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Bnccorp, Inc. v. Hub International Ltd.

Court of Appeals of Arizona, First Division

July 11, 2017

BNCCORP, INC. and BNC NATIONAL BANK, Plaintiffs/Appellants,

         Appeal from the Superior Court in Maricopa County No. CV2012-014329 The Honorable Lori Horn Bustamante, Judge


          Anthony Ostlund Baer & Louwagie PA, Minneapolis, MN By Richard T. Ostlund, Shannon M. Awsumb Counsel for Plaintiff/Appellant BNCCORP, Inc.

          Ryley Carlock & Applewhite PA, Phoenix By Fredric D. Bellamy Co-Counsel for Plaintiff/Appellant BNC National Bank

          Law Offices of Michele Van Quathem PLLC, Phoenix By Michele Van Quathem Co-Counsel for Plaintiff/Appellant BNC National Bank

          Osborn Maledon PA, Phoenix By David D. Garner Counsel for Defendants/Appellees

          Judge Jon W. Thompson delivered the opinion of the Court, in which Presiding Judge Randall M. Howe and Judge Lawrence F. Winthrop joined.


          Jon W. Thompson, Judge

         ¶1 BNCCORP, Inc. (BNCCORP) and BNC National Bank, N.A. (The Bank) (collectively, BNC), appeal from the trial court's judgments in favor of HUB International Limited, HUB International Services, Inc., HUB International of California Insurance Services, Inc., and HUB International Southwest Agency Limited (collectively, HUB). For the following reasons, we affirm.


         ¶2 BNCCORP, a Delaware corporation, is a registered bank holding company with its principal place of business in Bismarck, North Dakota. It does business through wholly owned subsidiaries, including The Bank. The Bank's main office is in Arizona. The Bank has branches in Arizona, North Dakota and Minnesota. In 2002, BNC purchased BNC Insurance Services, Inc. (BIS), an insurance agency.[1] BNC utilized BIS for all its insurance broker needs.

         ¶3 In 2004, BNC entered a mortgage-loans-in-transit (MLT) agreement with Concord Mortgage (Concord).[2] Pursuant to that agreement, Concord originated loans using up to $100 million in funds provided by BNC, with BNC retaining a 100% participation interest in each loan. Concord then sold the loans in the secondary market and paid BNC back the principal and accrued interest.

         ¶4 Although at the time BNC was placing all its own insurance coverage through BIS, the MLT agreement was a custom agreement that BNC's lawyers drafted. BNC did not take additional steps to determine whether it had coverage for any fraud or other risks that may be associated with the new MLT arrangement.

         ¶5 In 2005, BNCs Chief Financial Officer (CFO) questioned whether the MLT relationship should be included in BNCs insurance application. At the time, BIS had assigned its employee, Kathy Cook (Cook), as the insurance broker for BNC's insurance renewal. Because of its CFO's question, BNC, through BIS and Cook, added an optional coverage known as "servicing contractor coverage" to its financial institution bond and excess follow-form bond insurance policies with Chubb Group of Insurance Companies (Chubb)[3] to insure the MLT relationship with Concord. BNC did not seek a special endorsement or manuscript policy concerning any specific aspects of the Concord MLT relationship.

         ¶6 In October 2006, BNC entered into another MLT agreement with American Mortgage Specialists (AMS), an Arizona corporation.[4] The AMS MLT agreement was the same basic contract as was used for the Concord MLT agreement. Like Concord, AMS was to originate mortgage loans using funds from BNC, service the loans, and sell them in the secondary market, and repay to BNC, principal, interest and fees. Under the agreement, BNC allowed AMS to draw up to $27.5 million in funds from BNC at any time.

         ¶7 In March 2006, the Arizona Department of Financial Institutions (ADFI), under a seventeen-page Consent Order, had sanctioned AMS and fined it nearly a quarter of a million dollars for unlawful conduct, unlicensed activity, failure to maintain proper records, failure to maintain control over bank accounts, failure to comply with an earlier 2004 Consent Order, and pages of additional enumerated violations. The record does not indicate that BNC investigated AMS's standing with ADFI.

         ¶8 BNC approved and decided to go forward with an MLT relationship with AMS while BNC was renewing its insurance policies in August 2006. However, BNC did not disclose this new MLT agreement in its renewal application and requested coverage "same as prior year." This included the same servicing contractor coverage that it had obtained in 2005 for the Concord MLT relationship. BNC did not seek, through BIS, a special endorsement, rider or other coverage specific to the MLT program (Concord and AMS)-such as one that would cover the risk of a lapping scheme fraud.

