Fid. Nat'l Fin., Inc. v. Nat'l Union Fire Ins. Co. of Pittsburg

• Decision Date: 30 September 2014
• Docket Number: CASE NO. 09-CV-140-GPC-KSC
• Court: U.S. District Court — Southern District of California
• Parties: FIDELITY NATIONAL FINANCIAL, INC., CHICAGO TITLE INSURANCE CO., and CHICAGO TITLE CO., Plaintiffs, v. NATIONAL UNION FIRE INSURANCE CO. OF PITTSBURG, PA, Defendant.

FIDELITY NATIONAL FINANCIAL, INC., CHICAGO TITLE INSURANCE CO.,and CHICAGO TITLE CO., Plaintiffs, v. NATIONAL UNION FIRE INSURANCE CO. OF PITTSBURG, PA, Defendant.

CASE NO. 09-CV-140-GPC-KSC

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF CALIFORNIA

September 30, 2014

ORDER GRANTING PLAINTIFFS' MOTION FOR PARTIAL SUMMARY JUDGMENT ON LIABILITY AND DENYING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT

[Dkt. Nos. 324, 325.]

This case involves the aftermath of the collapse of a Ponzi scheme masterminded by Rollo Richard Norton which was executed with the assistance of certain employees of Chicago Title.The case raises a host of insurance coverage issues relating to the losses and claims resulting from the Ponzi scheme.The parties have filed competing motions for summary judgment that raise questions regardingpolicy coverage, discovery of claims and the termination of coverage.¹The Court grants Plaintiffs' motion for partial summary judgment as the evidence leaves no doubt that Defendant breached the fidelity bond and acted in bad faith.Plaintiffs sought a determination as to liability, but reserve the issue of compensatory and punitive damages for trial.The Court denies Defendant's cross motion for summary judgment.

I.Background²

A."Tower of Insurance"

PlaintiffsFidelity National Financial, Inc., Chicago Title Insurance Co., and Chicago Title Co.(hereinafter collectively and interchangeably referred to as either "FNF" or "Chicago Title") are insured by a "Tower of Insurance."Every year, FNF purchases several types of policies, and in each category, FNF buys a primary policy and four excess policies.Def.'s Opp. Ex. 173(LoverichDecl. ¶ 9).

1.The Financial Institution Bond

This lawsuit concerns the primary Financial Institution Bond ("FIB") issued by DefendantNational Union Fire Insurance Co. of Pittsburg, PA ("NU") for the policy period of November 18, 2005 through November 18, 2006 with a policy limit of $15 million per single loss.Pls.'Opp. Ex. 1.

The primary purpose of a fidelity bond is to protect the employer fromdishonest conduct by an employee.Id.(Insuring Agreement A);State Farm General Ins. Co. v. Wells Fargo Bank, N.A., 143 Cal. App. 4th 1098, 1108 & n.6(2006);44 C.J.S. Ins. § 9(2013).These summary judgment motions focus on the allegedly dishonest actions of two Chicago Title employees - Zuzzette Nieto, a Senior Escrow Officer, and her boss, Vice President and Sales Manager Craig Gainor.³

The FIB also covers other perils, including Forgery.Pls.'Opp. Ex. 1(Insuring Agreement D).Here, the acts of forgery were allegedly committed by Rollo Richard Norton, who does not work at FNF.Norton invested the victims' savings in the Crown Point condominium project; forged signatures on various escrow documents; had his associates notarize those signatures; and hired Chicago Title to process escrow transactions.Norton subsequently testified that Nieto and Gainor watched him sign the victims' names to documents.

2.Errors and Omissions Policy

Although most of FNF's other insurance policies are not relevant to the instant motions, the parties mention that FNF also purchased "Errors andOmissions" coverage ("E&O" or Miscellaneous Professional Liability Policy).FNF purchased a $15 million primary E&O policy from NU.Pls.'Ex. 2.[Doc. No. 374-4]

There are important differences between this E&O policy and the FIB.First, the E&O policy covers any losses caused by an employee's negligence, and excludes claims "arising out of a dishonest . . . act."Id.(§ III.A);Century Transit Sys., Inc. v. Am. Empire Surplus Lines Ins. Co., 42 Cal. App. 4th 121, 127 n.4(1996)("'Arising out of' is a broad concept requiring only a 'slight connection' or an 'incidental relationship' between the injury and the excluded risk.")(citation omitted).The E&O policy also obligates the insurance company to defend the insured when the third-party victim sues for damages arising from the employee's wrongful act.Pls.'Ex. 2;46 C.J.S. Ins. § 1298.

B. Norton's Ponzi Scheme

This section outlines the facts relevant to whether the FIB covered the claimed loss.The Court outlines the facts pertaining to NU's claims handling process below, in connection with the cause of action for breach of implied covenant of good faith and fair dealing.

The Ponzi scheme victims alleged they had entrusted their savings to Norton, who had inherited his father's financial planning business.In 1998, Norton's Safe Harbor company purchased a 116-unit apartment complex on Crown Point Drive with his own and his clients' money.E.g., Pls.'Ex. 7 ¶¶ 3, 50-51.When the complex later converted to condominium units, Norton devised a scheme to extract equity from the property by using his clients' identities to sell and refinance individual units.

