Nat'l Credit Union Admin. Bd. v. Cumis Ins. Soc'y, Inc.

• Decision Date: 17 March 2017
• Docket Number: Civil No. 16–139 (DWF/LIB)
• Parties: NATIONAL CREDIT UNION ADMINISTRATION BOARD, as Receiver/Liquidating Agent of St. Francis Campus Credit Union, 808 Third Street Southeast, Suite 100, Little Falls, Minnesota 56345–2143, Plaintiff, v. CUMIS INSURANCE SOCIETY, INC., Defendant.
• Court: U.S. District Court — District of Minnesota

241 F.Supp.3d 934

NATIONAL CREDIT UNION ADMINISTRATION BOARD, as Receiver/Liquidating Agent of St. Francis Campus Credit Union, 808 Third Street Southeast, Suite 100, Little Falls, Minnesota 56345–2143, Plaintiff,

v.CUMIS INSURANCE SOCIETY, INC., Defendant.

Civil No. 16–139 (DWF/LIB)

United States District Court, D. Minnesota.

Signed March 17, 2017

Frances Kern, Esq., Office of the Minnesota Attorney General; Glen E. Schumann, Esq., and James F. Baldwin, Esq., Moss & Barnett, PA; and Roy H. "Chip" Chockley, Esq., Wolff Ardis, P.C., counsel for Plaintiff.

Daniel N. Moak, Esq., Briggs & Morgan, PA; F. Joseph Nealon, Esq., and Nicholas T. Moraites, Esq., Eckert Seamans Cherin & Mellott, LLC, counsel for Defendant.

MEMORANDUM OPINION AND ORDER

DONOVAN W. FRANK, United States District Judge

INTRODUCTION

This matter is before the Court on Defendant's Motion for Summary Judgment. (Doc. No. 23.) For the reasons set forth below, the Court denies the motion.

BACKGROUND

St. Francis Campus Credit Union ("St. Francis") is a credit union with its principal place of business in Little Falls, Minnesota. (Doc. No. 1 ("Compl.") ¶ 4.) CUMIS Insurance Society, Inc. ("CUMIS") insured St. Francis under a fidelity bond, which insured against, among other things, theft by employees. (Id. ¶ 8 & Ex. C.) St. Francis was insured under the bond during all relevant times. (Id. ¶ 8.) On January 23, 2014, St. Francis discovered that one of its managers, Margurite Cofell, had embezzled in excess of $3 million from St. Francis. (Id. ¶¶ 10–11.) On January 27, 2014, St. Francis informed CUMIS of the discovery of the fraud, which St. Francis was still investigating. (Id. ¶ 12 & Ex. D.) On January 28, 2014, CUMIS acknowledged receipt of St. Francis's Notice of Loss. (Id. ¶ 13, Ex. E.)

Plaintiff National Credit Union Administration Board was appointed the receiver of St. Francis on February 14, 2014. (Compl. ¶ 5.) The receiver was put into place "in whole or in large part" as a result of the theft. (Id. ¶ 10.) On December 8, 2014, Plaintiff filed a proof of loss totaling $3,086,755.94. (Id. ¶ 14.)

On June 10, 2015, CUMIS sent a letter seeking to rescind the fidelity bond to Raymond C. Leake. (Id. ¶ 15 & Ex. G ("CUMIS Denial Letter").) Leake was an attorney hired to assist with the bond claim. (Doc. No. 29 ("Opp.") at 17.) In its letter, CUMIS explained that its basis for seeking rescission was that Cofell lied on the application for the bond's renewal. (CUMIS Denial Letter.) Specifically, Cofell checked "no" to the following application questions:

Does any director, officer, board committee member, or employee have knowledge of or information regarding any act, error, or omission which might give rise to a claim against them or the credit union, [...] which would be covered under ... the Bond or any of its Endorsements ...?

Does any director, officer, board committee member, or employee have knowledge of or information regarding any claims, demands or lawsuits currently pending or threatened that may be or have already been brought against them or the credit union?

(Id. )¹ Neither party disputes that Cofell lied by checking no because she was stealing from St. Francis at that time. (See Compl. at ¶ 23; Reply at 8.)

Included with the CUMIS Denial Letter was a check for the premiums that St. Francis had paid from April 10, 2012 to April 10, 2014. (CUMIS Denial Letter.) The CUMIS Denial Letter also stated that it had already refunded the premiums paid from April 10, 2014 to April 10, 2015. (Id. ) Leake forwarded the check and the letter to Robert D. Roach, a senior trial attorney for National Credit Union Administration (the federal agency who oversees Plaintiff). (See Doc. No. 32 ("Peeples Decl.") ¶¶ 1, 9.) During the mail-sorting process, a clerk separated the check from the letter. (Id. ¶ 10.) The check was then forwarded to St. Louis and cashed pursuant to the procedures in place because of the receivership. (See id. ) According to Plaintiff, the clerk did not understand that the letter was a purported offer for rescission. (Id. ¶ 11.)

On January 21, 2016, Plaintiff filed its Complaint seeking a declaration that CUMIS owed coverage under the bond. (Compl. ¶ 33.) On June 13, 2016, CUMIS filed a motion for summary judgment arguing that it rightfully rescinded the bond because either: (1) Cofell's misrepresentation increased CUMIS's risk of loss, which is grounds for rescission under Minn. Stat.§ 60A.08, subd. 9 ; or (2) Plaintiff agreed to rescind the bond after receiving the CUMIS Denial Letter and cashing and retaining the premium refund check. (Doc. No. 25.)