         ¶9 On March 14, 2007, the relationship between BNC and HUB began pursuant to a Purchase and Sale Agreement (PSA). BNCCORP and BIS were the named parties to the agreement, along with HUB International of California Insurance Services, Inc. (Hub Cal.). Pursuant to the PSA, BNC sold certain of BIS's assets and liabilities to HUB. HUB acquired BIS's book of business-including the BNC account. The BNC parties also agreed to appoint either Hub Cal. or one of the HUB "Affiliates"[5] as "the broker of record for all insurance maintained by [BNCCORP] and its direct and indirect wholly owned subsidiaries, " which included The Bank.

         ¶10 The PSA did not require HUB to provide BNC with risk management services, to act as BNCs guarantor, or otherwise recommend services beyond those BNC sought. The PSA states that BNCCORP and "its Affiliates" retained liability for their pre-sale conduct, which would include conduct arising out of insurance broker services provided to BNC in 2005 and 2006, when BNC added servicing contractor coverage to its insurance package to cover its MLT relationships, including its relationship with AMS. The PSA also included a jury trial waiver.

         ¶11 In accord with the PSA, upon closing of the sale in mid-2007, BNC appointed HUB as its broker of record. Cook became HUB's employee and continued in her role as BNCs broker. She assisted BNC in obtaining its 2007 renewal with Chubb-providing coverage for a bond period from August 15, 2007, to August 15, 2008. The renewal policy Cook procured included a financial institution bond and excess follow-form policy that provided servicing contractor coverage that was materially identical to the coverage BNC previously obtained through BIS in 2005 and 2006. Again, BNC did not specifically seek coverage for risks associated with its MLT program.

         ¶12 Cook left her position at HUB in May 2008, and Timothy Elliot and Thomas Gilmor[6] reassigned the accounts Cook had serviced-including the BNC account. BNCs account was reassigned to HUB's insurance brokers, Jerry Thomas and Brett Plant, who completed the 2008 renewal.

         ¶13 Around the time of the 2008 renewal, BNCs policies with Chubb were about to expire. As to the 2008 renewal, in a June 30, 2008 letter BNC informed HUB, as follows:

(1) We request a remarket this year. (2) We would like to look at the option of a three-year prepaid policy (or annual installments) as well as an annual renewal. (3) We would like the quote to include various deductible options. (4) We would like the quote to include a renewal at the current limits plus an increased limit for [Banker's Professional Liability (BPL)] and any recommendations for other limit increases you feel appropriate.

(Emphasis added.) As part of the 2008 renewal, BNC asked HUB to help it procure financial institution bond and excess follow-form policies from new insurance carriers that matched the coverages BNCs expiring insurance policies provided. BNC also requested servicing contractor coverage, but as in 2006, and 2007, BNC did not request any special endorsement, rider or other coverage specific to AMS or BNCs MLT program.

         ¶14 Consistent with BNCs directions in the June 30, 2008 letter and specific requests, HUB obtained insurance quotes/options, from multiple insurers in the remarketing process - including quotes with annual renewals, some with three year renewals, with various deductibles, and requested increases. HUB met with BNCs management and board to present options from respective carriers.

         ¶15 Instead of staying with Chubb, which offered only a one-year term, BNC elected to move its primary coverage to Colonial/Zurich (Colonial) and its excess coverage to St. Paul Mercy Insurance Company/Travelers (Travelers) (collectively, the insurance carriers). The 2008 renewal policies provided BNC with materially identical coverage as it had with Chubb, but included a higher $14.9 million combined limit and a guaranteed three-year term. In its bond, Colonial "agree[d] to indemnify [BNC] for . . . [l]oss resulting from dishonest or fraudulent acts committed by any servicing contractor[7] acting alone or in collusion with others."

         ¶16 BNC did not identify any fraudulent activities in its relationship with AMS until April 2010, despite the activities of its own management, credit analysts, auditors, and regulators. Throughout its three-and-a-half-year relationship with AMS, BNC accepted and relied on AMS's representations concerning dates, amounts, and "sources" of secondary-market purchases of loans originated by AMS using funds provided by BNC. In April 2010, BNC discovered AMS had defrauded it out of a claimed $26 million (the AMS loss) in a "fraudulent lapping scheme." Prior to[8] discovery of the AMS loss, BNC had not asked or required any of the secondary-market investors who purchased loans from AMS to provide purchase (and/or payment) advices directly to BNC, nor did BNC require any other independent verification of AMS's representations that the investor funds were being applied to pay off the correct loans.

