23 Fla. L. Weekly Supp. 535a
Online Reference: FLWSUPP 2306SKYBInsurance — Fidelity bonds — Coverage — Loss resulting from dishonest or fraudulent acts committed by employee acting alone or in collusion with others and committed with manifest intent to cause insured to sustain such loss or to obtain financial benefit for employee or another person or entity — Action against insurer by insured, which operated a “fund of funds” in the business of investing its clients’ capital with third-party investment advisors, who would select and manage the ultimate investments — Managers of funds in which insured invested were “employees” as defined by bond, which incorporated parties’ express agreement that “underlying managers” would fit within definition of “employees” — Standard of proof governing question of whether employee acted with “manifest intent” to cause loss is satisfied either by proof that it was employee’s purpose or desire to cause the insured to sustain a loss or by proof that the employee knew the loss was substantially certain to result from the employee’s conduct — Lack of due diligence is not a defense to coverage — Financial benefit — Language in bonds stating that financial benefit does not include salaries, commissions, fees bonuses, promotions, awards, profit sharing, pensions or other employee benefits earned in normal course of business does not encompass compensation secured by employees as direct consequence of their fraudulent conduct, even if it is of “type” an employee would earn in normal course of business — Discovery of employee dishonesty claims during bond period — Under policy language at issue, relevant question is not whether insured actually discovered its dishonesty claims during bond period, but whether, during the bond period, insured possessed facts which would cause a reasonable person to assume that a covered loss had been or will be incurred — Insurer not entitled to summary judgment on basis of insured’s admission that it did not discover its employee dishonesty claims until after the policy had terminated because factual issues exist as to what facts insured possessed during bond period which, when viewed objectively, would cause reasonable person to assume employee dishonesty — Proof of loss — If insured breached notice provision, prejudice to insurer will be presumed, but may be rebutted by showing that insurer has not been prejudiced by lack of notice — Because insurer argued only that insured’s failure to file proof of loss, standing alone, precluded suit, insurer is not entitled to summary judgment on proof of loss issue — Loss arising out of wire transfers — Although bonds provided that coverage arising out of wire transfers on behalf of employee would arise only if the wire transfers requested were approved in writing by an employee of the named insured listed on the declaration page, and employees in this case engaged in fraudulent conduct by, in part, “use” of the wires, that does not mean insured’s loss was one “arising out of” those transactions — Compensable damages — Insurer not entitled to summary judgment based on its contention that insured failed to prove compensable damages where insurer failed to affirmatively establish the absence of any genuine issue of material fact on the question of whether insured suffered any covered loss — Claim to setoff for collateral recoveries can be fully addressed post-trial if verdict is rendered in favor of insured
SKY BELL ASSET MANAGEMENT, LLC and SKY BELL SELECT, L.P., Plaintiffs, vs. NATIONAL UNION FIRE INSURANCE CO. OF PITTSBURGH, PA, and FEDERAL INSURANCE CO., Defendants. Circuit Court, 11th Judicial Circuit in and for Miami-Dade County, Civil Division. Case No. 10-48669 CA 03. December 17, 2015. Michael A. Hanzman, Judge. Counsel: Steven Thomas and David E. Schillinger, Thomas, Alexander & Forrester, LLP, Venice, CA. Lauri Waldman Ross, Ross & Girten, Miami. Hector Lombana and Zachary Hammond, Gamba, Lombana & Herrera, Coral Gables. Ramiro C. Areces, Ramiro C. Areces, P.A., Coral Gables. Robert G. Post, Post & Romero, Coral Gables. Patricia H. Thompson and Heather M. Jonczak, Carlton Fields Jorden Burt, P.A., Miami.
ORDER ON MOTIONS FOR SUMMARY JUDGMENT
I. Introduction
Contracts are voluntary undertakings and parties — particularly sophisticated ones like the litigants here — “are free to bargain for — and specify — the terms and conditions of their agreement, a right that is a constitutionally protected. Okeechobee Resorts, L.L.C. v. E Z Cash Pawn, Inc., 145 So. 3d 989 (Fla. 4th DCA 2014) [39 Fla. L. Weekly D1871a]; NW. Nat. Life Ins. Co. v. Riggs, 203, 252-253 U.S. 243 (1906); Hoffman v. Boyd, 698 So. 2d 346, 348 (Fla. 4th DCA 1997) [22 Fla. L. Weekly D1991a].
The first question presented in this case — like in many insurance disputes — is whether these parties “bargained” for the “coverage” Plaintiff seeks when they entered into primary (and following form excess) fidelity bonds issued by the Defendant Insurers. If so, the next questions are: (a) whether Plaintiff “discovered” its claims within the “Bond Period” and took the requisite steps to properly perfect them; and (b) whether Plaintiff has presented a viable damage claim. And because these matters are currently before the Court on “Motions for Summary Judgment,” the issue de jour is whether any of these matters are subject to adjudication short of trial.
II. Undisputed Material Facts
A. The Relevant Policy Provisions
Plaintiff, Sky Bell Asset Management, LLC, is a Delaware limited liability company operating a “hedge fund.” Plaintiff Sky Bell Select LP is the managing general partner of the Sky Bell LLC. (Collectively “Sky Bell”).
Defendant National Union Fire Insurance Company of Pittsburgh, P.A. (“National Union”) issued Sky Bell a “Financial Institution Bond,” or what is commonly referred to as a fidelity bond, covering the period of March 24, 2008 to March 24, 2009 (the “Bond” or “Policy”). Defendant Federal Insurance Co. (“Federal”) issued a following form excess policy covering the same time period. Each policy provides “Basic Bond Coverage” in the amount of $3 million dollars per incident and covers:
Loss resulting directly from dishonest or fraudulent acts committed by an Employee acting alone or in collusion with others.
Bond, Section (A).
To trigger coverage under this provision the dishonest or fraudulent acts of the “Employee” must be committed with the manifest intent:
a. to cause the insured to sustain such loss; or
b. to obtain financial benefit for the Employee or another person or entity.
Bond, Rider 12, ¶ 1(A). Though these criteria are in the disjunctive, the Bond goes on to provide that:
Notwithstanding the foregoing, however, it is agreed that with regard to Loans and/or Trading this bond covers only loss resulting directly from dishonest or fraudulent acts committed by an Employee with the intent to cause the Insured to sustain such loss and which results in a financial benefit for the Employee; or results in an improper financial benefit for another person or entity with whom the Employee committing the dishonest or fraudulent act was in collusion, provided that the Insured establishes that the Employee intended to participate in the financial benefit.
Id. (Emphasis added). So when the dishonest or fraudulent acts involve “trading” the insured’s burden is to prove both an intent to cause “loss” and a resulting financial benefit, or to prove collusion intended to financially benefit a third party with an intent by the Employee to participate in that financial benefit. For purposes of this provision:
The word “Trading” as used in this Insuring Agreement means trading or other dealings in securities, commodities, futures, options, foreign, or Federal Funds, currencies, foreign exchange and the like.
Id. The Bond also imposes an additional obstacle to coverage in cases “arising out of” wire transfers. It provides — somewhat unintelligibly — that:
Solely with respect to any coverage arising out of wire transfers on behalf of an employee listed above, shall only arise if the wire transfers requested were approved in writing by an employee of the named insured listed on the declaration page.”
Rider 4.
The Bond contains a sweeping definition of the term “Employee” set out in nine separate provisions. The first covers “employees” in the traditional sense (i.e., persons in “the service of the insured” compensated “directly by salary or commissions.” Bond, ¶1(e)(1). The succeeding five definitional paragraphs encompass certain third parties such as: (a) an attorney retained by the insured (¶1(e)(2)); (b) persons provided by an employment contractor (¶1(e)(3)); (c) employees of an institution merged or consolidated with the insured (¶1(c)(4)); (d) persons and entities authorized to perform services as “data processor of checks or other accounting records” (¶1(e)(5)); and (e) partners of the insured (¶1(e)(6)). These six definitions were contained in the original policy form.
The parties then negotiated a “Rider” which further expanded the definition of “Employee” to also include:
(7) A person, limited partnership or organization retained by the insured to provide investment advisory or management services on behalf of the insured. This shall include the underlying managers being used by the insured to manage the funds.
Bond, Rider 4, ¶ 1(7). (Emphasis added).
The policy limits coverage to losses “discovered” by the insured during the “Bond Period” (i.e., between March 24, 2008 and March 24, 2009). Rider 13 provides that:
This bond applies to loss discovered by the Risk Manager or General Council of the insured during the Bond Period. Discovery occurs when the Risk Manager or General Council of the insured first becomes aware of facts which would cause a reasonable person to assume that a loss of the type covered by this bond has been or will be incurred, even though the exact amount or details of loss may not be known.
Id. The policy then requires that the insured furnish a sworn proof of loss “within 6 months after such discovery. . . with full particulars.” Bond, ¶5(b). It also provides that legal proceedings for the recovery of any loss “shall not be brought prior to the expiration of 60 days after the original proof of loss is filed. . .” Bond, ¶ 5(d).
A. Plaintiff’s Investments and Claimed Loss
Sky Bell invests its client’s capital in other hedge funds and thus operates as what is commonly referred to as a “fund of funds.” Gary Marks (“Marks”) is Sky Bell’s principal and founder. See Marks Affidavit, ¶ 1. Upon securing funds from its clients Sky Bell — in turn — invested in Lancelot Investors Fund, LP and Lancelot Investors Fund II, LP (“Lancelot”), as well as in Palm Beach Finance Partners, LP and Palm Beach Funds II, LP. (“Palm Beach”). Palm Beach and Lancelot are not affiliated entities.
