NOT RECOMMENDED FOR PUBLICATION
File Name: 05a0183n.06
Filed: March 10, 2005
No. 03-6528
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
BFM LEASING COMPANY, LLC; LANDOAK
LEASING, LLC,
Plaintiffs-Appellants,
v. On Appeal from the United
States District Court for the
PHILADELPHIA INDEMNITY INSURANCE Eastern District of Tennessee
COMPANY,
Defendant-Appellee.
/
Before: GUY and ROGERS, Circuit Judges; DOWD, District Judge.*
RALPH B. GUY, JR., Circuit Judge. Plaintiffs, BFM Leasing Company, LLC, and
LandOak Leasing, LLC, appeal from the district court’s order granting defendant, Philadelphia
Indemnity Insurance Company, summary judgment on plaintiffs’ claims for rescission or
performance of a commercial insurance policy. The district court ruled that it should not rescind
the insurance contract based on mutual mistake and that it should not order defendant to perform
because plaintiffs failed to properly tender its claims. We AFFIRM.
I.
*
The Honorable David D. Dowd, Jr., United States District Judge for the Northern District
of Ohio, sitting by designation.
No. 03-6528 2
At the times relevant to this case, Jeff Coppinger was the president of Cherokee Rental, Inc.
(Cherokee), which was in the business of renting and leasing automobiles in several cities in Eastern
Tennessee. In 1997, Coppinger, on behalf of Cherokee, approached financial planners Michael
Atkins and Patrick Martin with a business plan whereby Martin and Atkins would recruit capital and
credit to purchase automobiles to lease to significant corporate accounts. BFM Leasing Company
(BFM) was formed to carry out this plan. It was BFM’s role to own the vehicles and Cherokee’s
role to recruit the customers, earning a commission on each new lease. Upon receiving certain
paperwork from Coppinger, BFM would forward Coppinger funds to purchase certain vehicles.
Coppinger would collect the lease payments from the customers and forward them to BFM. In
March of 1997, BFM and Cherokee executed an Independent Business Agreement which formally
defined their roles in the venture. In 1999, Martin and Atkins formed LandOak Leasing (LandOak)
as a separate entity and began funding vehicles in the exact same way BFM had. While the parties
never executed an agreement formalizing the relationship between LandOak and Cherokee, the
parties intended the relationship to remain the same as it had been with BFM.
BFM purchased residual value insurance from Philadelphia Indemnity Insurance Company
(PIIC) in 1997 and renewed it annually through August of 2000. Residual value insurance
guarantees that the leased vehicles will have the expected residual value when they are returned at
the end of a lease period. When BFM or LandOak received a title application and other paperwork
from Coppinger, BFM would submit a vehicle enrollment application and premium check to PIIC.
Over the course of the policy, BFM paid PIIC $325,570.58 and LandOak paid $52,424.91. PIIC
insured approximately 761 vehicles.
Martin and Atkins became suspicious that Coppinger was not correctly performing his duties
when the state of Tennessee failed to return some titles. They sent an accountant to Coppinger’s
No. 03-6528 3
office to investigate, and soon after Coppinger confessed to perpetrating a fraud. Coppinger created
fictitious title applications for vehicles he did not intend to purchase or for vehicles he did purchase
but were titled to Cherokee and put to his own use. Coppinger collected funds from BFM to
purchase the vehicles, and then used part of those funds to make the monthly lease payments. It is
unclear when Coppinger began the scam; however, plaintiffs submitted to the district court a private
investigator’s report showing that some of the leases were legitimate. Also, Martin testified that
“probably in the first year or two he was probably doing some leasing.”
When BFM and LandOak informed PIIC that the enrolled vehicles were never leased as
believed (and therefore not insurable), BFM and LandOak asked PIIC to return their premiums.
