Greenwald v. Western Surety Co., 031519 IDSCCI, 45404

Docket Nº:45404
Opinion Judge:STEGNER, JUSTICE.
Party Name:BRENT H. GREENWALD dba, GREENWALD NEUROSURGICAL, P.C., an Idaho Corporation, Plaintiff-Respondent-Cross Appellant, v. WESTERN SURETY COMPANY, Defendant-Appellant-Cross Respondent.
Attorney:Elam & Burke, P.A., Boise, for appellant. Joshua S. Evett argued. Swafford Law, P.C., Idaho Falls, for respondent. Larren K. Covert argued.
Judge Panel:Chief Justice BURDICK, Justices HORTON, BRODY, and BEVAN CONCUR.
Case Date:March 15, 2019
Court:Supreme Court of Idaho
 
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BRENT H. GREENWALD dba, GREENWALD NEUROSURGICAL, P.C., an Idaho Corporation, Plaintiff-Respondent-Cross Appellant,

v.

WESTERN SURETY COMPANY, Defendant-Appellant-Cross Respondent.

No. 45404

Supreme Court of Idaho

March 15, 2019

Appeal from the District Court of the Seventh Judicial District, State of Idaho, Bonneville County. Joel E. Tingey, District Judge.

The judgment of the district court is vacated and the case is remanded for further proceedings consistent with this opinion.

Elam & Burke, P.A., Boise, for appellant. Joshua S. Evett argued.

Swafford Law, P.C., Idaho Falls, for respondent. Larren K. Covert argued.

STEGNER, JUSTICE.

This appeal arises out of a Dishonesty Bond (the bond) issued by Western Surety Company (Western) that insured Greenwald Neurosurgical, P.C. (the P.C.), for up to $100, 000 in losses caused by any fraudulent or dishonest act of any employee of the insured.

At the summary judgment stage, the district court found that an employee of the P.C. caused over $100, 000 in losses to the P.C., while he was acting in the ordinary course of the P.C.'s business. The district court then issued a judgment to the P.C. for the policy amount of $100, 000. Western appeals the district court's determinations that the employee caused the loss while acting in the ordinary course of business and that the P.C. actually suffered the loss. The P.C. cross-appeals from the district court's findings that it was the only entity insured under the bond and argues it was awarded too little by way of attorney's fees. For the reasons set out, we reverse the order granting summary judgment, vacate the judgment, and remand the case for further proceedings.

I. FACTUAL AND PROCEDURAL BACKGROUND

Brent H. Greenwald, M.D. (Greenwald), is a neurosurgeon practicing in Idaho Falls, Idaho. Greenwald practices medicine under a professional corporation named Greenwald Neurosurgical, P.C. The P.C. was created in 2001. According to Greenwald, his medical office functioned as headquarters not only for the P.C., but also for his personal financial dealings and investments, as well as his real estate business.

The original bond application indicates that on November 5, 2002, Greenwald applied for a $100, 000 Dishonesty Bond to insure "Greenwald Neurosurgical" from losses caused by its employees. On November 11, 2002, Western issued a $100, 000 Dishonesty Bond insuring "Brent H. Greenwald dba Greenwald Neurosurgical" against the criminal acts of any employee as defined by the bond.

On December 8, 2009, the P.C. hired Matthew Udy (Udy) as a business and financial manager. According to Greenwald, Udy's responsibilities included receiving income from all sources, making payments on accounts payable, payments to credit card accounts, payments for other miscellaneous charges and services, and managing information technology issues at the medical office. Greenwald referred to Udy as his personal assistant and as a "financial manager of [the] medical practice." However, as evidenced by a 2012 W-2, the P.C. is the sole entity that employed Udy and paid for his services. (During the course of this litigation, Western conceded that the P.C. is an insured entity under the bond. However, it also maintained that only the P.C. was an insured because of language in the policy that limited coverage to fraudulent or dishonest acts of an employee of the insured.)

Also in 2009, Greenwald formed a real estate company, Allagash Realty, LLC (Allagash). According to Greenwald, Udy was responsible for managing Allagash, which included collecting Allagash's rents and other payments, as well as paying its creditors.

