IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 01-10272
FLORIDA DEPARTMENT OF INSURANCE,
as receiver of Western Star Insurance Company, Ltd.,
Plaintiff-Appellant,
versus
CHASE BANK OF TEXAS NATIONAL
ASSOCIATION, formerly known as Texas
Commerce Bank National Association,
formerly known as Ameritrust of Texas
National Association,
Defendant-Appellee.
Appeals from the United States District Court for
the Northern District of Texas
_________________________________________________________
November 30, 2001
Before REAVLEY, HIGGINBOTHAM and PARKER, Circuit Judges.
REAVLEY, Circuit Judge:
The Florida Department of Insurance (Florida), receiver for Western Star
Insurance Company, appeals the district court’s order granting Chase Bank of
Texas’s Motion for Summary Judgment, and denying Florida’s Cross-Motion for
Summary Judgment. The district court dismissed Florida’s claims for fraud and
breach of fiduciary duty against Chase Bank, who was trustee of a trust established
to (1) allow Western Star to conduct business in California, and (2) provide assets
as security for policyholders. Because Florida lacks standing to sue on behalf of the
policyholders, and because it has not raised a disputed issue of material fact with
respect to the claims raised on behalf of Western Star, we affirm the judgment of the
district court.
BACKGROUND
The facts are largely undisputed. Western Star was an insurance company,
based in Antigua, selling surplus line insurance in California. Although Western
Star was not admitted as an insurance company in California, it conducted business
there on the assumption that it could do so unless California regulatory authorities
entered a cease and desist order against it. In November 1992, California passed a
law requiring that every alien surplus line insurer establish a trust containing at least
$5.4 million to create a readily available pool of assets for payment of claims.
Compliant trusts were to be established by May 25, 1993.
Western Star contacted Ameritrust, whose successor in interest is Chase
Bank of Texas (Chase), to establish an acceptable trust. In February 1993, Western
Star and Chase executed a trust instrument largely patterned on the NAIC (National
2
Association of Insurance Commissioners) standard trust instrument, approved by
California regulators. The trust agreement provided that Western Star “desires to
establish a trust fund in the United States as security for said Policyholders and
Third Party Claimants and to qualify as an eligible or approved surplus lines insurer
therein.” As the trust settlor, Western Star funded the trust on March 10, 1993 with
a certificate of deposit issued by First Asia Development Bank, which had a face
value of $5.4 million.
Almost immediately, Chase sent a letter to insurance brokers in California
informing them that Western Star had established a trust account at Chase worth
$5.4 million. On March 18, 1993, Western Star’s sponsoring broker in California
repeated this information in a notice to “All Brokers.” Beginning in April, Western
Star sold thousands of insurance policies in California.
In May 1993, the California Department of Insurance asked Western Star and
Chase for additional information about the trust agreement and the First Asia
certificate of deposit. Chase responded with a “certification” to the Department that
the trust assets had a market value of $5.4 million; this document may have been
filed with the California Department of Insurance as part of Western Star’s Surplus
Line Insurance application package around May 21, 1993. For reasons that are not
clear from the record, the initial application was rejected, but Western Star refiled
3
the application on June 1, 1993. The Department of Insurance continued to find the
CD suspicious and, on June 15, 1993, denied the application and ordered brokers to
cease and desist selling Western Star policies in California.
California was rightly suspicious; the CD was worthless. Issued by First Asia
Development Bank, an unregulated bank from the South Pacific Republic of
Vanuatu,1 the CD stated, “Ameritrust Texas National Association [Chase], as
Trustee for Western Star Insurance, Ltd., Antigua has lodged a deposit in the
amount of United States Dollars Five Million and Four Hundred Thousand only.”2
In fact, neither Western Star nor Chase had deposited any money with First Asia
Development Bank. Instead, Western Star was “renting” the CD from Europe-
America Capital Corporation, in what is euphemistically described as a “credit
enhancement” transaction. The CD could not be drawn on by the holder.3
In 1994, unpaid insurance claims against Western Star were mounting. A
Florida state court placed Western Star into receivership, and appointed the Florida
Insurance Commissioner as the domiciliary receiver and the California Insurance
1
The Republic of Vanuatu is located between Australia and Fiji.