Monies invested with Lancelot — by Sky Bell and others — were managed by Greg Bell (“Bell”).1 Bell owned 99% of a holding company that in turn owned Lancelot. Monies invested with Palm Beach — again by Sky Bell and others — were managed by Bruce Prevost and David William Harrold (“Prevost” and “Harrold”). Prevost and Harrold similarly controlled Palm Beach and were responsible for investing its portfolio.
Pursuant to limited partnership agreements between Sky Bell on the one hand, and Lancelot and Palm Beach on the other, Bell (on behalf of Lancelot) and Prevost and Harrold (on behalf of Palm Beach) were entitled to receive “management” fees based upon the total value of fund assets (approximately 1.25% annually), as well as “performance” fees equal to a percentage of fund “profits.” Thus, the higher the reported net asset value of the funds the more management fees would be earned. Similarly, the higher the funds reported rate of return the more performance fees would be earned. Bell, Prevost and Harrold were therefore financially incentivized to: (a) bring in as many investor dollars as possible, and (b) maximize the rate of return realized by their funds’ portfolios.
Unbeknownst to Sky Bell or its clients, both Lancelot and Palm Beach invested large sums of money in what turned out to be a Ponzi scheme orchestrated by Thomas Petters and entities under his control. (Collectively “Petters”). The monies invested with Petters by Lancelot and Palm Beach were in the form of collateralized short term promissory notes. But in a typical Ponzi — like fashion, Petters did not use the borrowed funds for their intended purposes; there was no collateral for the “loans,” and the scheme was kept afloat by “repaying” investors with funds secured from subsequent “lenders”.
In September 2008 Petters’ Ponzi scheme collapsed when his entities were unable to pay amounts due “lenders,” including Lancelot and Palm Beach. Lancelot and Palm Beach — in turn — were unable to repay their investors, including Sky Bell. That same month, and upon learning that the Petters scheme had collapsed, Sky Bell notified National Union of a “potential incident” involving an FBI raid on the offices of Petters. See September 29, 2008 email from Mark Shapiro to Robert Cavallaro. Petters had been arrested a day earlier.
On July 2, 2009 Sky Bell submitted its original “proof of loss” seeking coverage “for losses directly resulting from the criminal fraud perpetrated by Thomas Joseph Petters (“Petters”) and associates. . . ;” losses it claimed were a “direct result of numerous forged instruments.” See July 2, 2009 correspondence from Steven W. Thomas to Carl Grant, Complex Claim Director. National Union was advised at that time that “Sky Bell asserts Coverage under the Policy’s Forgery or Alteration Provision.” Id.2 While this notice described Lancelot and Palm Beach as “Petters’ Lenders” — and disclosed that Sky Bell’s investments with “Petters” were made “through the Petters’ Lenders” — nothing in the letter or accompanying proof of claim asserted — or any way suggested — that Lancelot or Palm Beach (or their principals) committed any fraudulent or dishonest acts. Nor did the “proof of loss” assert coverage under the “Employee Dishonesty” provision of the Bond.3
On August 13, 2009 Sky Bell submitted an “Amended Proof of Loss” which, for the first time, made a claim based upon alleged fraudulent conduct on the part of Bell and Lancelot. The accompanying correspondence advised National Union that the “Amended Proof of Loss” was “[b]ased on information that only became available on July 10, 2009;” namely, the “fact” that the SEC announced fraud charges against Lancelot, Bell and Petters on that date. The letter advised National Union that:
In light of Lancelot Management’s apparent participation in the Petters’ fraud, Sky Bell now amends its Proof of Loss to additionally assert coverage for its losses incurred through Lancelot Management Investments under the Policy’s “Employee Dishonesty” Provision.
See August 13, 2009 Correspondence from Thomas to Grant.
Neither the July 2, 2009 nor August 13, 2009 Proofs of Loss made any mention of a claim — or potential claim — against Palm Beach, Harrold or Prevost. According to Marks, Sky Bell did not “discover its employee dishonesty claim with respect to Harrold and Prevost” until November 2013 when someone sent him the link to an article reporting that they had been “convicted of wire fraud.” See Marks 9/11/2014 deposition, pp. 180-181. Sky Bell did not, however, submit an amended “proof of loss.” It instead sought leave to amend its already pending complaint to assert an employee dishonesty claim based upon the alleged fraud committed by Prevost and Harrold.
The parties do not dispute that Bell, Harrold and Prevost committed fraudulent and dishonest acts which resulted in criminal convictions. As for Bell, in 2010 he pled guilty to charges of wire fraud committed through transactions described as “round tripping.” Specifically, Bell would send funds from Lancelot to Petters which Petters would in turn send back to Lancelot as “repayment” of loans, thereby making it appear as though Petters was current in servicing his debt when — in fact — Lancelot was self-funding its “returns.” In 2013 Prevost and Harrold similarly pled guilty to securities fraud, admitting that they participated in similar transactions (“loan swaps”) also designed to conceal the fact that Petters was no longer servicing his debt.
By concealing the fact that the “loans” made to Petters were in default, Bell, Harrold and Prevost were able to continue soliciting and receiving investor funds, and were able to avoid a barrage of redemption demands by current investors including Sky Bell. Bell, for example, acknowledged that after the “round trip” transactions commenced Lancelot was able to attract somewhere between $200 and $400 million dollars of new investor money; that his dishonesty prevented existing investors from removing their money; and that he personally had a significant investment he wanted to “protect,” and did so by concealing the fraud.
Likewise, Prevost and Harrold admitted that after their fraudulent “note swap” arrangements commenced the Palm Beach funds raised between $50 to $100 million dollars in new investor money, and there is no doubt disclosure would have resulted in existing investors demanding the return of their funds.4
In sum, by participating in transactions designed to conceal the fact that “loans” made to Petters were in default, Bell, Prevost and Harrold were able to: (a) continue to solicit new investor funds; (b) continue receiving management fees based upon an inflated net asset value; (c) continue receiving performance fees based on inflated returns; and (d) in Bell’s case protect his personal investments — at least temporarily.
Sky Bell seeks the recovery of $14,793,250.00 in “losses” it claims are covered by the Bonds: “7.6 million as a result of Harrold and Prevost’s acts and 7.1 as a result of Bell’s acts.” See Plaintiff’s Motion for Partial Summary Judgment, p. 40. Its damage expert, Andrew Bernstein, based this figure on Sky Bell’s net out of pocket loss (i.e., money in less money out), and did not attempt to determine whether any of Sky Bell’s “losses” resulted from anything other than the fraudulent conduct of Bell, Prevost and Harrold, including, but not limited to, the Ponzi scheme itself or general market forces.
I. The Parties’ Summary Judgment Motions
The parties’ motions raise a number of issues they claim are subject to summary adjudication. In its “Motion for Partial Summary Judgment” Plaintiff first asks the Court to conclude that “Greg Bell, Bruce Prevost and David Williams Harrold were ‘Employees’ as Defined by The Subject Policy.” See Motion, p. 4. Plaintiff then asks the Court to rule that an “objective” test should be employed in assessing whether the Bond’s “Manifest Intent” requirement is satisfied. See Motion, p. 21. Finally, Sky Bell requests an order finding that an insured’s lack of “Due Diligence” is not a defense to coverage. See Motion, p. 40.
Through its “Motion for Final Summary Judgment” National Union also raises the question of whether Bell, Prevost and Harrold are “Employees” as defined in the Policy. Not surprisingly, National Union insists that they are not. National Union also claims that Sky Bell’s employee dishonestly claims are not covered because they were not discovered by Sky Bell during the “Policy Period,” see Motion, p. 16, and that any claim based upon the conduct of Harrold and Prevost is barred “because Sky Bell never “Submitted a Proof of Loss For That Claim.” See Motion, p. 20. National Union also insists that there is no coverage because: (a) Sky Bell has failed to show that “Bell, Harrold and Prevost Obtained Financial Benefits as a Result of their Actions” as required by the Bond, see Motion, p. 21; and (b) the claimed losses arise out of unapproved “Wire Transfers.” Motion, p. 29.
Finally, National Union maintains that Sky Bell has failed to demonstrate that it “has suffered a loss of property as defined in the Policy,” see Motion, p. 35, and that Sky Bell should be required to reduce its damage claim by the amount of other recoveries secured. See Motion, p. 38. Federal — through its “Motion for Summary Judgment” — advances these same arguments.
The parties have thoroughly briefed these issues and the Court commends them for their outstanding written presentations. The Court also entertained oral argument on December 11, 2015. The Motions are now ripe for disposition.
II. Analysis
A. Plaintiff’s Motion for Partial Summary Judgment
Issue 1: Are Greg, Prevost and Harrold “Employees” as Defined by the Bond?
It is well settled that “insurance contracts are construed in accordance with ‘the plain language of the polic[y] as bargained for by the parties,’ ” Fayad v. Clarendon Nat. Ins. Co., 899 So. 2d 1082, 1086 (Fla. 2005) [30 Fla. L. Weekly S203a], and that in “construing insurance contracts, ‘courts should read each policy as a whole, endeavoring to give every provision its full meaning and operative effect.’ ” Washington Nat. Ins. Corp. v. Ruderman, 117 So. 3d 943 (Fla. 2013) [38 Fla. L. Weekly S511a]; Excelsior Ins. Co. v. Pomona Park Bar & Package Store, 369 So. 2d 938, 941 (Fla. 1979).
