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AXA CORPORATE SOLUTIONS v. UNDERWRITERS REINSURANCE COMPANY

November 9, 2004.

AXA CORPORATE SOLUTIONS, formerly known as AXA REASSURANCES S.A., Plaintiff,
v.
UNDERWRITERS REINSURANCE COMPANY, Defendant.



The opinion of the court was delivered by: JOAN H. LEFKOW, District Judge

MEMORANDUM OPINION AND ORDER

This case arises from a series of agreements involving insurance-backed film financing between plaintiff, AXA Corporate Solutions, formerly known as AXA Reassurances S.A. (either or both, "AXA"), and Underwriters Reinsurance Company ("URC"). AXA's amended complaint alleges that AXA is entitled to damages from URC as a result of URC's breaching its duty of utmost good faith (count I), warranties (count II), contract (count III), and duty of disclosure (count IV), as well as for promissory estoppel/promissory fraud (count V). URC has asserted counterclaims against AXA seeking damages on theories of breach of contract (counterclaim I) and promissory estoppel (counterclaim II), in addition to attorneys fees pursuant to Chapter 38 of the Texas Civil Practice & Remedies Code (counterclaim III). Diversity jurisdiction is properly invoked pursuant to 28 U.S.C. § 1332(a)(2) as AXA is a French reinsurance company with its principal place of business in Paris, France, and URC is an insurance corporation organized under the laws of the state of New Hampshire with its current principal place of business in Armonk, New York. During the times relevant to this lawsuit, URC's principal place of business was located in Calabasas, California. The amount in controversy exceeds $75,000. Before the court are URC's motion for summary judgment as to each count of AXA's amended complaint and AXA's motion for summary judgment as to URC's counterclaims. For the reasons set forth below, the court grants in part and denies in part URC's motion for summary judgment; the court grants AXA's motion for summary judgment as to URC's counterclaims.

SUMMARY JUDGMENT STANDARDS

  Summary judgment obviates the need for a trial where there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. Fed.R. Civ. P. 56(c). To determine whether any genuine fact exists, the court must pierce the pleadings and assess the proof as presented in depositions, answers to interrogatories, admissions, and affidavits that are part of the record. Fed R. Civ. P. 56(c) Advisory Committee's notes. The party seeking summary judgment bears the initial burden of proving there is no genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). In response, the non-moving party cannot rest on bare pleadings alone but must use the evidentiary tools listed above to designate specific material facts showing that there is a genuine issue for trial. Id. at 324; Insolia v. Philip Morris Inc., 216 F.3d 596, 598 (7th Cir. 2000). A material fact must be outcome determinative under the governing law. Insolia, 216 F.3d at 598-99. Although a bare contention that an issue of fact exists is insufficient to create a factual dispute, Bellaver v. Quanex Corp., 200 F.3d 485, 492 (7th Cir. 2000), the court must construe all facts in a light most favorable to the non-moving party as well as view all reasonable inferences in that party's favor. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986). On cross-motions for summary judgment, the court must consider the merits of each motion and assess the burden of proof that each party would bear on an issue at trial. Santaella v. Metropolitan Life Ins. Co., 123 F.3d 456, 461 (7th Cir. 1997).

  BACKGROUND

  A. A Five Picture Deal

  In 1996, Sawtantar Sharma ("Sharma"), a broker of Stirling Cooke Brown Reinsurance Brokers Ltd. ("SCB"), approached AXA and other insurance and reinsurance companies about providing insurance coverage for a syndicated, revolving loan of $100 million (the "Master Facility") to be made by Chase Manhattan Bank, now JP Morgan Chase Bank ("Chase"), to George Litto Productions ("GLP") to cover the production of five films. The Master Facility contemplated the use of insurance-backed gap financing, which meant that insurance companies would underwrite the loans made by Chase to GLP in order to cover any losses or gaps that resulted from a film's failure to yield enough revenue to cover the loan. The Master Facility was structured so that the five films would be cross-collateralized to mitigate against loss such that revenues generated by any of the films could be used to repay the loans on the other films.

  In early 1997, AXA and other reinsurers indicated their interest in participating as reinsurers for the Master Facility. AXA also agreed to act as a 100% reinsurer for the "Contingent Extra Expense" ("CEE") policy. This policy, issued by the New Hampshire Insurance Company and underwritten by AIG Europe (UK) Ltd., insured a loan of $6 million (later, $7.5 million). This loan, which became known as the "Working Capital Facility," provided financing for certain development and closing costs. The Working Capital Facility also contemplated that GLP would produce five films and provided that GLP would begin the repayment of the working capital facility after the production of each film, beginning with the second film. Although related to the Master Facility, the Working Capital Facility was a separate loan covered by the separate CEE policy. URC became involved with the GLP film-financing program in late 1997 when approached by AXA and SCB about providing an insurance policy for the Master Facility that would then be reinsured by AXA and the other reinsurers. URC ultimately decided to participate in the transaction as the fronting insurer for the Master Facility. URC also chose to retain a portion of the risk on the primary and secondary excess layers of reinsurance. In addition, URC considered becoming a lender to GLP under the proposed loan syndication of the Master Facility but never informed AXA about this consideration.