2
Chase concedes that Ameritrust itself was not the depositor with First Asia, but contends
it thought the CD wording was designed only to make the CD payable to Ameritrust rather than
Western Star.
3
First Asia canceled the CD prior to the commencement of receivership proceedings.
First Asia has since vanished from Vanuatu.
4
Commissioner as ancillary receiver. The Western Star receivership estate does not
have sufficient assets to pay policyholder claims, and may not even have enough
money to pay all of the Florida receiver’s administrative costs.
During preliminary litigation, a district court in the Northern District of Texas
discharged Chase from any further obligations as trustee when Chase tendered the
CD into the court registry. The discharge order did not, however, determine the
value of the trust assets, or consider liability Chase might have incurred for conduct
relating to its duties as trustee.4 Florida originally filed the instant suit against Chase
in Florida state court, but that case was dismissed for lack of personal jurisdiction.
Florida subsequently brought this action against Chase in the Northern District of
Texas. Although the California Insurance Commissioner has filed an amicus brief in
this appeal, it is not a plaintiff in the present suit against Chase, nor is any individual
policyholder a party to this action.
DISCUSSION
Summary judgment is reviewed de novo,5 and is appropriate when, viewing
4
See Texas Commerce Bank Nat’l Ass’n v. Florida, 138 F.3d 179, 181-82 (5th Cir.
1998).
5
Maher v. Strachan Shipping Co., 68 F.3d 951, 954 (5th Cir. 1995).
5
the evidence in the light most favorable to the nonmoving party, no genuine issue of
material fact exists, and the moving party is entitled to judgment as a matter of law.6
After a defendant properly moves for summary judgment, the non-movant plaintiff
must bring forward sufficient evidence to demonstrate that a genuine issue of
material fact exists on every element of a claim.7
Difficulties in this case arise in part because the briefing does not clearly
distinguish between the various theories of liability by identifying to whom a duty
was breached and the proper measure of damages with respect to each claim. Some
of Florida’s theories rely on breaches of duty to the policyholders, while others rely
on breaches of fiduciary and trust duties by Chase to Western Star directly.
Disentangling the various theories of liability is crucial to determining whether the
elements of each have been properly identified, and whether the record reveals a
disputed issue of material fact on every required element.
A. Policyholder Claims and Florida’s Standing
At the 12(b)(6) Motion to Dismiss stage of this case, the district court denied
Chase’s motion to dismiss Florida’s claims on behalf of the policyholders for lack of
6
See Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265
(1986).
7
Fontenot v. Upjohn Co., 780 F.2d 1190, 1196 (5th Cir. 1986).
6
standing. Although the parties have not briefed the standing issues as part of this
appeal, standing is a component of Article III’s case or controversy requirement,
and is jurisdictional in nature.8 Standing must exist for a suit to proceed:
In its constitutional dimension, standing imports justiciability: whether the
plaintiff has made out a “case or controversy” between himself and the
defendant . . . . As an aspect of justiciability, the standing question is whether
the plaintiff has “alleged such a personal stake in the outcome of the
controversy” as to warrant his invocation of federal-court jurisdiction and to
justify exercise of the court’s remedial powers on his behalf.9
As articulated by the Supreme Court in Lujan v. Defenders of Wildlife,10 the
elements of constitutional standing are: (1) that the plaintiff have suffered an “injury
in fact–an invasion of a legally protected interest which is (a) concrete and
particularized, and (b) actual or imminent”; (2) that there is “a causal connection
between the injury and the conduct complained of”; and (3) that the injury is likely
to be redressed by a favorable decision.11 Under Lujan, courts must carefully
examine whose injury is at issue, and to whom the recovery will go. If the plaintiff
is not the party who sustained the concrete and particularized injury for which a
8
Valley Forge Christian Coll. v. Americans United for Separation of Church and State,
Inc., 454 U.S. 464, 475-76, 102 S.Ct. 752, 760, 70 L.Ed.2d 700 (1982).
