{"id":134,"date":"2013-04-18T16:17:37","date_gmt":"2013-04-18T16:17:37","guid":{"rendered":"http:\/\/www.joneslemongraham.com\/blog\/?p=134"},"modified":"2021-12-21T20:05:58","modified_gmt":"2021-12-21T20:05:58","slug":"investors-in-failed-lender-have-no-right-to-recover-investment-loss-under-lenders-bonds-dishonesty-insuring-clause-even-after-lenders-bankruptcy-trustees-assignment","status":"publish","type":"post","link":"https:\/\/www.joneslemongraham.com\/blog\/investors-in-failed-lender-have-no-right-to-recover-investment-loss-under-lenders-bonds-dishonesty-insuring-clause-even-after-lenders-bankruptcy-trustees-assignment\/","title":{"rendered":"Investors in failed lender have no right to recover investment loss under lender\u2019s bond\u2019s Dishonesty Insuring Clause even after lender\u2019s bankruptcy trustee\u2019s assignment of rights under that bond to investors; investors\u2019 loss is not \u201cdirect loss\u201d under bond\u2019s terms"},"content":{"rendered":"

By Christopher J. Graham<\/a> and Joseph P. Kelly<\/a><\/p>\n

Abady v. Certain Underwriters At Lloyd\u2019s of London, Col. Court of Appeals No. 11CA1870, (3rd Div. October 11, 2012):<\/a><\/h2>\n

Commercial Capital, Inc. (CCI) provided short-term financing for commercial construction developers that could not secure credit from traditional lenders. CCI raised capital by borrowing from investors. It guaranteed investors that it had a $5 million bond securing them against loss of principal and also annual rates of return of between 18% and 25%. CCI\u2019s owner also personally guaranteed payment of CCI\u2019s debt to the investors. CCI defaulted, the owner refused to honor his guaranty, and CCI filed bankruptcy. The investors received relief from the automatic bankruptcy stay, and the bankruptcy trustee assigned them CCI\u2019s rights under CCI\u2019s Mortgage Bankers Bond, underwritten by Lloyd\u2019s.<\/p>\n

The investors sued in Colorado state court, alleging various claims against CCI and two claims against Lloyd\u2019s: one as assignee of the bond and the other to garnish Lloyd\u2019s bond as CCI\u2019s judgment creditor. Both claims were based on the bond\u2019s \u201cDishonesty Insuring Clause\u201d under which Lloyd\u2019s agreed, subject to the bond\u2019s terms, conditions, and exceptions to pay:<\/p>\n

Direct financial loss sustained by the Assured at any time and discovered by the Assured during the Bond Period by reason of and directly caused by [a] Theft of Money, Securities and other Property by any Employee of the Assured, whether committed alone or in collusion with others, or [b] any other dishonest acts by any Employee of the Assured, whether committed alone or in collusion with others, committed by said Employees with the manifest intent to obtain Improper Personal Financial Gain for said Employee, or for any other person or entity intended by the Employee to receive such Improper Personal Financial Gain.<\/p>\n

Lloyd\u2019s moved for summary judgment, and the trial court held: (1) the bond is a fidelity bond and not a surety bond; (2) the bond terms were unambiguous; (3) the plain language of the bond protects only CCI; (4) the bankruptcy trustee\u2019s assignment of CCI\u2019s rights to investors did not convert the investors\u2019 third-party claims into first-party insurance claims; and, therefore, (5) investors\u2019 claims were not recoverable under the bond. The investors appealed.<\/p>\n

Issue #1:<\/strong> Can the investors collect under the Bond for damages that CCI could not itself collect? No.<\/p>\n

\u201cAn assignee has no greater rights than his or her assignor. Pierce v. Ackerman, 488 P.2d 1118, 1120 (Colo. App. 1971) (not published pursuant to C.A.R. 35(f)). Therefore, investors’ third-party claims \u2014 to the amounts, plus interest, that they invested in CCI \u2014 have not become first-party losses merely because investors now stand in CCI’s shoes as first-party claimants. Rather, investors may only recover those losses that CCI could have recovered for itself.\u201d<\/p>\n

Issue #2:<\/strong> Are the losses asserted by the investors recoverable as \u201cdirect losses\u201d under the terms of the Bond? No.<\/p>\n