Also long settled is the tenet that an insurer, as the drafter of its policy, is bound by its language “which is to be construed liberally in favor of the insured and strictly against the insurer,” Ruderman, at 950, quoting Berkshire Life Ins. Co. v. Adelberg, 698 So. 2d 828, 830 (Fla. 1997) [22 Fla. L. Weekly S513a], and the sister principle that ambiguity in an insurance contract is construed “in favor of coverage.” Ruderman at 950. See also, Taurus Holdings, Inc. v. U.S. Fid. & Guar. Co., 913 So. 2d 528 (Fla. 2005) [30 Fla. L. Weekly S633a]; State Farm Fire & Cas. Co. v. CTC Dev. Corp., 720 So. 2d 1072, 1076 (Fla. 1998) [23 Fla. L. Weekly S527a] (“ambiguities are construed against the insurer”); Hartnett v. S. Ins. Co., 181 So. 2d 524, 528 (Fla. 1965) (terms of insurance agreements should be construed “liberally in favor of the insured and strictly against the insurer”).
Under binding Florida precedent it also is settled that the interpretation of an insurance contract presents a question of law because: (a) the interpretation of an unambiguous contracted provision raises no factual dispute, and (b) even if the relevant provision is found to be ambiguous (i.e., susceptible to more than one reasonable interpretation) the ambiguity is to be construed against the insurer and in favor of coverage. See Penzer v. Transp. Ins. Co., 29 So. 3d 1000 (Fla. 2010) [35 Fla. L. Weekly S73a]; Stuyvesant Ins. Co. v. Butler, 314 So. 2d 567 (Fla. 1975); Jones v. Utica Mut. Ins. Co., 463 So. 2d 1153, 1157 (Fla. 1985). Consideration of extrinsic evidence is a rare matter of last resort to be employed only when an ambiguity cannot be resolved without “outside aid.” Friedman v. Virginia Metal Products Corp., 56 So. 2d 515, 517 (Fla. 1952).
Applying these principles here the Court has no difficulty concluding that Bell, Prevost and Harrold were “Employees” as defined by the Bond. Rider 4, a negotiated addition to the standard form, defines an “Employee” to include:
(7) A person, limited partnership or organization retained by the insured to provide investment advisory or management services on behalf of the insured. This shall include the underlying managers being used by the insured to manage the funds.
Rider 4, ¶ (7) (emphasis added).
At the time this provision was agreed upon National Union was clearly aware of the fact that Sky Bell was a “fund of funds” in the business of investing its clients’ capital with third party investment advisors (i.e., other funds) who would select and manage the ultimate investments. It is simply undeniable that National Union was fully aware of the fact that Sky Bell’s business model was premised on the use of third party investment advisors; to wit: “underlying managers.” And National Union expressly agreed that the definition of “Employee” would “include” those “underlying managers;” in other words, that the “underlying managers” would be considered as falling within the definition of “person, limited partnership or organization retained by the insured to provide investment advisory or management services on behalf of the insured.” See Rider 4, ¶ 7.
In an effort to escape the obvious — and hence avoid coverage — National Union insists that because Bell, Prevost and Harrold were not “retained” by Sky Bell, and did not provide services “on behalf of” Sky Bell, they fall outside the definition of “Employees.” This argument is totally circular because the parties expressly agreed that these “underlying managers” would fit comfortably within that definition. Put simply, the second sentence of paragraph 7 — which begins with the word “this” (referring to the definition of “Employee”) is a plain and clear stipulation that “underlying managers” are within the ambit of the first sentence. Put simply, the parties agreed that the “underlying managers” would be deemed to have been “retained” to provide services “on behalf of” the insured and hence covered.
For this reason the Court need not decide whether — in the abstract — these “underlying managers” were “retained” to provide services “on behalf of the insured” as those terms are defined by dictionaries because the parties themselves stipulated that they were. The parties did not simply say, for example, that an “organization” referred to in the first sentence may include the “underlying managers” if they are “retained” to act “on behalf of the insured.” They agreed that the definition set forth in the first sentence includes those underlying managers. Plain and simple.
Acceptance of the Insurer’s interpretation also would drain the second sentence of any meaning, as the “underlying managers” would already be encompassed by the term “organization” and hence already covered if they were “retained” to provide investment services “on behalf” of the insured. But to avoid any possible “debate” over whether outside managers (i.e., underlying managers) would fall within this definition — the precise debate the insurers wish to partake in here — the parties expressly agreed to settle the question and make it clear that those “managers” fell within the scope of the first sentence.
The Court will not relieve National Union from that bargain by engaging in a semantic debate over whether these “underlying managers” were “retained” to provide services on “behalf of” Sky Bell. National Union agreed that they were and the Court’s duty is to hold it to that agreement. See Int’l Expositions, Inc. v. City of Miami Beach, 274 So. 2d 29-31(Fla. 3d DCA 1973) (“courts may not rewrite a contract or interfere with the freedom of contract or substitute their judgment for that of the parties thereto in order to relieve one of the parties from the apparent hardship of an improvident bargain”).
Furthermore, the result here would be no different even if the Court accepted the Insurers invitation to debate whether the underlying managers (i.e., Lancelot, Palm Beach and their principals) were “retained’ to provide services “on behalf of” Sky Bell as these terms are commonly used. This is so because the Court rejects the Insurers’ argument that because the terms “retained” and “invest” are defined differently, and because Sky Bell clearly “invested” in the Lancelot and Palm Beach, it ipso facto did not “retain” them; an argument which incorrectly assumes that one cannot “invest” with an advisor that also is “retained.” The two concepts are not mutually exclusive.
Here, Sky Bell clearly “retained” Bell, Prevost and Harrold to manage some of its assets. Sky Bell agreed, as part of that “retention” and “investment,” to pay (albeit indirectly) management and performance fees in exchange for advisory services. Thus, Bell, Prevost and Harrold were clearly “retained” by Sky Bell no matter what dictionary definition is employed. See e.g., THE AMERICAN HERITAGE DICTIONARY (3d Ed.) (defining “retain” as “to hire by payment of a fee; to keep in own service or pay”); Merriam Webster’s Online Dictionary (defines “retain” as “to keep in possession or use”).
Furthermore, while dictionary definitions can be useful to ascertain the meaning of undefined terms, words chosen by an insurer should be interpreted consistent with what a layperson would ordinarily understand them to mean. See, e.g., Fed. Ins. Co. v. United Cmty. Banks, Inc., 2:08-CV-0128-RWS, 2010 WL 3842359 (N.D. Ga. 2010) (by engaging an attorney to manage a loan, a reasonable bank would assume that the attorney was its employee even though attorney was initially selected by the buyer and not paid directly by the bank); Midland Bank & Trust Co. v. Fid. & Deposit Co. of Maryland, 442 F. Supp. 960 (D.N.J. 1977) (attorney was an “employee” of insured for purposes of fidelity bond even though not formally retained or paid a fee); see also, Lindheimer v. St. Paul Fire & Marine Ins. Co., 643 So. 2d 636 (Fla. 3d DCA 1994) (terms of an insurance contract “must be given their everyday meaning and read in light of the skill and experience of ordinary people”). And an “ordinary” person clearly would conclude that Sky Bell “retained” these “underlying managers” to invest its clients’ funds.
In assessing whether Bell, Harrold and Prevost acted “on behalf of” the insured, it also matters not whether, as a matter of tort law, they owed a fiduciary duty only to the funds (i.e., Lancelot and Palm Beach) — not the individual investors such as Sky Bell. See, e.g., W. Palm Beach Police Pension Fund v. Collins Capital Low Volatility Performance Fund II, Ltd., 09-80846-CIV-MARRA, 2010 WL 2949856 (S.D. Fla. 2010) (explaining that an advisor to a fund owes fiduciary duties only to the fund, not to the investors). Goldstein v. S.E.C., 451 F.3d 873 (D.C. Cir. 2006) (explaining that while an investor in a hedge fund may benefit from the advisors advice, he does not “receive advice directly”). The question here is not whether Bell, Prevost and Harrold owed Sky Bell a common law fiduciary duty, or whether Sky Bell received advice “directly” from Bell, Prevost and Harrold. The question is whether they fit the definition of “Employee” under the Bond. For the same reason it makes no difference whether any “relationship,” such as contractual privity, existed between the hedge fund managers and investors. Again, the only pertinent question is whether those managers are defined as “Employees” under the contract negotiated by the parties.
Finally, in a best case scenario for the Insurers the definition of “employee” and the underlying “retention” requirement are at best ambiguous, in part because the latter term is not defined at all. And if the Insurers wanted to limit liability it was their duty to do so clearly and unambiguously. See Ruderman, 117 So. 3d at 951 (while a carrier has the right to limit its liability, “the insurance company has a duty to do so clearly and unambiguously”). The Insurers here did not do so, and any ambiguity — to the extent one exists — must be construed in favor of Sky Bell and coverage.
The Court finds that Bell, Prevost and Harrold were “Employees” of Sky Bell as that term is defined by the fidelity bond issued by National Union. Accordingly, Plaintiff’s “Motion for Partial Summary Judgment” on this issue is granted, and the Defendants’ “Motions for Summary Judgment” on this issued are denied.
Issue 2: What Standard of Proof Governs the Question of Whether an Employee Acted with a “Manifest Intent” or “Intent” to Cause Loss
To obtain coverage the policy generally requires an insured to prove that the “employee’s” dishonest or fraudulent acts were committed with the “manifest intent”: (a) to cause the insured to sustain such loss; or (b) to obtain financial benefit for the Employee or another person or entity. Rider 12. The policy then, however, goes on the provide that with respect to fraudulent or dishonest “trading” the insured must show both that the Employee acted with the intent to cause the Insured to sustain such loss and a resulting financial benefit for the Employee; or collusion for the purpose of financially benefiting another person provided the insured establishes that the Employee intended to benefit in in the financial benefit.5 Id. Here, the fraudulent and dishonest acts (i.e., the “round tripping” and “loan swaps”) clearly involved “trading” as that term is broadly defined.
