Opinion
CIVIL NO. 1:99CV314
February 15, 2001
RULING ON MOTION FOR SUMMARY JUDGMENT (Paper 29) Background
On a motion for summary judgment, the moving party has the initial burden of informing the Court of the basis for its motion and of identifying the absence of a genuine issue of material fact. See, e.g., Chambers v. TRM Copy Centers, Corp., 43 F.3d 29, 36 (2d Cir. 1994). Where, as here, a motion for summary judgment is supported by affidavits or other documentary evidence, the party opposing that motion must set forth specific facts showing there is a genuine, material issue for trial. See Rexnord Holdings, Inc. v. Bidermann, 21 F.3d 522, 526 (2d Cir. 1994). Only disputes over facts which might affect the outcome of the suit under the governing law preclude the entry of summary judgment.
The record before the Court contains the following undisputed, material facts. Independent Bankgroup, Inc. (hereinafter "IBG") was a holding company for three Vermont banks, Caledonia National Bank (hereinafter "CNB"), Bradford National Bank (hereinafter "BNB") and First National Bank (hereinafter "FNB"). In 1990, St. Paul Fire and Marine Insurance Company (hereinafter "St. Paul") issued a financial institution bond naming IBG and its three subsidiary banks as insureds for the period commencing on July 11, 1990 and ending on August 1, 1991 (hereinafter the "Bond").
In relevant part, the Bond obligates St. Paul to indemnify the Insured for:
(A) Loss resulting directly from dishonest or fraudulent acts committed by an Employee acting alone or in collusion with others.
Such dishonest or fraudulent acts must be committed by the Employee with the manifest intent:
(a) to cause the Insured to sustain such loss, and
(b) to obtain financial benefit for the Employee or another person or entity.
However, if some or all of the Insured's loss results directly or indirectly from Loans, that portion of the loss is not covered unless the Employee was in collusion with one or more parties to the transactions and has received, in connection therewith, a financial benefit with a value of at least $2,500.
As used throughout this Insuring clause, financial benefit does not include any employee benefits earned in the normal course of employment, including: salaries, commissions, fees, bonuses, promotions, awards, profit sharing or pensions.
Alexander Affidavit (paper 33) at Exhibit 1, p. 3.
The Bond contains several exclusions, including:
[L]oss caused by an Employee, except when covered under Insuring Clause (A) or when covered under Insuring Clause (B) or (C) and resulting directly from misplacement, mysterious unexplainable disappearance or destruction of or damage to Property.
Exhibit 1 at 9, ¶ 2(h).
In 1990, Noel Lussier served as an officer and director, and Douglas Gilmour served as a director, of IBG. On or about September 24, 1990, Lussier encouraged plaintiff David Patrick to purchase 94,430 shares of IBG stock. In order to do so, Patrick borrowed $250,000 from BNB and $250,000 from CNB. He paid the balance of the purchase price through a margin account which Lussier assisted him in establishing at the brokerage firm of A.G. Edwards Sons, Inc.
As a result of Patrick's default on the loans, in early 1992, BNB and CNB first made a demand for payment and then filed a complaint in Addison County Superior Court. In his answer and counterclaim, Patrick alleged that IBG, BNB and CNB, through their agents Lussier and Gilmour, made false representations about the value and prospects of the IBG stock to induce him to buy it. Claiming reliance on Lussier's and Gilmour's representations, Patrick asserted that he suffered a loss because of a decline in the value of the stock.
On or about July 1, 1992, BNB, CNB and FNB merged, creating the First National Bank of Vermont. First National Bank succeeded to the rights of CNB and BNB against Patrick. On or about January 29, 1993, the Federal Deposit Insurance Corporation, as Receiver of First National Bank of Vermont, succeeded to the right of action against Patrick.
In 1994, both Patrick and IBG filed for bankruptcy protection in the United States Bankruptcy Court for the District of Vermont. Patrick pursued his third-party claim against IBG as an adversary proceeding in Bankruptcy Court. After a trial conducted on May 5-7, 1997, a jury rendered a verdict in favor of David Patrick and against the estate of IBG, awarding him $25,000 on his fraudulent misrepresentation claim, $200,000 on his negligent misrepresentation claim, and $50,000 on his negligent failure to disclose claim. After entry of judgment, the IBG bankruptcy estate settled the matter by assigning to David Patrick any right it had against St. Paul under the Bond.
