Aks v. Southgate Trust Co.

• Decision Date: 07 January 1994
• Docket Number: No. 92-2193-JWL.,92-2193-JWL.
• Parties: S. Ronald AKS, D.D.S.; Glen Henson; and James E. Williams, D.O., Individually and as Representatives on Behalf of the Putative Class of Which They are Members, Plaintiffs, v. The SOUTHGATE TRUST COMPANY; the Southgate Bank; John J. Bennett; Compensation Programs, Inc. of Kansas City; and Integrated Financial Services, Inc., Defendants, Federal Insurance Company, Garnishee.
• Court: U.S. District Court — District of Kansas

844 F. Supp. 650

S. Ronald AKS, D.D.S.; Glen Henson; and James E. Williams, D.O., Individually and as Representatives on Behalf of the Putative Class of Which They are Members, Plaintiffs, v. The SOUTHGATE TRUST COMPANY; the Southgate Bank; John J. Bennett; Compensation Programs, Inc. of Kansas City; and Integrated Financial Services, Inc., Defendants, Federal Insurance Company, Garnishee.

No. 92-2193-JWL.

United States District Court, D. Kansas.

January 7, 1994.

COPYRIGHT MATERIAL OMITTED

John M. Klamann, Payne & Jones, Chtd., Overland Park, KS, Kenneth B. McClain, Humphrey, Farrington & McClain, Independence, MO, for plaintiffs.

Dennis L. Davis, Tamara Wilson Setser, Cheryl Bloethe Linder, Hillix, Brewer, Hoffhaus, Whittaker & Wright, Kansas City, MO, for Southgate Bank.

Lawrence J. Zimmerman, F. Allen Speck, Daniel J. Flanigan, McDowell, Rice & Smith, P.C., Kansas City, MO, Michael T. Halloran, Knipmeyer, McCann, Smith, Manz & Gotfredson, Kansas City, MO, Sandra S. Watts, Kenneth C. Brostron, Margaret M. Mooney, Lashly & Baer, P.C., St. Louis, MO, for John J. Bennett, Compensation Programs, Inc. of Kansas City, Integrated Financial Services, Inc.

John J. Bennett, pro se.

Kent S. Jackson, Joe B. Whisler, Cooling & Herbers, P.C., Kansas City, MO, for Eric E. Ulmer, Dr. Bernard Gould, Dr. Don Davis, Dr. Vernon Debus, Dr. James Trimmer.

Juliann W. Graves, Benny J. Harding, Ronald S. Weiss, James F.B. Daniels, David J. Weimer, Berman, DeLeve, Kuchan & Chapman, Kansas City, MO, for Official Equity Sec. Holders' Committee.

Matthew J. Verschelden, Paul E. Donnelly, Tammy L. Womack, Stinson, Mag & Fizzell, Kansas City, MO, Thomas B. Alleman, Vial, Hamilton, Koch & Knox, Dallas, TX, for Federal Ins. Co.

MEMORANDUM AND ORDER

LUNGSTRUM, District Judge.

This matter comes before the court on plaintiffs' motion for partial summary judgment (Doc. # 265), the motion of garnishee Federal Insurance Company for summary judgment (Doc. # 269) and on the motion of Federal Insurance Company to strike testimony (Doc. # 295). This is a garnishment action in which plaintiffs, individually and on behalf of a class of plaintiffs settling with the Southgate Trust Company, seek the collection of insurance proceeds in the amount of $2,000,000.00 from the Federal Insurance Company in satisfaction of a judgment obtained against Southgate in December of 1992. Plaintiffs seek partial summary judgment on a variety of issues, including the meaning of certain general provisions of the insurance agreement between the parties and of pertinent exclusions. Garnishee seeks summary judgment on many of the same issues. For the reasons set forth below, the court denies garnishee's motion for summary judgment, denies in part and grants in part plaintiffs' motion for partial summary judgment, and denies garnishee's motion to strike as moot.

I. Facts

The following facts are uncontroverted for purposes of the motions now before the court. In May of 1992, plaintiffs, individually and on behalf of the class, filed a complaint with this court alleging claims against the Southgate Trust Company and other entities and persons under the Employee Retirement Income Security Act, 29 U.S.C.A. § 1001 et seq. ("ERISA"). Each of the plaintiffs were participants or beneficiaries of ERISA qualified pension plans or profit-sharing plans, some of the assets of which formed part of the Southgate Trust Company Master Trust for Employee Trusts ("Master Trust"). Southgate Trust Company ("Southgate") was a trustee for the Master Trust.

Plaintiffs alleged certain funds were removed from the Master Trust for investment into Master Mortgage Investment Fund, Inc., and the Master Mortgage Fund Trust Guaranteed Plus Fund ("Guaranteed Plus Fund"). They alleged the investment of these funds in Master Mortgage Investment Fund, Inc. ("MMIF"), and the Guaranteed Plus Fund was inappropriate and unlawful and directly resulted in damages and pecuniary loss. They further alleged that Southgate breached certain fiduciary duties under ERISA, and that Southgate was also liable for the breaches of any and all co-fiduciaries.