9
Warth v. Seldin, 422 U.S. 490, 498-99, 95 S.Ct. 2197, 2205, 45 L.Ed.2d 343 (1975)
(emphasis in original).
10
504 U.S. 555, 112 S.Ct. 2130, 119 L.Ed.2d 351 (1992).
11
Id. at 560-61, 112 S.Ct. at 2136 (citations omitted).
7
remedy is sought, and is not the assignee or designated representative of the injured
party,12 then it does not have standing. “The Art. III judicial power exists only to
redress or otherwise to protect against injury to the complaining party, even though
the court’s judgment may benefit others collaterally.”13
In Caplin v. Marine Midland Grace Trust Co. of New York,14 a case similar
in many respects to the present one, the Supreme Court held that a trustee in
bankruptcy did not have standing to bring claims against a third party on behalf of
creditors of the insolvent corporation. In Caplin, a company called Webb & Knapp
issued debentures worth $8,600,000 and pledged to limit its debt-equity ratio, which
would be certified by an annual report to Marine Midland Trust. Subsequently,
Webb & Knapp’s debt sky-rocketed, but Marine failed to report inflated appraisals
of the value of Webb’s assets. When Webb entered bankruptcy, the trustee in
bankruptcy sued Marine on behalf of the debenture holders, “seeking to recover the
12
Vermont Agency of Natural Res. v. United States ex rel. Stevens, 529 U.S. 765, 773-
74, 120 S.Ct.1858, 1863, 146 L.Ed.2d 836 (2000) (holding that a qui tam relator under the False
Claims Act is a combination agent and assignee of the United States’ claims, who has
“representational standing” to sue for the government).
13
Warth, 422 U.S. at 499, 95 S.Ct. 2197; see also Valley Forge, 454 U.S. at 473, 102
S.Ct. 752 (“The federal courts have abjured appeals to their authority which would convert the
judicial process into ‘no more than a vehicle for the vindication of the value interests of concerned
bystanders.’”) (quoting United States v. SCRAP, 412 U.S. 669, 687, 93 S.Ct. 2405, 37 L.Ed.2d
254 (1973)).
14
406 U.S. 416, 92 S.Ct. 1678, 32 L.Ed.2d 195 (1972).
8
principal amount of the outstanding debentures as damages for Marine’s alleged
bad-faith failure to compel compliance with the terms of the indenture.”15
The Supreme Court held that the trustee lacked standing to bring the action
against Marine on behalf of the debenture holders. First, the Court focused on the
statutory power accorded the bankruptcy trustee to sue on behalf of third parties; the
Court found no suggestion in the language of the Bankruptcy Code that a
bankruptcy trustee was to have such a responsibility.16 Instead, the Court reiterated
that a trustee in bankruptcy stands in the shoes of an insolvent corporation, and
emphasized the distinction between suits on behalf of the corporation and third
parties.17
Second, the Court was concerned that, as a practical matter, a recovery by the
trustee on behalf of the debenture holders would not really add to the assets of the
estate.18 If, as appeared to be the case, Webb & Knapp was in pari delicto with
Marine Trust, Marine Trust could turn right around and assert a claim against Webb
& Knapp in subrogation to the claims of the policyholders to apportion the loss
15
Id. at 420, 92 S.Ct. at 1681.
16
Id. at 428, 92 S.Ct. at 1685.
17
Id. at 429, 92 S.Ct. at 1685 (citing McCandless v. Furlaud, 296 U.S. 140 (1935)).
18
Id. at 429-30, 92 S.Ct. at 1686.
9
between them.19 And apart from the potential problem of subrogation, a suit by the
trustee to recover for the debenture holders would significantly complicate the
process of establishing damages:
Each creditor, including the debenture-holders, can prove the full amount of
his claim, and only to the extent that a debenture-holder fails to satisfy it from
the bankruptcy estate will he suffer a loss which he can assert against the
defendant through its failure to enforce the negative convenants.20
In other words, a suit by the trustee on the debenture holders’ behalf put the cart
before the horse; the trustee could not measure damages suffered by the debenture
holders until those creditors had brought their claims against the estate, and the
shortfall in available estate assets to pay those claims became clear. 21
Third, the Court found problematic the possibility that a suit by the trustee
would conflict with independent actions the debenture holders might want to bring
on their own behalf, and might not bind third-party claimants seeking to proceed
separately.22 Conflicts could arise between the trustee and the debenture holders if
the trustee chose to settle for less than what holders thought their claims were
19
Id. at 430, 92 S.Ct. at 1686.
