of an action whenever the complaint, on its face, fails to state a claim upon which relief can be granted. When considering a motion to dismiss, the court may consider, in addition to the complaint itself, “any documents attached to the complaint[] and any documents attached to the motion to dismiss that are central to the claim and referenced by the complaint.” Lone Star Fund V (U.S.), L.P. v. Barclays Bank PLC, 594 F.3d 383, 387 (5th Cir. 2010). The attached documents control in the case of a conflict between the allegations in the complaint and the contents of the documents. See United States ex rel. Riley v. St. Luke's Epis. Hosp., 355 F.3d 370, 377 (5th Cir. 2004).

         The court should construe the allegations in the complaint favorably to the pleader and accept as true all well-pleaded facts. Harold H. Huggins Realty, Inc. v. FNC, Inc., 634 F.3d 787, 803 n.44 (5th Cir. 2011)(quoting True v. Robles, 571 F.3d 412, 417 (5th Cir. 2009)). A complaint need not contain “detailed factual allegations” but must include sufficient facts to indicate the plausibility of the claims asserted, raising the “right to relief above the speculative level.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007); see also Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). Plausibility means that the factual content “allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Iqbal, 556 U.S. 678. A plaintiff must provide “more than labels and conclusions” or “a formulaic recitation of the elements of a cause of action.” Twombly, 550 U.S. at 555. In other words, the factual allegations must allow for an inference of “more than a sheer possibility that a defendant has acted unlawfully.” Iqbal, 556 U.S. 678.

         III. Analysis

         INA seeks dismissal of all claims that Plaintiffs asserted against it. As mentioned above, Plaintiffs dismissed the conversion and wrongful offset claims against INA.[57] With regard to the remaining claims, INA argues that Plaintiffs lack standing to assert a breach-of-contract claim, that Plaintiffs failed to allege that INA breached any contract, and that Plaintiffs are not entitled to a declaratory judgment against INA. Symetra Defendants also challenge Plaintiffs' standing to assert a breach-of-contract claim, and they contend that Plaintiffs failed to state a claim for either conversion or wrongful offset.

         A. Right to Sue for Breach of Contract

         The court begins with Defendants' common challenge to Plaintiffs' “standing” to assert a claim for breach of contract. The issue raised is whether Plaintiffs have contractual standing.[58]

         The Fifth Circuit recently discussed this concept of standing, explaining that it “is really an issue of contract interpretation that goes to the merits of the claim.” Cotton v. Certain Underwriters at Lloyd's of London, 831 F.3d 592, 594 (5th Cir. 2016)(internal quotation marks omitted)(quoting Perry v. Thomas, 482 U.S. 483, 492 (1987)). The court distinguished contractual standing from constitutional standing, only the latter being an issue of subject matter jurisdiction. See id. (quoting Novartis Seeds, Inc. v. Monsanto Co., 190 F.3d 868, 871 (8th Cir. 1999)); Norris v. Causey, 869 F.3d 360, 366 (5th Cir. 2017).

         INA and Symetra Defendants contend that Plaintiffs lack contractual standing because RSL-3B LP assigned its right to payment to RSL 2012-1, LP, and AMY was only a lender on a loan for which the payments served as collateral. Plaintiffs argue that RSL-3B LP has standing because it has the “administrative and custodial right to receive” the Koehler, Scott, and Purcell payments “under the transfer orders, a stipulation, and [RSL-]3B [LP]'s contract with RSL 2012-1[, LP].”[59] Plaintiffs further assert that AMY's standing is based on its purchase of the Koehler, Scott, and Purcell payments through foreclosure. Nothing in Plaintiffs' complaint suggests that either RSL-3B LP or AMY was an original party to the settlement agreement or the transfer agreement in any of the annuitants' factoring transactions or to the Koehler stipulation. Furthermore, to state the obvious, the transfer orders were not contracts.[60]

         As for RSL-3B LP's claim that it retained an “administrative and custodial right to receive” the payment, the allegations and supporting documentation reveal no such right. Nothing in the Koehler stipulation granted RSL-3B LP's predecessor a right to receive the Koehler payment; rather, the stipulation merely precluded the transferee from redirecting the payment to any person or entity other than RSL-3B LP's predecessor.[61] Regarding the argument that RSL-3B LP retained a right to receive the payment from its assignment to RSL 2012-1, LP, that right did not emanate from the stipulation. More importantly, the complaint did not make that allegation.[62] Although the assignment contract between RSL-3B LP and RSL 2012-1, LP, was not among the documents that Plaintiff attached to the complaint, the notices to SLIC of the transfer were attached and indicate a complete assignment of all rights in the Koehler, Scott, and Purcell payments.[63] Thus, RSL-3B LP retained no contractual rights in the Koehler, Scott, and Purcell payments and does not have contractual standing to sue either INA or Symetra Defendants for breach of contract.

         The allegations regarding AMY's ownership of the payments require a different conclusion. Plaintiffs alleged that AMY acquired the payments through a complicated series of financing transactions which included loans, security interests, and foreclosure. At this stage, the court cannot determine the validity or extent of these transactions, but it need not. The allegations asserted that AMY was more than a lender after it purchased the payments at the foreclosure sale and merged with FinServ, which, if the complaint is read favorably to AMY, rendered it the final assignee of the contractual rights to payment.

         B. Contract Claims and Declaratory Judgment Against INA

         As RSL-3B LP lacks contractual standing, only AMY's breach-of-contract claims remain. INA argues that AMY failed to identify a contract that INA breached. AMY's breach of contract claim against INA rests on the following allegation: “Through non-payment of the Koehler [a]ssigned [p]ayment when it came due on August 4, 2016, INA has breached its obligations under the [s]ettlement [a]greement, the parties' [s]tipulation, and the [Structured Settlement Protection Act] [t]ransfer [o]rder.”[64] In its responsive brief, AMY argues that it pled ‚Äúthat, ...


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