In re Lloyd Securities, Inc.
| Decision Date | 26 February 1993 |
| Docket Number | Proceeding No. 90-0985 S,Adv. No. 91-1090.,Misc. No. 92-0355 |
| Citation | 153 BR 677 |
| Parties | In re LLOYD SECURITIES, INC., Debtor. Robert E. SHIELDS, Trustee, Plaintiff, v. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA, Defendant. |
| Court | U.S. District Court — Eastern District of Pennsylvania |
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Warren T. Pratt, Drinker, Biddle & Reath, Philadelphia, PA, for plaintiff.
Paul N. Sandler, Sandler & Marchesini, P.C., Philadelphia, PA, for defendant.
This case comes to this court upon objections to a report and recommendation of the bankruptcy court that partial summary judgment should be entered in favor of plaintiff, Robert E. Shields, Trustee for the liquidation of the business of Lloyd Securities, Inc. ("LSI" or the "debtor") and against the defendant, National Union Fire Insurance Company ("NUFIC") in the amount of $500,000.
The relevant facts can be briefly summarized as follows. In June, 1990 the Securities and Exchange Commission ("SEC") filed a request for injunctive relief against LSI in the district court as a result of allegations of widespread misappropriation of funds belonging to LSI customers by Michael Lloyd and Warren Nachman. Lloyd and Nachman were the sole corporate officers of LSI with decision-making responsibility. They comprised at least the majority of its directors and they were the sole corporate officers, directors, and shareholders of LSI's parent company, IBEX International, Inc., the sole shareholder of LSI. On October 30, 1991, a criminal information was filed against Lloyd in federal district court charging him with wire fraud, mail fraud, bank fraud, and conversion of union benefit plan funds. Lloyd subsequently pleaded guilty to certain counts including defrauding six LSI customers. These six customers' claims form the basis of the Trustee's motion for partial summary judgment.
This court appointed a receiver for the debtor shortly after the SEC filed its request for injunctive relief. Subsequently, the Trustee was appointed to succeed the receiver under a protective decree and the SEC proceeding was transferred to the bankruptcy court on December 30, 1990 to administer the liquidation of LSI. On December 16, 1991 the Trustee filed the complaint in this adversary proceeding seeking to recover the maximum limit of liability for any one person under a fidelity bond issued by NUFIC as to both Nachman and Lloyd, $500,000 each, as a result their fraudulent conduct. The Trustee also sought damages pursuant to 42 Pa.C.S.A. § 8371 for conduct constituting bad faith on behalf of NUFIC. In response to NUFIC's motion for withdrawal of the reference of this proceeding to the bankruptcy court, the district court denied the motion, ordering that the case remain in the bankruptcy court until the case is ready for trial.
LSI first applied for and obtained coverage in NUFIC's bond program effective August 1, 1985. Declarations evidencing LSI's coverage under the Bond were issued for the period 11/2/85 to 11/1/85 and annually thereafter, the final period being 11/1/89 to 11/1/90. The present motion is based on the Bond itself and the latest declaration. LSI's renewal application for that Bond period was signed on behalf of LSI by Warren Nachman, the Executive Vice President. The parties do not dispute that Lloyd and Nachman made fraudulent misrepresentations on the bond applications.
On February 20, 1992 the Trustee filed a motion for partial summary judgment on NUFIC's liability under the Bond and as to the bad faith of NUFIC in its handling of the claim. NUFIC also filed a motion for summary judgment on March 31, 1992 claiming it had not acted in bad faith and that Nachman's misrepresentations on the Bond application justified rescission of the Bond. The bankruptcy court subsequently denied both motions stating that "we must therefore deny that Motion until we resolve all or at least some of our doubts about what the facts are or may be and what specific law exists which addresses the tension points identified herein." Lloyd Securities, Inc. v. National Union Fire Insurance Co., 1992 WL 119362, *12 (Bankr.E.D.Pa.1992) ("Lloyd I"). On July 31, 1992, the Trustee once again filed a motion for partial summary judgment on the same issues raised previously. Although the bankruptcy court specifically found that "the underlying factual record is virtually unchanged from Lloyd I." Lloyd Securities Inc. v. National Union Fire Insurance Co., 1992 WL 236162, *4 ("Lloyd II"), that court concluded, in short, that the losses caused by Lloyd are covered losses under the Bond; that Lloyd and Nachmans' fraudulent and dishonest behavior cannot be imputed to the Trustee, acting on behalf of LSI's estate, and, therefore, the bond is not rescindable; that NUFIC properly received notice of the losses as soon as practicable so as to preclude rescission; and, lastly, that any decision on the bad faith issue would be premature in light of the ongoing discovery on the issue.