20
Id. at 431, 92 S.Ct. at 1686 (quoting Clarke v. Chase Nat’l Bank, 137 F.2d 797, 800
(2d Cir. 1943)).
21
While the Caplin Court did not distinguish between “prudential” and “constitutional”
standing considerations, complications in measuring damages appear to be prudential concerns.
22
Id. at 431-32, 92 S.Ct. at 1686.
10
worth, or if the debenture holders began to inexpensively settle their individual
claims out of court, thus undercutting the trustee-led action. The Court found that,
unlike the Federal Rule governing class actions, the Bankruptcy Code was not
designed to handle such problems.23 Conflict of interest problems are not merely
prudential, but directly relate to Article III standing principles, which “reflect[] a
due regard for the autonomy of those persons likely to be most directly affected by a
judicial order.”24
In the present case, the Florida liquidator seeks to recover $5.4 million or
other damages from Chase on a variety of theories. Among these theories are the
claims that Chase defrauded individual policyholders by representing that Western
Star had a $5.4 million CD on deposit with Chase, and breached fiduciary duties to
the policyholders. The breaches of duty under these theories were to policyholders,
not Western Star. The policyholders experienced injury because they were tricked
into buying insurance policies from an insolvent company that is now unable to pay
insurance claims, or because Chase, as trustee, mishandled trust assets or breached
23
Id. at 433-34, 92 S.Ct. at 1688.
24
Valley Forge, 454 U.S. at 473, 102 S.Ct. at 759; see also Fleming v. Lind-Waldock &
Co., 922 F.2d 20, 25 (1st Cir. 1990) (holding that an equity receiver of an investment company
lacked standing to bring claims on behalf of third parties, in part because of conflicts that could
arise).
11
other duties it owed as trustee.25 The Florida Insurance Commissioner, as receiver
for the Western Star estate, does not have standing in federal court to bring these
claims on behalf of policyholders.
If recovery is sought for injury suffered by individual policyholders, the
Florida receiver has standing in federal court only if it is a representative of the
injured policyholders. In the present case, there are no facts to support any
recognized theory of representation. There is no indication in the record that the
policyholders have assigned their fraud claims to Western Star or the Florida
receiver. Similarly, there is no evidence that policyholders have designated the
Florida receiver as their agent.
Furthermore, as in Caplin, which dealt with the Bankruptcy Code, the
relevant statute in this case, Florida’s Insurer Rehabilitation and Liquidation Act,
does not designate the Florida receiver as any third party’s representative. The
insurance liquidation acts of some states do expressly authorize insurance receivers
to take up certain policyholder claims, or have been interpreted by state courts to
25
Whether Western Star alone, or both the policyholders and Western Star are the
beneficiaries of the trust is an issue neither party has briefed. Florida does not have standing to
raise individual policyholder claims for breach of trust or fiduciary duty. Whether Chase breached
trust or fiduciary duties to Western Star is discussed below.
12
allow such action.26 However, Florida’s statute provides only that “an order to
liquidate the business of a domestic insurer shall direct the department forthwith to
take immediate possession of the property of the insurer, to marshal all the assets of
the insurer . . . and to give notice to all creditors who may have claims against the
insurer to present such claims. . . .”27 A fraud or breach of trust action accruing to a
policyholder cannot be described as “property” or an “asset” of Western Star.
