LYONS FEDERAL S&L v. St. Paul Fire and Marine Ins.

• Decision Date: 22 March 1994
• Docket Number: No. 92-1524-PFK.,92-1524-PFK.
• Citation: 863 F. Supp. 1441
• Parties: LYONS FEDERAL SAVINGS AND LOAN, f/k/a Lyons Savings & Loan Association, Plaintiff, v. ST. PAUL FIRE AND MARINE INSURANCE COMPANY, Defendant.
• Court: U.S. District Court — District of Kansas

863 F. Supp. 1441

LYONS FEDERAL SAVINGS AND LOAN, f/k/a Lyons Savings & Loan Association, Plaintiff, v. ST. PAUL FIRE AND MARINE INSURANCE COMPANY, Defendant.

No. 92-1524-PFK.

United States District Court, D. Kansas.

March 22, 1994.

Deborah T. Carney, Golden, CO, and Phillip L. Turner, of Dan E. Turner Law Offices, Topeka, KS, for plaintiff.

Patrick L. Dunn, of Mitchell, Kristl & Lieber, P.C., Kansas City, MO, for defendant.

MEMORANDUM AND ORDER

PATRICK F. KELLY, Chief Judge.

This matter comes before the court on defendant St. Paul Fire and Marine Insurance Company's motion for summary judgment. Lyons Federal Savings and Loan (Lyons) brought this action against St. Paul claiming coverage under a financial institution fidelity bond for losses attributable to Lyons' servicing contractor, Mortgage Finance, Inc. Service Corporation (Mortgage Finance). Also pending before this court is Lyons' motion to reopen discovery and to add the issues of waiver and estoppel to the pretrial order. On March 14, 1994, the court heard the parties' oral arguments and then adjourned to review and consider the arguments. The court is now ready to make the following findings of fact and conclusions of law.

I. Facts

In 1974, Lyons entered into an agreement with Mortgage Finance in which Mortgage Finance agreed to act as a servicing contractor for Lyons. Mortgage Finance, a Colorado corporation, was a mortgage banking operation in Denver and was wholly owned and operated by Lyle Carpenter and Marianne McAleer. Mortgage Finance originated loans and then sold the loans to Lyons and other investors while retaining the servicing rights. The servicing rights included collecting the payments, paying the taxes and the insurance on the properties, maintaining the escrow accounts, and working to collect the delinquencies on the loans. Mortgage Finance received a fee for servicing the loan. Mortgage Finance either sold the entire loan to Lyons or a portion of a loan, referred to as a participation interest. This relationship continued until about 1989.

In March 1985, Lyons bought a loan from Mortgage Finance. The loan went to Joseph Dire, who borrowed the money in order to purchase a four-plex in Ft. Collins, Colorado for rental property. This was a long-term mortgage for the full amount borrowed, $188,000.00. After several payments, Dire defaulted on the loan. Mortgage Finance did not diligently pursue foreclosure once the loan went into default.

Eventually, Lyons became aware of the fact that the Dire loan was in default and also discovered that Dire had died. Mortgage Finance had not filed a claim against the Dire estate within the time allowed by law. There is some dispute as to whether Dire signed the note for the loan as the nominee for C. M. & D. Partnership. The partners of C. M. & D. Partnership were: Carpenter & McAleer Associates, a partnership wholly owned by Lyle Carpenter and Marianne McAleer; Dire's Lock and Key Company, a Colorado corporation; and Joseph Dire, Rose Dire and Donna Dire. Lyons was allowed to foreclose on the property; Lyons sold the property and was left with a deficiency judgment of $128,000.00.

In May 1985, Mortgage Finance approached Lyons about a participation loan in what was to be the Fair Oakes Condominiums, located in the Denver area. This was a construction loan totaling $4,800,000.00, with Lyons' participation interest being $250,000.00 for a term of six months at an interest rate of 13 1/8 percent plus a 1 percent fee. Mortgage Finance already had three major lenders in the Fair Oakes project and held a $400,000.00 interest for itself. Thus, when Lyons accepted the offer to invest in Fair Oakes, Mortgage Finance's interest was reduced to $150,000.00. Mortgage Finance failed to register Lyons' participating interest with the county recorder.

The Fair Oakes loan was due on November 1, 1985, but was never paid. In fact, at the time Lyons made the loan to Fair Oakes, Mortgage Finance knew the construction project was over budget and that foreclosure was imminent. By the time Lyons became aware of the Fair Oakes loan's delinquency, the other lenders had accepted a deed in lieu of foreclosure. Those lenders formed the 7117 W. 12th Street Corporation and loaned additional funds to that corporation to complete the project. Subsequently, the other lenders came under the control of the Resolution Trust Corporation (RTC).