Between 2002 and 2005, Norton instigated over 300 escrow transactions to steal his clients' money for his personal use.Id.¶ 82.The victims focused on Gainor and Nieto as willing participants in Norton's fraud, but also mentioned other Chicago Title employees.E.g., id.¶ 4, 67, 76, 81;seeid.¶¶ 131, 133, 136 (branchmanager and claims counsel).Nieto, who had been hired by Gainor, was the escrow officer on each transaction.The complaints specifically alleged that Gainor and Nieto were present when Norton "routinely forged signatures on the documents."Id.¶ 88.

As further evidence of Chicago Title's negligence in regard to the Norton scheme, the victims cited two transactions from 2004.The victims alleged that Nieto assisted Norton by artificially inflating the price of units sold to third parties in order to create more equity for Norton and to generate higher fees for Chicago Title.Id.¶¶ 6, 92-101, 121-29.The victims cited the Medhi transaction as an early example of an artificially inflated price.Id.¶¶ 91-101.They further alleged that Norton was "flipping" properties so quickly that he lost track of the liens.They cite the Kaplan transaction as an early example of this problem.Id.¶¶ 119-30.(The Kaplan and Medhi transactions are discussed in detail below in the Discovery section.).

In July 2006, FNF submitted a claim notice to NU under the FIB when dozens of victims alleged that three Chicago Title employees actively participated in a Ponzi scheme orchestrated by Norton.⁴Def.'s Opp. Ex. 173(LoverichDecl. ¶ 23 & Ex. 1F);seeid.Ex. 4(Tolling Agreement ¶ B)(notice of claim given July 7, 2006).FNF notified all of the carriers in its "Tower of Insurance" when this "First Wave" of lawsuits was filed in State Court.⁵

After the litigants conducted extensive discovery, and Norton entered a guilty plea, most of this "First Wave" of lawsuits settled in 2007.⁶This federal case, filed in 2008, is based upon FNF's settlement with nine of those victims.⁷

Norton's guilty plea establishes the material fact that he used forged documents."As part of the scheme, [Norton] and others signed the names of individual investors on grant deeds and other escrow closing documents, and caused those signatures to be notarized by notaries working in [Norton's] office and elsewhere.Pls.'Ex. 8at 4, ¶ 9;accordCase No. 07-CR-2260[Doc. No. 16 (RTat 21-28)].In addition, the victims testified in the underlying litigation that the signatures were forgeries.For example, Keith Holdaway confirmed that multiple documents had not been signed by him or his wife Joni but had been forged.Def.'s Opp. Ex. 8 (Ex. A at 17-19)(citingK. Holdaway2007 Depo.);accordPls.' Ex. 44 (K. Holdaway 2011 Depo.at 169-212)("Those look like forgeries to me. . . .Yeah, those are definitely forgeries.The whole document is forgeries. . . .This whole document has never been signed by my wife or I, any portion of it.")(citing Escrow Transaction 38047468, Short Form Deed of Trust, and Note Secured by Deed of Trust).

Norton operated a complex scheme with many variations, but a few specificexamples are sufficient to analyze the pending summary judgment motions.FNF's summary judgment motion focuses on Jr. Holdaway as sufficient to establish liability.The Court briefly describes three additional victims to illustrate other arguments raised by the parties.

1.Jr. and Sr. Holdaway

In 2002, Jr. Holdaway inherited 85 acres of undeveloped land in Utah with a fair market value of at least $6.3 million from Sr. Holdaway.Def.'s Opp. Ex. 8 (Ex. A ¶ 16 to July 2008 Proof of Loss Form).⁸

Sr. Holdaway had deeded the land to his son in exchange for three promissory notes.Pls.'Ex. 43(K. Holdaway Depo.at 524).Norton bundled the Sr. Holdaway investment, and promised them monthly income.Id.(K. Holdaway Depo.at 525).The promissory notes were initially secured by liens on the Utah acreage, but Norton convinced them to substitute three Crown Point condominiums as security.Def.'s Opp. Ex. 9 (Ex. A ¶¶ 2, 11, 41-43)."The deeds of trust against the Three Condominiums were the [Sr.] Holdaways' 'nest egg,' providing them with financial security in their later years."Id.(Ex. A ¶ 43).Norton "used forged signatures" and other methods "to steal the equity out of them and cheat the [Sr.] Holdaways' out of their retirement security."Id.(Ex. A ¶¶ 44-49)(describing fraudulent escrow transactions).Thus, Sr. Holdaway's assets can also be traced to Norton.

In April 2007, Chicago Title settled the Sr. Holdaway law suit for $4 million.Id.¶ 4.

Jr. Holdaway met and hired Norton in September 2002.Pls.'Ex. 7 ¶ 58(July 2006 First Amended Complaint from First Wave of State Court litigation);Def.'sOpp. Ex. 8(Ex. A).

In February 2003, Jr. Holdaway finalized an exchanged of the Utah real estatefor interest in 26 Crown Point condominiums.Pls.'Ex. 7 ¶¶ 2, 4, 13, 16, 53, 56, 59-61, 76(Norton represented excellent loan to value ratio and 50% net equity in excess of $6 million).Norton promised to manage the 26 condominiums and provide a monthly income of at least $22,000, though some funds would be reinvested by Norton.Id.¶¶ 68, 71.Aside from this initial,...