Fed. Sav. & Loan Ins. Corp. v. Transamerica Ins.

• Decision Date: 06 May 1987
• Docket Number: No. CV 84-4444 FFF.,CV 84-4444 FFF.
• Citation: 661 F. Supp. 246
• Court: U.S. District Court — Central District of California
• Parties: FEDERAL SAVINGS & LOAN INSURANCE CORPORATION, Plaintiff, v. TRANSAMERICA INSURANCE COMPANY, Defendant.

661 F. Supp. 246

FEDERAL SAVINGS & LOAN INSURANCE CORPORATION, Plaintiff, v. TRANSAMERICA INSURANCE COMPANY, Defendant.

No. CV 84-4444 FFF.

United States District Court, C.D. California.

May 6, 1987.

Harold J. Kwalwasser, A. James Roberts, III, Spurgeon E. Smith, Tuttle & Taylor, Los Angeles, Cal., for plaintiff.

George C. Montgomery, Rene J. Gascou, Jr., Ashley White, Montgomery, Gascou, Gemmill & Thornton, Los Angeles, Cal., for defendant.

MEMORANDUM OPINION

FERNANDEZ, District Judge.

Transamerica Insurance Company ("Transamerica") issued a Savings and Loan Blanket Bond to Northwestern Savings & Loan Association ("Northwestern"). When Northwestern suffered a loss, Transamerica denied coverage, and Federal Savings & Loan Insurance Corporation ("FSLIC") ultimately brought this action to recover under the bond. It also sought punitive damages.

Both FSLIC and Transamerica have filed summary judgment motions. The Court will grant those motions in part, and deny them in part.

While the motions cover various issues, only the following will be considered in this Opinion: (1) Is Northwestern's loss of securities covered by the bond; (2) what jurisdiction's law should apply to determine the availability and amount of punitive damages, if any; and (3) where FSLIC has recovered funds from others, how should those recoveries be applied, and what is the effect on Transamerica's liability?

I. FACTS

Transamerica is a California corporation with its principal place of business in Los Angeles, California. It maintains sales offices in St. Louis, Missouri and in Collinsville, Illinois.

Northwestern was a Missouri savings and loan association, with its principal place of business in St. Louis, Missouri. Its assets were insured by FSLIC.

Northwestern obtained a Savings and Loan Blanket Bond, Standard Form 22 ("the bond") from Transamerica. Negotiations for the bond took place in St. Louis, Missouri, and all of the initial steps involved in underwriting the bond took place there. While completion of the underwriting, review, and approval of the bond took place at Transamerica's head office in California, the bond itself was delivered to Northwestern in Missouri. The form of the bond was drafted by the insurance industry's trade association, The Surety Association of America, in consultation with FSLIC and others.

The bond was in the face amount of $1,250,000. It became effective on May 13, 1981.

Northwestern purchased certain federal book entry securities (two Treasury Notes and one Federal Farm Credit System Bond). Federal book entry securities are evidenced by computer entries, which show the indebtedness of various federal agencies, such as the United States Treasury and the Federal Farm Credit System. Those entries are recorded and maintained in the Federal Wire System, which is operated by the Federal Reserve System and member clearing banks.

In July of 1981, Northwestern deposited the securities in question with Comark, a company registered under the laws of California as a broker/dealer, with its principal offices in California. Comark was a company that dealt in federal securities.

Northwestern's securities were to be held in safekeeping. Comark told Northwestern it was doing that. Safekeeping means that securities are held in such a way that they will only be handled as and when the owner expressly directs. They are not to be comingled with the securities of the holding brokerage firm.

Despite Comark's assurances to Northwestern, the securities were in fact comingled with Comark's own assets. Comark only maintained a single clearing account for all federal book entry securities, including those owned by it and those owned by its customers. That account was maintained at Marine Midland Bank, N.A. ("Marine Midland"), and Marine Midland acted as Comark's clearing agent for all of its book entry government securities.

Comark was well aware of the fact that its handling of the securities was illegal and was inconsistent with its duties to Northwestern. Nevertheless, it did not reveal the true situation to Northwestern or to Marine Midland. Rather, it concealed the facts, made false representations to Northwestern, and even obtained loans from Marine Midland, which were secured by all of the securities in Comark's clearing account, including those of Northwestern.

Comark then ran into severe financial difficulties, and when Marine Midland ultimately demanded payment of the loans, Comark defaulted. On June 3, 1982, Marine Midland seized all of the securities in Comark's federal book entry securities clearing acocunt, including those of Northwestern. Marine Midland then sold the securities and kept the proceeds. The market value of Northwestern's securities was then $2,024,174.