As \u201cdirect financial loss\u201d is not defined in the Bond, the court looks to the plain and ordinary meaning of the term. The Court adopted Black\u2019s definition of \u201cdirect\u201d as \u201cfree from extraneous influence; [or] immediate.\u201d The court noted that: \u201cA liability policy protects the insured against claims brought by third parties who have been injured by the insured’s conduct. . . . In contrasting liability insurance with a fidelity bond, it is helpful to note that in the liability context, the insured’s loss is indirect; it is a third party who directly suffers the loss. City of Burlington v. Western Sur. Co., 599 N.W.2d 469, 472 (Iowa 1999)(emphasis added) (citing 1 Eric Mills Holmes & Mark S. Rhodes, Holmes’s Appleman on Insurance \u00a7 3.3, at 349 (2d ed. 1996)); see also Qwest Communications Int’l, Inc. v. QBE Corporate Ltd., 829 F. Supp. 2d 1037, 1040 (D. Colo. 2011) (“Commercial crime policies are not intended to be liability policies.”).\u201d<\/p>\n

The court chose not to follow bond cases holding that \u201cdirect financial loss\u201d included losses from an insured\u2019s liability to third parties, including F.D.I.C. v. United Pacific Ins. Co., 20 F.3d 1070, 1079 (10th Cir. 1994), Continental Savings Ass\u2019n v. U.S. Fidelity & Guarantee Co., 762 F.2d 1239, 1243 (5th Cir. 1985), and RBC Dain Rauscher Inc. v. F.D.I.C., 370 F. Supp. 2d 886, 890 (D. Minn. 2005). The court also distinguished Massachusetts Mutual Life Insurance Co. v. Certain Underwriters at Lloyd\u2019s of London, 2010 WL 2929552 (Del. Ch. No. 4791-VCL, July 23, 2010)(unpublished opinion), which denied a bonding company\u2019s motion to dismiss an insured mutual fund\u2019s complaint alleging coverage under the fidelity insuring agreement for indemnity and defense costs arising from mutual fund investor claims. The investors\u2019 claims in that case were premised on allegations that the mutual funds deposited funds with the notorious Bernie Madoff to manage as an investment advisor (which qualified as an Employee under the bond), the funds remained property of the mutual funds while possessed by Madoff, and the funds were misappropriated by Madoff for his own benefit.<\/p>\n

Given the meaning of \u201cdirect\u201d and that CCI bought a fidelity bond, not a liability policy, the Court held that \u201cdirect financial loss\u201d unambiguously refers to the immediate loss of CCI\u2019s property, not harm to investors. The investors therefore could not recover the losses under the Bond.<\/p>\n","protected":false},"excerpt":{"rendered":"

By Christopher J. Graham and Joseph P. Kelly Abady v. Certain Underwriters At Lloyd\u2019s of London, Col. Court of Appeals No. 11CA1870, (3rd Div. October 11, 2012): Commercial Capital, Inc. (CCI) provided short-term financing for commercial construction developers that could not secure credit from traditional lenders. CCI raised capital by borrowing from investors. It guaranteed […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[5],"tags":[],"_links":{"self":[{"href":"https:\/\/www.joneslemongraham.com\/blog\/wp-json\/wp\/v2\/posts\/134"}],"collection":[{"href":"https:\/\/www.joneslemongraham.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.joneslemongraham.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.joneslemongraham.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.joneslemongraham.com\/blog\/wp-json\/wp\/v2\/comments?post=134"}],"version-history":[{"count":7,"href":"https:\/\/www.joneslemongraham.com\/blog\/wp-json\/wp\/v2\/posts\/134\/revisions"}],"predecessor-version":[{"id":144,"href":"https:\/\/www.joneslemongraham.com\/blog\/wp-json\/wp\/v2\/posts\/134\/revisions\/144"}],"wp:attachment":[{"href":"https:\/\/www.joneslemongraham.com\/blog\/wp-json\/wp\/v2\/media?parent=134"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.joneslemongraham.com\/blog\/wp-json\/wp\/v2\/categories?post=134"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.joneslemongraham.com\/blog\/wp-json\/wp\/v2\/tags?post=134"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}