  In late 1997 and early 1998, SCB, AXA, and GLP began negotiating the agreements that would govern the financing of the GLP-produced films. URC received a term sheet for the Master Facility that set forth the general parameters of the parties' agreements. The premium was set at 10% of the maximum exposure of the insurance companies (the "Sum Insured"), which in this case meant 10% of $100 million, or $10 million. The parties agreed that the reinsurance would be structured in three layers. This required that claims exhaust the maximum monetary exposure of each layer before the next layer was at risk. Chase further required that AXA execute a Loss Payee Endorsement or "cut-through" agreement. The Loss Payee Endorsement gave Chase the right to deal directly with AXA on any claim as if AXA had issued the insurance policy.

  Throughout 1998, URC, SCB, and Chase negotiated and conferred about the language of the insurance policy, including the terms of the policy and the state from which the policy would issue. AXA informed URC that AXA wanted the insurance, reinsurance, and Loss Payee Endorsement agreements to provide that New York law would govern the agreements and that any dispute over the agreements would be settled in New York courts. The parties agreed that the policy and related documents would provide for New York law and jurisdiction. Although URC was aware that it was unable to issue the insurance policy from New York because it did not have the proper license, URC did not disclose this fact to AXA.

  Because of URC's inability to issue the policy from New York, URC, Chase, and SCB conferred about the state from which URC should issue the policy and ultimately decided that the policy would issue from Texas. In October 1998, the Texas Department of Insurance ("Texas DOI") notified URC that it would not approve a policy that contained wording giving jurisdiction to New York. URC discussed this issue with Chase but did not advise any of the reinsurers of this development. URC subsequently sent a letter to the Texas DOI in February 1999 regarding the approval of a policy that provided for New York law and New York jurisdiction. In a letter dated February 4, 1999, the Texas DOI informed URC that it would accept a policy providing for New York law and New York jurisdiction.

  B. A Two Picture Agreement

  By January 1999, GLP had not come forward with a film and the Master Facility was not finalized. In April 1999, GLP announced that it had obtained the rights to produce two films, "The Crew" and "Standing Room Only." Chase agreed to provide GLP with a loan of $89 million, the "Credit, Security, Guarantee and Pledge Agreement," for use as "bridge" financing to fund the two films. This loan would then be rolled over into the $100 million Master Facility once Chase completed syndication of the Master Facility. Chase proposed that URC provide fronting insurance for the Credit, Security Guarantee and Pledge Agreement through a two-picture "Cash Flow Policy." On April 23, 1999, counsel for Chase circulated the initial draft of the "Cash Flow Policy," for "The Crew" and "Standing Room Only." URC submitted the Cash Flow Policy and Loss Payee Endorsement providing for New York law and jurisdiction to the Texas DOI on April 30, 1999. The Loss Payee Endorsement was expressly incorporated by reference in the Cash Flow Policy.

  At the beginning of June 1999, one of the reinsurers, Kemper RE, raised concerns about the language of the Cash Flow Policy, including, inter alia, that the agreement appeared to favor the insured, GLP, at the expense of the insurers/re-insurers. Kemper RE ultimately withdrew from the transaction on June 2, 1999. On June 4, 1999, Sharma apprised URC of Kemper RE's concerns and its decision to withdraw from the transaction. URC did not inform AXA or the other reinsurers of Kemper RE's concerns.

  On June 16, 1999, URC learned that the Texas DOI had changed its position and would not accept a policy providing for New York law and jurisdiction. The Texas DOI gave URC the option of either substituting Texas law and jurisdiction for New York law and jurisdiction or deleting the choice of law and jurisdiction provisions from the policy and Loss Payee Endorsement. The following day, June 17, counsel for Chase issued a memorandum to Sharma and Barry Smith, a lawyer appointed to act on behalf of AXA with regard to the GLP transaction, indicating that URC had informed Chase that the Texas DOI would not approve the policy with the language providing for New York law and jurisdiction. The memorandum further advised that URC had changed the policy to require Texas law and jurisdiction and that Chase agreed to that change. URC then filed amended versions of the Cash Flow Policy and LPE with the Texas DOI on June 18, 1999. The amended versions provided for Texas law and jurisdiction. On June 21, 1999, AXA received a copy of the June 17 memorandum. On June 23, 1999, AXA received draft documents reflecting the change to Texas law and jurisdiction. As of July 2, 1999, both URC and Chase were aware that AXA objected to the change from New York law and jurisdiction to Texas law and jurisdiction.