Northwestern was informed of the loss on June 15, 1982, and presented a claim to Transamerica on October 20, 1982. Northwestern understandably asserted that the loss was due to the fraudulent acts of Comark, and claimed that the provisions of the bond covered the loss.

Transamerica investigated the claim through its offices in St. Louis, Missouri and Collinsville, Illinois, and also used the services of a law firm located in St. Louis, Missouri. That law firm recommended that the claim be rejected. The final decision was made in Los Angeles, and on August 2, 1983, the denial of the claim was transmitted from Transamerica's Los Angeles Office.

In the meantime, Northwestern itself had fallen on hard times, and on March 15, 1983 FSLIC facilitated the merger of Northwestern into Roosevelt Savings & Loan, whose principal place of business is also in Missouri. Shortly thereafter, FSLIC entered into a formal assistance agreement with Roosevelt and, among other things, received an assignment of all of Roosevelt's and Northwestern's interests arising out of the loss of the securities. This action followed.

After Transamerica's rejection of coverage, FSLIC did not remain inactive. Rather, it sought relief from other sources. Without any aid from or participation by Transamerica, FSLIC was able to recover the following amounts:

(1) An action entitled Wichita Federal Savings and Loan Association v. Comark, No. 82 Civ. 4073 (MEL) (S.D.N.Y.) (the "Marine Midland Action") was settled pursuant to an agreement dated October 23, 1985, and FSLIC received $367,557.62.

(2) An action entitled First Federal Savings and Loan Association v. Oppenheim, Appel, Dixon & Co., No. 85 Civ. 4163 (MEL) (S.D.N.Y.) (the "OAD Action") was settled pursuant to an agreement dated June 23, 1986, and FSLIC received $967,721.44.

(3) FSLIC also recovered $10,000 from Comark's broker-dealer bond carrier.

(4) FSLIC's attorneys fees and expenses incurred in the Marine Midland action were $386,921.82. Its attorneys fees and expenses incurred in the OAD action were $126,417.95. Its attorneys fees and expenses incurred in recovering on the broker-dealer bond were $3,983.

(5) FSLIC also has a claim on behalf of Northwestern in the bankruptcy case of In Re Comark, Case No. SA-03850-AP (United States Bankruptcy Court, C.D.Cal.). As of February 9, 1987, FSLIC had not received a recovery from Comark's estate.

II. DISCUSSION

A. Is the loss of the securities covered by the bond?

The main focus of this case must be the bond itself, and the centerpiece of the dispute over the bond is Insuring Agreement (B), which reads:

(B) Loss of Property (occurring with or without negligence or violence) through robbery, burglary, common-law or statutory larceny, theft, hold-up, or other fraudulent means, misplacement, mysterious unexplainable disappearance, damage thereto or destruction thereof, and loss of subscription, coversion, redemption or deposit privileges, through the misplacement or loss of Property, while the Property is (or is supposed to be) lodged or deposited within any offices or premises located anywhere, except in the mail or with a carrier for hire, other than an armored motor vehicle company, for the purpose of transportation.

Although this language may not be the clearest imaginable, the Court does not believe that it takes an epopt to apply it to the facts of this case. Three portions of the language must be considered: Were the federal book entry securities property; were they lost by the mentioned means; and were they on premises located anywhere?

The question of whether the securities were property need not detain the Court for long. The bond's definition section 1(b) defines property in very broad terms, and specifically includes "securities, evidences of debts, and debentures...." Clearly enough, the federal book entry securities are property. See, e.g., First National Bank of Decatur v. Insurance Company of North America, 424 F.2d 312 (7th Cir.1970).

On the question of whether the loss was by the means mentioned in the paragraph, one would have to ignore the language of the provision and blink at reality to find that the securities were lost by a method that is not listed there. As will be noted later, there are some disputes about whether California or Missouri law should apply to this case. Either would reach the same result. In fact, California would call this a larceny California Penal Code § 484(a) and Missouri would call it stealing Missouri Revised Code § 570.030(1). In any event, Comark's actions were at least fraudulent. Courts have consistently interpreted "other fraudulent means" in a broad manner, and this Court sees no reason for deviating from those interpretations. See, e.g., First National Bank of Clinton v. Insurance Company of North America, 606 F.2d 760, 768 (7th Cir.1979); and Merchants-Produce Bank v. United States Fidelity and Guaranty Co., 305 F.Supp. 957, 966-67 (W.D.Mo.1969). Comark's actions involved lying to Northwestern and to Marine Midland. They also involved the use of Northwestern's assets to secure Comark's own debts, and ultimately resulted in the loss of those assets. The fact that all of this was accomplished in the white...