United States District Court, D. Idaho
EDMARK AUTO, INC., an Idaho corporation; CHALFANT CORP., an Idaho corporation, Plaintiffs,
ZURICH AMERICAN INSURANCE COMPANY, a New York corporation; and UNIVERSAL UNDERWRITERS SERVICE CORPORATION, a Delaware corporation, Defendants.
MEMORANDUM DECISION AND ORDER GRANTING IN PART AND
DENYING IN PART PLAINTIFFS' SECOND MOTION TO COMPEL
DISCOVERY (DKT 151)
W. Dale, U.S. Magistrate Judge
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.
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). 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.
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
Receipt and Use of the Dealer Refund Payments by
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
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.)
assert that the funds swept into these money market accounts
were shortly returned to the general ledger accounts be used
for daily operating expenses. 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.
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. (Dkt. 156-2 at 5 ¶ 9.)
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.
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
Dealers reference investment return information set forth in
confidential consolidated reports. 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.
The Discovery Dispute
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.
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.
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.