The Policy does not define “manifest intent” or “intent,” and this question has consumed considerable judicial resources.6 A number of courts have concluded that the issue of whether an employee acted with a “manifest intent” (or “intent”) to cause the insured loss must be viewed through an “objective” lens; reasoning that:
Manifest intent does not require that the employee actually wish to or desire a particular result; rather, manifest intent exists when a particular result is substantially certain to follow from the employees conduct. Manifest intent to cause a loss may be intended from an employees’ reckless conduct and other circumstantial evidence. Direct evidence of the employee’s intent is not required, and a claim by an employee that he intended no loss [to the insured] is not conclusive.
F.D.I.C. v. United Pac. Ins. Co., 20 F.3d 1070, 1078 (10th Cir. 1994) (internal citations omitted). See also, First Dakota Nat. Bank v. St. Paul Fire & Marine Ins. Co., 2 F.3d 801 (8th Cir. 1993); Auto Lenders Acceptance Corp. v. Gentilini Ford, Inc., 181 N.J. 245, 854 A.2d 378, 392 (2004) (“[w]e conclude that the substantial-certainty test best comports with our understanding of manifest intent. Thus, we hold that the manifest-intent standard is satisfied either by proof that it was an employee’s purpose or desire to cause the insured to sustain a loss. . . or by proof that the employee knew the aforesaid loss. . . [was] substantially certain to result from his or her conduct”).
Other courts have taken a more restrictive approach by applying a “subjective” analysis which requires proof that the employee “acted with the specific purpose or objective to harm the insured.” F.D.I.C. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, 205 F.3d 66, 73 (2d Cir. 2000); Resolution Trust Corp. v. Fid. & Deposit Co. of Maryland, 205 F.3d 615, 642 (3d Cir. 2000) (“neither an employee’s recklessness nor his knowledge that a result was substantially certain to occur would satisfy the language of the policy, absent that inference of specific intent”). Even these courts, however, acknowledge that the employee’s “intent” need not be proven by direct evidence, and that the insured is permitted to use objective indicia to show that the employee intended to cause the loss. First Nat. Bank of Louisville v. Lustig, 961 F.2d 1162, 1166-67 (5th Cir. 1992) (“[w]hen an employee obtains fraudulent loans with reckless disregard for a substantial risk of loss to the bank, a jury may infer from his reckless conduct and surrounding circumstances that he intended to cause that loss”); Resolution Trust Corp. 205 F.3d at 642 (“[w]e emphasize, however, that by recognizing that the term “manifest intent” requires proof of the employee’s purpose in engaging in the dishonest or fraudulent acts, we are cognizant that the employee’s actual subjective state of mind virtually is impossible to prove absent resort to circumstantial evidence — objective indicia of intent”).
The Insurers say that case law has in fact developed two “objective” standards, and claim that both “have been criticized by courts and commentators as undermining the express requirement in the policy that the insured must prove the existence of the wrongdoers intent to cause the insured’s loss.” See National Union Opposing Memo, pp. 16-18. The first, described by the Insurers as a “purely objective standard,” allows for a finding of “intent” to cause a loss whenever that loss is determined to be a natural consequence of an employee’s action, regardless of the employee’s subjective intent. See, e.g., Transamerica Ins. Co. v. Fed. Deposit Ins. Corp., 465 N.W.2d 713 (Minn. Ct. App. 1991). This test, say the Insurers, “ignores all record evidence that creates issues of fact as to subjective intentions,” and often permits “the jury to find intent based merely upon the occurrence of a loss.” See National Union Opp. Memo, p. 18, citing Michael Keely, Employee Dishonesty Claims: Discerning the Employees Manifest Intent, 30 Torts & Ins. L.J. 915, 917-920 (1995).
According to the Insurers the “second objective standard” is represented by the line of cases permitting a finding of intent when the employee knows that the loss was “substantially certain” to result from her conduct. See, e.g., Fed. Deposit Ins. Corp. v. St. Paul Fire & Marine Ins. Co., 942 F.2d 1032, 1035 (6th Cir. 1991); F.D.I.C. v. United Pac. Ins. Co., 20 F.3d 1070 (10th Cir. 1994); Heller Intern. Corp. v. Sharp, 974 F.2d 850 (7th Cir. 1992); Hanson PLC v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., 794 P.2d 66 (Wash. Ct. App. 1990). While the Insurers are less offended by this “standard,” they argue that it also fails to give proper effect to the word “intent” under the policy, “which necessarily requires inquiring into the employee’s subjective purpose.” See National Union Opp. Memo, p. 20, citing APPLEMAN ON INS. LAW LIBRARY ED, at 112-28-29.
The Insurers urge the Court to adopt what they describe as the “majority rule” which requires a showing that the employee’s specific “purpose” or “desire” was to cause the insured to sustain a loss. The Insurers claim that this “subjective” test has been adopted by the United States Second, Third, Fourth and Fifth Circuits. See, Resolution Trust Corp. v. Fid. & Deposit Co. of Maryland, 205 F.3d 615 (3d Cir. 2000); F.D.I.C. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, 205 F.3d 66 (2d Cir. 2000); Gen. Analytics Corp. v. CNA Ins. Companies, 86 F.3d 51 (4th Cir. 1996); First Nat. Bank of Louisville v. Lustig, 961 F.2d 1162 (5th Cir. 1992).
The “subjective” test proposed by the Insurers — which would require that the jury find that the employees “specific purpose or desire was to cause the insured to sustain a loss,” is — in this Court’s opinion — too restrictive. The policy — as plainly drafted — does not require a showing that the Employees “purpose,” “desire,” or “motive” was to cause a loss, (i.e., “specific” intent). And the law often — but certainly not always — presumes that one intends the natural consequence of their actions. “[A] man is to be taken to intend what he does, or that which is the necessary and natural consequence of his own act.” R. Perkins, Perkins on Criminal Law 748 (2d ed.1969); Am. Fire & Cas. Co. v. Sunny S. Aircraft Serv., Inc., 151 So. 2d 276, 278 (Fla. 1963) (“every person is presumed to intent [sic] the natural and probable consequence of his act”). Moreover, an employee could — and many often do — steal money fully “intending” to pay it back before being caught — certain that they will be able to do so, and never “intending” that the employer suffer a loss. But the money is still stolen and a loss is — in most of these cases — “substantially certain” to occur.
“Intent,” of course, can certainly be proven by showing that it was the actor’s “purpose” or “desire” to cause a particular result. But that is simply not the only way to prove intent. And if insurers want to limit coverage to those instances where an employee’s subjective “purpose,” “desire,” or primary “motive” was to cause “loss” to the employer, they are obligated to do so clearly — an obligation that would not be difficult to fulfill by simply stating — in plain English — that the policy covers only “loss” that the employee “desired” or had a “specific” intent to cause. See, e.g., Ruderman, 117 so. 3 at 951. (Insurer has a duty to limit his liability clearly and unambiguously).
Rather than contractually clarify the matter by defining “manifest intent” or “intent,” fidelity carriers instead have chosen to litigate this same issue time and time again in both federal and state courts, thereby burdening the judiciary. Since they have chosen to leave these terms undefined, and as the Insurers themselves recognize, it is appropriate to look to dictionary definitions. See, e.g., Fidelity Memo, p. 17, citing Beans v. Chohonis, 740 So. 2d 65 (Fla. 3d DCA 1999) [24 Fla. L. Weekly D1592a] (when term is not defined Florida courts look “to the dictionary for the plain and ordinary meaning of words”).
Black’s Law Dictionary defines “intent” as, among other things, “a state of mind existing at the time a person commits an offense and may be shown by act, circumstances and inferences deductible therefrom.” Black’s Law Dictionary (5th Ed. 1979, p. 727). It also emphasizes that the word “intent” denotes “that the actor desires to cause consequences of his act, or that he believes that the consequences are substantially certain to result from it.” Id. So given that the Insurers have (in the Courts opinion intentionally) decided not to contractually clarify what must be shown in order to establish that an employee acted with a “manifest intent” or “intent” to cause loss, this Court cannot see any reason why an insured should not be permitted to prove either that the employee desired to “cause the consequence of his act,” or knew that those consequences were “substantially certain to result from it.” See Black’s Law Dictionary, supra. Again, if insurers want to require an insured to prove that the employee acted with a “subjective” desire to cause the loss, they easily could say so in clear and unambiguous language. See Ruderman, 117 So. 3d at 951 (while a carrier has a right to limit its liability, the “insurance company has a duty to do so clearly and unambiguously”).
In sum, the Court agrees with — and adopts — the New Jersey Supreme Court’s holding that “the manifest-intent standard is satisfied either by proof that it was an employee’s purpose or desire to cause the insured to sustain a loss . . . or by proof that the employee knew the aforesaid loss [was] substantially certain to result from his or her conduct.” Auto Lenders Acceptance Corp. v. Gentilini Ford, Inc., 181 N.J. 245, 854 A.2d 378 (2004) (emphasis added).
Issue 3: Is Lack of Due Diligence a Defense to Coverage
The last issue posed by Sky Bell’s Motion is whether the Insurers are permitted to assert the Plaintiff’s alleged lack of “Due Diligence” as an affirmative defense.
Our Supreme Court has squarely held that:
In the area of fidelity insurance, the law is well settled that negligence or inattention, or anything short of actual discovery on the part of the insured employer will not defeat recovery under a fidelity bond covering the default of a dishonest employee, unless it is otherwise provided in the contract.
Dixie Nat. Bank of Dade County v. Employers Commercial Union Ins. Co. of Am., 463 So. 2d 1147 (Fla. 1985) citing American Employers’ Ins. Co. v. Cable, 108 F.2d 225 (5th Cir. 1939).
