California Union Ins. Co. v. American Diversified Sav. Bank, 89-55843

• Decision Date: 30 October 1991
• Docket Number: No. 89-55843,89-55843
• Citation: 948 F.2d 556
• Parties: CALIFORNIA UNION INSURANCE CO., Plaintiff, v. AMERICAN DIVERSIFIED SAVINGS BANK, Defendant, and National Union Fire Insurance Company of Pittsburgh, Pennsylvania; Certain Underwriters at Lloyd's, London, Defendants-Cross-Defendants-Appellees, American Diversified Capitol Corporation; Federal Savings and Loan Insurance Corporation, as Receiver for American Diversified Savings Bank; American Diversified Investment Corporation, Defendants-Cross-Claimants-Appellants.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 556

948 F.2d 556

60 USLW 2343

CALIFORNIA UNION INSURANCE CO., Plaintiff, v. AMERICAN DIVERSIFIED SAVINGS BANK, Defendant, and National Union Fire Insurance Company of Pittsburgh,

Pennsylvania; Certain Underwriters at Lloyd's,

London, Defendants-Cross-Defendants-Appellees,

American Diversified Capitol Corporation; Federal Savings

and Loan Insurance Corporation, as Receiver for American

Diversified Savings Bank; American Diversified Investment

Corporation, Defendants-Cross-Claimants-Appellants.

No. 89-55843.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Nov. 7, 1990.

Decided Oct. 30, 1991.

Theodore Russell, Pettit & Martin, San Francisco, Cal., for defendants-cross-claimants-appellants.

Richard W. Zevnik, Wolf & Leo, Raul L. Martinez, Lewis, D'Amato, Brisbois & Bisgaard, Los Angeles, Cal., for defendant-cross-defendant-appellee Nat. Union Fire Ins. Co. of Pittsburgh, Pa.

Frederick D. Baker, Sedgwick, Detert, Moran & Arnold, San Francisco, Cal., for defendant-cross-defendant-appellee Certain Underwriters at Lloyd's, London.

Appeal from the United States District Court for the Central District of California.

Before HUG, CANBY, and WIGGINS, Circuit Judges.

HUG, Circuit Judge:

This case involves an attempt by the Federal Savings and Loan Insurance Corporation ("FSLIC") to recover under certain fidelity bonds issued to a federally insured thrift, American Diversified Savings Bank ("ADSB"), losses incurred due to the defalcations of two of the principal officers and directors of the failed thrift institution. The district court dismissed the case after granting summary judgment in favor of the insurance companies that had issued the fidelity bonds, National Union Fire Insurance Company ("National Union") and Certain Underwriters at Lloyd's of London ("Lloyd's"). We have jurisdiction to hear this case under 28 U.S.C. § 1291, and we affirm the district court's dismissal.

The bonds and policy cover losses "discovered" while the bonds and policy were in force. On appeal, we must decide whether the National Union fidelity bond, by its terms, terminated automatically when the FSLIC took control of ADSB and, if so, whether this provision for automatic termination upon takeover violates federal public policy. Next, we must determine whether FSLIC presented evidence sufficient to avoid summary judgment on the issue of whether "discovery," as that word is defined under the terms of the bond, occurred prior to takeover. If there was no "discovery" prior to takeover, we must then consider appellants' argument that equitable tolling should apply to extend the period for discovery of losses under the bond. Finally, we must address whether the two wrongdoing officers were "employees" of the Insured within the meaning of the comprehensive "dishonesty, disappearance and destruction" ("3-D") policy issued to a subsidiary of ADSB, American Diversified Capital Corporation ("ADCC"), by National Union.

This is a diversity action in which the events forming the basis of the lawsuit occurred in California. Therefore, we are required to apply California law. See Stone v. Millstein, 804 F.2d 1434, 1438 (9th Cir.1986). We must review de novo the district court's grant of summary judgment in this case. See T.W. Elec. Serv., Inc. v. Pacific Elec. Contractors Ass'n, 809 F.2d 626, 630 (9th Cir.1987).

I.

FSLIC, ¹ as conservator for ADSB, appeals the district court's grant of summary judgment in favor of National Union and Lloyd's. FSLIC seeks recovery under certain fidelity bonds obtained by ADSB from National and Lloyd's.

ADSB was a federally insured savings and loan association. Ranbir Sahni owned 96 percent of its stock and Lester Day owned the remaining four percent. Pursuant to the federal regulations in effect during the relevant time periods, 12 C.F.R. § 563.19(a) (1988), ADSB obtained fidelity insurance coverage to provide insurance against loss caused by the dishonest or fraudulent conduct of its employees. ² In 1983, ADSB purchased a primary Standard Form 22 bond from National Union, providing for $1 million of coverage. Thereafter, by amendment, the two wholly-owned service corporation subsidiaries of ADSB, ADCC and American Diversified Investment Corporation ("ADIC"), became additional insureds under the primary bond issued by National Union. ADSB also obtained $2 million dollars of excess coverage by purchasing a second Form 22 bond from Lloyd's.

