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Parties Involved:
Mortgage Clearing Corporation
Appellant
Verex Assurance, Inc.
Appellee

Document Text:

.,,, 

FI LED 

UNITED STATES COURT OF APPEAL~nited States Court ~f Appeals 

Tenth Circuit 

TENTH CIRCUIT 

MORTGAGE CLEARING CORPORATION, a 

corporation, 

Plaintiff-Appellant, 

v. 

VEREX ASSURANCE, INC., an 

Insurance company, 

Defendant-Appellee. 

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JUN 10 1991 

ROBERT L. HOECKER 

Clerk 

Nos. 89-5161 

90-5176 

(N.D. Oklahoma) 

(D.C. No. 87-C-777-P) 

ORDER AND JUDGMENT* 

Before MCKAY, ANDERSON, and BALDOCK, Circuit Judges. 

In case no. 89-5161, Mortgage Clearing Corporation ("MCC") 

appeals a district court order granting summary judgment to Verex 

Assurance, Inc. ("Verex") and denying MCC's request for attorney 

fees. 

BACKGROUND 

MCC brought suit seeking recovery from Verex on private 

mortgage insurance policies insuring over 150 mortgage loans which 

MCC serviced on behalf of various housing finance agencies, 

trustees, or lenders. MCC also claimed that Verex improperly 

* This order and judgment has no precedential value and shall 

not be cited, or used by any court within the Tenth Circuit, 

except for purposes of establishing the doctrines of the law of 

the case, res judicata, or collateral estoppal. 10th Cir. R. 

36.3. 

Appellate Case: 89-5161 Document: 010110118862 Date Filed: 06/10/1991 Page: 1 
cancelled 37 certificates of insurance. In addition, MCC alleged 

that Verex violated its duty to deal fairly and in good faith. 

Originally filed in Oklahoma state court, MCC's suit was 

removed, pursuant to 28 u.s.c. § 1441(a), to the United States 

District Court for the Northern District of Oklahoma. Thereafter, 

the Oklahoma Housing Finance Agency and Bank of Oklahoma were 

allowed to intervene as Plaintiffs. R. Vol. I, Tab 25. 

After extensive settlement negotiations involving a 

magistrate, the district court entered a Partial Agreed Judgment 

that construed various disputed policy terms and thereby provided 

a vehicle for resolving the parties' disputes regarding insurance 

coverage and contract interpretation. As a result, all of the 

mortgage insurance claims were subsequently settled. MCC's cause 

of action for bad faith and its claim for attorneys' fees, 

however, remained unresolved and were scheduled for trial. Prior 

to trial, the district court granted summary judgment against MCC 

on its bad faith claim and denied its request for attorneys' fees. 

DISCUSSION 

We review, de novo, a district court's summary judgment 

order. Osgood v. State Farm Mut. Auto. Ins. Co., 848 F.2d 141, 

143 (10th Cir. 1988). "When a motion for summary judgment is 

granted, it is the appellate court's duty to examine the record to 

determine if any genuine issue of material fact was in dispute; if 

not, the court must determine if the substantive law was correctly 

applied. " Id. 

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The district court held against MCC's bad faith tort claim, 

as a matter of law, on two separate grounds: 1) MCC is not the 

proper party in interest to pursue the claim, and 2) under 

Oklahoma law, MCC could not collect punitive damages in the 

absence of an actual damage award. 

From the outset, we note that the district court's order 

mischaracterizes the relevant cause of action. The order repeatedly refers to it as solely a claim for "punitive damages." R. 

Vol. I, Tab 115. While this is understandable as a shorthand, it 

is an incomplete characterization of MCC's remaining cause of 

action, which is the alleged tort of bad faith settlement of an 

insurance claim. Under the tort, the plaintiff seeks actual damages, and, in some circumstances, may also be awarded punitive 

damages. Christian v. American Home Assur. Co., 577 P.2d 899, 904 

(Okla. 1978). 

Although both sides to this lawsuit, as oral shorthand, 

frequently referred to this cause of action as one for "punitive 

damages," both sides also demonstrated that they understood this 

separate cause of action was the tort of bad faith settlement of 

an insurance claim. The first Agreed Pre-trial Order, filed Sept. 

6, 1988, bifurcated the pending trial, providing for a first 

stage, 

held by the Court, magistrate, or special master without 

a jury to adjudicate the separate amounts owed, if any, 

on each claim. A second stage of the trial should be 

held before a jury to determine whether or not Verex has 

been guilty of bad faith and, if so, the damages it 

should be assessed therefor. 

R. Vol. I, Tab 61 at 17 (emphasis added). 

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The final Pretrial Order, filed on May 17, 1989, also 

demonstrates the parties' understanding that the remaining cause 

of action was the tort of bad faith: 

This is an action by which MCC seeks to recover monetary 

damages and attorneys' fees for breach of insurance 

policies issued by Verex. Additionally, MCC seeks the 

recovery of actual and punitive damages and attorney 

fees for the alleged failure of Verex to act in good 

faith with respect to insurance claims settlement. 