Florida courts have not interpreted the insurance receivership laws as
authorizing receivers to act in a representative capacity on behalf of anyone other
than the insolvent insurer. One Florida court has held that as a successor in interest
of the insolvent insurer, an insurance receiver may only bring causes of action that
the insurer could have brought.28 The Florida Supreme Court has explained in the
26
See, e.g., Four Star Ins. Agency, Inc. v. Hawaiian Elec. Indus., Inc. 974 P.2d 1017,
1022 (Hi. 1999); Arthur Andersen LLP v. Superior Court, 67 Cal. App. 4th 1481, 1487 n.3,
1495, 79 Cal. Rptr. 2d 879 (Cal. Ct. App. 1998) (defining auditor’s incorrect valuation as breach
of duty to insurance commissioner, who could recover damages sustained by policyholders for
their benefit); Merin v. Yegen Holdings Corp., 573 A.2d 928, 940 (N.J. Super. Ct. App. Div.
1990) (holding that under New Jersey law, the liquidator could conduct a “class action type”
proceeding on behalf of policyholders claiming fraud against the insurer’s auditor). The Court
notes that the majority of cases allowing a receiver to proceed on behalf of third parties are state
court cases. Article III’s “case or controversy” limitation is not binding on state courts.
27
FLA. STAT. ANN. § 631.111(1) (1996) (emphasis added).
28
Florida Dep’t of Ins. v. Blackburn, 633 So. 2d 521, 524 (Fla. Dist. Ct. App. 1994) (“As
a successor, the receiver can only bring causes of action that were possessed by the corporation
placed in receivership.”); see also Schacht v. Brown, 711 F.2d 1343, 1346 n.3 (7th Cir. 1983)
(casting doubt in dicta on a receiver’s standing to bring suit on behalf of third parties under a
similar Illinois statute).
13
context of equitable receiverships, “‘a receiver takes the rights, causes and remedies
which were in the corporation, individual or estate whose receiver he is, or which
were available to those whose interests he was appointed to represent. A receiver
has no right to property which does not belong to the individual or corporation over
which he was appointed.’”29 Assuming that Florida could designate its Insurance
Commissioner as the automatic representative of policyholders in the prosecution of
their fraud and breach of trust claims, it has not evidenced an intent to do so.30
Policy considerations of the sort at issue in Caplin lend further support to the
above interpretation of Florida’s Insurance Liquidation Statute.31 In Caplin, the
Court noted the likelihood of conflicts of interest between the trustee in bankruptcy
and the debenture holders. In the present case, such conflicts are unlikely to emerge
if, as the parties state, the California policyholders have already missed their
window under the statute of limitations to sue on their own. However, an
interpretation of Florida law as authorizing receiver suits on behalf of third parties
29
Hamilton v. Flowers, 183 So. 811, 817 (Fla. 1938) (quoting 53 C.J. 99, 324).
30
Where a receiver has effectively appropriated policyholder claims, and any recovery is
applied in part to the estate’s administrative claims, due process might well be implicated.
31
If the Florida courts were, on similar facts, to read the Florida statute as authorizing the
type of representational standing the Receiver seeks to exercise in this case, the policy
considerations in Caplin might nevertheless provide a prudential basis for rejecting Receiver
standing to assert policyholder claims in federal court.
14
might apply equally to future cases in which individual policyholders might want to
act autonomously, and in which legal and strategic preferences of policyholders and
the receiver diverge.
Also, as in Caplin, unless and until individual policyholders have established
the amount of money that they are owed for insurance claims by bringing claims
against the receivership and the amount of the shortfall is established, it is unclear
how a fraud or breach of fiduciary duty suit against Chase on behalf of the
policyholders could establish policyholder damages. Indeed, the Florida receiver
overtly endorses a “pay first, establish damages later” approach, demanding $5.4
million from Chase up front, to be used for any and all purposes under the
Liquidation Act priority scheme, including payment of administrative claims first.32
Not only might a flat $5.4 million recovery be incommensurate with actual damages,
but conceivably any such recovery could go entirely to the cost of estate
administration, with little remaining to compensate injuries suffered by those on
whose behalf these claims are ostensibly brought.
32
Florida’s Insurer Insolvency, Rehabilitation and Liquidation Act establishes a priority
scheme for payment of claims, similar to the Bankruptcy Code. All claims in one class must be
paid before any claims lower in the priority line. If insufficient funds exist to pay a class in full, a
pro rata distribution is made. In order of priority, the classes include: (1) administrative claims;
(2) losses covered by insurance policies; (3) premium refunds; (4) federal government claims; (5)
debts to insurance company employees; (6) general creditors. FLA. STAT. ANN. § 631.271 (1996).
