In re Leedy Mortg. Co., Inc.

• Decision Date: 24 July 1987
• Docket Number: Bankruptcy No. 83-03502K,Adv. No. 84-1168K.
• Citation: 76 BR 440
• Parties: In re LEEDY MORTGAGE CO., INC., Debtor. John P. JUDGE, Trustee, Plaintiff, v. Steven James BURNHOPE, Excess Insurance Co., Ltd., English and American Insurance Co., Ltd., Bankers Insurance Corp., Bellefont Insurance Co., Nippon Insurance Co., Ltd., Defendants.
• Court: U.S. Bankruptcy Court — Eastern District of Pennsylvania

76 B.R. 440 (1987)

In re LEEDY MORTGAGE CO., INC., Debtor.

John P. JUDGE, Trustee, Plaintiff, v. Steven James BURNHOPE, Excess Insurance Co., Ltd., English and American Insurance Co., Ltd., Bankers Insurance Corp., Bellefont Insurance Co., Nippon Insurance Co., Ltd., Defendants.

Bankruptcy No. 83-03502K, Adv. No. 84-1168K.

United States Bankruptcy Court, E.D. Pennsylvania.

July 24, 1987.

David S. Fishbone, Philadelphia, Pa., for trustee/plaintiff.

Charles C. Hileman, III, Philadelphia, Pa., for Stephen James Burnhope, Underwriter of Lloyds.

Robert R. Reeder, Philadelphia, Pa., for Bankers Ins. Corp.

Marvin Krasny, Philadelphia, Pa., for debtor.

John Judge, Philadelphia, Pa., trustee.

OPINION

DAVID A. SCHOLL, Bankruptcy Judge.

A. INTRODUCTION AND PROCEDURAL HISTORY

The instant adversarial proceeding is an action by the Trustee of a Debtor mortgage company to recover, originally, compensatory damages of over $14 million and punitive damages of $50 million against the underwriters and the sales agent on two fidelity bonds as the result of certain fraudulent conduct of the Debtor's President and major shareholder, Richard Micheel, and certain other high-level employees of the Debtor. Presently before us is a Motion by the underwriter Defendants for summary judgment as to eleven of the twelve separate Claims identified by the Plaintiff, which embrace all but an employee theft loss of $5,377.27.

We believe that in a case where the facts are so complex and which involves a Motion for summary judgment by an insurer, against which all ambiguities in the policies must be construed, we must deny the Motion as to all claims concerning which we have any reasonable doubt as to the merits. This causes us to grant the Motion entirely as to only three of the eleven Claims (Claims 6, 7, and 12), regarding which we are convinced that the Trustee could not possibly assert a successful cause of action. Further, we indicate that the other Claims must either be reduced in amount from the amount originally stated by the Trustee to be in issue (Claims 2, 3, 4, 9, and 11) or that they can be maintained successfully only if considerably more evidence than was revealed to date can be proven (Claims 1, 8, and 10). However, we do support the viability of the eight remaining Claims in general. We therefore grant the Motion in part only, hoping that our extended discussions herein will spur a complete resolution of the matter. In the event that it does not, we include a Pre-Trial Order within our Order attached hereto.

The parties, while submitting voluminous Briefs,¹ provide therein very little in the way of a procedural history of this proceeding, which was originally filed on August 28, 1984, almost to the day two years before the undersigned was appointed to the bench. We will attempt to reconstruct the procedural history briefly as the result of our perusal of the Docket Entries and file.

On October 31, 1984, the Trustee filed his First Amended Complaint which, to our knowledge, has never been subsequently amended and remains as the present statement of the Trustee's causes of action. The five underwriter Defendants, all of the Defendants except BANKERS INSURANCE CORPORATION, (hereinafter referred to as "Bankers"), filed a joint Answer on November 6, 1984. Bankers, alleged to be the agent that sold the insurance to the Debtor, filed a separate Answer on the same day.

It appears that the next two years were consumed with discovery, and Motions to compel discovery, which were continuously filed, scheduled for hearings, which were often continued, and, apparently, all ultimately resolved. It is difficult to judge what progress was made towards resolving the substance of the matter or moving it along to trial during this period. The first time that the matter surfaced after the undersigned's appointment to the bench on August 27, 1986, was on January 7, 1987, when the matter came before us on the Trustee's Amended Motion to compel certain discovery from the underwriter defendants. We directed the parties to promptly file Memoranda relating to that matter in order that we could resolve it.

However, almost immediately thereafter, we were advised that this discovery matter had been resolved and that the parties desired a conference call on the status of the merits of the case.

