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Lincoln General Insurance Company v. Kingsway America Agency

May 7, 2012


The opinion of the court was delivered by: The Honorable Sylvia H. Rambo


Before the court are five motions to dismiss filed individually by Defendant Kingsway America Agency, Inc. f/k/a Avalon Risk Management, Inc. (Doc. 11), Defendant Gary C. Bhojwani (Doc. 12), Defendant Scott D. Wollney (Doc. 13), Defendant Global Solutions Insurance Services, Inc. (Doc. 19), and Defendant East-West Associates, Inc. (Doc. 38). These motions argue that the statute of limitations has expired for the alleged claims, or, alternatively, that the complaint fails to state a cause of action and should be dismissed under Federal Rule of Civil Procedure 12(b)(6). For the reasons that follow, the motions will be granted in part and denied in part.

I. Background

A. Parties

Plaintiff, Lincoln General Insurance Company ("LGIC"), is a property and casualty insurance company based out of York, Pennsylvania. (Compl. ¶ 1.)

Defendant Avalon Risk Management, Inc. ("Avalon"),*fn1 was a provider of insurance and surety services located in Elk Grove Village, Illinois. (Id. ¶ 2.) It is alleged that at all times relevant to this complaint, Gary C. Bhojwani ("Bhojwani") and Scott D. Wollney ("Wollney") were officers and/or directors of Avalon. (Id. ¶¶ 5, 6.)

Defendant East-West Associates, Inc. ("East-West"), is a customs bond broker located in La Mirada, California. (Id. ¶ 4.) Defendant Global Solutions Insurance Services, Inc. ("GSIS") is an insurance producer located in Redondo Beach, California. In this capacity, GSIS solicits, underwrites and issues U.S. Custom Bonds as a sub-producer to Avalon. (Id. ¶ 3.) With regard to this case, it is alleged that GSIS and East-West worked together to issue custom bonds which exposed LGIC to millions of dollars of potential liability. (Id.)

B. Facts

By way of background, U.S. custom bonds are federal instruments that guarantee the payment of import duties and taxes on goods entering the United States. (Id. ¶ 9.) These bonds are a financial promise between a surety, an importer (the principal), and the United States Customs and Border Agency Protection ("CBP") (obligee).*fn2 (Id.) The CBP also collects "anti-dumping" duties ("ADDs"). "Dumping" references when a company in one country exports goods to another country at a price that is either lower than the price the company charges in its home market, or below the cost it takes to produce the product. (Id. ¶ 14.) If a company in the United States believes it is being injured by dumping from a foreign company, they may file a petition with the U.S. Department of Commerce ("DOC") and the U.S. International Trade Commission ("ITC"). (Id. ¶ 15.) If the DOC and the ITC determine that dumping is in fact occurring, ADDs may be levied against the offending company. (Id. ¶ 16.)

Between 2000 and 2004, the U.S. government allowed importers to post customs bonds instead of depositing cash in order to secure duties. (Id. ¶ 17.) During this time, shippers of commodities who were concerned that ADDs might be imposed on them were allowed to pre-apply for an ADD rate and post custom bonds instead of cash in anticipation that the ADDs would eventually be assessed against them. (Id. ¶ 18.)

At all times relevant to this complaint, Avalon was acting as LGIC's agent in managing LGIC's custom bonds program and LGIC allowed Avalon, under specific underwriting guidelines, to issue both single and continuous custom bonds. (Id. ¶¶ 19, 37.) Starting in January 2000, Avalon was under an Agency Agreement ("the Agreement") with LGIC under which Avalon would "solicit applications for risks, including insurance policies and bonds, to underwrite and issue policies and bonds, and to collect premiums thereon." (Id. ¶ 20 (citing Ex. A, Agency Agreement).) In addition, under the Agreement, Avalon agreed to "'solicit ,accept and bind risks in accordance with the underwriting rules, regulations and directions' given by LGIC." (Id. ¶ 22.) Avalon also agreed that the "dollar value of its binding authority would be specifically limited by a written notice which LGIC shall, from time to time, provide [Avalon], and [Avalon] will promptly notify LGIC in writing of all risks written or bound in accordance with the directions and limitations in that written notice." (Id. ¶ 23.) Because Avalon was LGIC's custom bond agent, LGIC issued Power of Attorney status to Avalon, Bhojwani and Wollney. In accordance with this status, these Defendants agreed to "bind themselves, jointly and severally, their successors or assigns, to indemnify and hold [LGIC], its successors or assigns, harmless of and from any and all actions, suits, debts, claims or demands of any nature whatsoever arising under, or as a result of, any unauthorized use of said Power of Attorney." (Id. ¶ 27 (citing Ex. B, Power of Attorney Use Agreement).)