  As a result of the proposed change to Texas law and jurisdiction, AXA demanded changes to the wording of the Loss Payee endorsement in late June and early July 1999. AXA's proposed changes sought to protect AXA from the potential exposure of having to pay twice or more than its own share of a loss. URC subsequently agreed on July 7, 1999 to use its "best efforts" to move all of the policy documents to Illinois. In a letter dated July 7, 1999 from Kathryn Lessman ("Lessman"), then Branch Manager for URC's Western Region, to AXA's counsel, URC specifically agreed to

 
file the Form of Cash Flow Insurance Policy, the Master Policy of Cash Flow Insurance, and the Loss Payee (Cut Through) Endorsement (with amendments requested by [AXA] today during our telephone conference) for review and approval with the Illinois Department of Insurance as soon as practicable. The policy and endorsement wording that URC will file with the Illinois Department of Insurance (DOI) will designate New York as the choice of law and jurisdiction governing the terms of the contract. If the Illinois DOI will not approve New York as the choice of law and jurisdiction, then the policy and endorsement will be amended to designate Illinois law and courts instead.
(AXA Resp. App. Ex. 65).
  In a facsimile sent on July 8, 1999 from Lessman to AXA, Lessman advised that
Underwriters Reinsurance Company (URC) will use our best efforts and endeavors to file with and obtain approval from the Illinois Department of Insurance (DOI) for the Form of Cash Flow Insurance Policy, the Master Policy of Cash Flow Insurance, and the Loss Payee (Cut Through) Endorsement (with amendments requested by you on July 7 during our teleconference). The policy and endorsement wording that URC will file with the Illinois DOI will designate New York as the choice of law and jurisdiction governing the terms of the contract. If the Illinois DOI will not approve New York as the choice of law and jurisdiction, then URC will amend the policy and endorsement wording to designate Illinois law and courts instead.
URC also confirms that we will use our best efforts and endeavors to file with and obtain approval from the Texas DOI for the Loss Payee (Cut Through) Endorsement with amendments requested by you on July 7 during our teleconference.
(AXA Resp. App. Ex. 65) URC also agreed to amend the Loss Payee Endorsement filed in Texas to address AXA's concerns regarding double payment and limiting its exposure to its reinsurance share. URC's in-house lawyer, Jeffrey Gunchick, informed AXA that the Illinois Department of Insurance ("DOI") had given its assurance that it would issue a policy providing for New York law and jurisdiction. However, URC never used its best efforts to obtain approval of the amendments to the Loss Payee Endorsement from the Texas DOI. In addition, URC never used its best efforts to file the Form of Cash Flow Insurance Policy, the Master Policy of Cash Flow Insurance, or the Loss Payee Endorsement with the Illinois DOI.

  Following the agreement between AXA and URC, counsel for Chase redrafted the Loss Payee Endorsement, and the parties discussed a number of versions of the Loss Payee Endorsement on July 8, 1999. URC, through Mr. Gunchick, also proposed language for inclusion in the Loss Payee Endorsement and reinsurance slips obligating the reinsurers to pay shares of any extra-contractual claims and claims in excess of policy limits. AXA did not agree to URC's proposed language.

  That same day, URC conditionally signed a Form of Cash Flow Insurance, which was the Cash Flow Policy referenced in the Credit, Security, Guaranty and Pledge Agreement. The Cash Flow Policy indemnified Chase for the "Ascertained Net Loss in respect of each Film Production, up to but not exceeding the Sum Insured and requires the Insurer to make payment of the Ascertained New Loss as provided under `Claims Procedure.'" (URC App. Ex. 23 at UR 002217; AXA Resp. App. Ex. 1 at UR 2217). The Cash Flow Policy defined a "Film Production" as "[a] Qualifying Picture which is the subject of a Declaration." (URC App. Ex. 23 at UR 002219; AXA Resp. App. Ex. 1 at UR 2219). Under the terms of the Cash Flow Policy, a "Declaration" is "made by the Insured and accepted by the Insurer and the Lead Re-Insurers for the coverage of a Film Production under the Policy, in the form of Schedule 2 herein." (URC App. Ex. 23 at UR 002218; AXA Resp. App. Ex. 1 at UR 2218). The policy designated AXA and Royal & SunAlliance Insurance PLC as the "Lead Re-Insurers." (URC App. Ex. 23 at UR 002220; AXA Resp. App. Ex. 1 at UR 2218).