         ¶17 In July 2010, BNC submitted a proof of loss insurance claim and supporting information to Colonial and Travelers. Colonial denied the claim, and thereafter filed a lawsuit seeking declaratory judgment concerning its obligations under the bond. Travelers also filed a complaint for declaratory relief. Colonial's and Travelers's suits were consolidated (the coverage litigation). BNC filed counterclaims for breach of contract and bad faith, and sought punitive damages.

         ¶18 In September 2012, for $7.5 million, BNC settled its lawsuit against the insurance carriers. The settlement agreement reflects that BNC was contemplating filing a suit against HUB. BNC did so less than a week after settling with the insurance carriers, asserting a claim for negligence against HUB. The complaint demanded a jury trial.

         ¶19 In separate rulings in HUB's favor, the trial court found (1) pursuant to the waiver in the PSA, BNC had waived its right to a jury trial, and (2) HUB did not breach the applicable standard of care and that BNC did not prove HUB proximately caused BNCs damages. After denying BNCs motion for a new trial and/or to alter or amend judgment, the trial court entered final judgment, pursuant to Rule 54 on August 26, 2015.

         ¶20 BNC timely appealed to this court. We have jurisdiction pursuant to Arizona Revised Statutes (A.R.S.) sections 12-120.21 (2016) and -2101 (2016).[9]


         I. Jury Waiver

         ¶21 As a preliminary matter, we review whether the trial court erred in ruling that both BNCCORP and The Bank waived their right to a jury trial under the terms of the PSA. Both The Bank and BNCCORP argue that the purported waiver does not extend to the negligence action. Relying heavily on external authorities, The Bank separately argues that it is not bound by the jury trial waiver because it was neither a named party nor signatory to the PSA. We agree with the trial court's ruling as to both BNCCORP and The Bank.

         ¶22 Pursuant to the Arizona Constitution, a right to a jury trial "may be waived by the parties in any civil cause." Ariz. Const. art. 6, § 17. In Arizona, jury waivers are recognized as commonplace such that they typically "attract no attention." Indus. Comm'n v. Frohmiller, 60 Ariz. 464, 474, 140 P.2d 219, 223 (1943). It has been said that the right to a jury trial in civil matters is "a privilege which may be waived by either party and not an absolute right." Id. There are typically no procedural obstacles for obtaining a jury waiver in a civil case, and such waiver may be the consequence where parties simply fail to timely request a jury. See, e.g., Stukey v. Stephens, 37 Ariz. 514, 516, 295 P. 973, 974 (1931). It follows that parties may include such waiver provisions in their contractual agreements.

         ¶23 As pertinent here, the jury waiver in the PSA states[10]:

Each party hereto hereby irrevocably and unconditionally waives any and all right to trial by jury in any action, suit, or proceeding arising out of or related to this agreement or any of the transactions contemplated hereby. The parties acknowledge and agree that the terms and provisions of this section constitute a material inducement for the parties to enter into this agreement.

(Emphasis added.) We interpret these terms to avoid surplusage. See, e.g., Taylor v. State Farm Mut. Auto. Ins. Co., 175 Ariz. 148, 158 n.9, 854 P.2d 1134, 1144 n.9 (1993); see also In re Estate of Zaritsky, 198 Ariz. 599, 603, ¶ 11, 12 P.3d 1203, 1207 (App. 2000).

         ¶24 We find the negligence action falls within the terms of the PSA's jury waiver. This negligence action could not have arisen absent the relationships created by the PSA. The provision of broker services, which HUB is alleged to have negligently provided in procuring insurance for The Bank, arose out of and was a "transaction contemplated" by the PSA. The Bank acknowledges as much. In its briefing, The Bank states that the PSA required HUB to provide BNCCORP and its affiliates - which includes The Bank-with broker services for five years. Additionally, contrary to The Bank's and BNCCORP's position, the fact that HUB's duty and standard of care in the negligence action is dictated by Arizona law does not change the fact that the jury waiver is guided by the terms of the PSA which extends to the negligence action.

         ¶25 We further address The Bank's objection to being bound by the waiver because, as The Bank argues, it did not "knowingly and voluntarily" waive its right to a jury trial. In support of this position, The Bank asserts that the present jury waiver is unlike an agreement to arbitrate. Therefore, The Bank posits Arizona's policy not to presume against jury waivers-espoused in Harrington v. Pulte Home Corp., which involves an arbitration agreement-is inapplicable in this matter. 211 Ariz. 241, 250, ¶ 30, 119 P.3d 1044, 1053 (App. 2005). We disagree. See id. (citations omitted) (stating, generally, that in civil actions "test of waiver applied ...

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