By then Lyons had been awarded a judgment of $250,000.00, plus $263,359.89 in accrued interest, against Mortgage Finance arising out of Mortgage Finance's dealing with Lyons on the Fair Oakes loan. In that suit Lyons was also awarded $50,680.55 for losses to an escrow account controlled by Mortgage Finance. Although St. Paul originally denied coverage on the escrow account loss, St. Paul eventually paid $40,680.55, 100 percent of the loss after payment of the $10,000.00 deductible. There are no claims involving the escrow account loss in the suit before this court.

When addressing Lyons' claim against Mortgage Finance, the magistrate judge, in his recommendation to the district court, stated in part:

I further find ... that Defendant Mortgage Finance was obligated and agreed, but thereafter failed, to document Lyons' participation interest by an appropriate recording on the public land records of Jefferson County, Colorado, and Lyons thus lost its $250,000 investment. This occurred in part by reason of the failure to record Lyons' participation interest in the public land records despite specific representations by Mortgage Finance officers that they had, in fact, caused the participation interest to be properly documented and recorded. I further find from the well-pleaded allegations and the evidence that Lyons' loan participation proceeds were not used for finalizing the construction of the Fair Oakes project, but were allowed by Mortgage Finance officers to be used by the Fair Oakes developer representatives for other and unauthorized purposes.

(Pltf.'s Memo. in Resp., Ex. 40, Lyons Federal Savings Assn. v. Mortgage Finance, Inc., Service Corp., No. 90-M-569, slip op. at 7, ¶ 10 (D.Colo. Dec. 28, 1990).) Lyons then proceeded to garnish Mortgage Finance, which allowed Lyons to step into Mortgage Finance's shoes. This enabled Lyons to recover $285,000.00 from the RTC because the RTC sold the property and wanted to clear the title. In addition, Lyons recovered $192,744.16 of the judgment from other sources. As of May 19, 1993, however, the judgment remained unsatisfied in the amount of $92,000.23 plus interest of $21,502.94.

On June 3, 1987, Carpenter and McAleer filed separate, individual bankruptcies pursuant to Chapter 7 of the United States Bankruptcy Code. On or about August 3, 1987, Carpenter and McAleer Associates filed a voluntary bankruptcy and the court ordered the joint administration of the partnership's bankruptcy estate with the individuals' bankruptcy estates. Lyons had no knowledge of these bankruptcy filings until the summer or fall of 1989.

In 1990, the bankruptcy estates' trustee, Ross J. Wabeke, filed a complaint against Lyons in an attempt to void the assignments of 10 percent participation interests in three loans by Mortgage Finance to Lyons. These three assignments occurred after the bankruptcies were filed; however, Mortgage Finance has never filed bankruptcy. Mortgage Finance made the transfers to provide Lyons with additional collateral on another loan that was in default. The trustee based his claims on the theory that Mortgage Finance was wholly owed by Carpenter and McAleer, and therefore the transfers were fraudulent as to Carpenter and McAleer Associate's creditors. St. Paul refused to defend Lyons in this adversary proceeding. The bankruptcy judge dismissed the trustee's complaint.

On or about May 14, 1987, Lyons purchased a financial institution fidelity bond from St. Paul. The coverage included $250,000.00 worth of coverage for service contractors with a $10,000.00 deductible. The bond's insuring clauses state in pertinent part:

(K) SERVICING CONTRACTORS

(1) Loss resulting directly from dishonest or fraudulent acts committed by any Servicing Contractor acting alone or in collusion with others.

Dishonest or fraudulent acts as used in this Insuring Clause shall mean any dishonest or fraudulent acts committed by such Servicing Contractor with the manifest intent

(a) to cause the Insured to sustain such loss; and

(b) to obtain financial benefit for the Servicing Contractor or for any other person or organization intended by the Servicing Contractor to receive such benefit, other than salaries, commissions, fees, bonuses, promotions, awards, profit sharing, pensions or other employee benefits earned in the normal course of employment or performance of the servicing contract.

(2) Loss of Money, including obligations of the United States of America, collected or received for the Insured by any such Servicing Contractor through the failure of such Servicing Contractor to pay to the Insured the Money so collected or received as is discovered to be due and payable while this Insuring Clause is in force, except, however, Money disbursed by such Servicing Contractor in accordance with instructions from the Insured.

(Second Amended Complaint, Ex. B at 5.)

The bond's conditions and limitations section provides the following definitions:

(q) Servicing Contractor means a natural person, partnership or corporation, other than an officer or employee of the Insured, duly authorized by the Insured to perform any or all of the following:

(a) collect and record payments on real estate mortgage or home improvement loans made, held or assigned to the Insured, and establish tax and insurance escrow accounts,

(b) manage real property owned by or under the supervision or control of the Insured,

(c) perform other acts directly related to the above,

but only while such natural person, partnership or corporation is actually performing such services within the

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