12-4061-Kes v. Bancinsure, Inc. (In re Certification of Court)

• Decision Date: 30 July 2014
• Docket Number: No. 26921.,26921.
• Citation: 851 N.W.2d 924,2014 S.D. 57
• Court: South Dakota Supreme Court
• Parties: In the Matter of the CERTIFICATION OF A QUESTION OF LAW FROM The UNITED STATES DISTRICT COURT, DISTRICT OF SOUTH DAKOTA, SOUTHERN DIVISION, Pursuant to the Provisions of SDCL 15–24A–1, and Concerning Federal Action Civ. 12–4061–KES, Titled as Follows. First Dakota National Bank, Plaintiff, v. BancInsure, Inc., Defendant.

851 N.W.2d 924

2014 S.D. 57

In the Matter of the CERTIFICATION OF A QUESTION OF LAW FROM The UNITED STATES DISTRICT COURT, DISTRICT OF SOUTH DAKOTA, SOUTHERN DIVISION, Pursuant to the Provisions of SDCL 15–24A–1, and Concerning Federal Action Civ. 12–4061–KES, Titled as Follows.First Dakota National Bank, Plaintiff,

v.BancInsure, Inc., Defendant.

No. 26921.

Supreme Court of South Dakota.

Considered on briefs May 27, 2014.

Decided July 30, 2014.

Sheila S. Woodward, Steven K. Huff, Johnson, Miner, Marlow, Woodward & Huff, Prof. LLC, Yankton, South Dakota, Attorneys for plaintiff.

William P. Fuller, Fuller & Williamson, LLP, Sioux Falls, South Dakota, Emeric J. Dwyer, Joseph A. Nilan, Gregerson, Rosow, Johnson & Nilan, Ltd., Minneapolis, Minnesota, Attorneys for defendant.

WILBUR, Justice.

[¶ 1.] In answer to a certified question from the United States District Court for the District of South Dakota, we conclude that the Financial Institution Bond in this case is not a surety contract.

Background

[¶ 2.] First Dakota National Bank purchased a Financial Institution Bond from BancInsure, Inc. to provide coverage for liability issues that could arise in the course of its operations. The Bond provides in pertinent part:

Legal proceedings for the recovery of any loss under this Bond shall not be brought prior to the expiration of sixty (60) days after the original proof of loss is filed with [BancInsure] or after the expiration of 24 months from the discovery of such loss, except that any action or proceeding to recover under this Bond on account of any judgment against [First Dakota] in any suit mentioned in General Agreement (F), or to recover attorneys' fees paid in any such suit, shall be brought within 24 months from the date upon which the judgment and such suit shall become final.

[¶ 3.] In 2004, First Dakota loaned Terry Schulte $250,000. Loan officer Wayne Wassink was in charge of the Schulte loan. Over the next five years, the Schulte loan was reviewed annually and renewed, and the interest on the loan was paid until the loan matured. Wassink always transacted business concerning the Schulte loan exclusively through Schulte's intermediary, Douglas Larsen.

[¶ 4.] In October 2009, Wassink met with Schulte because the Schulte loan was past due. Schulte told Wassink he did not have a line of credit with First Dakota and suggested that Larsen must have forged the note. After an investigation, First Dakota believed certain documents used to renew the Schulte loan had falsified signatures.¹ First Dakota notified BancInsure of the potential forgery on October 13, 2009.

[¶ 5.] In July 2011, First Dakota filed a proof of loss with BancInsure seeking coverage under the Bond for three loans, including the Schulte loan. In November 2011, BancInsure denied coverage on two of the three claims and stated that the information submitted regarding the Schulte Loan was insufficient to prove coverage under the Bond. In response, First Dakota agreed the other two loans were not covered, but maintained there was coverage for the Schulte loan under the Bond. In March 2012, BancInsure again denied coverage for the Schulte loan and informed First Dakota it had not brought suit within two years since the loss was discovered.

[¶ 6.] In April 2012, First Dakota sued BancInsure in federal court seeking coverage under the Bond and damages for bad-faith denial of the claim and vexatious refusal to pay the claim. BancInsure moved for summary judgment because the claim fell outside the two-year statute of limitations outlined in the Bond. The following question was then certified to this Court:

SDCL 53–9–6 prohibits parties from contractually limiting the statute of limitations except in the case of a “surety contract.” Is the Financial Institution Bond a “surety contract”?

Standard of Review

[¶ 7.] “Technically, this Court does not sit as an appellate court in this case as the matter came to us as a certified question from the United States District Court for the District of South Dakota. Nevertheless, we employ the same legal standards for this analysis that we use when reviewing appellate cases.” Unruh v. Davison Cnty., 2008 S.D. 9, ¶ 5, 744 N.W.2d 839, 841–42. We interpret contractsand statutes de novo. In re Pooled Advocate Trust, 2012 S.D. 24, ¶ 20, 813 N.W.2d 130, 138; Lillibridge v. Meade Sch. Dist. No. 46–1, 2008 S.D. 17, ¶ 9, 746 N.W.2d 428, 431.