PIIC refused. BFM and LandOak then submitted applications for benefits, but PIIC never
responded. BFM and LandOak then filed suit seeking either rescission of the insurance contract and
a full refund of all the premiums, or in the alternative seeking benefits from PIIC on the applications
previously submitted. The district court granted PIIC summary judgment on both claims. It first
found that BFM and LandOak were not entitled to rescind the contract based on mutual mistake
because there was no mistake as to the terms of the contract. The court further held that PIIC did
not have to pay benefits because BFM and LandOak did not (and could not) provide the documents
required under the contract before PIIC was required to pay benefits and, further, the contract was
not intended to insure against the type of loss incurred by BFM and LandOak. BFM and LandOak
appeal, arguing that the district court erred in concluding that mistakes as to underlying material
facts of a contract (as opposed to mistakes as to contract terms) are not grounds for rescission.
II.
We review de novo the district court’s grant of summary judgment. Smith v. Ameritech, 129
F.3d 857, 863 (6th Cir. 1997). Summary judgment is appropriate when there are no issues of
No. 03-6528 4
material fact in dispute and the moving party is entitled to judgment as a matter of law. FED. R. CIV.
P. 56(c). In deciding a motion for summary judgment, the court must view the factual evidence and
draw all reasonable inferences in favor of the nonmoving party. Matsushita Elec. Indus. Co. v.
Zenith Radio Corp., 475 U.S. 574, 587 (1986).
A. Count One: Rescission of the Insurance Contract
Under Tennessee law, a contract may be rescinded if there is a mutual mistake. Warren v.
Crockett, 364 S.W.2d 352, 355 (Tenn. 1962). A “mistake” is “an unconscious ignorance [or]
forgetfulness of a fact, past or present, material to the contract, which exists in a legal sense where
a person, acting upon some erroneous conviction either of law or fact, executes some instrument,
does some act or omits to do some act which, but for the erroneous conviction, would not have been
executed, done or omitted.” Bowater N. Am. Corp. v. Murray Mach., Inc., 773 F.2d 71, 75 (6th Cir.
1985). “[T]he mistake must relate to a past or present fact, not an opinion as to the result of the
known fact.” Metro. Life Ins. Co. v. Humphrey, 70 S.W.2d 361, 362 (Tenn. 1934).
At summary judgment, the parties treated the mistake issue solely in terms of whether
Coppinger was BFM’s agent and, therefore, whether his knowledge of his fraud should be imputed
to BFM. The district court rejected defendant’s agency theory1, but went on sua sponte to initiate
the discussion of whether a mutual mistake occurred even though the parties agreed to the terms of
the contract. BFM and LandOak argue that the district court erred when it decided there was no
mutual mistake here because there was “a meeting of the minds as far as the contract terms are
1
The district court was correct that Coppinger’s knowledge of the fraud should not be
imputed to BFM and LandOak because “where the agent is dealing with the principal in his own
interests or where his interests are adverse to that of the principal so that it is to his own advantage
not to impart his knowledge to the principal,” the principal will not be charged with the knowledge
of the agent. Griffith Motors, Inc. v. C.E. Parker, 633 S.W.2d 319, 322 (Tenn. Ct. App. 1982).
No. 03-6528 5
concerned.” They assert that even though the parties agreed to the terms of the contract, both parties
suffered from a mistake of fact; namely, that there would be insurable cars.
Plaintiffs are correct that a mutual mistake of a material past or present fact may be grounds
for rescission. Id. The district court erred insofar as it held that mistakes must go to the
understanding of the terms of a contract and cannot be material facts underlying the contract.
Nevertheless, there was no mutual mistake here because there was no mistake of material fact when
the parties negotiated the policy. The parties mistakenly enrolled noninsurable cars after they
formed the contract. Put another way, at the time the parties formed the contract, they were not
mistaken as to a present fact. Rather, they mistakenly predicted future facts. Such a mistake is not
grounds for rescission under Tennessee law. Id.
Young America, Inc. v. Union Central Life Insurance Co., 101 F.3d 546 (8th Cir. 1996), does
not persuade us to reach a different result. There, a business purchased life insurance policies for
its officers. Id. at 547. The policy was governed by the Employee Retirement Income Security Act,
29 U.S.C. §§ 1001-1461 (1994) (ERISA). Id. When the Chief Executive Officer died, the insurance
company refused to pay benefits because he was not a full-time employee, as the policy required.