15
Florida lacks direct standing to bring claims to recover for injuries that are not
its own or Western Star’s, and does not have representational standing to proceed
on behalf of the policyholders.
B. Western Star’s Claims
If the receiver may not assert the individual claims of the policyholders, then
it may proceed to trial only on causes of action resting on breaches of duty to
Western Star itself. The receiver has asserted several claims of this sort. The
question is under what theory, if any, and to what extent, Western Star’s estate may
recover from Chase for its acceptance of Western Star’s dummy CD. Though
Florida has standing to assert these claims, the district court properly granted
summary judgment on them.
1. Loss of Trust Assets
Florida alleges that Chase wrongfully lost $5.4 million of trust assets and that
it is, as trustee, subject to the remedy of restoring the lost assets, both at common
law and under the terms of the trust agreement. Under this theory, Chase is liable
for $5.4 million, the amount of the loss. This theory is not grounded in reality.
Florida demands that Chase hand over $5.4 million in cash instead of the worthless
piece of paper that Western Star used to settle the trust. There never was $5.4
million, except, perhaps, in the mind’s eye of some creative bankers. As the district
16
court observed, the start and end value of the trust was $0.00.
Similarly, Florida’s heavy emphasis on paragraph 4.4 of the trust agreement,
which provides that the Trustee must, in the event of insolvency, transfer all trust
assets to the receiver, is misplaced. The district court correctly noted that paragraph
4.4 is a turnover provision, not a liquidated damages provision. Chase has already
turned over the CD, which was the sole, worthless asset held “in trust.” These
observations do not necessarily excuse Chase from wrongdoing; rather, they simply
illustrate that “loss of trust assets” and failure to comply with the trust agreement’s
turnover provision are not useful ways to conceptualize the wrong.
In its reply brief, Florida argues for the first time in this appeal that Chase is
estopped from denying that it held assets worth $5.4 million. Under Texas law,
“[e]stoppel involves the reasonable reliance of one party on the conduct or
statements of another party. If the relying party suffers harm as a result of its
reliance, the law estops the other party from disavowing its earlier conduct or
statements.”33 Florida’s argument appears to be that Chase is estopped, in
defending against Florida’s causes of action, from making the factually correct
statement that the $5.4 million never existed. Whatever Florida’s estoppel position
33
Matador Petroleum Corp. v. St. Paul Surplus Lines Ins. Co., 174 F.3d 653, 660 (5th
Cir. 1999).
17
is, Florida’s own summary judgment brief noted, “a party invoking estoppel must be
ignorant of the facts which the party to be estopped is alleged to have represented
by his conduct or silence.”34 Florida has never responded to Chase’s argument that
Western Star knew full well that the CD was worthless, and so could not have relied
on any representations Chase made to the contrary.35
2. Improper Certification of Trust Assets
Florida argues that Chase breached a duty to Western Star by not compelling
it to place assets valued at the trust fund minimum into the account. Florida states,
“[d]uring the entire time, the Trustee never rejected the CD or valued the Trust at
less than $5.4 million. Consequently, the Trustee never demanded other collateral.
The Trustee never should have executed the Trust Agreement and promulgated the
express representation of value as $5.4 million until after it had received and
accepted qualified assets.” This argument fails for two reasons.
First, in a deviation from standard NAIC trust language, the terms of the trust
34
Meyers v. Moody, 693 F.2d 1196, 1208 (5th Cir. 1982) (citations omitted).
35
Wheeler v. American Nat’l Bank of Beaumont, 347 S.W.2d 918 (Tex. 1961), cited by
Florida in its reply brief, is distinguishable. In that case, the receiver sued officers and employees
of the insolvent insurer together with banks who had misrepresented the value of the loans. Id. at
919. The receiver thus placed all wrongdoing on parties other than the insurance company, on
whose behalf the receiver was suing. In contrast, Florida has not explained why knowledge of the
fraudulent CD valuation should not be imputed to Western Star itself. Florida’s Complaint
describes conduct perpetrated by “Western Star,” thus eliminating any possibility of reliance.
