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Renasant Bank v. St. Paul Mercury Insurance Co.

United States District Court, N.D. Mississippi, Aberdeen Division

February 21, 2017



         Presently before the Court are the parties' cross-motions for summary judgment: Defendant St. Paul Mercury Insurance Company's motion for summary judgment [192] and Plaintiff Renasant Bank's motion for partial summary judgment [195], as well as Plaintiff Renasant Bank's motion to strike [211] specific argument in Defendant St. Paul Mercury Insurance Company's reply [207] in support of its motion for summary judgment [192]. Upon due consideration, the Court finds that Plaintiff Renasant Bank's motion for partial summary judgment [195] should be granted in part and denied in part, and Defendant St. Paul Mercury Insurance Company's motion for summary judgment [192] should be granted in its entirety. Because the Court does not consider Defendant St. Paul Mercury Insurance Company's reply [207] in its ruling on the motion for summary judgment [192], Plaintiff Renasant Bank's motion to strike [211] is denied as moot.

         I. Factual and Procedural Background

         Plaintiff Renasant Bank ("Renasant" or "Renasant Bank") brings this breach-of-contract claim against Defendant St. Paul Mercury Insurance Company ("St. Paul") to recover under a Financial Institution Bond for damages arising out of the alleged dishonest or fraudulent activities of a former bank Vice-President of Construction Lending, Wendy Hurt ("Hurt"). According to Renasant's complaint, Hurt was a veteran loan officer for Renasant, having been involved in commercial and construction lending since 1990 and having joined Renasant in March of 1999. Also according to Renasant's complaint, Hurt approved, extended, administrated, and funded two large commercial real estate loan transactions with Renasant customers H.B.O. Holdings, LLC ("HBO); Hackmeyer/Hyneman/Bourne, LLC ("HHB"); and/or their common principals, William R. Hyneman ("Hyneman") and Michael Bourne ("Bourne") (collectively, the "Loans").

         Renasant alleges that Hurt was responsible for ensuring the Loans were properly underwritten in accordance with Renasant's policies and procedures and the commercial/construction lending industry, submitting the proposed loans to Renasant's loan committee, closing on the terms and conditions of committee approval, and funding the Loans only on the approved terms and conditions and in accordance with Renasant's policies and procedures.

         Renasant further alleges, inter alia, that Hurt had a significant, sixteen-year banking and lending relationship with Hyneman, who "was a well-known real estate developer/investor at the time of the Loans and is now notorious for colluding to manipulate lending transactions in order to receive substantial profits on the front end instead of in the normal course and during the life of development projects." Pl's Compl. [1] ¶¶ 23-24. According to Renasant, Hurt worked in concert with Hyneman and Bourne so that Hyneman and Bourne could receive financial gain and Hurt could receive an improper financial benefit and/or intended improper financial benefit, including "gifts, entertainment, travel, and/or goods and services, all with the expressed or implied understanding that Hurt would in turn facilitate and administer extensions of credit for Hyneman[-]related projects that would ensure front[-]end profit for Hyneman and Bourne and continued business and improper financial benefits for Hurt." Id. ¶ 27. Renasant avers that when Hurt's actions in connection with the Loans came to light, Hurt left Renasant's employment and accepted employment with another financial institution, where she continued to extend credit to Hyneman, despite her knowledge of Hyneman's fraudulent dealings and Renasant's losses on the Loans.

         Renasant Bank, which is owned by Renasant Corporation, is a Mississippi-chartered bank with its principal place of business in Tupelo. Id. ¶ 1; Pl's Corp. Disclosure Statement [8] at 1. St. Paul is an insurance company incorporated in Connecticut with its principal place of business in Connecticut; St. Paul is authorized to and is conducting business in Mississippi. Pl's Compl. [1] ¶ 2; Def.'s Answer & Aff. Defenses [23] ¶ 2. As part of its business, St. Paul issues Financial Institution Bonds. Pl's Compl. [1] ¶ 5; Def.'s Answer & Aff. Defenses [23] ¶ 5. St. Paul issued a Financial Institution Bond, Policy No. 468PB1324 (the "Bond"), to Renasant Corporation with an effective date of September 6, 2008. Pl's Compl. [1] ¶ 6; Def.'s Answer & Aff. Defenses [23] ¶ 6; Def.'s Mem. Br. Supp. Mot. Summ. J. [193] at 8; Bond [1-1] at 5. On September 11, 2008, an Endorsement was executed that amended the Insured as stated in the Declarations of the Bond to include Renasant Bank, effective September 6, 2008. Pl's Compl. [1] ¶ 7; Def.'s Answer & Aff. Defenses [23] ¶ 7; Bond [1-1] at 34.