Id. The business asked the insurance company to return all of its premiums since it was paying
under the mistaken notion that certain part-time employees were covered by the policy, but the
insurance company refused. Id. at 548. The business sued, and the district court granted it summary
judgment, holding that the business was entitled to recover the premiums pursuant to ERISA federal
common law. Id. The Eighth Circuit agreed that federal common law provided an action for
restitution of mistakenly made payments to an ERISA plan. Id. The court further concluded that
the district court was right to order restitution of the mistakenly made payments. Id. Since it
appeared that at some point during the life of the policy the officers in question did work full time,
No. 03-6528 6
the case was remanded to the district court for determination of how many payments were made in
error. Id. at 548-49.
Young America was decided under ERISA common law, which does not govern this case.
Furthermore, the plaintiffs in Young America sought restitution of improperly made payments, not
rescission of the entire contract based on a mistake at the formation of the contract.
BFM and LandOak also argue for the first time on appeal that Tennessee’s “uninsurable
interest” doctrine requires the court to rescind the insurance contract. Tennessee law provides
“where a policy of insurance had been issued to one having no insurable interest therein, the policy
is void, and ordinarily the person paying the premiums thereon can recover the same from the
insurer.” Vinson v. Mills, 530 S.W.2d 761, 763 (Tenn. 1975). Otherwise, the contract is essentially
a wager and a violation of public policy. Duncan v. State Farm Fire & Cas. Co., 587 S.W.2d 375,
376 (Tenn. 1979).
This court normally does not entertain arguments that parties make for the first time on
appeal. See, e.g., United States v. Ninety-Three Firearms, 330 F.3d 414, 424 (6th Cir. 2003). In this
case, however, the district court decided the mutual mistake issue on a theory it applied to the case
sua sponte, to which BFM and LandOak were not able to respond, and to which BFM and LandOak
arguably would have presented this “uninsurable interest” argument in response. At summary
judgment, the opposing party should have an opportunity to respond to all issues considered by the
court. Routman v. Automatic Data Processing, Inc., 873 F.2d 970, 971 (6th Cir. 1989). If sua
sponte summary judgment is improperly granted, the losing party must show prejudice. Harrington
v. Vandalia-Butler Bd. of Educ., 649 F.2d 434, 436 (6th Cir. 1981). For the reasons explained
below, even if plaintiffs had argued this issue in the district court it would have been unsuccessful,
and therefore they suffered no prejudice.
No. 03-6528 7
In Vinson, the son of the owner of real property took out an insurance policy on the property.
530 S.W.2d at 763.2 The insurance agent advanced the first premium, and when the son did not pay
him back the agent sued to recover the advanced premium. Id. at 762. The defendant argued that
he had no insurable interest in the property, and therefore the policy was void. Id. at 763. The
Tennessee Supreme Court disagreed, holding that there was an insurable interest because the policy
was issued to the holder of the mortgage, and the mortgage holder did have a valid insurable interest
in the policy. Id.
In Duncan, the plaintiff purchased a tractor-trailer rig and also purchased a collision
insurance policy from the defendant insurance company. 587 S.W.2d at 375. After the tractor was
destroyed in a single-vehicle collision, the plaintiff filed a claim for the loss with the defendant
insurance company. Id. The insurance company refused to pay the claim because the tractor had
been stolen before the plaintiff purchased it, and the insurance company therefore believed the
plaintiff had no insurable interest in the tractor. Id. The court first held that “one has an insurable
interest in property if by its continued existence he will gain an advantage, or if by its damage or
destruction he will suffer a loss, whether or not he has any title in, lien upon or possession of the
property.” Id. at 376. Applying that principle to a good faith purchaser of a stolen vehicle, the court
held that the purchaser does have an insurable interest because the purchaser benefits from the
continued use of the vehicle, and as a constructive bailee of the vehicle he may be liable to the true
owner if the true owner demands its return but the good faith purchaser is unable to return it because
it is destroyed. Id. See also Oliver v. Johnson, 692 S.W.2d 855, 857 (Tenn. Ct. App. 1985) (holding
that the plaintiff had an insurable interest in real property); Brewer v. Vanguard Ins. Co., 614
2
The insurance policy included coverage for personal injury and property damage as well
as comprehensive hazard insurance to the buildings and personal property.