The Bond makes absolutely no mention of any “due diligence” requirement on the part of the Insured, or any available lack of “due diligence” defense to coverage. National Union, however, claims Sky Bell’s alleged lack of “due diligence” may bear on whether its loss resulted “directly from” its employees dishonest or fraudulent conduct — as opposed to “from” Sky Bell’s alleged failure to follow its “own investment policies and/or perform its appropriate due diligence.” See National Union Opp. Memo, p. 31.
As its factual predicate for this defense, National Union claims that Sky Bell “over-concentrated its fund’s assets by only investing in Lancelot and Palm Beach, which it knew only invested in Petter’s entities.” National Union Opp. Memo, p. 32. This — according to National Union — was contrary to Sky Bell’s “investment policy,” as well as contrary to its “solicitation materials.” National Union Opp. Memo, p. 33. Instead of implementing that policy, National Union claims that Sky Bell decided to seek “high returns by investing solely in Petters’ scheme.” National Union Opp. Memo, pp 33-34. It was that “decision” — according to National Union — which “caused” (or at least contributed to) Sky Bell’s “loss.” National Union Opp. Memo, p. 35.
The problem for the Insurers is that the Bond simply did not obligate Sky Bell to implement any particular trading strategy or make only “low risk” investments. And as the Insurers undoubtedly are aware, hedge funds — by their nature — are not for the faint of heart. Nor did the Bond impose any “due diligence” obligation upon Sky Bell by — for example — providing that a failure to conduct “due diligence” or follow it’s published “investment strategy” would operate as a defense to coverage. Nor does the Bond say that the Insurers’ “lack of due diligence” or “comparative negligence” may be used to reduce any payment obligation.
It may be true that Sky Bell departed from its stated investment strategy — and its “investors” may very well have a legitimate gripe or — in legal parlance — a viable claim for damages. But the Court will not rewrite the Bond by judicially engrafting onto it concepts of “due diligence,” “comparable negligence” and the like, hatched from the requirement that the Insured’s “loss” be one “resulting directly” from the employee’s misconduct, thereby doing indirectly what the Insurers chose not to do directly. If insurers want to avail themselves of these types of “defenses” they should say so in the policy. Ruderman, supra.
The Plaintiff’s “Motion for Partial Summary Judgment” on this issue is granted, and the Insurers’ affirmative defenses based on Sky Bell’s claimed lack of due diligence are stricken.
B. Insurers’ Motions for Summary Judgment
Issue 1: Did Bell, Prevost and Harrold Receive a Financial Benefit as a Result of Their Fraudulent and Dishonest Conduct.
There is no doubt that Bell, Prevost and Harrold received substantial monetary benefits as a direct result of their fraudulent conduct. The Insurers, however, insist that the Bonds “financial benefit” condition is not met here because:
As used in this Insuring Agreement, financial benefit does not include any salaries, commissions, fees, bonuses, promotions, awards, profit sharing, pensions, or other employee benefits earned in the normal course of business.
Bond, Rider 12 (emphasis added). Relying on this provision the Insureds insist that the “fees” and other “compensation” secured by Bell, Prevost and Harrold as a direct consequence of their fraudulent conduct were “earned in the normal course of business,” and hence were not a “financial benefit” for purposes of the Bond.
Contrary to the Insurers’ contention, it is apparent — at least to this Court — that this provision is designed to exclude from the definition of “financial benefit” compensation the employee was entitled to “earn in the normal course of business” absent the alleged fraudulent or dishonest conduct. The Court simply cannot fathom how compensation — in whatever form — received solely due to fraud could possibly be “earned” at all; let alone in the “normal course of business.” And if Insurers wanted to exclude from the term “financial benefit” any and all compensation of the “type” typically received by the employee, they easily could have said so.
The Bond, for example, could have said — in plain English — that a “financial benefit” of the “type” typically paid to the employee in the normal course of business is excluded from the term “financial benefit.” Or the Bond could have been even clearer and said — again in plain English — that compensation of the “type” typically paid to the employee such as “salary,” “commissions,” “fees,” etc., are excluded even if received by the employee solely as a result of the fraudulent or dishonest conduct. The Bond says no such thing. It instead excludes only compensation “earned in the normal course of business.”
Aside from the plain language used in the Bond, the Insurers’ “reading” also makes no common sense. Assume, for example, an employee embezzles money by hacking into the company’s payroll system and fraudulently increasing their “salary” or the percentage “commission” paid on transactions. As a result of that “dishonest” conduct the employer “overpays” the employee. The funds were clearly “embezzled” — the precise type of conduct the Insurers forcefully claim their bonds are intended to protect against. But because the money was “embezzled” in the “form” of salaries and commissions, the Insurers would argue that the employee did not receive a “financial benefit.” In other words, accepting the Insurers “interpretation” of this clause would result in no coverage simply because of the “method” used by the embezzler. See Cincinnati Ins. Co. v. Tuscaloosa County Parking & Transit Auth., 827 So. 2d 765 (Ala. 2002) (embezzled funds taken by way of fraudulently paid “salary” were not “earned in the normal course of employment”).
While this argument is — at least in this Court’s view — feeble, insurers have succeeded in persuading some courts to accept it. For example, in Verex Assur., Inc. v. Gate City Mortgage Co., CIV. C-83-0506W, 1984 WL 2918 (D. Utah 1984), the employee had allegedly “decided to make loans to persons of questionable credit in order to collect the commissions,” falsifying information on the application forms to ensure the loans would close. The court concluded that this “scheme in order to obtain commissions on the allegedly improper loans” was not covered given the language of the rider excluding compensation “earned in the normal course of employment.” In the court’s view the “paradigmatic scheme that would be covered by this rider is an embezzlement,” and this scheme did not fit that category. Other courts also have concluded that the phrase “in the normal course of employment” applies even to compensation “earned” because of the “fraudulent” or “dishonest” activity, interpreting this language to simply “define the type of excluded benefits.” See, e.g., Auburn Ford Lincoln Mercury, Inc. v. Universal Underwriters Ins. Co., 967 F. Supp. 475 (M.D. Ala. 1997); Mun. Sec., Inc. v. Ins. Co. of N. Am., 829 F.2d 7 (6th Cir. 1987).7
The Insurers say that this line of authority is consistent with the purpose of the policy which is to protect only against losses caused by “embezzlement or embezzlement-like acts.” See Glusband v. Fittin Cunningham & Lauzon, Inc., 892 F.2d 208, 212 (2d Cir. 1989); National Union Memo, pp 22 (the purpose of the provision excluding compensation from the definition of “financial benefit” is to “limit protection under this bond to losses due to embezzlement or embezzlement-like acts”). The Bond again says no such thing. It instead covers any species of “fraud” or “dishonesty.” Bond, Section (A). And it is not the Court’s job to make it an “embezzlement” or “embezzlement like” only policy through a cramped interpretation of a collateral clause. Furthermore, as discussed earlier, under the Insurers view even “embezzled” funds would be excluded from coverage so long as the employee “embezzled” them in the “form” of increased salaries, fees, commissions, etc. So if the employee simply stole the money by, for example, stealing cash, the claim would be covered. But if the employee “embezzled” the same funds by writing himself a fraudulent payroll check (i.e., salary), it would not. This makes absolutely no sense.
With all due respect to those courts that have embraced this argument, this Court does not, and concludes that under no circumstance would any “ordinary” person consider the “fees” (management or performance) taken by Bell, Prevost and Harrold based upon non-existent asset value or inflated performance to have been “earned in the normal course of business.” See Cincinnati Insurance Company, supra (“earned” is to “gain especially for the performance of service, labor, or work,” and the funds in question were not “earned,” they were “stolen”). Put another way, no “man-on-the-street” would understand this phrase as excluding a financial benefit realized through fraud or dishonesty. State Farm Fire & Cas. Co. v. Castillo, 829 So. 2d 242, 244 (Fla. 3d DCA 2002) [27 Fla. L. Weekly D1845a].
The bottom line is that if insurers want to limit their liability by excluding from coverage any benefit received of the “type” normally paid the employee, they should do so in plain English. See Ruderman, 117 So. 3d at 951 (“the insurance company has a duty [to limit its liability]. . . clearly and unambiguously”). The clause used here — at least in this Court’s view — excludes only compensation the employee would have “earned” sans the fraudulent or dishonest conduct. But at the very least it is ambiguous and must be construed against the Insurer and in favor of coverage.
Finally, even if the Court were to accept this argument — and it clearly does not — the record reflects that Bell, Prevost and Harrold may very well have received “financial benefits” other than the “fees” they earned as a direct result of their fraudulent conduct.
The Insurers’ Motions for Summary Judgment on this ground are denied.
Issue 2: Does a Genuine Issue of Material Fact Exist on the Issue of Whether Sky Bell’s Claims Were Discovered during the Bond Period.
Section 3 of the Bond, as amended by Rider 13, provides that:
Section 3. This bond applies to loss discovered by the Risk Manager or General Council of the insured during the Bond Period. Discovery occurs when the Risk Manager or General Council of the insured first becomes aware of facts which would cause a reasonable person to assume that a loss of a type covered by this bond has been or will be incurred, even though the exact amount or details of loss may not then be known.
Id.
The Insurers maintain that they are entitled to summary judgment because Sky Bell “admits that it did not discover its alleged employee’s dishonesty claims until after the policy had terminated on March 24, 2009.” See National Union Motion, p. 17. According to the Insurers, Sky Bell has failed to “identify any facts of which it was aware as of March 24, 2009 (the expiration date of the policy), that would cause a reasonable person to assume that Bell, Harrold and Prevost had caused a loss that was covered by the Policy’s employee dishonesty agreement.” See National Union Motion, pp. 18-19. The Court is thus faced with two questions. The first is exactly what is it that must be “discovered” during the “Bond Period.” The second is whether a genuine issue of material fact exists as to whether the required “discovery” occurred before March 24, 2009.