DISCUSSION

I. Legal Standard

Summary judgment is proper if there are no disputed issues of material fact and the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(a). The Court must view the evidence and the inferences that may be reasonably drawn from the evidence in the light most favorable to the nonmoving party. Enter. Bank v. Magna Bank of Mo. , 92 F.3d 743, 747 (8th Cir. 1996). However, as the Supreme Court has stated, "[s]ummary judgment procedure is properly regarded not as a disfavored procedural shortcut, but rather as an integral part of the Federal Rules as a whole, which are designed ‘to secure the just, speedy, and inexpensive determination of every action.’ " Celotex Corp. v. Catrett , 477 U.S. 317, 323–24, 327, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986) (quoting Fed. R. Civ. P. 1 ).

The moving party bears the burden of showing that there is no genuine issue of material fact and that it is entitled to judgment as a matter of law. Enter. Bank , 92 F.3d at 747. The nonmoving party must demonstrate the existence of specific facts in the record that create a genuine issue for trial. Krenik v. Cty. of Le Sueur , 47 F.3d 953, 957 (8th Cir. 1995). A party opposing a properly supported motion for summary judgment "may not rest upon the mere allegations or denials of his pleading, but must set forth specific facts showing that there is a genuine issue for trial." Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 256, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).

CUMIS moved for summary judgment before any discovery had been conducted. As a general rule, "summary judgment is proper only after the nonmovant has had adequate time for discovery." Toben v. Bridgestone Retail Operations, LLC , 751 F.3d 888, 894 (8th Cir. 2014) (internal quotation marks omitted). As a result, the court can elect to defer deciding the motion until the parties have conducted adequate discovery if the nonmovant can demonstrate that "for specified reasons, [the nonmovant] cannot present facts essential to justify its opposition."

Fed. R. Civ. P. 56(d) ; see also Toben , 751 F.3d at 894. Specifically, "[t]he party seeking additional discovery must show: (1) that they have set forth in affidavit form the specific facts that they hope to elicit from further discovery, (2) that the facts sought exist, and (3) that these sought-after facts are ‘essential’ to resist the summary judgment motion." Toben , 751 F.3d at 895 (internal quotation marks omitted); accord Jackson v. Riebold , 815 F.3d 1114, 1121 (8th Cir. 2016) ; Marvin Lumber & Cedar Co. v. Marvin Architectural Ltd. , Civ. No. 16-887, 2016 WL 6595902, at *3 (D. Minn. Nov. 7, 2016).

II. Risk of Loss

CUMIS argues that it is entitled to rescind the bond because Cofell misrepresented her theft on the bond renewal application. The insurance contract is governed by Minnesota law. (Compl. ¶ 20.)² Minn. Stat. § 60A.08, subd. 9, provides:

No oral or written misrepresentation made by the assured, or in the assured's behalf, in the negotiation of insurance, shall be deemed material, or defeat or avoid the policy, or prevent its attaching, unless made with intent to deceive and defraud, or unless the matter misrepresented increases the risk of loss.

While not plainly apparent, an application for insurance is covered by this section. Pioneer Indus., Inc. v. Hartford Fire Ins. Co. , 639 F.3d 461, 466 (8th Cir. 2011) (collecting cases). Under § 60A.08, subd. 9, an insurer may rescind the contract by showing, among other things, that "the matter misrepresented [on the application] increase[d] the risk of loss." Id. at 468 ("An increase in the risk of loss is all that is required in order to trigger application of Minn. Stat. § 60A.08(9) ; an insurer is not required to further prove that it would never have issued the policy but for the misrepresentations."). The insurer bears the burden of proving "a misrepresentation increased the risk of loss." Id.

Here, it is clear that CUMIS's risk of loss increased due to Cofell's omission that she was stealing from St. Francis. While Plaintiff argues that CUMIS has not provided any proof that its risk of loss increased as a result of Cofell's misrepresentation, the Court is not persuaded. CUMIS issued the fidelity bond on the risk of employee theft. The fact that Cofell was actually stealing changed that risk to a guarantee. Thus, the Court concludes that Cofell's misrepresentation increased CUMIS's risk of loss on the fidelity bond.³

The only issue for the Court is whether that misrepresentation can be attributed to St. Francis, the insured. As a general rule, a principal is bound by an agent's authorized actions, and the principal is imputed with the agent's knowledge during those actions. St. Paul Fire & Marine Ins. Co. v. F.D.I.C. , 968 F.2d 695, 700 (8th Cir. 1992) ; see also Restatement (Second) of Agency § 278 (Am. Law. Inst. 1958). An exception to this general rule is that a principal is not imputed with the knowledge of an authorized agent who is acting adversely to the interest of the principal.

Sussel Co. v. First Fed. Sav. & Loan Ass'n of St. Paul , 307 Minn. 199, 238 N.W.2d 625, 627 (1976). "The refusal to impute knowledge to the principal of an agent who is acting adversely to the principal is an acknowledgment that the usual legal fiction of complete agent-principal communication is unjustified where the agent is acting...