Starting in January 2003, Avalon and LGIC began operating under a "Program Manager Agreement" ("2003 PMA"). (Id. ¶ 28 (citing Ex. C, 2003 Program Manager Agreement).) Under the 2003 PMA, Avalon could only contract risks that were within LGIC's own underwriting and pricing standards, and also to report all bound risks to LGIC. (Id. ¶¶ 29, 30.) In addition, Avalon agreed to "accept business on behalf of LGIC written by properly licensed and qualified, professional insurance agents, solicitors and brokers ("sub-producers"), and to direct, supervise and coordinate the efforts of sub-producers" and to "solicit risks and classes of risks at limits and for lines of insurance . . . that, in their pricing and insurability, meet or exceed the underwriting and pricing standards from time to time established by [LGIC]." (Id. ¶¶ 31, 32 (citing 2003 PMA).) Avalon also agreed to maintain sufficient "competent and trained personnel, to produce, develop, underwrite and supervise" staff to monitor the business between Avalon and LGIC. (Id. ¶ 33 (citing 2003 PMA).) Furthermore, under the 2003 PMA "Avalon agreed to indemnify LGIC 'against any and all claims, suits, hearings, actions, damages of any kind, liability, fines, penalties, loss or expense, including attorneys' fees caused by or resulting from any allegation of any misconduct, error or omission or other act; or breach of [the 2003 PMA] by' Avalon or 'Sub-producers.'" (Id. ¶ 36 (citing 2003 PMA).) It is also alleged that LGIC and Avalon worked under the policy that Avalon would ensure collateral for all bonds relating to ADDs unless the "principal had a tangible net worth of at least five times the probable maximum bonded exposure." (Id. ¶ 38.)

In 2002 and 2003, it is alleged that Avalon authorized Defendants East-West and GSIS to post hundreds of custom bonds on goods being imported from China. (Id. ¶¶ 39, 42.) GSIS possessed a computer program that provided customs brokers "with on-line access to a software application that can create and report single entry and continuous transaction bond forms on an 'on-demand' and 'as-needed' basis." (Id. ¶ 40.) Presumably using this program, it is alleged that "Avalon entered into an arrangement with GSIS and East-West that permitted East-West, without any individual, per bond authority, to print out fully executed LGIC customs bonds with Avalon's signature as attorney-in-fact (through Avalon's officers, Wollney and/or Bhojwani) for LGIC, East-West's signature for the principal and other evidences of legitimacy." (Id. ¶ 41.) These bonds were then posted for "flyby-night" principals who imported the above listed agricultural goods from China. (Id. ¶ 42.) LGIC alleges that when issuing these bonds, East-West and GSIS were acting as agents for LGIC and, thus, owed fiduciary duties to LGIC. (Id. ¶ 43.)