The first sentence of Section 3 provides that the bond applies only to “loss” discovered during the “Bond Period.” Read in isolation and literally this would require that only the “loss” (as opposed to the “claim”) be discovered during the policy term. But the policy covers only “loss resulting directly from” dishonest and fraudulent acts committed by an Employee, not “loss” in the abstract. And the second sentence of Section 3 provides that discovery occurs when the insured becomes aware of facts which would cause a reasonable person to assume that a loss “of a type covered by this bond” has or will be incurred. Reading these provisions in pari materia, and “as a whole, endeavoring to give every provision its full meaning and operative effect,” see Ruderman, 117 So. 3d at 948, the Court concludes that Section 3 of the Bond requires that during the policy period the insured be aware of facts that would cause a reasonable person to assume that a “loss” resulting from employee dishonesty (i.e., a loss of a type covered by this Bond) has been or will be realized. See Fed. Deposit Ins. Corp. v. New Hampshire Ins. Co., 953 F.2d 478 (9th Cir. 1991); Leucadia, Inc. v. Reliance Ins. Co., 101 F.R.D. 674 (S.D.N.Y. 1983); Fireman’s Fund Ins. Co. v. Levine & Partners, P.A., 848 So. 2d 1186 (Fla. 3d DCA 2003) [28 Fla. L. Weekly D1319a] (where the employee’s dishonesty was not discovered until after policy expired, the insured’s claim was barred); Fed. Deposit Ins. Corp. v. Aetna Cas. & Sur. Co., 426 F.2d 729 (5th Cir. 1970).
As the Third Circuit has explained, the “discovery” standard articulated in this Bond “is comprised of a subjective and objective component: the trier of fact must identify what facts and information the insured actually knew during the relevant time period, and it must determine, based on those facts, the conclusions that a reasonable person could draw from them.” Resolution Trust Corp. v. Fid. & Deposit Co. of Maryland, 205 F.3d 615, 630 (3d Cir. 2000). Under this “objective” test, discovery will occur “. . .if the totality of the facts known to the insured. . . would cause a reasonable person to assume” that a covered loss had been or will be realized. St. Paul Mercury Insurance Corp. v. Federal Dept. Insurance Corp. 2011 WL 1195402, 3 (S.D. Fla. 2011).
In support of their request for summary judgment on this issue the Insurers point out that Sky Bell has admitted that it did not discover its employee dishonesty claims until after the policy had terminated. The Insurers direct the Court to Sky Bell’s amended proof of loss filed on August 13, 2009 which asserts, on its face, that Sky Bell discovered its potential claim involving Lancelot for the first time “based upon information that became available on July 10, 2009,” and Mark’s deposition testimony that Sky Bell did not discover Harrold and Prevost’s alleged dishonesty until November 2013. See National Union Motion, p. 17.
These admissions, however, do not carry the day because under the policy language used by the Insurers, the relevant question is not whether Sky Bell “actually” discovered its dishonesty claims during the “Bond Period”; the pertinent inquiry is whether, during the Bond Period, Sky Bell was possessed of “facts” which would “cause a reasonable person” to assume that a covered loss had been or will be incurred. So while Sky Bell may not have “discovered” its claims during the “Bond Period,” it is free to argue that a “reasonable” person would have. For this reason even an unequivocal admission that Sky Bell itself did not “discover” its claims until after the policy expired would not entitle the Insurers to summary judgment. The only way the Insurers are entitled to summary judgment on this issue is if they affirmatively establish either that: (a) during the “Bond Period” Sky Bell possessed no facts suggesting that it may have a covered claim; or (b) that the undisputed facts in Sky Bell’s possession could not, as a matter of law, have caused any “reasonable” person to assume that a claim existed.
The record evidence establishes that Sky Bell was aware of certain facts during the “Bond Period,” including the fact that Petters’ offices had been raided by the FBI; that the investments with Petters were made through Lancelot and Palm Beach; and that Lancelot would likely have to be liquidated. These facts, however, either singularly or cumulatively, are not sufficient to raise a question of fact as to whether a “reasonable” person would “conclude” fraud on the part of Bell, Prevost and Harrold unless, perhaps, the Petters Ponzi scheme could not have been executed without their knowing assistance, something Sky Bell does not claim. What these facts show is that Sky Bell had been victimized by the Petters Ponzi scheme, nothing more.
The record also establishes that no “facts” implicating Bell, Prevost and Harrold were “relayed” by Sky Bell to the Insurers via either the July 2 or August 13, 2009 “proofs of loss.” The Insurers, therefore, ask the Court to “presume” that no such facts were within Sky Bell’s possession because, if they were, Sky Bell was obligated (and financially incentivized) to disclose them; a “presumption” that is certainly reasonable. Given that Sky Bell filed two proofs loss after the “Bond Period” — and neither suggested that Bell, Prevost or Harrold were “involved” in the Petters Ponzi scheme, or that Bell, Prevost and Harrold had committed any fraudulent or dishonest acts, the inference that Sky Bell possessed no facts at the time which could lead a “reasonable” person to “assume” that a covered claim existed is undoubtedly plausible.
In response Sky Bell does not point to a single fact in its possession as of March 2009 which suggests that Bell, Prevost or Harrold committed any fraudulent or dishonest acts. It instead argues that the policy provision does not require that it discover “the exact amount or details of the loss” during the “Bond Period,” see Rider 13. Plaintiff Opp. Memo, pp. 15-16. While that is no doubt true, an insured still must possess some facts suggesting that a covered employee “has acted fraudulently or dishonestly.” Royal Trust Bank, N.A. v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., 788 F.2d 719, 721 n. 2 (11th Cir. 1986). This of course requires more — indeed much more — than knowledge that a “loss” has occurred as a result of a non-employee’s (i.e., Petters’) fraudulent activities. Yet Sky Bell has proffered no “facts” which it possessed prior to expiration of the policy which suggested that Lancelot or Palm Beach had committed fraudulent or dishonest acts that caused — or contributed to — the loss. In other words, it appears that Sky Bell possessed no “facts” from which a “reasonable” person could “assume” that one of its “employees” (i.e., Bell, Prevost or Harrold) had participated in the scheme. See, e.g, U.S. Fid. & Guar. Co. v. Empire State Bank, 448 F.2d 360 (8th Cir. 1971) (in order for there to be discovery a reasonable person would have to appreciate that a loss had actually been sustained because of an employee’s dishonesty).
That is what distinguishes this case from St. Paul Ins. Co. v. F.D.I.C., 08-21192-CIV, 2011 WL 1195402 at 4 (S.D. Fla. 2011), relied upon by Sky Bell. In St. Paul Judge Garber concluded — like this Court has — that the “facts” known during the policy period must be sufficient to caused a “reasonable person” to “assume” that a “type of covered loss had taken place” — in other words, a loss caused by employee dishonesty. In St. Paul, however, the Insurer’s argument was that the claim had not been “discovered” during the policy period because the insured was uncertain as to which employee (Lacayo or Masferer) “had masterminded and benefited from the alleged scam.” Under those circumstances Judge Garber correctly found:
That Harris [the insured] may have initially been mistaken about who actually masterminded and benefitted from the fraud, does not diminish the fact that it was reasonable for him to assume that the losses incurred by reason of the Golden Vision loan were due to an employee’s or multiple employees’ fraud or dishonesty. . . .
Id.
Unlike the situation presented in St. Paul, the record here is currently devoid of “facts” from which a “reasonable” person could “assume” dishonest or fraudulent conduct on the part of a Sky Bell “employee.”
The Insurers have no doubt tried, through discovery, to “pin down” precisely what facts Sky Bell possessed during the “Bond Period” which — when viewed objectively — would cause a “reasonable person” to assume employee dishonesty; information which is — by its very nature — in the exclusive domain of the insured. Sky Bell, however, has not been particularly cooperative. During his deposition Marks repeatedly skirted the issue:
Q. Was Sky Bell aware of facts by March 24, 2009 that would cause a reasonable person to believe that Harrold and Prevost had been dishonest within the meaning of this policy?
A. To my recollection, I didn’t know yet.
Q. So the answer to the question would be no.?
A. To my recollection —
Q. How about with respect to Bell? Was Sky Bell aware of the facts that would cause a reasonable person to assume that an employee dishonesty type of loss involving Greg Bell had been or would be incurred by March 24, 2009?
A. The facts unfolded as they unfolded. They all came from the same scheme. One house of cards fell after another, but when we filed proof of loss there was no way — we’re not the FBI. We’re not detectives. There was no way we could know how all the pieces were going to fit together. That was up to the courts.
So we filed a proof of loss because we only had a certain amount of time to do so and felt like the insurance company would pay us. As time has gone by, the facts have solidified, but there was no way I could have known those facts before I knew the facts.
Q. So you couldn’t have possibly known of the employee dishonesty on the part of Harrold, Prevost and Bell prior to March 24, 2009?
MR. LOMBANA: He says he doesn’t know.
Q. Correct?
A. Yeah. I mean, I didn’t know. Somebody in the world may have known. I was not involved in the day-to-day activities of Sky Bell as of July 2012. I was just moving on with my life. So if somebody was going to, you know — and of course I have attorneys that were abreast of the situations.
. . .
Q. And was there anyone more involved in the Sky Bell operations during the 2009 calendar year than you?
A. There was someone more involved in this proof of loss than I was.
Q. And who was that?
A. Thomas, Alexander & Forrester.
Q. Okay. I mean other than your attorneys.
A. I was relying on my attorneys.
Marks depo. TR. pp. 181-185.
Then, when the Insurers attempted to depose the attorney “relied upon” (Mr. Thomas) — and ascertain what relevant “facts” he may have been aware of — Sky Bell succeeded in securing a protective order preventing the deposition. Thus, the Insurers have not been able to establish the “absence” of any probative facts in the possession of the Insured’s “Council.” Bond, Rider 13.