The certificate of incorporation of MMIF states its purposes are:

(a) To operate in such a manner as to qualify as a Real Estate Investment Trust under the Internal Revenue Code of 1986, and in such capacity to commit to, originate, invest in, fund, hold, administer, enforce, earn principal and interest on, derive income from, purchase and sell Loans secured by interests in real estate or other security; to invest in, purchase, hold, operate, lease, sell and derive income and gains from interests in real estate; and to make and profit from such other investments and conduct such other activities as the Board of Directors shall determine from time to time; and

(b) To engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of Delaware.

MMIF filed a voluntary petition for bankruptcy with the United States Bankruptcy Court in the Western District of Missouri on April 17, 1992.

At the time of the events at issue in this case, Southgate was insured by Federal Insurance Company ("Federal") under Policy No. 7022-50-59(A) ("the policy"). The policy is entitled "Indemnity Insurance Policy" and insures Southgate up to a limit of $2,000,000.00 per policy year, with a deductible in the amount of $150,000.00 per claim. The policy contains the following provisions:

Section I. Insuring Agreements

A. To indemnify the Insured Entity for Loss which the Insured Entity shall become legally obligated to pay as a result of any Claim first made against the Insured Entity and reported in writing to the Insurer during the Policy Period or, if elected, the Extended Reporting Period arising out of any Wrongful Act committed by the Insured Entity during or prior to the Policy Period while performing a trust department function permitted by law.

Section III. Definitions

E. "Wrongful Act" shall mean any actual or alleged error misstatement, misleading statement, act or omission or neglect or breach of duty by the Insured which arises solely from the Insureds performing, ratifying or acquiescing in a trust department function permitted by law.

G. "Loss" shall mean any amount that the Insureds shall become legally obligated to pay for any Claim or Claims made against the Insureds for Wrongful Acts as to which coverage applies, and shall include, but not be limited to damages, judgments, settlements, and reasonable Defense Costs, provided always, such Loss shall not include amounts otherwise reimbursable to the Insureds by the trust, estate, plan or fund and/or any similar entity and/or the sponsor of any such trust, estate, plan or fund and/or any other similar entity....

Section IV. Exclusions

The Insurer shall not be liable to make any payment for Loss in connection with any Claim made against the Insureds:

(G) based upon, arising out of, relating to, in consequence of, or in any way involving the insolvency, conservatorship, receivership, bankruptcy or liquidation of any bank, banking firm, investment company, investment banker or any broker or dealer in securities or commodities, or other such organizations of a similar nature, or the failure to pay or suspension of payment by such entities;

Section VI. Defense Costs

D. The Insureds shall not admit any liability for or settle any Claim or incur any Defense Costs without the prior written consent of the Insurer, whose consent shall not be unreasonably withheld. The Insurer shall not be liable for any admissions, settlements or Defense Costs to which it has not consented in writing.

Endorsement No. 2

The Insurer shall not be liable to make any payment for Loss based upon, attributable to, or arising out of:

1. Any recommendation of or in sic actual investment in specialty investments other than commonly traded securities including, but not limited to real estate, precious metal, commodities, or other futures, restricted securities, oil and gas leases, cattle trusts, limited partnerships or other similar speculative investments by the Southgate Trust Company.

In May of 1992, Federal received from Southgate a copy of plaintiffs' class action complaint, as well as a copy of the plaintiffs' settlement demand as it then existed. In a letter dated June 26, 1992, Federal provided Southgate with what it terms a `coverage position'. The pertinent parts of the letter provided as follows:

On behalf of the Federal Insurance Company, we acknowledge receipt of the Class Action Complaint filed in the above-referenced matter on May 21, 1992 which we reviewed for coverage.... Based on that review, we must deny coverage at this time for the reasons discussed below.

... To the extent a qualified Wrongful Act has been alleged in the Complaint, the Southgate Trust Company appears to qualify as an Insured for whom coverage under the Policy is potentially applicable. However, we must deny coverage for the Southgate Trust Company, for the following reasons.

The letter then states that Section IV (G), Endorsement No. 2, Section III (G), and Section IV, Exclusion (C) of the policy prevent coverage.

... Federal bases its coverage position on the allegations in the Complaint that was submitted and the presently known facts. If there are additional allegations or facts that develop through the course of discovery and further pleading, we expressly reserve rights under the Policy and available at law to reserve our rights, deny coverage or rescind the Policy based on other provisions of the Policy including statements and omissions in the application.

After Federal denied coverage, Southgate informed Federal, by letter dated July 21, 1992, that it considered the denial "to be a breach of the contractual obligations" of the insurance company, and that "Federal has forfeited its right to prior approval of any settlement which The Southgate Trust Company may deem to be in its best interest."

Subsequently,...