18
agreement provide that Chase did not have a duty to certify the value of the trust
assets to the National Association of Insurer Information Office. Paragraph 2.13 of
the agreement between them provided that “the Trustee shall be under no duty or
obligation to require the Company to make any transfers or payments of additional
assets to the Trust and it shall be conclusively presumed that any and all such
transfers or payments to Trustee have been properly made.” Under Texas law, the
settlor of a trust “may relieve the trustee of a duty, liability, or restriction imposed
by this subtitle,”36 and the parties agreed in the trust instrument that Chase would
have no duties or responsibilities not expressly provided for in the trust language.
Accordingly, Chase did not have a duty to compel Western Star to deposit
additional assets.
Second, Florida has not supplied a valid measure of damages under its
“breach of duty to value assets” theory. Even if Chase did have a duty to Western
Star to value assets, Florida assumes, without any explanation, that the measure of
damages is $5.4 million. There is no reason that $5.4 million, an amount of money
that never existed except in ink on the face of a piece of paper, bears any connection
to anyone’s actual damages.
The measure of damages under this theory is at best the amount of money
36
TEX. PROP. CODE § 113.059.
19
Chase could have successfully compelled Western Star to place into the trust for the
benefit of Western Star and its estate in the event of insolvency. Western Star was
already insolvent in 1993 when the trust was established, and at all times thereafter.
As the Fifth Circuit has previously held, “a ‘trustee is not liable for a loss resulting
from the breach of trust if the same loss would have been incurred if he had
committed no breach of trust.’”37
There is no evidence that Western Star ever had any net assets it could have
used to fund the trust. Florida argues that because Western Star took in upwards of
$6 million in premium payments after the trust was established, Chase could have
compelled payment of the $5.4 million. Evidence of income in the form of premium
payments does not establish the amount of assets that Western Star had available at
any given time.
3. Misrepresentation/Fraud
The district court properly granted summary judgment against Florida’s claim
that Western Star itself had been the victim of Chase’s fraud or misrepresentation.
37
Whitfield v. Lindemann, 853 F.2d 1298, 1304 (5th Cir. 1988) (quoting RESTATEMENT
(SECOND) OF TRUSTS § 212 cmt. e, in the context of ERISA trust law); see also Craft v. Sunwest
Bank of Albuquerque, 84 F.Supp.2d 1226,1240-41 (D.N.M. 1999) (suggesting in dicta that a
trustee who fails to compel the settlor to deposit sufficient assets into a trust cannot be liable for
more than the assets that would have been available to fund the trust).
20
Under Texas law, reliance is an element of fraud or misrepresentation,38 and Florida
concedes that Western Star did not rely on Chase’s representation that the CD was
worth $5.4 million. Florida’s opening brief on appeal does not explicitly identify
fraud on Western Star (as opposed to the policyholders) as an issue on appeal,
although there is scattered language suggesting an attempt to pursue this theory.
However, Florida has not raised any argument as to how it might bring a fraud
action for injury inflicted on Western Star without proving reliance.39 Florida’s
reliance arguments relate to fraud claims brought on behalf of the policyholders, not
Western Star.
4. Deepening Insolvency
Florida argues that by certifying the trust assets at $5.4 million, Chase caused
the life of Western Star to be artificially prolonged, causing it fall deeper into debt
as it issued more policies on which it could not pay claims. Florida says, “if the
Trustee had not executed the Trust Agreement to enable Western Star to market
38
F.D.I.C. v. Patel, 46 F.3d 482, 486-87 (5th Cir. 1995) (citing Sears Roebuck & Co. v.
Meadows, 877 S.W.2d 281, 282 (Tex. 1994)).
