Straz v. Kansas Bankers Sur. Co.

• Decision Date: 26 November 1997
• Docket Number: No. 96-C-855.,96-C-855.
• Parties: David A. STRAZ, Jr., Plaintiff, v. THE KANSAS BANKERS SURETY COMPANY, Defendant.
• Court: U.S. District Court — Eastern District of Wisconsin

986 F.Supp. 563

David A. STRAZ, Jr., Plaintiff, v. THE KANSAS BANKERS SURETY COMPANY, Defendant.

No. 96-C-855.

United States District Court, E.D. Wisconsin.

November 26, 1997.

Michael T. Hopkins, Mequon, WI, Stanley F. Hack, Milwaukee, WI, for Plaintiff.

Scott W. Hansen, Kathleen S. Donius, Christopher Banaszak, Reinhart, Boerner, Van Deuren, Norris & Rieselbach, Milwaukee, WI, Ann C. Hoover, Bennet & Dillon, L.L.P., Topeka, KS, for Defendant.

DECISION AND ORDER DENYING PLAINTIFF'S MOTION FOR PARTIAL SUMMARY JUDGMENT (DOC. # 20); GRANTING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT (DOC. # 15) AND DISMISSING COMPLAINT WITH PREJUDICE

CLEVERT, District Judge.

The plaintiff, David A. Straz, Jr. (Straz), filed suit against the defendant, The Kansas Bankers Surety Company (KBSC), in Milwaukee County Circuit Court on July 3, 1996, seeking $1,618,000 from KBSC under a directors and officers insurance policy. KBSC issued the policy to First Bank Southeast, N.A., and First Bank was sued by Saint Catherine's Hospital, Inc. (St.Catherine's), in Circuit Court of Kenosha County, Wisconsin, for mishandling its investments. First Bank merged with Firstar Bank which eventually settled St. Catherine's lawsuit. Thereafter, Straz indemnified Firstar for the $1.4 million it paid to settle with St. Catherine's, and Firstar assigned its claim against KBSC for coverage of the St. Catherine's lawsuit to Straz. KBSC then removed the case from the Milwaukee County Circuit Court to this court, where jurisdiction is based upon diversity under 28 U.S.C. § 1332. Straz and KBSC are now seeking summary judgment. Both motions focus on the scope of the insurance policy's trading loss exclusion.

I. Facts

KBSC and First Bank are parties to "Directors and Officers Legal Defense and Indemnity Policy, DO 1586 WI" covering the period from November 1, 1993, to November 1, 1994. The policy provides $2 million in coverage for "wrongful acts" of First Bank or its directors or officers.

During the policy term, St. Catherine's invested funds with First Bank's trust department. Later, but still during the policy term, St. Catherine's raised complaints about the lack of communication from First Bank regarding the handling of its investments, as well as the bank's actual investment choices. First Bank had invested St. Catherine's funds in volatile derivative securities. Ultimately, on December 27, 1994, St. Catherine's filed a four count complaint against First Bank in Kenosha County Circuit Court.

Each of the four counts in the complaint relates to the financial loss St. Catherine's suffered either directly or indirectly as a result of securities trading. Count One alleges that First Bank owed St. Catherine's a fiduciary duty because of its role as an investment advisor. It asserts that First Bank breached that duty by purchasing highly risky securities, making unauthorized securities purchases, failing to disclose the nature of its securities purchases to St. Catherine's before and after trades, and misrepresenting the nature of securities purchases. The complaint states: "[b]y reason of the Bank's breach of fiduciary duty as aforesaid, the Hospital has been damaged in that it has lost over $1,100,000 in the Sinking Fund." (St. Catherine's Complaint at ¶ 19.)

The second count of the complaint alleges that First Bank's investment decisions were negligent:

22. The Bank's actions in investing in highly speculative derivatives (The Pooled Mortgages) constituted a breach of its duty [to use reasonable care] and negligence because it knew or reasonably should have known that such investments were (a) unauthorized by the Hospital; (b) contrary to the Hospital's investment strategy and intent; (c) highly speculative and subject to interest rate swings.

(St. Catherine's Complaint at ¶ 22.)

Count Three charges that First Bank breached its investment contract, stating:

The Bank breached that obligation [to exercise good faith in the use of its discretion] in one or more of the following ways:

(a) The Bank failed to advise the Hospital that it was investing in highly speculative derivatives;

(b) The Bank concealed said investments from the Hospital; and

(c) The Bank misrepresented the nature of the investments after the same were discovered by the Hospital and misrepresented the "safety" of the same.

(St. Catherine's Complaint at ¶ 25.)