         In pertinent part, the Bond covers "[l]oss resulting directly from: . . . [d]ishonest or fraudulent acts committed by an Employee acting alone or in collusion with others, which acts are committed by the Employee with the intent: (a) to cause the Insured to sustain such a loss; or (b) to obtain financial benefit for the Employee or another person or entity." Bond [1-1] at 9, Insuring Clause (A). The Bond provides that if the "Insured's loss results directly or indirectly from Loans, that portion of the loss is not covered unless the Employee: (i) acted with the intent to cause the Insured to sustain such a loss; (ii) was in collusion with one or more parties to the transaction; and (iii) has received, in connection therewith, an improper financial benefit." Id. The Bond further provides that "in the case of loss resulting from . . . Loans . . . where such Employee fails to receive an improper financial benefit, such loss nevertheless will be covered hereunder as if the Employee had received such benefit if: (i) other persons with whom the Employee was dishonestly or fraudulently acting in collusion received proceeds from the Loan .. . and (ii) the Insured establishes that the Employee intended to share or participate in the proceeds of the Loan . . . ." Id. The Bond also provides that "financial benefit does not include any employee benefits earned in the normal course of employment, including: salaries, commissions, fees, bonuses, promotions, awards, profit sharing[, ] or pensions." Id. The Bond defines the term "Loan" as "all extensions of credit by the Insured and all transactions creating a creditor relationship in favor of the Insured and all transactions by which the Insured assumes an existing creditor relationship." Id. at 21, Conditions and Limitations, § l(ff).

         After Renasant allegedly suffered the losses in connection with Hurt's Loans, Renasant contacted St. Paul, and indicated that the losses potentially triggered the Bond's coverage. St. Paul acknowledged receipt of Renasant's notice of potential loss on July 28, 2009, and provided Renasant with a blank Proof of Loss form. Pl's Compl. [1] ¶ 16; Def.'s Answer & Aff. Defenses [23] ¶ 16. On May 19, 2011, St. Paul received correspondence from Renasant concerning its claim against the Bond and enclosing a notarized Proof of Loss with a Statement of Facts in Support of Proof of Loss. Pl's Compl. [1] ¶ 13; Def.'s Answer & Aff. Defenses [23] ¶ 13; Proof of Loss [1-2]. The Proof of Loss provided information concerning Renasant's alleged losses due to Hurt's alleged dishonesty in connection with the Loans. Proof of Loss [1-2] at 2.

         On July 6, 2011, St. Paul received further correspondence from Renasant concerning its claim against the Bond and enclosing a Supplemental Proof of Loss, wherein Renasant provided materials purporting to support its claim. Pl's Compl. [1] ¶ 18; Def.'s Answer & Aff. Defenses [23] ¶ 18; Supplemental Proof of Loss [1-3]. Subsequently, Renasant and St. Paul engaged in communication concerning Renasant's claim against the Bond. Pl's Compl. [1] ¶¶ 19-20; Def.'s Answer & Aff. Defenses [23] ¶¶ 19-20. On September 28, 2012, St. Paul denied Renasant's claim. Pl's Compl. [1] ¶ 21; Def.'s Answer & Aff. Defenses [23] ¶ 21.

         On May 15, 2015, Renasant filed this lawsuit against St. Paul, alleging that St. Paul's denial of Renasant's claim for coverage on the Bond constitutes breach of contract. On June 9, 2015, St. Paul filed a motion to dismiss [9] pursuant to Rules 12(b)(6) and 12(e) of the Federal Rules of Civil Procedure. On July 23, 2015, the Court entered an Order [21] and memorandum opinion [22] denying St. Paul's motion to dismiss.[1] On August 5, 2015, St. Paul filed its answer and affirmative defenses [23]. The parties then engaged in extensive discovery.

         On December 22, 2016, St. Paul filed a motion for summary judgment [192]. On December 26, 2016, Renasant filed a motion for partial summary judgment [195]. Responses and replies have been filed to the two dispositive motions. The cross-motions for summary judgment are now ripe for review.

         II. Summary Judgment Standard

         Summary judgment "should be rendered if the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine dispute as to any material fact and that the movant is entitled to judgment as a matter of law." Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). See Fed. R. Civ. P. 56(a); Johnston & Johnston v. Conseco Life Ins. Co., 732 F.3d 555, 561 (5th Cir. 2013). The rule "mandates the entry of summary judgment, after adequate time for discovery and upon motion, against a party who fails to make a sufficient showing to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex Corp., 477 U.S. at 322, 106 S.Ct. 2548.

