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Berkley Insurance Co. v. Hawthorn Bank

United States District Court, W.D. Missouri, Central Division

September 29, 2017




         Plaintiffs Berkley Insurance and Berkley Regional Insurance are surety companies[1] that issued payment and performance bonds on behalf of Jefferson City Industries (JCI), a construction contractor. Berkley entered into an Indemnity Agreement with JCI, requiring JCI to repay Berkley if Berkley had to pay on the bonds. Defendant Hawthorn Bank was JCI's bank, and made loans to JCI.

         JCI began having financial difficulties. After JCI failed to pay subcontractors and suppliers, or finish construction projects, Berkley paid claims under the bonds. Prior to that time, to satisfy some of JCI's unpaid loan debts due to Hawthorn Bank, Hawthorn Bank applied funds from JCI's accounts, including some progress payments that JCI received for its work on bonded contracts.

         In this lawsuit, Berkley alleges that it is entitled to recover, from Hawthorn, the amount of the progress payments received by JCI, deposited into JCI's bank account, and then applied by Hawthorn to JCI's loan debts. Hawthorn moves for summary judgment. Doc. 38. Having considered the briefing and exhibits, and the oral arguments presented by the parties, the motion is granted.

         I. Background[2]

         Berkley is a surety company and in the business of issuing surety bonds to contractors. Among other types of banking activities, Hawthorn Bank provides financial lending services to contractors.

         In February 2013, Berkley and non-parties Jefferson City Industries (JCI), United HRB General Contractors, Jeff-Cole Holdings, Raidan Equipment, Anthony R. Adrian, and Onnimaria Adrian (collectively, Indemnitors) entered into a General Agreement of Indemnity related to any bonds that Berkley may issue to JCI. The Agreement provided for the assignment of bonds and contracts, and granted Berkley a general lien and continuing security interest in the Indemnitors' collateral, which included contracts, subcontracts, accounts, machinery and equipment, general intangibles, inventory, etc. The Agreement also provided that any funds due under any contract covered by a bond were trust funds. Berkley did not file UCC statements regarding the Agreement. Hawthorn Bank was not a party to the Agreement.

         Berkley subsequently issued, as surety, payment and performance bonds with effective dates ranging from February 2013 to August 2014 for 20 mid-Missouri construction projects on behalf of JCI as bond principal. Despite receiving payments from obligees, JCI failed to pay numerous subcontractors and suppliers.

         Hawthorn Bank provided financial lending services to JCI and filed UCC financing statements with the Missouri Secretary of State. JCI received progress payments on its contract work and deposited payments in its Hawthorn Bank, direct deposit accounts. Hawthorn applied some progress payments to the loan obligations that JCI owed Hawthorn.

         On January 20, 2015, Hawthorn received Berkley's written demand for “possession of” progress payments, along with a copy of the General Agreement of Indemnity.

         On January 7, 2015 and February 5, 2015, Berkley sent correspondence to JCI vendors and subcontractors in which Berkley acknowledged its receipt of their proofs of claim, stating that the vendors and subcontractors would be contacted in due course regarding Berkley's investigation of their allegations, and stating that “this letter…should not be construed as an admission of liability or a promise to pay[.]” Doc. 39-2. Hawthorn Bank was not copied on or referenced in the correspondence. Berkley made its first payment under a payment or performance bond on February 10, 2015.

         Berkley alleges that as JCI's surety, it has incurred losses in excess of $2, 500, 000 in paying for completion of the work, and resolving claims of the bonded project owners and obligees, and unpaid subcontractors and suppliers.

         II. Discussion

         Berkley sues Hawthorn Bank under six counts: conversion, tortious interference with business expectancy, equitable lien, constructive trust, implied indemnity, and unjust enrichment. Doc. 11, pp. 18-26. For the reasons discussed below, Hawthorn is entitled to summary judgment on all counts.

         A. Evidentiary matters

         The Court will address two evidentiary matters before addressing each of the counts.

         1. The date of the last progress payment applied to a JCI loan by Hawthorn

         Hawthorn states that January 16, 2015 was the date that the last progress payment from any of the 20 project owners was deposited into a JCI direct deposit account by JCI, or applied to a JCI loan by Hawthorn. Doc. 39, p. 6 of 23 (Hawthorn's Statements of Fact, para. 6, citing Doc. 39-1, Affidavit of Jason Schwartz, Senior Vice President of Hawthorn Bank, p. 2).