Finally, the complaint accuses First Bank of fraud, alleging that First Bank "purposefully and deceitfully" failed to advise St. Catherine's of the investments, concealed the investments, and misrepresented the nature of the investments. (St. Catherine's Complaint at ¶ 28.)

30. By reason of the Bank's misrepresentations as aforesaid, the Hospital was induced and lulled into believing that the Pooled Mortgages were safe and that the Hospital would not sustain a loss since they could be repurchased by the broker, and accordingly, the Hospital did not order a sale of the Pooled Mortgages at an early state (when it would have otherwise lost only $97,000).

(St. Catherine's Complaint at ¶ 30.)

While Straz and KBSC dispute when First Bank first became aware of St. Catherine's dissatisfaction, it is not disputed that First Bank provided KBSC with notice of this issue on September 29, 1994. Further, KBSC received a courtesy copy of the complaint prior to filing and then an authenticated copy of the actual complaint. Nevertheless, KBSC insists that it never received a formal demand to provide First Bank with a defense to St. Catherine's complaint.¹

Regardless of whether First Bank provided KBSC with sufficient notice of St. Catherine's complaint, the insurance company argues that the damages sought by St. Catherine's are not covered by its policy. It also contends that Straz does not have standing to assert his claims. KBSC bases its first assertion on the following policy language:

The Underwriter [KBSC] shall not be liable to make any payment or provide any defense in connection with any claim made against the Directors or Officers:

...

13) for loss resulting directly or indirectly from trading, with or without the knowledge of the Directors or Officers, whether or not represented by any indebtedness shown to be due the Directors or Officers or the Bank on any customer's account, actual or fictitious, and notwithstanding any act or omission on the part of any employee in connection with any account relating to such trading, indebtedness, or balance;

(emphasis added.)

II. Analysis

Under Fed.R.Civ.P. 56, summary judgment is appropriate when the pleadings, affidavits, and other materials on file with the court show that there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 2551, 91 L.Ed.2d 265 (1986). When a rational trier of fact cannot find in favor of the nonmoving party, there is no genuine issue of fact for trial. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986).

This case is particularly well suited for summary judgment because the the material facts are not in dispute. Resolution of this case can be based on the court's interpretation of the disputed insurance contract as a matter of law.

The first step in the court's analysis of this dispute must be application of the appropriate body of law.² In this case, the parties do not dispute that the insurance contract should be analyzed under Wisconsin law. Moreover, other than the place of business of KBSC, all of the relevant contacts are in Wisconsin. Therefore, this court will review the insurance contract under Wisconsin law.

In applying a state's substantive law, this court will look to cases from the state's highest court and if necessary decisions of the state's intermediate courts. Hill v. Int'l Harvester Co., 798 F.2d 256, 260 n. 12 (7th Cir.1986). Where the state's courts do not offer sufficient guidance, this court may look to the state's federal courts and then courts from other jurisdictions in order to determine how the state's supreme court might rule. Shirley v. Russell, 69 F.3d 839, 843 (7th Cir.1995). The present case appears to raise an issue of first impression under Wisconsin law, the scope of an insurance policy exclusion of losses from securities trading.

A. The Trading Loss Exclusion

KBSC argues that no matter how St. Catherine's claim arose, whether it was the result of a breach of fiduciary duty or negligence, the claim is the result of a loss from dealing in securities, and therefore it is excluded from coverage. The insurance contract states:

The Underwriter [KBSC] shall not be liable to make any payment or provide any defense in connection with any claim made against the Directors or Officers:

...

13) for loss resulting directly or indirectly from trading, with or without the knowledge of the Directors or Officers, whether or not represented by any indebtedness shown to be due the Directors or Officers or the Bank on any customer's account, actual or fictitious, and notwithstanding any act or omission on the part of any employee in connection with any account relating to such trading, indebtedness, or balance;

(Policy at Section IV, emphasis added.)

The scope of the trading loss exclusion at issue appears to be a matter of first impression under Wisconsin law. Hence, KBSC cites authorities from a number of other jurisdictions to support its view that Straz is not entitled to relief. Glusband v. Fittin Cunningham & Lauzon, 892 F.2d 208, 211-12 (2d Cir.1989); Roth v. Maryland, 209 F.2d 371, 374 (3d Cir.1954); Shearson/ American Express, Inc. v. First Continental Bank & Trust Co., 579 F.Supp. 1305 (W.D.Mo.1984); see also Continental Corp. v. Aetna Cas. & Surety Co., 892 F.2d 540 (7th Cir.1989); but see Insurance Co. of North America v. Gibralco, Inc., 847 F.2d 530, 533 (9th Cir.1988). Regardless, under Wisconsin law ambiguities in insurance contracts...