R. Vol. I, Tab 75A at 1 (emphasis added). The final Pretrial 

Order further stated: 

The trial of this case has been bifurcated. The issues 

of bad faith are to be tried to a jury. All other 

issues are to be tried before the Court without a jury. 

A partial agreed judgment was entered on December 5, 

1988. Other issues have been settled between the 

parties. The only remaining issues are MCC's attorneys' 

fees which is a non-jury matter and the bad-faith issues 

which are to be tried to a jury. 

Id. at 2. Finally, the final Pretrial Order also stated: 

The following issues of fact remain to be 

determined: 

1. Whether Verex acted in bad faith with respect to the 

insurance claims involved herein? 

2. If the answer to issue of fact number 1 is in the 

affirmative what actual damages, if any, would MCC 

sustain as a result of the bad faith? 

3. If the answer to issue of fact number 2 is in the 

affirmative what exemplary damages, if any, should be 

awarded? 

Id. at 3. 

It is clear that the parties understood, and agreed, that the 

bad faith tort claim had yet to be litigated. They understood 

that the claim was broader than a mere assertion of "punitive damages," and that the actual damages resulting from Verex's alleged 

bad faith remained at issue. 

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Thus, the district court's second legal rationale is flawed. 

The district court order states: 

Here, there has not been, and will not be, an award of 

actual damages in favor of MCC against Verex because the 

claims of the insureds against Verex have been settled. 

As a result, even if MCC were classified as an insured 

for purposes of this lawsuit, the $100 million punitive 

damages action which MCC claims to have exempted from 

the settlement negotiations could not be pursued because 

no actual damages award could be recovered. 

R. Vol. I, Tab 115 at 14 (emphasis added). 

Contrary to the district court's assertion, MCC's alleged bad 

faith damages stand quite apart from the underlying contract 

claims that were settled. Oklahoma law is clear on this point. 

See Roach v. Atlas Life Ins. Co., 769 P.2d 158, 162 (Okla. 1989) 

(Plaintiff was allowed to pursue the separate bad faith claim even 

though defendant had been dismissed from liability on the 

contract.). The fact that there were no actual damages awarded on 

MCC's contract claim1 is wholly irrelevant to whether actual damages may be demonstrated on the bad faith tort claim. It should 

not be too surprising that MCC has not been awarded actual damages 

on a claim that has not yet been litigated. 

The district court's other legal rationale is that MCC is not 

a real party in interest to pursue the bad faith tort claim. We 

disagree with both the factual and legal analysis underlying this 

conclusion. 

The district court's order implies that MCC did not assert 

its bad faith claim until after the coverage claims had been 

1 We reject MCC's assertion that the Partial Agreed Judgment 

constituted an award for damages in MCC's favor. It only 

established a framework for interpreting the insurance policies 

and settling the coverage claims. 

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settled with the various insureds. The order also suggests that 

the settling magistrate believed the entire lawsuit had been 

settled, and no claims remained. Neither suggestion is supported 

by the record. 

MCC pressed its own bad faith cause of action in the original 

complaint, and at every available opportunity thereafter. The 

original complaint states: 

By reason of the refusal to pay and because of the wilful, deliberate, arbitrary, and capricious conduct and 

bad faith of said defendant the plaintiff and the 

insureds have been damaged by being deprived of money 

lawfully owed, by work and expense of continued 

administration of said loans and oversight and preservation of property securing them, by incurring attorney 

fees and expenses of collection, by exposing them to 

liability for failure to collect monies owed. Plaintiff 

and the insureds have been delayed, inconvenienced, and 

subjected to hardship and expense to their great damage. 

R. Vol. I, Tab 1 at 4. A significant part of the original 

complaint focused on the damage to MCC as servicer of the loans. 

MCC alleged it had been damaged and explicitly explained why. 

Moreover, as quoted above, both pre-trial orders explicitly stated 

that the bad faith tort cause of action was separate from the 

underlying contract claims. 2 

Nor is there support in the record for the assertion that 

Magistrate Wolfe believed all of the lawsuit had been settled. 

And even if he did, such a belief would have been patently 

unreasonable. First, the document resulting from the settlement 

2 If anything was raised belatedly, it was the district court's 

sua sponte suggestion to the parties, a year and a half after the 

suit was initiated and just weeks before it was scheduled to go to 

trial, that they brief the issue whether MCC was a real party in 

interest. See Hefley v. Jones, 687 F.2d 1383, 1388 (10th Cir. 

1982). 

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conferences was called a Partial Agreed Judgment. Second, it made 

no reference whatsoever to the separate bad faith tort claim found 

in the complaint and the pretrial order. On its face, the Partial 

Agreed Judgment merely purports to interpret various contract 

terms in dispute, and provide a framework for resolving future 

similar disputes. It does not purport to settle the entire 

lawsuit. R. Vol. I at Tab 72. 

As for the law, the insurer's duty to deal fairly and in good 

faith was set out by the Oklahoma Supreme Court in Christian v. 