No. 03-6528 8
S.W.2d 360, 364 (Tenn. Ct. App. 1980) (holding that the plaintiff had an insurable interest in her
dwelling).
The critical question is what was the interest that plaintiffs insured. Unlike the cases
discussed above, here the plaintiffs did not insure a thing, but rather insured against a contingent
event—the residual value of the used cars being lower than the parties predicted. Plaintiffs did have
an interest in that event not occurring as the success of their investment in the leases (some of which
appear to have been legitimate) depended on the residual value of the vehicles at the leases’ end.
To have an insurable interest, it does not have to be a certainty that plaintiffs would sustain
economic injury from the loss of the property, it is “sufficient that loss of the property might subject
the insured to such injury.” Duncan, 587 S.W.2d at 376. Plaintiffs had an insurable interest in the
contingent event even if ultimately they could not collect on their claims because, when the time
came, they lacked the proper documents.
B. Count Two: Payment of Claims
As to BFM and LandOak’s claim for benefits under the insurance policy, BFM and LandOak
contend the district court erred in finding that PIIC was not required to pay benefits because it was
impossible for BFM and LandOak to submit the paperwork necessary for claim as provided by the
contract. The “MVP Settlement Endorsement Option” provides that to make a claim, plaintiffs must
tender to PIIC a copy of the title to the enrolled vehicle, together with copies of the relevant sales
or lease contract and the factory invoice for the vehicle. Plaintiffs argue that since PIIC was to
calculate the lease-end value of the vehicle by reference to a trade publication, the requirement for
them to provide actual titles and lease agreements would not preclude PIIC from calculating and
paying the claims. Where, as in this case, the insured cannot provide any of the documents the
No. 03-6528 9
policy requires before the insurer pays benefits, the insurer should not be forced to pay out on the
claims. The district court correctly granted PIIC summary judgment on this claim.
AFFIRMED.
No. 03-6528 10
ROGERS, Circuit Judge, dissenting. Tennessee law clearly requires a refund of insurance
premiums when no risk ever attached. The law is reflected in an 1891 Tennessee Supreme Court
case that has never been overruled and that is consistent with general insurance law. Jones &
Abbott v. Insurance Co. of North America, 18 S.W. 260, 260 (Tenn. 1891). The case and its
principle are the primary argument of the plaintiffs on appeal, yet the case is only cited in the
defendant’s brief for another proposition, which simply disregards the argument. As a federal court
sitting in diversity, we are bound to follow applicable state law, in this case Tennessee law. Erie
R. Co. v. Tompkins, 304 U.S. 64 (1938). Reversal is required by that law in this case.
The existence of at least a genuine issue of material fact about whether the vehicles at issue
ever existed, or were ever insurable, is not disputed. If the vehicles did not exist or were uninsurable
for other reasons, PIIC did not incur the risk contemplated by the insurance policy—i.e. that the cars
would have depreciated below a certain value by the end of the lease. If no risk attached under a
contract of insurance, no premium is earned, and under Tennessee law, premiums must be returned.
In Jones & Abbott, the Supreme Court of Tennessee considered an insurance policy by which
the insurer purported to assumed the risk of fire to certain lumber. Jones & Abbott, 18 S.W. at 260.
The policy contained a warranty stating that a space of 150 feet existed between the insured lumber
and a nearby mill. Id. However, at the time the contract was entered, a space of 150 feet between
the lumber and the mill did not exist. Id. Because the conditions necessary to make the contract
effectual were never satisfied, the court found that no risk had attached to the insurer and
accordingly, that the insured was entitled to a return of his premium. Id. The court explained that
“[t]he contract of insurance is a conditional one. If no risk attaches, no premium, in the absence of
fraud, is earned. When the risk never attached, and no risk was ever run, the premium is to be
No. 03-6528 11
returned in case it has been paid, and the assured was guilty of no fraud. May on Ins. § 4.” Id.3
Jones & Abbott has been followed by the Tennessee Court of Appeals in Interstate Life & Accident
Co. v. Cook, 86 S.W.2d 887, 890-91 (Tenn. App. 1935).