         The party moving for summary judgment bears the initial responsibility of informing the Court of the basis for its motion and identifying those portions of the record it believes demonstrate the absence of a genuine dispute of material fact. See Id. at 323, 106 S.Ct. 2548. "An issue of fact is material only if its resolution could affect the outcome of the action." DeBlanc v. St. Tammany Par. Sch. Bd., 640 F.App'x 308, 312 (5th Cir. 2016) (per curiam) (quoting Manning v. Chevron Chem. Co., LLC, 332 F.3d 874, 877 (5th Cir. 2003) (quoting Wyatt v. Hunt Plywood Co., 297 F.3d 405, 408 (5th Cir. 2002) (internal quotation marks omitted))).

         Under Rule 56(a), the burden then shifts to the nonmovant to "go beyond the pleadings and by . .. affidavits, or by the 'depositions, answers to interrogatories, and admissions on file, ' designate 'specific facts showing that there is a genuine issue for trial.' " Celotex Corp., 477 U.S. at 324, 106 S.Ct. 2548; Littlefield v. Forney Indep. Sch. Dist., 268 F.3d 275, 282 (5th Cir. 2001); Willis v. Roche Biomedical Labs., Inc., 61 F.3d 313, 315 (5th Cir. 1995).

         It is axiomatic that in ruling on a motion for summary judgment "[t]he evidence of the nonmovant is to be believed[ ] and all justifiable inferences are to be drawn in his favor." Tolan v. Cotton, ___U.S.___, ___, 134 S.Ct. 1861, 1863, 188 L.Ed.2d 895 (2014) (per curiam) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986) (internal quotation marks omitted)); see, e.g., Ard v. Rushing, 597 F.App'x 213, 217 (5th Cir. 2014) (per curiam) (citing United Fire & Cas. Co. v. Hixson Bros., Inc., 453 F.3d 283, 285 (5th Cir. 2006)). The Court " 'resolve[s] factual controversies in favor of the nonmoving party, but only where there is an actual controversy, that is, when both parties have submitted evidence of contradictory facts.' " See Thomas v. Baldwin, 595 F.App'x 378, 378 (5th Cir. 2014) (per curiam) (quoting Antoine v. First Student, Inc., 713 F.3d 824, 830 (5th Cir. 2013) (internal quotation marks and citation omitted)). "[T]he nonmoving party cannot defeat summary judgment with conclusory allegations, unsubstantiated assertions, or only a scintilla of evidence.' " Id. at 380 (quoting Hathaway v. Bazany, 507 F.3d 312, 319 (5th Cir. 2007)).

         "[A] 'judge's function' at summary judgment is not 'to weigh the evidence and determine the truth of the matter but to determine whether there is a genuine issue for trial.' " Cotton, 134 S.Ct. at 1866 (quoting Anderson, 477 U.S. at 249, 106 S.Ct. 2505); see Stewart v. Guzman, 555 F.App'x 425, 430 (5th Cir. 2014) (per curiam) (citing Vaughn v. Woodforest Bank, 665 F.3d 632, 635 (5th Cir. 2011) (In ruling on a summary judgment motion, "[w]e neither engage in credibility determinations nor weigh the evidence.")). With the foregoing standard in mind, the Court turns to the motions before it.

         III. Analysis and Discussion

         St. Paul argues in its motion for summary judgment that all claims fail as a matter of law, because Renasant cannot prove improper financial benefit under the Bond. Renasant argues in its motion for partial summary judgment that the Bond is a statutory bond under Mississippi law, Mississippi Code § 81-5-15, and that the Bond's terms improperly attempt to limit liability under Mississippi law. Because the ruling on Renasant's motion for partial summary judgment impacts St. Paul's motion for summary judgment, the Court first addresses Renasant's motion for partial summary judgment.

         A. Renasant's Motion for Partial Summary Judgment

         Renasant argues in its motion for partial summary judgment that the Bond is a Mississippi statutory bond that must be construed pursuant to the terms of the statute, Mississippi Code § 81-5-15; that the Bond improperly attempts to limit St. Paul's liability on the Bond; that the statute requires that Financial Institution Bonds cover any acts of employee dishonesty; that this Court should hold that the Bond is a statutory bond under Mississippi law subject to the full coverage enumerated in the statute; and that the Court should "read out" any limiting terms and "read in" the more expansive terms of the statute. Renasant further argues that because the Bond is a statutory bond, Renasant is not required to prove that Hurt received a financial benefit of any kind, as the same is surplusage that must be stricken.