In addition, ADCC, one of the two wholly-owned subsidiaries of ADSB, purchased an additional $500,000 of fidelity insurance coverage from National Union under the so-called "3-D policy." The 3-D policy covered losses "resulting directly from one or more fraudulent or dishonest acts committed by an employee, acting alone or in collusion with others."

On February 14, 1986, after two years of investigation by examiners from the Federal Home Loan Bank Board ("FHLB"), FSLIC was appointed conservator of ADSB. FSLIC maintains that, between January 1984 and February 1986, the period in which the FHLB examiners were investigating ADSB, a number of transactions occurred that may represent losses that are covered by the Form 22 bonds and the 3-D policy. ³ Accordingly, on February 24, 1986, FSLIC notified National Union and Lloyd's that it was making claims against the bonds. National Union relied on the Form 22 bond's "Automatic Termination Provision" to deny the claim. The Automatic Termination Provision provided that the bond would terminate "immediately upon the taking over of the Insured by a receiver or other liquidator or by State or Federal officials." It appears that Lloyd's, whose bond expired by its terms on February 13, 1986, also later denied FSLIC's claim.

Subsequently, two of ADSB's other insurers (not involved in this case) filed a declaratory relief action seeking to establish their rights and liabilities with respect to FSLIC, as well as Sahni and Day. On February 16, 1988, FSLIC filed a cross-claim against National Union and Lloyd's seeking recovery under the fidelity bonds and the 3-D policy issued by National Union.

Between January and June 1989, the district court granted three separate motions for summary judgment in favor of the insurance companies which effectively disposed of FSLIC's claims against National Union and Lloyd's. The district court determined that the fidelity bonds had terminated automatically upon takeover by FSLIC pursuant to the express terms of the bonds, and that such termination was not in violation of public policy. Moreover, the district court concluded that FSLIC failed to present specific facts showing that there was a genuine issue for trial on whether "discovery" under the bonds occurred prior to takeover by FSLIC, and further ruled that equitable tolling properly would not apply to extend the period for "discovery" of losses under the fidelity bonds. Finally, the court determined that the two wrongdoing officers and directors were not "employees" within the meaning of the comprehensive 3-D policy issued by National Union for the purpose of covering losses resulting directly from one or more fraudulent or dishonest acts committed by an employee.

On July 17, 1989, the district court entered final judgment in the case. FSLIC, as conservator for ADSB, filed a timely appeal from the district court's judgment of dismissal.

II.

FSLIC first contends the district court erred when it determined that the National Union Form 22 bond, by its terms, terminated automatically when FSLIC took control of ADSB. FSLIC argues that the language of the termination provision is ambiguous and, therefore, must be construed against National Union. Alternatively, it argues the Automatic Termination Provision is void as contrary to federal public policy because it frustrates the congressional purpose behind receivership with FSLIC as conservator. FSLIC asserts that, even if the Automatic Termination Provision is valid, the bond requires a ten-day notice prior to termination.

1. Automatic Termination Provision

Specifically, we must address whether National Union's Form 22 bond, as amended by Rider 9, ⁴ terminated automatically upon the appointment of FSLIC as conservator of ADSB on February 14, 1986. An insurance policy is a contract and therefore is enforced in accordance with contract principles. Under California law, the starting place for contract interpretation is with the language of the contract, provided it is "clear and explicit, and does not involve an absurdity." Cal.Civil Code § 1638 (West 1985). "The words used in a policy of insurance are to be construed according to the plain meaning a layman would ordinarily attach to them...." Ray v. Farmers Ins. Exchange, 200 Cal.App.3d 1411, 1416, 246 Cal.Rptr. 593, 595 (1988). Moreover, the words of a contract, including an insurance policy, "are to be understood in their ordinary and popular sense, ... unless used by the parties in a technical sense, or unless a special meaning is given them by usage." Cal.Civil Code § 1644 (West 1985). See Burke Concrete Accessories, Inc. v. Tolson, 27 Cal.App.3d 237, 241, 103 Cal.Rptr. 513, 515 (1972). If the language is unclear or ambiguous rendering its meaning uncertain, "the language of [the] contract should be interpreted most strongly against the party who caused the uncertainty to exist." Cal.Civil Code § 1654 (West 1985). California courts, however, "will not adopt a strained or absurd interpretation in order to create an ambiguity where none exists." Reserve Ins. Co. v. Pisciotta, 30 Cal.3d 800, 807, 640 P.2d 764, 767-68, 180 Cal.Rptr. 628, 631-32.

Turning to the Automatic Termination Provision in the National Union policy, we note that thus far, only two circuits have addressed issues of interpretation and the public policy considerations of provisions identical to the disputed provision in this case. See Federal Deposit Ins. Corp. v. Aetna Cas. & Sur. Co., 903 F.2d 1073 (6th Cir.1990) (clause does not violate public policy); ...