Decision

[¶ 8.] “In matters of statutory interpretation, this Court begins with the plain language and structure of the statute.” State ex rel. Dep't of Transp. v. Clark, 2011 S.D. 20, ¶ 10, 798 N.W.2d 160, 164 (citations omitted). “Words and phrases in a statute must be given their plain meaning and effect.” Id. ¶ 5, 798 N.W.2d at 162 (citation omitted). In addition, it is fundamental “that the words of a statute must be read in their context and with a view to their place in the overall statutory scheme.” In re Expungement of Oliver, 2012 S.D. 9, ¶ 9, 810 N.W.2d 350, 352 (citations omitted). “[I]t is inappropriate to select one statute on a topic and disregard another statute which may modify or limit the effective scope of the former statute.” Id. (citation omitted). Accordingly, we are not free to “enlarge the scope of [a] statute by an unwarranted interpretation of its language.” In re Adams, 329 N.W.2d 882, 884 (S.D.1983) (citation omitted).

[¶ 9.] In relying on SDCL 56–2–1, First Dakota argues that the Bond is not a surety contract because BancInsure did not promise to perform any obligation of First Dakota, but rather agreed to indemnify First Dakota for covered losses, e.g., employee infidelity. In response, BancInsure argues that because the Bond is fidelity insurance, which is defined as surety insurance in SDCL 58–9–29, the Bond is a surety contract that satisfies the exception of SDCL 53–9–6. In making its arguments, BancInsure relies on the analysis in Resolution Trust Corp. v. Hartford Accident & Indemnity Co., 25 F.3d 657 (8th Cir.1994). In addition, BancInsure argues that the necessary element of a surety contract—the surety's responsibility to perform the defaulting principal's obligation to a third party—is BancInsure's promise to secure First Dakota from its employees' infidelity.

[¶ 10.] SDCL 53–9–6 voids contract provisions, except those in surety contracts, that limit the statute of limitations.² But SDCL 53–9–6 fails to define a surety contract. Instead, we turn to SDCL 56–2–1:

Suretyship is a contract by which one[, the surety,] who at the request of another[, the principal,] and for the purpose of securing to [the principal] a benefit becomes responsible for the performance by the [principal] of some act in favor of a third person....

In interpreting SDCL 56–2–1, we stated:

Suretyship is a contractual relationship, which results from two persons becoming obligated to the same creditor with one of them bearing the ultimate liability. In other words, if the debt is enforced against the surety, he then is entitled to be indemnified by the one who should have paid the debt before the surety was compelled to do so.

State of Wis. Inv. Bd. v. Hurst, 410 N.W.2d 560, 562–63 (S.D.1987). ³ Because

suretyship is defined in statute and interpreted in our case law as a contractual relationship, we conclude that suretyship is a surety contract as used in SDCL 53–9–6.

[¶ 11.] In applying the plain language of SDCL 56–2–1 to the Bond, we conclude that the Bond is not a surety contract. In order for the Bond to satisfy the definition of a surety contract, BancInsure must become responsible for First Dakota's performance “of some act in favor of a third person.” SDCL 56–2–1 (emphasis added). The Bond does not identify “some act” that BancInsure is responsible to perform in case of First Dakota's default. Rather, the Bond provides that BancInsure, “in consideration of an agreed premium and subject to the ... terms of this Bond, agrees to indemnify” First Dakota for, inter alia, “[l]oss resulting directly from dishonest or fraudulent acts committed by an Employee acting alone or in collusion with others” and “[l]oss resulting directly from ... delivering any funds” on the basis of forgery. Because the Bond is missing the language that satisfies the critical element of a surety contract—BancInsure becoming responsible for First Dakota's performance “of some act in favor of a third person”—it is not a surety contract. SeeSDCL 56–2–1.

[¶ 12.] BancInsure argues that the principal (the party that is primarily obligated to perform some act) is not First Dakota, but rather First Dakota's employees. In doing so, it states “the Bond obligates BancInsure to pay [First Dakota] in certain enumerated circumstances where [First Dakota's] employees or certain other third-parties do not carry out their obligations to [First Dakota].” As a result, “BancInsure guarantees to [First Dakota] the fidelity of the actions of [First Dakota] employees and other third parties.” We disagree. First, in order to have a surety contract under SDCL 56–2–1, the principal must request surety protection. No evidence exists showing First Dakota's employees have made such a request. Indeed, the Bond is a contract between First Dakota and BancInsure. Second, the Bond does not articulate a guarantee that First Dakota's employees will act honestly, but rather protects First Dakota by indemnifying it from employee dishonesty.⁴

[¶ 13.] BancInsure also urges this Court to conclude the Bond is a surety contract on the basis of SDCL 58–9–29 and the analysis of Resolution Trust.SDCL 58–9–29 states: “ ‘Surety insurance’ includes fidelity insurance, insurance to guarantee the fidelity of persons holding positions of public or private trust.” BancInsure argues a four-step analysis: First, the Bond is fidelity insurance because it protects First Dakota from employee dishonesty; second, SDCL 58–9–29 plainly states that fidelity insurance is surety insurance; third, the Bond is a contract; and fourth, as a result, the...