         St. Paul argues in response that the Bond is not a statutory bond under Mississippi law, because the Bond was procured by Renasant Corporation for coverage to many entities, including Renasant Bank, and thus is not the fidelity bond contemplated by the statute; that the Bond was not procured by the employee/officer as contemplated by the statute; that Mississippi Code § 81-5-15 does not limit the terms of the Bond; that the Bond is entirely consistent with the objectives of the statute; that enforcing the requirements of Insuring Clause (A) of the Bond does not contravene Mississippi public policy; and that Renasant's argument that the statute imposes a "read-in-read-out" requirement has no valid legal support. St. Paul bases most of its arguments on Banklnsure, Inc. v. Peoples Bank of the South, 866 F.Supp.2d 577 (S.D.Miss. 2012) (Lee, J.).

         In Banklnsure, Inc., the district court was confronted with, inter alia, an issue of first impression under Mississippi law: whether a Financial Institution Bond issued by an insurer to a bank is a statutory bond under Mississippi Code § 81-5-15. In that case, as in the case sub judice, the bank argued that "[Section] 81-5-15 requires that a fidelity bond be issued for officers and employees of banks"; that a fidelity bond issued for such coverage is considered a statutory bond under the law; and that "since the statute requires that such fidelity bond provide coverage for 'any loss or liability' suffered as a result of the employee's acts of dishonesty, 'regardless of whether the instrument so describes the conditions or not, ' " the bond's requirements of proof to sustain a claim for loan-related losses "conflict with the requirements of the statute and must be stricken as surplusage." See Banklnsure, Inc., 866 F.Supp.2d at 581-82. In that case, similarly to the case sub judice, the insurer argued that the bond was not intended to be a statutory bond for the following reasons: (1) the statute requires the bank employee to furnish a fidelity bond, but the bond was procured by the bank, not the bank employee; (2) the statute requires the bank employee, as principal, to agree "to protect the [b]ank from losses with the surety's obligation being secondary to that of the employee, " but "the [b]ond neither names [b]ank employees as principals nor treats them as such"; and (3) no evidence showed that "the [b]ank complied with the statutory provisions requiring approval by the State Comptroller and inspection by state authorities on examination of the [b]ank." See Id. As in the case before this Court, in Banklnsure, Inc., the bank argued that bonds obtained under comparable statutes have been held to be statutory bonds. See id.

         In its well-reasoned Banklnsure, Inc. opinion, the court ultimately found it unnecessary to determine whether the subject bond was a statutory bond under Mississippi law, because "even assuming that is the case, the terms of the [b]ond may be enforced as written, as they are not inconsistent with the underlying purpose of [Mississippi Code] § 81-5-15." See Id. at 582. The bond's specific proof requirements for loan-related losses were as follows: (1) the "claimed losses resulted directly from [the employee's] dishonest or fraudulent acts"; (2) the claimed losses "were committed by [the employee] with the manifest intent to cause the [b]ank to sustain such loss, or to obtain an improper financial benefit for himself or for another"; and (3) that "[the employee] was in collusion with one or more parties to the transactions and received an improper financial benefit in connection with the transactions." Id. at 583.

         With all of the foregoing in mind, the Court turns to the issues before it.

Since 1863, commercial banks in the United States have been able to choose to organize as national banks with a charter issued by the Office of the Comptroller of the Currency (OCC) or as state banks with a charter issued by a state government. The choice of charter determines which agency will supervise the bank: the primary supervisor of nationally chartered banks is the OCC, whereas state-chartered banks are supervised jointly by their state chartering authority and either the Federal Deposit Insurance Corporation (FDIC) or the Federal Reserve System (Federal Reserve).

         Christine E. Blair & Rose M. Kushmeider, Challenges to the Dual Banking System: The Funding of Bank Supervision, FDIC BANKING REVIEW, Mar. 31 2006, (last visited Feb. 17, 2017).[2]

         Renasant, a Mississippi-chartered bank, is a member of the FDIC. See Miss. Code Ann. § 81-5-9 (requiring Mississippi banks to be a member of the FDIC or other similar agency). Although not mentioned in the parties' briefing, the Court finds the FDIC's supervisory role important to the analysis of the statutory bond issue. When evaluating an application for FDIC coverage, the FDIC considers several factors, including "[t]he general character and fitness of the management of the depository institution." See 12 U.S.C. § 1816. The FDIC currently interprets this statutory factor to include "the sufficiency of fidelity insurance, policies, and audit coverage." See Applying for Deposit Insurance, FDIC: A Handbook for Organizers of DeNovo Institutions, (last visited Feb. 17, 2017). FDIC policy suggests that each FDIC-insured depository institution, including each state-chartered bank, "should maintain sufficient fidelity bond coverage on its active officers and employees to conform with generally accepted industry practices." See FDIC Statement of Policy on Applications for Deposit Insurance, (last visited Feb. 17, 2017).[3]Although the FDIC recommends that FDIC-insured depository institutions maintain fidelity coverage in policy, there is no federal banking law compelling such coverage. Furthermore, ...

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