In sum, the Insurers have certainly proven that certain facts in Sky Bell’s possession are — by themselves — insufficient, and they have proven that Sky Bell did not “disclose” any relevant “facts” through its “proofs of loss.” They also have shown that Marks personally possessed no “facts” suggesting that the claim had been “discovered” as defined by the Bond. But they have not — in the Court’s view — been able to demonstrate a total absence of any pertinent facts in Sky Bell’s (or its agents’) possession, and unless that burden had been, Sky Bell was not required to come forward with any facts whatsoever, as a motion summary judgment is not to “be used as a pre-trial motion for directed verdict.” Le v. Lighthouse Associates, Inc., 57 So. 3d 283, 287 (Fla. 4th DCA 2011) [36 Fla. L. Weekly D663b]. In other words, until the Insurers “pinned down” all the facts that were in Sky Bell’s possession during the “Bond Period,” Sky Bell is not “obligated to show that issues remain to be tried.” Steinhardt v. Lehman, 338 So. 2d 64, 65 (Fla. 3d DCA 1976).
The Court is obviously troubled by the fact that this evidence has proven so difficult to flush out. But I cannot grant summary judgment by drawing “inferences” — however reasonable they may be — against the non-moving party. At trial it will of course be Sky Bell’s burden to prove that during the “Bond Period” it possessed “facts” from which a jury could conclude that a “reasonable person” would assume fraud and dishonesty on the part of Bell, Prevost and Harold. And because Sky Bell itself did not “discover” these claims it will be in the awkward position of trying to convince a jury (if the case gets that far) that a “reasonable person” would have. In other words, Sky Bell will have to persuade the jury that it was “unreasonable.” The Court is no doubt skeptical, but the record simply does not permit the issue to be disposed of on summary judgment.
The Insurers’ Motions for Judgment on the “Discovery” issue are denied.
Issue 3: Is Coverage for the Harrold and Prevost Employee Dishonesty Claim Precluded Due to Sky Bell’s Failure to Submit a Proof of Loss
Section 5(b) of the Fidelity Bond provides that:
Within 6 months after . . . discovery, the Insured shall furnish to the Underwriter proof of loss, duly sworn to, with full particulars.
Id. Subsection (d) then provides that legal proceedings for recovery under the Bond “shall not be brought prior to the expiration of 60 days after the original proof of loss is filed. . . .”
The Insurers say that Sky Bell’s claims based upon the dishonesty of Prevost and Harrold are barred because: (a) Sky Bell filed no proof of loss, and (b) compliance with a proof of loss requirement is a condition precedent to suit even absent resulting prejudice. See Rodrigo v. State Farm Florida Ins. Co., 144 So. 3d 690 (Fla. 4th DCA 2014) [39 Fla. L. Weekly D1760a]; Starling v. Allstate Floridian Ins. Co., 956 So. 2d 511 (Fla. 5th DCA 2007) [32 Fla. L. Weekly D1100a]; Ferrer v. Fid. & Guar. Ins. Co., 10 F. Supp. 2d 1324 (S.D. Fla. 1998).
In its response Sky Bell claims that it filed an original proof of loss on July 2, 2009 and that, as a minimum, it “substantially complied” with this policy requirement. Sky Bell also claims that the Insurers must demonstrate resulting prejudice. See Sky Bell’s Opp. Memo, pp. 21-23.
There is no question — and the Court finds — that Sky Bell failed to file a “proof of loss” with respect to its claim based upon the fraud or dishonesty of Prevost and Harrold. The Court rejects Sky Bell’s claim that because its earlier “proofs of loss” reported the same monetary “loss,” they should be deemed a “proof of loss” with respect to the employee dishonesty claim based upon the conduct of Prevost and Harrold. The only question then is whether the consequence of Sky Bell’s “failure” to file a “proof of loss” with respect to this claim is a summary adjudication. The answer turns on whether the Insurers are required to show resulting “prejudice.”
Despite what appears to be some confusion amongst our intermediate appellate courts, I conclude that this issue was settled by Bankers Ins. Co. v. Macias, 475 So. 2d 1216 (Fla. 1985), and that this precedent remains binding. The case — like this one — involved a situation where the insured “failed to prove that she gave notice of the accident and provided proof of claim” to the carrier. Id. at 1217. In that circumstance our Supreme Court held that “[i]f the insured breaches the notice provision, prejudice to the insurer will be presumed, but may be rebutted by a showing that the insurer has not been prejudiced by the lack of notice.” Id. The “burden should be on the insured to show lack of prejudice where the insurer has been deprived of the opportunity to investigate the facts. . . .” Id.
The rule laid down by Bankers has generally been followed. See, e.g., Allstate Floridian Ins. Co. v. Farmer, 104 So. 3d 1242, 1249 (Fla. 5th DCA 2012) [38 Fla. L. Weekly D75a] ([i]n the absence of explicit policy language making forfeiture the consequence. . . [of a failure to provide a proof of loss]. . . we [conclude] that the remedy [has] to be proportionate to the harm, i.e., prejudice [has] to be considered”); Kramer v. State Farm Florida Ins. Co., 95 So. 3d 303, 306 (Fla. 4th DCA 2012) [37 Fla. L. Weekly D1699a] (the insured’s untimely notice of “proof of loss is presumed to have prejudiced the insurer” shifting the burden to insureds to show a lack of prejudice); Soronson v. State Farm Florida Ins. Co., 96 So. 3d 949 (Fla. 4th DCA 2012) [37 Fla. L. Weekly D1777a]. And in this Court’s view decisions suggesting that no “prejudice” need be shown when an insured fails to timely submit a “proof of claim” are incorrectly decided. See, e.g. ., Rodrigo, supra.
Having concluded that Macias is controlling here, the question would then become whether this issue can be disposed of on summary judgment. The Insurers, however, did not raise the “prejudice” issue in their Motions. Instead, they argued only that Sky Bell’s failure to file a “proof of loss” — standing alone — precluded suit. See, e.g., Federal’s Motion for Summary Judgment, pp. 32-34; National Union’s Motion for Summary Judgment, pp. 20-21. The Insurers first claimed that the “prejudice” issue was appropriate for summary judgment in Federal’s Reply brief. See, Federal Reply, pp. 10-11. For this reason, the “prejudice” issue is not properly before the Court. See Fla. R. Civ. P. 1.510(c) (“the motion shall state with particularity the grounds upon which it is based and the substantial matters of law to be argued. . .).
The Insurers’ “Motions for Summary Judgment” on the “proof of loss” issue are denied.
Issue 4: Does this Case Involve Loss Arising Out of Wire Transfers
The Insurer’s claim that summary judgment is warranted because the loss arises out of wire transfers need not detain the Court long. It is true — as the Insurers point out — that Bell, Prevost and Harrold engaged in fraudulent conduct by, in part, “use” of the wires. That does not, however, mean that Sky Bell’s loss is one “arising out of” those transactions, see Bond, Rider 4, and the Court concludes — without difficulty — that the intent and purpose of this provision is to exclude coverage for funds stolen (i.e., embezzled) by way of unauthorized wire transfers, thereby ensuring that employees (i.e., insureds) will establish a protocol to prevent unauthorized wires.
The Insurers’ Motions for Summary Judgment on this ground are denied.
Issue 5: Has Sky Bell Failed to Prove Compensable Damages
National Union8 next insists it should be granted summary judgment because Sky Bell has not — in its view — “established whether and to what extent” it has suffered a covered “loss”; (i.e., a “loss resulting directly” from the dishonest or fraudulent acts of Bell, Prevost and Harrold.) See National Union Memo, p. 36. National Union says that this “failure of proof is fatal to Plaintiffs’ damages claim.” Id. at 37. National Union also argues that Sky Bell has not — but must — reduce its damage claim by amounts it has recovered from “entities facilitating the Petters Ponzi scheme, McGladery and Charter One Bank.” Id. at 38.
While the Insurers correctly point out that Sky Bell has the burden to prove the existence and amount of loss for which it seeks coverage, see Ferrell v. Inter-County Title Guar. & Mortg. Co., 213 So. 2d 518 (Fla. 3d DCA 1968), it does not bear that burden on summary judgment. Rather, to secure summary judgment on this point the Insurers must affirmatively establish the absence of any genuine issue of material on the question of whether Sky Bell has suffered any covered loss. The Insurers have not met that burden.
It is of course true — as the Insurers say — that only loss “resulting directly from” employee dishonesty is covered, and that in the context of fidelity coverage an insured generally “suffers a loss when funds are dispersed due to the employee’s wrongful conduct.” F.D.I.C. v. United Pac. Ins. Co., 20 F.3d 1070, 1080 (10th Cir. 1994). This standard — not surprisingly — has been developed in cases involving “embezzlement” — the most common type of claim made under these policies. See, e.g., First Am. State Bank v. Cont’l Ins. Co., 897 F.2d 319, 325 (8th Cir. 1990) (direct loss means “actual depletion of bank funds caused by an employee’s dishonest acts”). The “direct loss” requirement also is routinely — and easily — applied in cases where credit is extended as a result of employee fraud. See Beach Cmty. Bank v. St. Paul Mercury Ins. Co., 635 F.3d 1190, 1195 (11th Cir. 2011) [22 Fla. L. Weekly Fed. C1902a] (“[t]he measure of the loss Beach Community suffered is based on the amount of credit extended”).