The Jones & Abbott principle moreover appears fully consistent with general insurance law.
Insurance is a contract whereby insurance premiums are paid to an insurer in return for the insurer’s
assumption of the risk . See 28 Williston on Contracts § 70:255. However, “[w]here the risk has
not attached or where no part of the interest insured is exposed to any of the perils insured against,
the insurer, in the absence of any fault or fraud on the part of the insured, has no claim to the
premium, and must return it.” 5 Couch on Ins. § 79:8; see also 28 Williston on Contracts § 70:255
(“if no risk attaches, the premium may be recovered”); 14 Williston on Contracts § 41:21 (“where
the risk never attaches, the reason for requiring a surrender of the premium by insurer is apparent”).
A comprehensive annotation published in 1940 cites cases from 23 American jurisdictions indicating
that, absent fraud, premiums are to be returned where the insurance policy was void, even though
the contract was not contrary to public policy. 129 A.L.R. 57, 60-63 (1940).
A relatively recent North Carolina case applied this law in circumstances very similar to
those of the present case. Latta v. Farmers County Mutual Fire Ins. Co., 313 S.E.2d 214 (N.C. Ct.
App. 1984). In Latta, the plaintiff sought to recover premiums paid to an insurance company for
crop insurance. No risk had ever attached under the policy because, at the time the plaintiff entered
into the contract for insurance, the plaintiff had Federal Crop Insurance and, unbeknownst to the
3
The cited treatise explains as follows:
[Insurance is] a conditional contract; for when no risk attaches no premium is to be
paid, or, if paid, must, in the absence of fraud, be returned to the assured. In point
of fact, the contract is to pay the premium on condition that the risk is run . . . .”
John Wilder May, THE LAW OF INSURANCE § 4, at 3-4 (1873) (footnote omitted).
No. 03-6528 12
plaintiff, a clause in the insurance contract suspended coverage in the event the insured has or
obtains Federal Crop Insurance. Id. at 215. The court found it inapposite that the defendant was at
all times “‘ready, able and willing’ to perform, provided the plaintiff complied with the terms of the
agreement,” because the insurance company was never at risk under the policy. The court stated that
“[i]t is an established principle of insurance law that an insurer must return premiums where, without
fault or fraud by the insured, no risk to the insurer ever attaches under the policy. Id. at 216. In such
a case, the premiums have been paid upon a consideration which has failed.” Id. at 215-216.
Therefore, the court found the plaintiff was entitled to a return of the premiums paid. Id. at 216.
It follows inexorably that BFM and LankOak are entitled under Tennessee law to a return
of premiums paid because PIIC was never at risk under the insurance contract. The policy at issue
in this case was for residual value insurance. Residual value insurance insures that, at the end of a
long-term lease, the insured automobile will have a certain value. However, BFM and LandOak
have established a genuine question of fact about whether the cars purportedly enrolled under the
insurance policy ever existed or were leased in accordance with the eligibility requirements of the
policy. If the cars never existed or did not meet the eligibility requirements of the policy, PIIC did
not incur the risk contemplated by the parties—that the cars would be worth less than a specified
amount—because the cars were never actually insurable. The district court and the majority opinion
both agree that BFM and LankOak were innocent of any fraud in the situation.4 The grant of
summary judgment should therefore be reversed.
It is true that Jones & Abbott does not appear to have been cited by plaintiffs to the district
court. The complaint did state, however, that “Defendant incurred no risk of loss,” J.A. 8, that the
4
Both the district court and the majority opinion agree that the perpetrator of the fraud, Jeff
Coppinger, was an independent contractor of BFM and LandOak. Accordingly, Coppinger’s fraud
is not properly imputed to BFM and LandOak.
No. 03-6528 13
contract was “void initiato [sic],” and that plaintiffs are “entitled to a refund of [the] premiums.”
J.A. 9. While these allegations were made in the context of “mutual mistake,” they nonetheless
sufficiently plead a claim that the premiums should be returned on the Jones & Abbott principle.