When contracting with East-West and GSIS, it is alleged that Avalon informed these companies that they were not authorized to issue bonds for more than $1,000 per principal. (Id. ¶ 44.) Furthermore, it is alleged that East-West and Avalon were informed that they should first secure an application, a written indemnity agreement, and disclosure of financial information form for each principal wishing to receive a bond. (Id.) LGIC claims that because of the financial risk East- West and GSIS knew their conduct posed to LGIC, they had a fiduciary duty to abide by all underwriting guidelines provided to them by Avalon. (Id. ¶ 45.) Likewise, LGIC claims that Avalon had a similar fiduciary duty to act with reasonable care in following all underwriting guidelines provided to it by LGIC. (Id. ¶ 46.) The complaint further alleges that Defendants Avalon, East-West and GSIS all breached their fiduciary duties when they issued custom bonds to "fly-by-night" principals who were, generally, unable to live up to their financial obligations when called upon to do so. (Id. ¶ 48.) LGIC claims Defendants did not follow LGIC's underwriting guidelines and/or properly evaluate the principals' financial conditions before issuing the principal customs bonds. (Id. ¶¶ 48, 49.) The bonds that were issued were to cover duties on goods from China which are normally subject to ADDs, such as, crawfish, honey, garlic and mushrooms. (Id. ¶ 51.)

With regard to East-West and GSIS, LGIC alleges that these bonds violated the underwriting requirements which sub-producers to Avalon were bound because "(1) the bond principals had never demonstrated the financial condition required to meet LGIC's or Avalon's minimum requirements; (2) the bond principals had not posted sufficient collateral; and (3) the amount of the Bonds exceeded the maximums permitted by LGIC's underwriting guidelines and/or Avalon's sub-producer underwriting guidelines." (Id. ¶ 52.) Due to this alleged failure to follow the underwriting guidelines, LGIC was exposed to substantial risks totaling over $90 million because many of the importers Avalon and the sub-producers issued bonds to were not legitimate companies and "when it came time to pay, many had closed their doors, leaving LGIC on the hook for the duties." (Id. ¶ 53.) Furthermore, LGIC contends that because of this negligent behavior, as well as East-West's failure to properly implement security software to protect its online bond issuing software, faulty bonds were not properly reported to either Avalon or LGIC, and thus LGIC was not able to timely recognize that underwriting guidelines were not being followed. (Id. ¶ 54.)

LGIC claims it suffered its first loss on September 29, 2010, when it paid $100,000 to the CBP for a bond which was issued to a J.H. Brain for the period between July 15, 2002, and July 14, 2003. (Id. ¶ 56.) In addition, on May 5, 2011, LGIC suffered an additional loss when it had to pay $2,650, 277 in bonds for importers "Noodles for Lunch" and "Digicellet, Inc." (Id. ¶ 57.) Furthermore, LGIC predicts it will continue to have to pay bonds issued by Avalon, East-West, GSIS, Bhojwani and Wollney. (Id. ¶ 58.)

B. Procedural History

On June 23, 2011, Plaintiff LGIC filed the instant complaint. (Doc. 1.) On August 25, 2011, motions to dismiss were filed by Defendants Avalon, Bhojwani and Wollney. (Docs. 11, 12 & 13.) Respective briefs in support were filed on September 5, 2011. (Docs. 15, 16 & 17.) On September 19, 2011, Defendant GSIS filed its motion to dismiss, (Doc. 19), and brief in support, (Doc. 20). On September 26, 2011, LGIC filed briefs in opposition to Defendants Avalon, Bhojwani and Wollney's motions to dismiss. (Docs. 25, 26 & 27.) On October 6, 2011, LGIC filed a brief in opposition to GSIS's motion to dismiss. (Doc. 28.) Avalon, Bhojwani and Wollney filed reply briefs on October 11, 2011. (Docs. 30 & 31.) Subsequently, on January 3, 2012, Defendant East-West filed a motion to dismiss, (Doc. 38.), followed by a brief in support on January 17, 2012, and an additional brief in further support -- without leave of court - on February 27, 2012. (Docs. 39 & 41.) LGIC filed a brief in opposition on February 2, 2012, (Doc. 40), and a motion to file a sur-reply brief to East-West's briefs on March 5, 2012, (Doc. 42).

On March 7, 2012, the court stayed the motion to file a sur-reply brief should the court later determine that additional briefing on the issues in question was needed. (Doc. 44.) At this time, the court does not believe additional briefing will be ...

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