The question here then is what loss, if any, did Sky Bell suffer as a “direct result” of Bell, Prevost and Harrold’s fraud, a “fraud” the Court defines as encompassing both the illegal “round tripping” and “loan swap” transactions, and the failure to disclose the obviously “material” fact that Petters could no longer service his debt. Clearly, had adequate disclosure been made a jury could conclude that Sky Bell would have ceased investing in Lancelot and Palm Beach, thereby saving the approximately $4 million “invested” after the employees’ fraud commenced. This is true even if — as National Union contends — Marks would not be permitted to testify to the obvious; namely, that he would have stopped investing in Lancelot and Palm Beach had he been alerted to the fraud. See National Union Response brief, pp. 32-33, citing Drackett Products Co. v. Blue, 152 So. 2d 463 (Fla. 1963); Donshik v. Sherman, 861 So. 2d 53 (Fla. 3d DCA 2003) [28 Fla. L. Weekly D2114a].9
Although the record does establish that Sky Bell has suffered a “loss” directly resulting from its employee’s dishonesty — represented by the amount invested after the fraud commenced — the Court tends to agree with National Union that Sky Bell is not entitled to recover either: (a) its total “out of pocket” loss (i.e., $14.7 million); or (b) “losses” that allegedly could have been “avoided” because had the fraud been discovered Sky Bell “would have pulled its money out of the Funds. . .” Marks Affidavit, ¶ 8-9.
As for the first point, it is undisputed that Sky Bell’s total “out of pocket” loss was caused by far more than dishonesty on the part of its employees; it invested — albeit indirectly — in a Ponzi scheme. It also is undisputed that much of its investment was made prior to the time any fraud on the part of Bell, Prevost or Harrold began. Thus, Sky Bell’s $14.7 million damage model appears seriously flawed.
With respect to the second point, the claim that Sky Bell could have successfully redeemed (i.e., “pulled out”) its investments had its employees disclosed the “Petters” scheme (instead of trying to conceal it by entering into phony transactions) likely fails because: (a) it assumes — without any evidentiary basis — that no losses had been “realized” at the time disclosure should have been made; and (b) the contention that Sky Bell would have succeeded in “pulling out” money from the Ponzi scheme is pure conjecture.10 Nothing in the record even remotely suggests that Lancelot or Palm Beach would have been able to — or would have — returned Sky Bell’s funds — thereby conferring upon Sky Bell a “preference” over other victims.
In sum, the Court concludes that Sky Bell clearly has a viable claim for the recovery of those funds invested after its employees learned — yet failed to disclose — that Petters was no longer servicing his debt. And while the Court doubts that any other claimed “losses” are recoverable under the Bond, that issue is left for another day.
National Union’s Motion for Summary Judgment on this point is denied.
Issue 6: Are The Insurers Entitled to a Set off in the Amount of Sky Bell’s Other Recoveries
The last issue raised by the Insurers is whether they are entitled to a “set off” of amounts recovered by Sky Bell from others who allegedly assisted in “facilitating Petters’ Ponzi scheme.” National Union’s Memo, p. 38. National Union says this amounts to $1,709,674 recovered by Sky Bell “as its stake of two multi-million dollar” settlements with McGladery and Charter One Bank. Id.
The Insurers’ contention that they are entitled to a “set off” would be correct if, for example, they were legally responsible for Sky Bell’s entire loss, as Sky Bell could not, under any circumstances, secure an “excess” recovery. See Humana Health Plans v. Lawton, 675 So. 2d 1382 (Fla. 5th DCA 1996) [21 Fla. L. Weekly D1299g] (no liability under policy “where full recovery has been made by the insured, who is thus ‘made whole,’ ”); F.D.I.C. v. United Pac. Ins. Co., 20 F.3d 1070 (10th Cir. 1994) (insurer entitled to credit against the amount of loss claimed by insured based on the insured’s settlement with third party).
Here, however, the Court has concluded that the Insurers may not be legally obligated to indemnify Sky Bell for all of the losses it suffered, liability that may have been found against the settling parties (i.e., McGladery and Charter One Bank). Moreover, the Insurers’ liability is in any event capped at $6 million. So the issue is one of allocation. Should the collateral recovery be first applied to reduce Sky Bell’s “uncovered” losses, or should those recoveries be “allocated” first to the Insured’s “covered” losses, thereby reducing the Insurer’s exposure.
The policy appears to answer this question, or at least comes close enough. Section 7(c) provides that:
Recoveries, whether effectuated by the Underwriter or by the Insured, should be applied net of the expenses of such recovery first to the satisfaction of the Insured’s loss, which would otherwise have been paid but for the fact that it is in excess of either the Single or Aggregate Limit of Liability, secondly to the Underwriters as reimbursement of amounts paid in settlements of the Insured’s claim, and thirdly, the Insured in satisfaction of any deductible amount.
Id.
Sky Bell will — under any set of circumstances — realize an “excess” loss either because of policy limits, or because not all of its “loss” will be found to have “resulted directly” from employee dishonesty. In the former instance the Insurers are not entitled to a set off as the Bond clearly provides that any third party recovery would first be allocated to any “loss” that would have been paid “but for” policy limits. The Court sees no reason to treat the latter scenario any differently. If a collateral recovery is not applied to “offset” the Insurers’ liability when the Insured has losses that would have been paid “but for” policy limits, there is no reason why the Insurers should receive an “offset” in the amount of other recoveries when the Insured has “losses” that are not paid because a lack of coverage for some other reason (i.e., the loss was not caused directly by employee dishonesty).
This makes common sense. If a portion of the Insured’s “loss” is “covered” — and other portions are not — recovery from third parties who may have been liable for “all” of the loss should first be allocated to the uncovered portion, thereby allowing the Insured to have an opportunity to be made whole. Conversely, an “offset” is clearly warranted if a failure to “offset” will confer a windfall (i.e., excess recovery) on an insured.
In any event, the Court concludes that this issue can be fully addressed post trial if a verdict is rendered in favor of Sky Bell.
The Insurers’ Motions for Summary Judgment on this issue are denied.
IV. Conclusion
Fifty years ago our Supreme Court observed that:
There is no reason why [insurance] policies cannot be phrased so that the average person can clearly understand what he is buying. And so long as these contracts are drawn in such a manner that it requires the proverbial Philadelphia lawyer to comprehend the terms embodied in it, the courts should and will construe [sic] them liberally in favor of the insured and strictly against the insurer to protect the buying public who rely upon the companies and agencies in such transactions.
Hartnett v. S. Ins. Co., 181 So. 2d 524, 528 (Fla. 1965).
Yet fidelity insurers — including these Defendants, still refuse to clearly draft their policies in the way they want them to be “interpreted.” They instead choose to “litigate” the “meaning” of vague and ambiguous phrases over and over again. And that is precisely why most of the strained interpretations advanced by the Insurers here have been rejected.
On the other hand, and as should be evident to the reader, the Court has serious concerns regarding the viability of this case, both from a liability and damage standpoint. Though Sky Bell has barely cleared the summary judgment hurdle, it will no doubt have an extremely difficult time establishing that it “discovered” its employee dishonesty claims during the “Bond Period.” The Court is in fact uncertain as to whether Sky Bell will survive a motion for directed verdict on that issue. The Court also has concluded that recoverable damages are likely no more than the additional funds (approximately $4 million) invested after the employees’ fraudulent conduct commenced. That is, however, still a significant “exposure” facing the Insurers. Given the uncertainty and expense of continued litigation, the Court encourages the parties to make every effort to resolve this case at their upcoming mediation. In the meantime, it is hereby Ordered that:
a. Sky Bell’s Motion for Partial Summary Judgment on the question of whether Bell, Prevost and Harrold were employees is Granted, and the Insurers’ cross motions on this issue are Denied;
b. The jury shall be entitled to find “intent” based upon proof that either Bell, Prevost and Harrold acted with a “purpose” or “desire” to cause Sky Bell loss, or knew the resulting loss caused was substantially certain to result from their conduct;
c. Sky Bell’s Motion for Partial Summary Judgment on the Insurers’ “Lack of Due Diligence” defense is Granted; and
d. The Insurers’ Motions for Summary Judgment are Denied.
__________________
1Greg Bell has no relationship with Sky Bell.
2These claims, asserted under Insuring Agreements D and E, have since been abandoned.
3The letter does mention that “other investors” had filed civil actions against Lancelot Management. See p. 5.
4Sky Bell invested approximately $2 million of additional capital with Lancelot, and approximately $2 million of additional capital with Palm Beach, after Bell, Prevost and Harrold began to engage in fraudulent transactions.
5Sky Bell does not argue that Bell, Prevost and Harrold conspired with any third party, so the second prong of this requirement does not appear to be implicated.
6For purposes of this discussion the terms “manifest intent” and “intent” are, in the Court’s view, interchangeable.
7In Morgan, Olmstead, Kennedy & Gardner, Inc. v. Fed. Ins. Co., 637 F. Supp. 973, 976 (S.D.N.Y. 1986), also relied on by the Insurers, the Court was faced with a different clause; one which excluded any compensation received (as opposed to earned) from the “Assured by an Employee.”
8Federal’s Motion for Summary Judgment does not advance this “damage” argument.
9This Court has serious doubts as to whether the rule enunciated in these cases has any application in the present context. But even if Marks’ testimony that he would have discontinued making additional investments was “inadmissible” — which the Court again doubts — the jury could reasonably infer this “obvious” fact; as no rational investor would “knowingly roll the dice in a crooked crap game.” Basic Inc. v. Levinson, 485 U.S. 224 (1988)
10It is theoretically possible that had Bell, Prevost and Harrold “blown the whistle” earlier, thereby bringing an end to Petters’ scheme, Sky Bell and other investors may have received more than they did six (6) months later. The Court, however, has seen no evidence suggesting that Sky Bell’s investment declined in value between the time its employees should have alerted it to Petters’ default and the date on which the scheme eventually collapsed.