See Smith v. City of Salem, Ohio, 378 F.3d 566, 577 (6th Cir. 2004) (“legal theories of recovery need
not be spelled out as long as the relevant issues are sufficiently implicated in the pleadings”). The
summary judgment motion papers did not treat the question of whether, assuming plaintiffs had no
knowledge that the automobiles did not exist, the premiums should be refunded. Instead, the
summary judgment motions dealt with whether such knowledge should have been attributed to the
plaintiffs. See majority opinion at fn. 1. With regard to the claim for refund of premiums,
defendant’s memorandum in support of summary judgment was based entirely on the argument that
“there was no mutual mistake because BFM Leasing knew, through their agent’s knowledge, that
the cars did not exist at the time the policies were issued.” J.A. 35, 37-38. The district court ruled
against defendant on this issue, but ruled in favor of defendant on another basis—one that, it turns
out, was contrary to Tennessee law. Where summary judgment is granted on an unanticipated legal
theory, it makes little sense to prevent a party from refuting the theory for the first time on appeal.
See Routman v. Automatic Data Processing, Inc., 873 F.2d 970, 971 (6th Cir. 1989) (noting that the
party opposing summary judgment must have “a reasonable opportunity to respond to all issues to
be considered by the court”).
Moreover, the fact that plaintiffs on appeal cited some cases involving insurance contracts
that were void as against public policy should not be construed to limit plaintiffs’ argument to cases
regarding “insurable interest.” The Jones & Abbott principle is broader: if no risk attached,
premiums must be refunded, absent fraud. It does not matter whether risk did not attach because of
No. 03-6528 14
the lack of insurable interest, as was argued in Vinson, or because it was impossible for the insured
event to occur, as in this case and as in Jones & Abbott.5
It should make no difference whether the Jones & Abbott principle is based on a theory of
lack of consideration, or on a theory of mutual mistake.6 Whichever theory the principle is based
on, it is controlling here. Even assuming, however, that plaintiffs are limited to a theory of mutual
mistake, the plaintiffs should succeed. The plaintiffs have demonstrated a mutual mistake of the
parties about a material fact underlying the contract—the existence or insurability of the cars. It is
no answer that the parties were not, at the time they formed the contract, mistaken as to a present
fact. Contract formation often involves a master agreement and subsequent implementing
agreements. See Gregg v. Transportation Workers of America International, 343 F.3d 833 (6th Cir.
2003) (life insurance); Beynon v. Garden Grove Medical Group, 100 Cal. App. 3d 698 (Cal. Ct.
App. 1980) (health insurance). The master agreement in this case provided insurance only with
respect to “Enrolled Vehicles,” and a vehicle was enrolled only following the submission of an
Enrollment Form, in duplicate, along with a corresponding premium payment, plus acceptance and
certification by the insurance company of the Enrollment Form. J.A. 67-68. Nothing about the
Jones & Abbott principle applies with less force when insurance contracts are structured in this way.
At some point the mutual obligations of premium payment and risk undertaking ostensibly went into
force (presumably when the Enrollment Form was accepted). At that point, with respect to cars that
5
Indeed, in a case arising out of Tennessee this court specifically read the Jones & Abbott
principle to be applicable where “the contract was not against law or public morals.” Georgia
Home Ins. Co. v. Rosenfield, 95 F. 358, 363 (6th Cir.1899). See also Annotation, 129 A.L.R. 57,
60-63 (1940).
6
It appears to be the former. See n. 1, supra.
No. 03-6528 15
did not exist or were not otherwise insurable, no risk attached. At that point the Jones & Abbott
principle accordingly required a return of premiums.
Of course, public policy may not support the Jones & Abbott rule. Insurance companies may
incur unnecessary costs of administration, and may have to maintain unnecessary reserves or buy
unnecessary reinsurance as a result of risk that the insurance companies reasonably believe to exist.
Sound policy may suggest that this cost should be borne by the insured, by allowing the insurance
company to keep the premiums, since the insured is in a better position than the insurance company
to know whether the risk has attached. We are however nonetheless bound by Tennessee law, which
is clearly to the contrary.
Accordingly, I respectfully dissent.