American Home Assurance Co., 577 P.2d 899, 901 (Okla. 1977). In 

the subsequent case of Roach v. Atlas Life Ins. Co., 769 P.2d 158, 

161 (Okla. 1989), the Oklahoma high court addressed the scope of 

standing to bring the bad faith tort. It held there must be 

"either a contractual or statutory relationship between the 

insurer and the party asserting the bad faith claim before the 

duty arises." Id. ( emphasis added). 3 

The district court's order cites to Christian and Roach, but 

then declares, ipse dixit, that "no contractual or statutory 

relationship" exists between MCC and Verex. It is certainly arguable, however, that both exist. 

The pool policies provide: 

9. To Whom Provisions Applicable 

3 The district court cites three cases for the proposition that 

the Oklahoma Supreme Court is "limiting, rather than expanding, 

the application of Christian." R. Vol. I, Tab 115 at 11. But not 

one of the cases cited actually deals with the duty of good faith 

imposed upon contracts for insurance. In two of the cases, the 

Court declines to apply the Christian duty of good faith to 

employment-at-will contracts; in the other, the Court declines to 

apply it to commercial loans. None of them cite to or modify 

Roach (two of them pre-dated Roach). 

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The provisions of this Policy shall inure to the benefit 

of and be binding upon the Company, the Insured, and any 

Servicer and their successors and assigns. 

R. Vol. I, Tab 115, Exhibit B (emphasis added). 

This provision suggests a contractual relationship between 

Verex as insurer and MCC as servicer. 4 Moreover, the statutory 

relationship referred to in Roach is that of a third party 

beneficiary. Roach v. Atlas Life Ins. Co., 769 P.2d at 161 (citing OKLA. STAT. tit. 15, § 29 (1981 and Supp. 1984)). And the 

above-quoted policy provision also suggests that MCC may be a 

beneficiary of the insurance policies. At any rate, without 

deciding the issue ourselves, we hold that the district court did 

not meaningfully address whether, under Oklahoma law, a sufficient 

contractual or statutory relationship exists between MCC and 

Verex. 5 

For the above-stated reasons, we hold that the district court 

improperly granted summary judgment. If, upon applying Oklahoma 

law to the facts of this case, the district court determines that 

Verex owes MCC the duty to deal fairly and act in good faith, the 

following questions of fact, as set out in the final Pretrial 

4 Indeed, Verex referred to this contractual relationship with 

MCC in its Answer, which alleged that MCC had "breached the 

implied covenant of good faith and fair dealing in MCC's 

contractual obligations to Verex." R. Vol. I, Tab 6 at 3. Verex 

incorporated the .same allegation in its amended answer. R. Vol. I 

at Tab 18. 

5 The district court did address, as do the parties at great 

length on appeal, whether or not MCC is "insured" under the 

contract. This is part of but not the entire legal question under 

Oklahoma law. Under Roach, MCC may have an actionable contractual 

or statutory relationship with Verex without being directly 

insured. 

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Order, remain to be tried: 

1. Whether Verex acted in bad faith with respect to the 

underlying insurance claims? 

2. If the answer to issue of fact number 1 is in the 

affirmative what actual damages, if any, would MCC 

sustain as a result of the bad faith? 

3. If the answer to issue of fact number 2 is in the 

affirmative what exemplary damages, if any, should be 

awarded? 

R. Vol. I, Tab 75A at 3. 

We also note, however, that MCC's claim is solely its own. 

MCC contends on appeal that it represents the claims of the six 

other insureds who did not "disclaim" their interest in a bad 

faith claim. This contention is directly contrary to MCC's assertion before the district court below: "MCC is suing in its own 

right for its damages and no other party's damages. MCC does not 

contend that the "bad-faith" cause of any entity has been assigned 

to it." Plaintiff's Trial Brief on the Issue of Real Party in 

Interest, R. Vol. I, Tab 89 at 10. We hold MCC to its earlier 

assertion. The insureds are capable of and responsible for bringing any tort claims on their own behalf. 

In addition, we affirm the district court's order with 

respect to the denial of MCC's attorneys' fees for services 

performed in connection with the settlement of the underlying 

coverage claims. For the reasons listed by the district court, 

MCC was not a prevailing party that could, under Oklahoma law 

recover attorneys' fees. 

We vacate, however, the award of costs to Verex that MCC 

appeals in case no. 90-5176. That award was explicitly based on 

Verex's prevailing on the summary judgment that we today vacate. 

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Any determination of the appropriate allocation of attorneys' fees 

and costs for the bad faith tort claim will have to await resolution of that issue in the district court. 

Accordingly, we AFFIRM the district court's denial of 

attorneys' fees for MCC on the underlying coverage claims. We 

VACATE the district court's grant of summary judgment to Verex on 

MCC's bad faith tort claim, and VACATE the award of costs to Verex 

on that claim. We REMAND for further proceedings in the district 

court in accordance with this order. 

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ENTERED FOR THE COURT 

Stephen H. Anderson 

Circuit Judge 

Appellate Case: 89-5161 Document: 010110118862 Date Filed: 06/10/1991 Page: 10