39
Florida does not argue, for example, that Western Star could have pursued a fraud claim
against Chase because the knowledge of its officers and directors should not be imputed to the
corporate entity itself, F.D.I.C. v. Ernst & Young, 967 F.2d 166, 170-71 (5th Cir. 1992)(“In
Texas, whether an employee’s fraud is attributable to a corporation depends on whether the fraud
was on behalf of the corporation or against it. . . .”), or that any such imputed knowledge should
not carry over to the receiver asserting claims on behalf of the estate. See F.D.I.C. v. O’Melveny
& Myers, 61 F.3d 17, 19 (9th Cir. 1995).
21
policies in California, there would not have been millions collected in premiums and
millions owed on claims and, of course, no lawsuit by the Receiver on the Trust.”
There is a trend toward recognizing “deepening insolvency” as a cause of
action against a party who creates the false appearance of solvency in an insurance
company or other financial institution.40 As a result of this deception, regulatory
authorities allow the company to keep operating, and do not place it into
receivership in a timely fashion. Damages are measured by the dissipation of assets
or increased debt load occurring after the false representation of solvency was
made. Some courts have suggested that the receiver may only bring such an action
on behalf of the insolvent company when individual officers of the insolvent
company engaged in such activity with an outside party to keep the business open
for the purposes of looting its assets, rather than benefitting the company.41
In any event, Florida does not point to any caselaw in support of this theory,
and mentions it only in passing. There do not appear to be any reported Texas cases
recognizing “deepening insolvency.” Ultimately, the Court need not decide whether
40
Official Comm. of Unsecured Creditors v. R.F. Lafferty & Co., Inc., 2001 WL 1188245
*6-8 (3d Cir. Oct. 9, 2001) (holding that Pennsylvania’s Supreme Court would recognize a
“deepening insolvency” cause of action); see also Corcoran v. Frank B. Hall & Co., Inc., 149
A.D.2d 165, 175-76 (N.Y. App. Div. 1st Dep’t 1989).
41
See Schacht, 711 F.2d at 1350; see also In re Latin Inv. Corp., 168 B.R. 1, 5 (Bankr.
D.C. 1993) (discussing a bankruptcy trustee’s standing to sue a third party who worked with
insolvent company’s principals in misusing corporate funds).
22
the Texas Supreme Court would recognize this theory as an independent cause of
action. Even if it would, Florida has made no attempt, either in its summary
judgment briefing and evidence in the district court, or in its brief on appeal, to
quantify how much additional debt, if any, Western Star incurred after Chase
assisted in establishing the empty trust. To the extent that Florida has adequately
briefed deepening insolvency as a viable legal theory, there is no evidence of
damages measured from the “deepening insolvency” perspective that would justify
allowing Florida to proceed to trial on this claim.
Finally, the Court addresses the concern of both the Florida receiver and the
District Court that “[m]any wrongs but no rights is not the hallmark of either Texas
or Florida jurisprudence.” Our holding today does not demonstrate the absence of a
remedy in this type of case. Without expressing an opinion on the merits of any
particular option, policyholders might bring a class action to attempt fraud or breach
of fiduciary duty claims against a NAIC trustee; the California Insurance
Commissioner, who the California Supreme Court has held to be a representative of
California policyholders,42 might bring such claims on their behalf; a receiver in
Florida’s position might prevail on a deepening insolvency theory or recover from
officers and directors of the insurance company; or an insurance commissioner
42
See Arthur Andersen, 67 Cal. App. 4th at 1495, 79 Cal. Rptr. 2d 879.
23
might sue the trustee for contribution if the insurance company and trustee acted as
joint tortfeasors and applicable state law allows. In the present case, however, the
correct combination of legal theories, proper plaintiffs, and evidence on damages is
not present.
CONCLUSION
Western Star was not the victim of any tort for which it has both identified a
duty that was breached, and supplied adequate summary judgment evidence on the
existence of damages. With respect to injuries sustained by the policyholders,
neither Western Star nor the Florida receiver is an assignee of policyholder claims,
or an agent to represent their interests. To the extent that Florida could statutorily
designate its insurance commissioner as an agent of California policyholders to
prosecute claims on their behalf, it has not evidenced an intent to do so. The Florida
receiver lacks standing in federal court to bring claims predicated on a breach of
duty and injury to the policyholders.
AFFIRMED.
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