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Wilbanks Securities, Inc. v. Scottsdale Insurance Company of Pittsburgh

United States District Court, W.D. Oklahoma

February 6, 2018

WILBANKS SECRUITIES, INC, et al., Plaintiff,



         Defendant issued a Blanket Fidelity Bond for Securities Dealers, Bond Number No. 015900031 (“the Bond”), to Wilbanks Securities, Inc., with a coverage period from November 1, 2013 to November 1, 2014. Plaintiffs filed this action seeking a declaratory judgment that certain claims being pursued against Wilbanks Securities in a pending Financial Industry Regulatory Authority (“FINRA”) proceeding are covered by the Bond and that Defendant National Union Fire Insurance Company of Pittsburgh (“National Union”) will be required to indemnify Wilbanks Securities for any award and defense costs. Plaintiff also seeks damages for breach of contract and breach of the duty of good faith and fair dealing. Defendant seeks summary judgment, asserting that by its terms, the Bond does not provide coverage for the claims asserted in the FINRA proceedings. (Doc. No. 54). Plaintiff responded to the motion and Defendant filed a Reply in support of its position. Accordingly, the motion is ripe for disposition. Having considered the parties' submissions, the Court finds as follows.[1]

         Wilbanks Securities asserts that in May 2014, it provided notice to National Union of a potential claim by Kent and Shawna Powell regarding a February 2012 investment made by the Powells, which Wilbanks Securities sold them. In December 2014, Plaintiff provided National Union with a copy of the Powells' Statement of Claim to FINRA, and asserted that the claim, at least in part, was subject to coverage under the Bond. In the Statement of Claim, the Powells alleged claims stemming from investment in the Aztec Drilling Program, as described below.

         Mr. and Mrs. Powell had a prior relationship with Wilbanks Securities and one of its registered representatives, John Stevens, when in 2012 Mr. Powell sold his business for 1.5 million dollars. Powell sought Mr. Stevens's advice on how to best invest the proceeds of the sale. Mr. Stevens first recommended a Charitable Remainder Unitrust, but withdrew this recommendation because the Powells would be unable to access the funds once transferred to the trust. He then recommended the Aztec Drilling Program, representing to the couple that he and Wilbanks Securities had researched the company and its drilling programs and investment therein would carry zero risk and provide an 88% tax deduction in 2012, as well as providing substantial monthly income after a year. Mr. Stevens did not offer alternative investment suggestions, nor did he advise the Powells that he lacked the requisite license to sell the investment, although it was one of the “approved products” of Wilbanks Securities. In January 2013, acting in reliance on Stevens's representations, the Powells met with Mr. Stevens to execute the necessary subscription documents for the Aztec Drilling Program. They concede their signatures appear on pages 9 and 12 of the Subscription Documents Booklet, but contend initials in devoted spaces throughout the booklet are not theirs, nor did they make any “check marks” in the document. Mr. Stevens indicated they should sign their names and he would complete the forms. The Powells, concerned about the security of their sizeable investment, did not wire the necessary funds until emailing with Mr. Stevens, who assured the Powells they would not lose their investment, and that he had an E&O policy for their protection in the event their investment was lost. Believing Mr. Stevens's additional representations, the Powells funded their 1.5 million dollar investment. However, despite Mr. Stevens's promises, the Powells received only $37, 000 in distributions, none of the promised tax benefits; the remainder of their investment was lost.

         In connection with their allegations, the Powells contend their signatures and initials were forged on a General/Limited Partnership Disclosure Form that bears the Wilbanks Securities, Inc. heading, which required the would-be investor to acknowledge:

As an illiquid investment, I understand that my principal may be tied up for more than 10 years. I hereby attest that the investment does not represent more than 10% of my total liquid assets and that my total illiquid direct participation program and limited partnership investments, including this purchase, do not exceed 20% of my total liquid assets. (Exceptions may be available for accredited investors.)

         Additionally, Will Freeman, who the Powells alleged to be a broker and general securities principal with Wilbanks Securities, requested an exception to the 10% rule on their behalf, although they were unaware of the form or the need for an exception. Will Freeman never spoke with the Powells about the program or its suitability, but received a commission because the records indicated that he sold the investment. The Powells allege this was so because the Aztec Drilling Program was not available to Mr. Stevens under the Series 6 license he held, but was available to Mr. Freeman. The Powells additionally contend that after their investment was funded, Mr. Stevens requested that if anyone made inquiry, they should indicate Will Freeman was their broker and had made the recommendation. Their claims in arbitration are grounded on the alleged material misstatements of Mr. Stevens and the unsuitability of the investment, as well as the alleged forgeries. The FINRA arbitration remains ongoing.