In the course of that conference call, conducted on March 2, 1987, the underwriter defendants, at least in the person of Defendant STEPHEN JAMES BURNHOPE,² indicated that they had already prepared and intended to file a Motion for Summary Judgment. Counsel for Bankers indicated that it might do so as well. We therefore sent out an Order of that date directing that any Summary Judgment Motion in the matter must be filed on or before March 9, 1987; that the Trustee should remit any responsive Motions or Briefs on or before April 10, 1987; and that the Moving Parties could respond on or before April 20, 1987. Ultimately, only Burnhope filed such a Motion, with his opening Brief, on March 4, 1987. The Trustee filed his Reply Brief on April 10, 1987; and Burnhope requested and was granted until May 1, 1987, to file his Reply Brief, when he did so.

Since the matter before us is a Motion for Summary Judgment, we need not and cannot make Findings of Fact. However, we will begin by setting forth a few general facts and allegations pertinent to the case necessary to give shape to our legal analysis. Then, we shall proceed, at the outset, to set down our view of the criteria for resolving Motions for Summary Judgment pursuant to Bankruptcy Rule (hereinafter referred to as "B. Rule") 7056 and Federal Rule of Civil Procedure (hereinafter referred to as "F.R.Civ.P.") 56. We will then consider several principles regarding interpretation of insurance contracts generally which we deem pertinent to our analysis. Next, we shall proceed to discuss the issues of law relevant to interpretation of the fidelity bonds in question which Burnhope raises i.e., (1) What constitutes a "loss" for "personal gain" under such a policy? (2) Are actions by Richard Micheel covered under the policies? and (3) Does the Trustee have standing to maintain this action, particularly when it is alleged by Burnhope that most of the losses were incurred by investors or creditors of the Debtor?³ After we have answered these questions, we will apply our analyses to the particular facts of the eleven separate Claims in issue.

B. GENERAL FACTS

At the outset, we shall quote the identical paragraph one of both Certificates of Insurance, one of which covered the period from December 22, 1979, to December 22, 1982, and the other of which covered the period from December 22, 1982, to December 22, 1985, which provides for coverage from losses due to breach of fidelity by employees, as follows:

THE LOSSES COVERED ARE THOSE SUSTAINED AS FOLLOWS:

1. FIDELITY

BY REASON of and solely and directly caused by any dishonest or fraudulent act of the employees of the Assured, as defined, committed with the manifest intention of making improper personal financial gain for themselves wherever committed and whether committed directly or in collusion with others, including loss of property through any such act of any of the employees, as defined. Salary, fees, commissions and other emoluments, including salary increases and promotions shall not constitute improper personal gain.

IT IS AGREED, however, that this insuring clause shall also indemnify the Assured to an amount not exceeding the Limit of Liability of this bond or $50,000, whichever is less, against loss by reason of any such act of attorneys who are retained by the Assured to perform legal services for the Assured and the employees of such attorneys while such attorneys or the employees of such attorneys are performing such services for the Assured.

"Employee" or "employees" as used in this Bond shall be deemed to mean

1. one or more of the Assured\'s officers, clerks and other natural persons in the regular service of the Assured in the ordinary course of the Assured\'s business and whom the Assured compensates by salary, wages or commissions and has the right to govern and direct in the performance of such service.

2. any natural person assigned to the Assured through an intervening employer or agency to perform the usual duties of any employee of the Assured on a contingent or part-time basis.

3. each natural person, partnership or corporation appointed by the Assured to act as its agent in the capacity of electronic data processor of checks or other accounting records of the Assured, while acting on behalf of the Assured or while in possession of money or other property belonging to the Assured or in which the Assured has an interest. Each such agent and the partners, officers and employees of such agent shall be, collectively, on Employee for all the purposes of this Bond, excepting, however, subparagraphs (1) and (2) of Condition L.

4. any natural person who is a director or trustee of the Assured while such director or trustee is engaged in handling funds or other property of any Employee Welfare or Pension Benefit Plan established and maintained by the Assured for the benefit of its employees or any natural person who is trustee, fiduciary, administrator, officer or Employee of any such Plan. It is agreed that the Deductible Amount applicable to loss sustained through acts or defaults committed by employees shall not apply to loss sustained by any Employee Welfare Pension Benefit Plan covered under this Bond through acts or defaults committed by any Employee of any such Plan.

We note that the Debtor, incorporated in the State of Alabama in 1977, filed the instant voluntary Chapter 11 case on September 7, 1983. The Trustee, Plaintiff herein, was appointed by our predecessor, the Honorable William A. King, Jr., on September 16, 1983. It appears that the Debtor did not conduct any business subsequent to the filing. We also note that Richard Micheel,...