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Edmark Auto, Inc. v. Zurich American Insurance Co.

United States District Court, D. Idaho

May 15, 2018

EDMARK AUTO, INC., an Idaho corporation; CHALFANT CORP., an Idaho corporation, Plaintiffs,


          Candy W. Dale, U.S. Magistrate Judge


         Pending before the Court is Plaintiffs' second motion to compel discovery, filed on April 2, 2018. (Dkt. 151.) It has been fully briefed, and the Court heard oral argument on the motion on May 7, 2018. After careful consideration of the briefing, the parties' arguments, the standard of review, and the relevant authorities, the Court will grant in part and deny in part Plaintiffs' motion.


         The claims asserted in this matter stem from a long-running business relationship between Plaintiffs -two automobile dealers- Edmark Auto, Inc. (Edmark) and Chalfant Corp. (Chalfant) (Dealers), and Defendants Universal Underwriters Service Corporation (Universal), and Zurich American Insurance Company (Zurich) (Insurers).[1] On November 1, 1996, Edmark entered into a Vehicle Service Contract Dealer Agreement (Dealer Agreement) with Universal. (Dkt. 19-2.) Thirteen years later, in 2009, Chalfant entered into the same Dealer Agreement with Universal. Therein, the Dealers agreed to offer and sell Universal's Vehicle Service Contracts (VSCs) to their customers for newly-purchased automobiles. VSCs are contracts for extended warranty agreements that cover the repair or replacement of parts due to mechanical breakdown. VSCs require customers to pay upfront for the extended warranty, but permit cancellation prior to the expiration of the VSC term - typically 60 months in duration. When customers exercise the option to cancel, they are entitled to a pro-rated refund of any value left in their extended warranty at the time of the VSC termination.

         Universal drafted an addendum to the Dealer Agreement setting forth terms and conditions to manage the administration of customer refunds pursuant to the VSCs. The addendum is entitled: Addendum to Vehicle Service Contract - Dealers Designated Refund Account Program - Dealer Agreement (DDRA Addendum). (Dkt. 72-3.) The overarching purpose of the DDRA Addendum was to provide a means of administratively processing the proportional amounts of the VSC warranty refunds the Dealers and the Insurers owed to customers. The DDRA Addendum required the Dealers to pay a refund payment of $80 to Insurers for every extended warranty sold (Dealer Refund Payment). How such Dealer Refund Payments were recorded, spent or used, whether the payments were invested by Insurers, and if so, what was earned on such investments, are all facts relevant to the parties' claims and defenses in this matter.

         A. Receipt and Use of the Dealer Refund Payments by Insurers

         The Dealer Refund Payments were initially deposited by Insurers into one of three general ledger bank accounts. These accounts held payments and funds received from other sources as well-including other customers and dealerships that also sold Insurers' extended warranty products (known as “F&I products”). Thus, upon receipt by Insurers, the Dealer Refund Payments were immediately comingled with other F&I remittances and funds. Insurers tracked the receipt of each Dealer Refund Payment and any refunds issued to Dealers' customers under the DDRA Addendum.[2]

         Insurers used the general ledger accounts to pay for daily operating expenses, including the payment of claims, reinsurance, employee expenses, account fees, and other corporate obligations. Insurers state that funds remaining in the general ledger accounts were swept into one or more of six short-term money market accounts at the end of each business day. Insurers identified each of these money market accounts within their responses to discovery and produced Excel spreadsheets to provide the rates of return for 1-day, 7-day, and 30-day periods on each account. (Dkt. 156-1.)

         Insurers assert that the funds swept into these money market accounts were shortly returned to the general ledger accounts be used for daily operating expenses.[3] Other than this transfer, Dealers assert the only other transfer of the funds were periodic sweeps made pursuant to a global cash pooling agreement between Zurich North America and Zurich Insurance Company. Under the pooling agreement, funds from two of the general ledger accounts were periodically transferred to a Deutsche Bank account and returned to the same account the funds were drawn from the following day. In turn, Deutsche Bank paid short-term interest at the Federal Fund Rate. Insurers state that they do not have business records to account for how much short-term interest was credited back as a result of the pooling agreement. Further, because of the comingled nature of the funds, Insurers assert that they can in no way provide information regarding the percentage return earned specifically from the Dealer Refund Payments, if any.

         In any event, Insurers assert the percentage of interest from both the short-term money market accounts and the pooling agreement was the only investment related income earned on F&I remittances, including the Dealer Refund Payments from 2010 through 2015.[4] (Dkt. 156-2 at 5 ¶ 9.)

         Dealers believe these disclosures by the Insurers fall short of telling the entire story regarding the use of F&I remittances and profits. Thus, they assert also that the disclosures fall short of providing information regarding the use of such remittances and profits, including, necessarily, the Dealer Refund Payments. Dealers point to several pieces of information garnered through the discovery process to support their contention and their second motion to compel.

         First, they point to annual reports published during a portion of the relevant time period for Zurich Insurance Group. These reports reference the performance of Zurich American Insurance Companies' investments. The overall annual estimate of return, as computed by Dealers' expert, was 6.48 percent. Dealers contend this is at odds with Insurers' assertion that the only regular interest earned was from the money market accounts, which returned less than 1 percent.

         Second, Dealers reference investment return information set forth in confidential consolidated reports.[5] The documents report the cash from investments for Universal for 2015 and 2016. Dealers assert that the multi-million-dollar return noted for 2015 is evidence that Insurers must have made investments with Universal's F&I-related revenue beyond short-term money-market deposits and periodic sweeps under the pooling agreement.

         B. The Discovery Dispute

         This discovery dispute centers around questions set forth in Dealers' Interrogatory Nos. 5 and 6, and on Dealers' Request for Production Nos. 11, 12, 13, and 14. On February 6, 2018, the Court ordered Insurers to respond to numerous discovery requests, including those subject to the pending motion. (Dkt. 134.) Insurers responded to those requests on March 20, 2018. The parties held a telephonic meet and confer session regarding Dealers' objections to the sufficiency of the responses on March 22, 2018.[6]

         At that time, Dealers expressed their belief that Insurers had not fully responded to the requests or complied with the Court's order to supply information related to the Insurers' use of the Dealer Refund Payments. Insurers disagreed, but offered to provide Dealers with a sample of redacted bank statements from the general ledger accounts previously identified. Dealers, however, do not believe such documents will provide information relevant to Insurers' use of the Dealer Refund Payments-specifically, any profit tied to investments of the comingled F&I funds.

         In the motion to compel, Dealers contend Insurers' responses “appear to misrepresent the facts and are so incomplete it is hard to believe they were provided in good faith.” (Memorandum in Support of Second Motion to Compel, Dkt. 151-1 at 4.) As such, Plaintiffs argue sanctions are appropriate. Insurers, in turn, contend Dealers' use of the motion to compel to challenge the factual accuracy of Insurers' responses is inappropriate, and that they have answered the requests “directly and fully, ” and thus they have complied with the Court's order. (Defendants' Opposition to Second Motion to Compel, Dkt. 156-3 at 3.) Dealers reply by explaining the motion to compel is not based on a challenge to the accuracy of Insurers' responses, rather, it is based on their assertion that the responses were incomplete. (Plaintiffs' Reply in Support of Second Motion to Compel, Dkt. 158 at 6.) Of note, after the motion to compel had been fully briefed, Insurers filed with the Court a copy of their Third Supplemental Responses, which were provided to Dealers on April 26, 2018. (Dkt. 162.) These responses have been considered by the Court in its evaluation of the merits of the present motion.

         STANDARD ...

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