         As noted, Plaintiff filed the action seeking declaratory relief with regard to indemnity under the Bond, which includes the following provision:

Under the terms of the Fidelity Bond, “[t]he Underwriter will indemnify the Insured against court costs and reasonable attorneys' fees incurred and paid by the Insured in defending any suit or legal proceeding brought against the Insured to enforce the Insured's liability or alleged liability on account of any loss, claim or damage which, if established against the Insured, would constitute a valid and collectible loss sustained by the Insured under the terms of this bond.”

Doc. No. 1-2. Defendant National Union seeks summary judgment on the basis that even if the Powells establish their claims in arbitration, the claims fall outside the terms of the Bond, and therefore, Wilbanks Securities is without recourse thereunder.

         Plaintiff's claims are premised in part on the Federal Declaratory Judgment Act which provides that “[i]n a case of actual controversy within its jurisdiction, ...any court of the United States, upon the filing of an appropriate pleading, may declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought.” 28 U.S.C. § 2201(a) . “The phrase ‘case of actual controversy' in the Act refers to the type of ‘Cases' or “Controversies' that are justiciable under Article III of the United States Constitution.” Columbian Fin. Corp. v. BancInsure, Inc., 650 F.3d 1372, 1376 (10th Cir. 2011) (citations omitted). The Tenth Circuit has cautioned that “Article III has long been interpreted as forbidding federal courts from rendering advisory opinions.” Id. “It is not the role of federal courts to resolve abstract issues of law. Rather, they are to review disputes arising out of specific facts when the resolution of the dispute will have practical consequences to the conduct of the parties.” Id. The central question in deciding whether a declaratory judgment action satisfies the case or controversy requirement is “whether the facts alleged, under all the circumstances, show that there is a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment.” MedImmune, Inc. v. Genetech, Inc., 549 U.S. 118, 127 (2007).

         The Court finds that there exists an “injury in fact” herein despite the absence of an award in favor of the Powells, based on the following: (1) the pending FINRA arbitration proceedings; (2) Wilbanks Securities clearly plans to seek indemnity for any award that results from the FINRA proceedings; (3) the Powells claims may fall outside the scope of the fidelity bond. Courts routinely hold, under similar contingent circumstances, that Article III and the Declaratory Judgment Act's “injury in fact” requirements are satisfied. See Kunkel v. Cont'l Cas. Co., 866 F.2d 1269, 1274 (10th Cir. 1989) (explaining that the existence of contingencies, such as whether victim has obtained a final judgment, does not prohibit the Court from issuing a declaratory judgment); Cont'l Cas. Co. v. Bowen, No. 2:09-CV-00810-TC, 2010 WL 3743909, at *1 (D. Utah Sept. 22, 2010) (“Federal courts can issue declaratory judgment on the scope of insurance coverage, even if the federal declaratory judgment action concerns some of the same factual questions as the state court action about which coverage is disputed.”); Farmers All. Mut. Ins. Co. v. Willingham, No. 08-CV-0532-CVE-FHM, 2009 WL 3720023, at *2 (N.D. Okla. Oct. 28, 2009) (justiciable controversy existed where insurer sought declaration of coverage of a “specific claim” in the underlying civil case because judgment would end the controversy between the insurer and its insured); 22A Am. Jur. Declaratory Judgments § 133 (generally, “an insurer's action for a declaration that a liability policy does not cover the claims against its insured is a case of actual controversy sufficient to entertain the action for a declaratory judgment”). Therefore, the Court concludes it has subject matter jurisdiction over the dispute.

         Summary judgment is warranted under Federal Rule of Civil Procedure 56 when the "movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a); see Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248-50, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). A disputed fact is "material" if under the relevant substantive law it is essential to proper disposition of the claim. Wright v. Abbott Labs., Inc., 259 F.3d 1226, 1231-32 (10th Cir. 2001). Only disputes over material facts can create a genuine issue for trial and preclude summary judgment. Faustin v. City & Cty. of Denver, 423 F.3d 1192, 1198 (10th Cir. 2005). An issue is "genuine" if the evidence is such that it might lead a reasonable jury to return a verdict for the nonmoving party. Allen v. Muskogee, 119 F.3d 837, 839 (10th Cir. 1997). Plaintiff Wilbanks Securities does not dispute any facts set forth by Defendant but argues Defendant misinterprets the terms of the Bond. The Court concurs with Defendant's interpretation of the relevant provisions thereof, and concludes that Defendant is entitled to judgment in this action.

         Plaintiff relies on two provisions in the “Insuring Agreements” section of the Bond, clauses (A) and (E)(1). By virtue of the Bond, Defendant agreed to indemnify ...

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