  AXA and URC had not yet reached an agreement as of the morning of July 9, 1999. AXA, by its underwriter Erick Derotte ultimately signed two alternative versions of the Loss Payee Endorsement. The first version, signed unconditionally, specified the extent of AXA's potential exposure so as to prevent AXA from incurring the risks of double exposure and paying more than its share of a loss.*fn1 The second version was in the form originally filed with the Texas DOI. Mr. Derotte signed this version with a handwritten disclaimer stating "to be amended as agreed." (URC App. Ex. 28; AXA Response App. Ex. 53). Both versions of the Loss Payee Endorsement established that Texas law would govern its construction and that the parties would submit to the jurisdiction of the state courts of Texas in Harris County and the U.S. District Court for the Southern District of Texas.

  Mr. Derotte also signed the reinsurance slips, which specified: "All amendments, alterations, and declarations to be agreed by Reinsurers hereon." (AXA Resp. App. Ex. 2). The AXA stamp by which Mr. Derotte executed the slips similarly specified: "ALL TERMS AND AMENDMENTS TO BE AGREED." (AXA Resp. App. Ex. 2). The reinsurance slips established AXA's obligation to pay under the Primary Layer of Reinsurance ($18,690,000) 57.72% of any claim within that layer (or 60.20% of 95.88% of the layer not retained by URC). AXA was obligated to pay 75.75% of any claim within the First Excess Layer ($25,810,000); and 36.20% of any claim within the Second Excess Layer ($44,500,000). The reinsurance slips further allocated how Chase would pay premiums and expenses to the insurers and reinsurers. Under the reinsurance slips, AXA was to receive 57.57% of the premium due on the Primary Layer of reinsurance, 75.75% of the premium due on the First Excess Layer of reinsurance, and 36.20% of the premium due on the Second Excess Layer. AXA then forwarded the signed documents to SCB.

  C. Additional Agreements and Continued Negotiations

  Concerns immediately arose because URC had previously rejected the first version of the Loss Payee Endorsement that AXA had executed unconditionally. In addition, Chase found the second version of the Loss Payee Endorsement unacceptable because of the "to be amended as agreed" qualification. URC, however, ultimately accepted the first version of the Loss Payee Endorsement. URC, Chase, and SCB also entered into letter agreements providing that: (1) SCB would use its "best endeavors" to obtain amendments to the reinsurance slips;*fn2 (2) Chase would not, and would not authorize Chase Bank of Texas, "(i) in any action against Underwriters Reinsurance Company, to seek punitive or exemplary damages or (ii) to institute any proceeding to enforce the Policy against Underwriters Reinsurance Company without seeking to join each of the re-insurers . . .;" and (3) "notwithstanding the text of the Policy, Underwriters Reinsurance Company does not have an obligation . . . to insure any additional theatrical motion picture other than "The Crew." (AXA Resp. App. Ex. 77 at UR 002245-002248). AXA and the other reinsurers were not copied on these letter agreements.*fn3

  The parties dispute whether and to what extent AXA participated in the conversations that eventually yielded the letter agreements. AXA contends that it was not a party to the conversations and was not aware of the agreements until mid-August 1999. See AXA RE's Rule 56.1(b) Response To Statement Of Facts And Statement Of Additional Facts That Require The Denial of URC's Motion For Summary Judgment at ¶ 57. URC maintains to the contrary that counsel for AXA, Joelle de Lacroix ("de Lacroix"), participated in conversations during which "Chase explained that, under the agreements in place that it `would not claim more than was due to them. And not for punitive damages. [Counsel for Chase] also said he will bring everybody to the same court if there was a bad faith claim except those who had paid.'" (URC's Response To AXA RE's Local Rule 56.1 Statement of Undisputed Material Facts at ¶ 27). AXA had not heard anything from Chase, Sharma, or URC regarding the GLP transaction and presumed that the transaction was "okay" until having a meeting with Sharma on or about July 21, 1999. (AXA Resp. App. Ex. 118D at P. 98-100). Since the closing of the transaction, URC and Sharma had exchanged a series of faxes concerning URC's proposed changes to the cover notes, reinsurance slips, and reinsurance agreements. URC requested that Sharma undertake "immediate efforts to have all reinsurers on this placement sign the amended cover note per URC's requested changes . . ." (AXA Resp. App. Ex. 80). In a fax dated July 20, 1999, Lessman, on behalf of URC, informed Sharma that "URC cannot approve the loss payee (cut-through) endorsement wording that AXA has signed, as we feel it is contradictory in its intent." (AXA Resp. App. Ex. 82).

  Sharma met with de Lacroix on July 21, 1999 and attempted to continue negotiating the language of the Loss Payee Endorsement. On July 27, 1999, Sharma faxed de Lacroix a number of documents, including a copy of the Loss Payee Endorsement that URC had approved and additional reinsurance language. The following day, Sharma informed AXA that ...


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