870 F.2d 1504 (9th Cir. 1989), 87-4240, Liberty Bank of Montana v. Travelers Indem. Co. of America

Docket Nº:87-4240.
Citation:870 F.2d 1504
Party Name:LIBERTY BANK OF MONTANA, Plaintiff-Appellant, v. The TRAVELERS INDEMNITY COMPANY OF AMERICA, Defendant-Appellee.
Case Date:March 29, 1989
Court:United States Courts of Appeals, Court of Appeals for the Ninth Circuit

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870 F.2d 1504 (9th Cir. 1989)

LIBERTY BANK OF MONTANA, Plaintiff-Appellant,



No. 87-4240.

United States Court of Appeals, Ninth Circuit

March 29, 1989

Argued and Submitted Oct. 7, 1988.

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Gary M. Zadick, Ugrin, Alexander, Zadick & Slovak, P.C., Ward E. Taleff, Alexander & Baucus, Great Falls, Mont., for plaintiff-appellant.

Kenneth R. Dyrud, Church, Harris, Johnson & Williams, Great Falls, Mont., for defendant-appellee.

Appeal from the United States District Court for the District of Montana.

Before FLETCHER, BOOCHEVER and TROTT, Circuit Judges.

TROTT, Circuit Judge:

Liberty Bank sued Travelers Indemnity (Travelers) for a declaration that Travelers had a duty to defend Liberty Bank against a counterclaim in its suit against Liberty Manufacturing to foreclose on a security interest. The district court granted Travelers' motion for summary judgment and denied Liberty Bank's motion for partial summary judgment. Liberty Bank appeals this order. We affirm.



As security for a loan, Liberty Manufacturing granted Liberty Bank (Liberty) a security interest in all of its assets, inventory, equipment and accounts receivable. Upon default, Liberty threatened foreclosure unless Liberty Manufacturing brought the loans current. Liberty agreed to defer foreclosure if additional capital was injected into the company. A group of investors, "Private Lenders," were approached to make such investments. Liberty stated that if Private Lenders made the requested investment, the bank would subordinate its security position in the inventory and accounts receivable to the extent that they appreciated in value after September 1, 1981. Based upon this representation, Private Lenders invested in Liberty Manufacturing.

Liberty subsequently repudiated its subordination agreement, foreclosed its security interest, sold the collateral, and applied the proceeds to recover its own investment. During the foreclosure proceedings, Private Lenders brought a counterclaim against Liberty, alleging fraudulent misrepresentation, negligent misrepresentation, and breach of the implied covenant of good faith and fair dealing. In this underlying suit, the trial court eventually found in favor of the Private Lenders on the counterclaim.

Pursuant to its belief that the counterclaim in the underlying action triggered the duty to defend provision of their insurance policy, Liberty requested Travelers' assistance. After Travelers refused several tenders of defense, Liberty instituted this action in district court, seeking a declaration regarding the scope of coverage under the insurance policy. Cross-motions for summary judgment were filed. The district court found there was no duty to defend and granted Travelers' summary judgment motion.



We review grants of summary judgment de novo, viewing evidence in the light

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most favorable to the nonmoving party to determine whether substantive law was correctly applied and whether there was any issue of material fact. Century 21 Real Estate Corp. v. Sandlin, 846 F.2d 1175, 1178 (9th Cir.1988) (citing Darring v. Kincheloe, 783 F.2d 874, 876 (9th Cir.1986)).

In this diversity action, Montana law controls the substantive rights and obligations of the parties. St. Paul Fire & Marine Insurance Co. v. Weiner, 606 F.2d 864, 867 (9th Cir.1979). Liberty cites various sections of Appelman, Insurance Law & Practice (1979 ed.), to support its argument that the duty to defend is determined by reference to the pleadings, discovery, and final issues declared ready for trial. While the scope of this rule has not been extensively defined in Montana, we may assume that the Montana Supreme Court, if faced with this issue, would hold that the duty to defend may be triggered by notification to the insured of facts asserted in the pleadings, discovery, or final issues declared ready for trial, giving rise to potential liability under the policy. Another way to state this rule is that the insurer's duty to defend arises when the claim against the insured sets forth facts representing a risk covered by the terms of the policy. Lindsay Drilling & Contracting v. United States Fidelity & Guarantee Co., 208 Mont. 91, 93, 676 P.2d 203, 205 (1984). Under this framework, we must determine whether the district court erred in holding the claims asserted against Liberty did not trigger Travelers' duty to defend.


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