         Berkley “object[s]” to Hawthorn's Statement of Fact, para. 6, Doc. 42, p. 3 (citing Doc. 43-2, Exhibit A-4, Schwartz deposition), and argues that the Court should defer ruling on this issue because of a discovery dispute. First, Berkley has not shown good cause for failing to timely raise the discovery dispute, as required under the Scheduling Order, Doc. 17, p. 2 (requiring discovery motions to be filed by 3/22/2017, and discovery disputes to be resolved by 4/21/2017). See Fed. R. Civ. P. 16(b)(4) (modification of scheduling order requires a showing of good cause and the court's consent). Nor did Berkley file an affidavit showing why it could not “present facts essential to justify its opposition, ” as required under Fed.R.Civ.P. 56(d). See Willmar Poultry Co. v. Morton-Norwich Prod., Inc., 520 F.2d 289, 297 (8th Cir. 1975). The Court will not defer ruling.

         Second, Berkley's exhibits do not show that any progress payments were deposited into JCI's accounts after January 16, 2015 or applied to a JCI loan by Hawthorn after that date. While Berkley submits in its Statement of Additional Material Facts, para. 35, that after January 16, 2015, Hawthorn used “indemnitors' funds” to pay down debts they owed to Hawthorn, it cites no evidence to support that statement. Specifically, Berkley's evidence does not distinguish between the indemnitors' funds from contract owners on the bonded projects which are the funds relevant to this lawsuit, and funds that Hawthorn recovered from a Small Business Administration guaranty or other collateral which are not. See also Doc. 46-3, Deposition of Ellen Cavallaro, Berkley's corporate representative, p. 6 of 17 (testifying that Berkley sought only to recover proceeds from JCI's bonded contracts and not, for example, proceeds paid over from the Small Business Administration loans). Thus, whether some unspecified indemnitor funds were applied to a loan after January 16, 2015, Berkley has failed to genuinely dispute, by “citing to particular parts of materials in the record, ” Fed.R.Civ.P. 56(c)(1)(A), Jason Schwartz's statement that January 16, 2015 was the date that the last progress payment from any of the 20 project owners was applied to a JCI loan by Hawthorn.

         2.Hawthorn's knowledge of the Indemnity Agreement

         Hawthorn states that it did not have actual knowledge of the Indemnity Agreement until receiving it on January 20, 2015. Doc. 39, p. 6 of 23, para. 13 (citing Doc. 39-1, Schwartz Affidavit, p. 3). The statement is not genuinely disputed, for the reasons discussed below.

         Berkley states that Hawthorn's Statement of Fact, para. 13, is controverted because Hawthorn may be charged with “constructive knowledge” that the contracts were bonded and that the surety had an equitable right of subrogation upon the contractor's default. Doc. 44, p. 5 (citing First State Bank v. Reorganized Sch. Dist. R-3, Bunker, 495 S.W.2d 471');">495 S.W.2d 471, 478 (Mo. App. 1973), and Hawthorn's UCC filings, including an attached construction contract that by its terms required payment and performance bonds). “Constructive knowledge” is not a matter of fact but a matter of law, and the parties' legal arguments about equitable subrogation, First State Bank, and UCC filings are addressed in Section II.B.1.-.2, below. Furthermore, whether Hawthorn had any sort of knowledge that the contracts were bonded does not address Hawthorn's knowledge of the Indemnity Agreement or its contents, including the trust provision.

         B. Count I, Conversion

         “Conversion is the unauthorized assumption of the right of ownership over the personal property of another to the exclusion of the owner's rights.” Herron v. Barnard, 390 S.W.3d 901, 908-09 (Mo. App. 2013) (citation omitted). To establish conversion, a plaintiff must show that: (1) it owned the property or was entitled to possess it; (2) the defendant took possession of the property with the intent to exercise some control over it; and (3) the defendant thereby deprived the plaintiff of the right to possession. Id. Berkley alleges that it was entitled to possession of the progress payments “through contract assignment and equitable subrogation, ” and ...

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