Because the issues raised by the summary judgment motion are non-core issues yet related to the bankruptcy case of In re Lloyd Securities, Inc., this court must consider the bankruptcy court's proposed findings and conclusions and subject those matters to which any party has filed objections to a de novo review. 28 U.S.C. § 157(c). Only then can this court enter a final judgment on the motion.
Defendant NUFIC timely filed a total of twenty-four (24) objections, excluding subparts, to the bankruptcy court's report and recommendation. After careful consideration of each of these objections, with a few modifications, this court supports and approves the bankruptcy court's recommendation to grant the motion for partial summary judgment with respect to the acts of Michael Lloyd.
Because our review is de novo, we must apply the same standard of summary judgment review as if the motion were before us initially. In other words, we must consider whether the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, show there is no genuine issue as to any material fact, and whether the moving party is entitled to a judgment as a matter of law. Fed.R.Civ.P. 56(c). This court is required to determine whether the evidence is such that a reasonable jury could return a verdict for the nonmoving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986). In making this determination, all reasonable inferences must be drawn in favor of the nonmoving party. Anderson, 477 U.S. at 256, 106 S.Ct. at 2512. While the movant bears the initial burden of demonstrating an absence of genuine issues of material fact, the nonmovant must then establish the existence of each element of its case. J.F. Feeser, Inc. v. Serv-A-Portion, Inc., 909 F.2d 1524, 1531 (3d Cir.1990) citing Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 2553, 91 L.Ed.2d 265 (1986). Furthermore, when interpreting the terms of an insurance contract, any ambiguities or uncertainties must be construed in favor of coverage. Worldwide Underwriters Ins. Co. v. Brady, 973 F.2d 192 (3d Cir.1992).
In his brief supporting the motion for partial summary judgment, the Trustee sets forth eight assertions which, if proven would justify the grant of summary judgment. These assertions are as follows:
The bankruptcy court found that NUFIC was prepared to defend only the fourth, fifth and seventh of the above assertions, having advanced no argument against the first, second and eighth assertions and having apparently conceded the third and sixth.
Despite defendant's lack of explicit opposing arguments, the bankruptcy court conducted a thorough analysis of the first and second issues, finding in favor of the plaintiff on both. First, the bankruptcy court found that Lloyd was an employee of LSI and, thus, his fraudulent conduct was covered under the terms of the Bond. Second, Lloyd's guilty plea agreement evidenced a manifest intent to cause loss to LSI which is also required under the terms of the Bond. After careful review of the bankruptcy court's reasoning, we accept these conclusions.
NUFIC also argues that each of the prior year's bonds rendered collection for frauds predating the last bond period, commencing on November 1, 1989, uncollectible. This is essentially the issue contained in Plaintiff's Assertions three and six. The bankruptcy judge found that NUFIC had conceded this issue. However, the record does not reflect that NUFIC explicitly conceded any of the arguments advanced by plaintiff in support of his motion for summary judgment. It appears that the bankruptcy court relied upon discussions made during a settlement conference in concluding that NUFIC had conceded this point and NUFIC justifiably objected to the bankruptcy court's use of those discussions in deciding the motion for summary judgment. As indicated above, the express provisions of Fed.R.Civ.P. 56(c) provide that when considering a motion for summary judgment a court cannot look beyond the record to make findings of fact. The necessity of the Rule can be exemplified by no better means than our present attempt to review the bankruptcy court's...
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