On September 11, 2013, Janeene Ditmore (Ditmore), the P.C.'s office manager, was notified that a questionable purchase had been made with one of Greenwald's credit cards. Udy was suspected of making the questionable purchase. Greenwald, along with Ditmore and Troy Clayton (Clayton), the CPA for the P.C., confronted Udy about the purchase. Udy confessed to wrongfully appropriating money and was fired that day. Due to the admitted wrongdoing, Clayton conducted an internal financial audit for the P.C. The audit consisted of an analysis of the P.C.'s financial records, Allagash's financial records, and Greenwald's personal credit card accounts. Greenwald reported Udy's financial embezzlement to the police. Ultimately, on November 10, 2014, Udy pleaded guilty to felony Unauthorized Use of an Access Device (in violation of 18 U.S.C. § 1029) in federal court. He was subsequently sentenced on March 17, 2015. As a result of pleading guilty to Unauthorized Use of an Access Device, Udy was ordered to pay $275, 488.32 in restitution.[1]

A. Prelitigation communication between Western and the P.C.

By letter dated October 10, 2013, Larren Covert, the lawyer for Greenwald and Greenwald Neurosurgical, notified Western of their claim pursuant to the bond, that an employee had "stolen funds from the business."[2] As a result of this notification, Ginger Barnes (Barnes), Western's claim manager, alerted the firm representing Greenwald and the P.C. by letter dated October 17, 2013, that a sworn proof of loss form, along with other documentation, needed to be submitted to Western in order for her to process the claim.

Clayton responded to Western by letter dated January 19, 2014, with an attached sworn proof of loss form dated January 22, 2014. The proof of loss form identified the "approximate loss" in the amount of $347, 395. Greenwald also submitted an affidavit dated January 15, 2014, with an attached, undated Summary Of Total Amounts Stolen (the prelitigation summary), in support of his claim. In his affidavit, Greenwald commented that Udy paid for the fraudulent credit card purchases "with stolen/embezzled funds from my checking accounts using a complex scheme of transfers between accounts."

Greenwald also broke down the estimated losses as follows: $32, 000 in resulting legal fees and costs; $23, 907.74 in "unauthorized charges, accounts, and expenses[;]" $161, 396.52 embezzled from accounts; and $130, 091.20 in "[f]raudulent use of business credit card accounts." Totaling these amounts equals $347, 395.46, which is almost identical to the "approximate loss" identified in the proof of loss.

The undated prelitigation summary submitted to Western attempted to substantiate the amounts listed by Greenwald. Regarding the $161, 396.52 embezzled from accounts, the prelitigation summary itemized that amount as follows: $140, 095 stolen "from Allagash[;]" and $21, 301.52 stolen from Idaho Spine & Brain. The latter amount (stolen from Idaho Spine & Brain) was further broken down into three separate checks from "ReHabAuthority." Those checks were made out to "Allagash," and each check's memo reads "Allagash c/o Idaho Spine & Brain 3155 Channing Way, Suite B Idaho Falls, ID 83404," which is also the address of the P.C.'s office. (The P.C.'s letterhead reads "The Spine & Brain Specialty Center;" however, the record does not explain the relationship between the Spine and Brain Specialty Center and the P.C.) The police report, submitted in support of the P.C.'s claim, indicated that the $140, 095 "from Allagash" was an estimated amount of Allagash rents collected and stolen by Udy.

The prelitigation summary broke down the $130, 091.20 in fraudulent charges to credit card accounts into five separate amounts specific to the following credit card accounts: Citibank, Chase Marriott, CapitalOne Visa, Amex Personal, and Zions. (This total is substantially different from the $25, 102.10 found owed to the various credit card companies in the restitution order. See supra note 1.)

On January 27, 2014, Barnes spoke with Clayton on the phone about the claim. Western contends that Barnes told Clayton on the phone that if any losses were to be reimbursed, they had to be sustained by the P.C. The reason for Western's position was the language of the bond itself. The Bond only covers the fraudulent or dishonest "act of an employee of the Insured . . . ." Western contended that Udy was only an employee of the P.C. and consequently only the P.C. would be insured under the bond. A few months later, on March 21, 2014, Barnes once again informed Greenwald that Western was still awaiting documentation demonstrating that the P.C. incurred a loss caused by Udy.3

On May 29, 2014, counsel for Greenwald and the P.C., Ronald Swafford (Swafford), wrote Western, requesting a response regarding the P.C.'s claim and attached Greenwald's previous January 15, 2014, affidavit with the prelitigation summary. Barnes responded by letter on June 3, 2014, outlining the previous communications and again noting that Western still required documentation of the P.C.'s actual losses. Barnes noted that the $21, 301.52 loss in checks appeared to...

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