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Bethel v. Darwin Select Ins. Co.

United States Court of Appeals, Eighth Circuit

November 18, 2013

Charles E. BETHEL, II; Jennifer Kalsow Frantz, Plaintiffs-Appellants

Submitted: Oct. 23, 2013.

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[Copyrighted Material Omitted]

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Adam P. Gislason, argued, Minneapolis, MN (Chad A. Snyder, on the brief), for Appellant.

Amy Jane Woodworth, argued, Minneapolis, MN (Erin D. Doran, on the brief), for Appellee.

Before GRUENDER, BEAM, and SHEPHERD, Circuit Judges.

GRUENDER, Circuit Judge.

Charles Bethel II and Jennifer Frantz appeal the district court's [1] grant of summary judgment in favor of Darwin Select Insurance Company (" Darwin" ) on their claims for declaratory relief, breach of contract, and breach of implied contractual duties of good faith and fair dealing. For the reasons discussed below, we affirm.

I. Background

In 2005, Trent Jonas formed Zen Title, LLC, a Minnesota-based title insurance agency. Jonas persuaded Bethel and Frantz to invest both time and money in Zen Title in exchange for minority ownership interests in the company. Frantz also worked for Zen Title as a bookkeeper and title agent from 2005 to 2007. Beginning in May 2006, Zen Title served as an agent for United General Title Insurance Company (" UGT" ). Pursuant to this agency relationship, Zen Title was responsible for recording mortgages, deeds, and mortgage satisfactions and paying fees associated with those recordings. Zen Title also had the duty to pay off mortgages on behalf of UGT and its customers to facilitate mortgage refinancing transactions. In order to permit Zen Title to make these payments, UGT entrusted millions of dollars to Zen Title, which was required to maintain the funds in segregated escrow accounts.

In May 2007, Darwin issued a professional liability insurance policy (the " Policy" ) to Zen Title. The parties agree that Jonas, Bethel, and Frantz qualified as insureds under the Policy. The Policy obligated Darwin to defend and indemnify the insureds against any claim for any " [n]egligent act, error, omission, misstatement, misleading statement, neglect or breach of duty ... by an Insured, in the performance of or failure to perform Professional Services." However, the Policy excluded from coverage " any Claim ... based upon, arising out of, directly or indirectly resulting from, in consequence of, or in any way involving ... any actual or alleged ... loss, disappearance, pilferage or shortage of, or commingling or improper use of, or failure to segregate or safeguard, any client or customer funds, monies, or securities" (the " Customer Funds Exclusion" ).

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In early August 2007, UGT terminated its relationship with Zen Title and filed a six-count complaint in Minnesota state court against Zen Title, Jonas, Bethel, Frantz, and TitleSource, a Minnesota corporation associated with Zen Title. UGT subsequently amended its complaint to add two additional counts. The complaint described a wide-ranging fraudulent scheme to misappropriate the funds entrusted to Zen Title by UGT. UGT alleged that " Zen, and the other Defendants associated with Zen and acting for same, deliberately chose to delay the recording [of mortgage instruments] so as to benefit from the pool of cash escrowed for the purpose of paying recording fees." In addition, Zen Title allegedly failed to use escrowed funds to pay off existing mortgages in mortgage refinancing transactions. The gravamen of UGT's allegations was that the defendants delayed recording mortgage instruments in order to retain and use funds that had been escrowed to pay fees associated with those recordings. In many instances, Zen Title transferred these funds to TitleSource, which had no relationship whatsoever with UGT or its customers. In Count Seven of its complaint— for negligence— UGT alleged that " [b]y failing to file mortgages, satisfactions of mortgages, and other closing documents, by failing to pay associated recording fees, and by failing in at least nine (9) instances to use escrowed funds to pay off the refinanced mortgages, Defendants were negligent and breached their duties of care to UGT." Count One— for breach of contract— contained substantially similar allegations. Neither Count One nor Count Seven specifically alleged any conduct that was unrelated to the general scheme to misappropriate escrowed funds.

The insureds promptly gave notice and tendered defense of UGT's action to Darwin pursuant to the Policy. However, Darwin refused to defend the action, concluding that the entirety of UGT's complaint fell within the Customer Funds Exclusion. Ultimately, in February 2009, all parties to UGT's action entered into a settlement agreement. The settlement agreement required Jonas, Bethel, and Frantz to confess judgment, and it required all defendants to pursue a declaratory judgment action against Darwin to establish Darwin's duty to defend ...

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