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Group v. Euler Hermes American Credit Indemnity Co.

United States District Court, N.D. California, San Jose Division

March 2, 2015



EDWARD J. DAVILA, District Judge.

This case involves a type of commercial financing known as "factoring." Plaintiff Marble Bridge Funding Group ("MBFG") is a "factor, " or a company that provides accounts receivable financing to growing businesses that sell their products or services to other businesses. See Am. Compl., Docket Item No. 176, at ¶ 3. "Factoring" provides these businesses, the "sellers" in this scenario, with funds earlier than the 45-60 days they would otherwise need to wait for payment of outstanding invoices, which in turn allows them to continue operations and grow. Id.

MBFG alleges it was induced by Defendant Euler Hermes American Credit Indemnity Company ("Euler') to buy out another factor, Liquid Capital, who had purchased accounts receivable invoices from another business, Nature's Own Pharmacy LLC. Id. at ¶¶ 8-9. In the end, Nature's Own turned out to be a fraud with manufactured invoices, and Euler, who had insured Nature's Own accounts receivable, did not pay claims that MBFG made on the policy.

MBFG filed an Amended Complaint in this action[1] on September 12, 2015, to which Euler filed an Amended Answer and Counterclaims. See Docket Item No. 177. Two of those counterclaims, for rescission of the Nature's Own Policy (Counterclaim IV) and for fraud and deceit (Counterclaim V), either affect or are asserted against MBFG.

Presently before the court is MBFG's Motion to Dismiss the two counterclaims. See Docket Item No. 182. Euler has filed written opposition to the Motion. See Docket Item No. 185. The court found this matter suitable for disposition without oral argument and previously vacated the associated hearing date.

Federal jurisdiction arises pursuant to 28 U.S.C. § 1332. Having carefully considered the parties' arguments, MBFG's Motion to Dismiss will be granted in part and denied in part for the reasons explained below.


Since November 1, 2010, Nature's Own Pharmacy LLC had a credit insurance policy with Euler. See Answer, at ¶ 19. The original policy was designated at Policy No. 5033862, and was renewed on November 1, 2011, at Policy No. 5041669. Id.

A. The Terms of the Nature's Own Policy

The coverage grant of the Policy provided that "[Euler] will provide [Nature's Own] insurance against credit losses described in the Policy, subject to the terms and conditions stated within, in return for the Premium and [Nature's Own compliance with the provisions of the Policy...." Id. at ¶ 21. It also provided that "[s]ubject to terms and conditions of this Policy, [E]uler will cover [Nature's Own] against credit losses due to non-payment of amounts due from a covered Buyer for Shipments of Covered Products made by [Nature's Own] during the Policy Period...." Id.

The way several terms were defined in the Policy clarifies the scope of the coverage grant. A "Buyer, " or a customer of the insured, was defined as "a legal entity and its branch offices, trade styles, divisions, if any, which is domiciled in the United States (including Puerto Rico) or Canada and is approved for coverage under the Policy, " but "does not include subsidiaries or affiliated corporations, which are separate legal entities." Id. at ¶ 21 n. 8. "Credit Losses" were defined as "1. The Insolvency of a covered Buyer, or 2. Protracted Default due to slow payment of a covered Buyer." Id. at ¶ 21 n. 7. "Covered Products" were defined as "the products and/or services, including associated labor and service costs, described in the Declaration." Id. at ¶ 22. Specific to the Nature's Own Policy, "Covered Products" were specified as "PHARM PRODUCTS/NATURAL/ORAGNIC/ENVIRON PRODTS." Id.

As the coverage grant states, there must be "Shipments of Covered Products, " a phrase which was defined as "Covered Products which are Dispatched by [Nature's Own] and Delivered to a Buyer." Id. at ¶ 23. "Dispatched" means "the point in time when Covered Products leave [Nature's Own's] control, " and "Delivered" means "the point in time when legal title to and the risk of loss of the Covered Products have left [Nature's Own] custody and physical control." Id. at ¶ 23.

Putting all of this together, Euler alleges that, because the definition of "Covered Products" requires the occurrence of some bona fide transaction, the existence of invoices alone does not trigger coverage if those invoices do not represent the actual exchange of a product or service from a seller to a buyer. Id. at ¶ 22. Furthermore, transactions on paper do not trigger coverage under the definition of "Shipments" unless goods physically move from a seller to a buyer, along with transfer of title. Id. at ¶ 23. As Euler ...

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