On July 28, 1999, Patrick filed this action in Addison Superior Court. St. Paul removed it to this Court on October 15, 1999, and moves for summary judgment on a variety of grounds, including the claim that the loss the plaintiff seeks to recover is not compensable under the Bond it issued to IBG.
Discussion
In this proceeding, David Patrick essentially is a claimant under the Bond. The gravamen of his position is that, as the assignee of IBG's rights, he is entitled to recover the amount of his Bankruptcy Court judgment. The issue is whether his claim is covered under the Bond's insuring clause (A).
Pursuant to the Bond, St. Paul only promised to indemnify its insured, IBG, against losses resulting directly from the fraudulent or dishonest acts of an employee. The problem for the plaintiff is that, in this particular case, neither Patrick nor IBG has suffered a direct loss which is covered by the Bond.
Under Vermont law, "[i]t is fairly well settled that bonds guaranteeing the fidelity of officers and employees, if written for profit and in the course of business undertaken therefor, are essentially insurance contracts and are to be construed as such." Town of Troy v. American Fidelity Co., 120 Vt. 410, 417 (1958). "Where the language of a contract is clear and unambiguous, the plain meaning of the language applies."Petition of New England Tel. Tel. Co., 159 Vt. 459, 465 (1993). "If . . . no ambiguity is found, then the language must be given effect in accordance with its plain, ordinary and popular sense." Isbrandtsen v. North Branch Corp., 150 Vt. 575, 579 (1988).
It is important to note the policy at issue is a fidelity bond.
A fidelity bond is an indemnity insurance contract whereby one for consideration agrees to indemnify the insured against loss arising from the want of integrity, fidelity or honesty of employees or other persons holding positions of trust. Such a contract is considered to be one on which the insurer is liable only in the event of a loss sustained by the insured. It is direct insurance procured by him in favor of himself, as contrasted with bonds running to the benefit of members of the public harmed by the misconduct of the covered individual, which bonds are third-party beneficiary contracts.Kami Kountry Broadcasting. Co. v. United States Fidelity and Guaranty Co., 208 N.W.2d 254, 256 (Neb. 1973) (citing 13 Couch on Insurance, 2d, §§ 446:1, 446:2)
Viewed together, Bond paragraph (A) and exclusion 2(h) necessarily preclude the Court from construing a loss to a third party, such as the plaintiff, as a "direct" loss which is covered under this fidelity bond.See, e.g., Lynch Properties, Inc. v. Potomac Insurance Co. of Illinois, 962 F. Supp. 956, 961 (M.D. Tex. 1996), aff'd 140 F.3d 622 (5th Cir. 1998). "Although employee dishonesty policies may cover the loss of third-party property in the possession of the insured, . . . these policies do not serve as liability insurance to protect employers against tortious acts committed against third-parties by their employees." Lynch Properties, 140 F.3d at 629.
The fact that Patrick sued IBG and recovered a judgment does not result in a "direct" loss to the insured covered by the Bond. The plaintiff's claim of loss is conditioned on the judgment itself and therefore is indirect. See Aetna Casualty Surety, Co. v. Kidder. Peabody Co., 246 A.D.2d 202, 210 (N.Y.App.Div. 1998) ("The logical extension of Kidder's argument, that settlement with a third party under the factual circumstances of this case constitutes a direct loss to the insureds, would create the potential for almost any loss, not initially direct to the insureds, to become a direct loss, a subterfuge that would render the exclusion in this case clearly meaningless.")
Furthermore, even viewed as an assignee, Patrick is only entitled to recover what IBG could have recovered as a direct loss. Patrick has secured a judgment for damages against IBG. However, IBG has never paid those damages and therefore cannot claim a direct loss against the Bond. "Under the insuring clauses, [IBG] is covered only for direct losses to [IBG] caused by its employee's dishonesty, not for vicarious liability for losses suffered by others arising from its employee's tortious conduct." Vons Companies, Inc. v. Federal Insurance Co., 212 F.3d 489, 490 (9th Cir. 2000). Until paid by IBG, Patrick's judgment represents a potential, indirect, loss to the insured which is explicitly excluded from policy coverage. Id. at 492-93 ("[D]irect" means "direct" and that in the absence of a third party claims clause, Vons's policy did not provide indemnity for vicarious liability for tortious acts of its employee.") Accordingly, Patrick does not have a valid claim under the Bond.
Conclusion
St. Paul's Motion for Summary Judgment is GRANTED.
SO ORDERED.