Vons v. Federal Insurance Company
| Decision Date | 09 May 2000 |
| Docket Number | No. 98-56645,98-56645 |
| Citation | 212 F.3d 489 |
| Parties | (9th Cir. 2000) THE VONS COMPANIES, INC.,Plaintiff-Appellant, v. FEDERAL INSURANCE COMPANY,OPINION Defendant-Appellee |
| Court | U.S. Court of Appeals — Ninth Circuit |
COUNSEL: Michael R. Doyen and Cary B. Lerman, Munger, Tolles & Olson, Los Angeles, California, for the plaintiff-appellant.
David T. DiBiase, Anderson, McPharlin & Conners, Los Angeles, California, for the defendant-appellee.
Appeal from the United States District Court Central District of California; Carlos R. Moreno, District Judge, Presiding. D.C. No.CV-97-08715-CM
Before: Stephen Reinhardt and Diarmuid F. O'Scannlain, Circuit Judges, and William W Schwarzer,* Senior District Judge.
The appellant, The Vons Companies, Inc., (Vons), seeks coverage for a $10 million dollar payment it made to settle two lawsuits in which it was sued under respondeat superior for the tortious actions of one Gene Shirley. The lawsuits were brought by investors in a scheme who suffered losses due in part to Shirley's fraud. We must decide whether Vons was entitled to coverage under its employee dishonesty policy issued by Federal Insurance Company (Federal), which insured it against "direct losses . . . caused by. . . any employee." The district court granted Federal's motion for summary judgment and we affirm.
The controversy in this case stems from a legitimate practice known as "diverting," under which grocers buy and sell on a secondary market. Because of regional differences in the price of merchandise sold by manufacturers, grocers can occasionally purchase products from retailers in another part of the country at a price lower than they would have to pay for the product wholesale. Diverters act for grocers to purchase goods at off-market prices in one location and sell them to retailers in another location for a profit.
The diverting operation at Vons was handled by one Gene Shirley, who had been posted on Vons's premises for this purpose by Stanford Trading Company. On behalf of Vons, Shirley bought diverted goods from and sold diverted goods to Premium Sales Company (Premium). Premium's operations were financed by investors in funding entities who lent funds at extravagant interest rates. The investors' money was needed to provide a float because the selling grocers required payment in advance and the buyers demanded credit terms. While Premium engaged in some legitimate transactions, many of its transactions were fictitious. To lend an appearance of legitimacy to these transactions, Premium told the funding entities that their money would be used to effectuate specific buy/sell transactions. With respect to each particular transaction, Premium identified the grocer who had agreed to sell a product and the grocer who had agreed to buy. It also gave the funding entities the names of individuals at the various grocers whom they could contact to confirm a transaction. The funding entities relied on the confirmers' word in deciding to finance transactions.
Shirley was a confirmer for Premium at Vons, for which he received secret payments from Premium. He falsely confirmed some 500 fictitious transactions ostensibly in Vons's name. Premium obtained over $40 million from investors on account of transactions Shirley falsely confirmed. Vons, for its part, lost no money.
Not surprisingly, the exorbitant returns from this program turned it into a Ponzi scheme as Premium diverted funds from new investors to pay old investors instead of financing legitimate transactions. In 1993, Premium's investors discovered the fraud and brought two lawsuits. In October 1995, Vons was added as a defendant in the suits. Its liability was predicated on Shirley's actual or apparent authority to act for Vons and on Vons's negligent supervision of Shirley. Damages of some $300 million were claimed. In 1996, Vons settled the claims against it by a payment of $10 million.
Vons then submitted a proof of loss to Federal for the $10 million, stating that it had suffered a "direct loss of money . . . caused by thefts and forgeries by Gene Shirley." Under an Executive Protection Policy issued by Federal, Vons had crime coverage from at least 1986 through 1996. Insuring Clause 1 covered Vons for "direct losses of Money. . . caused by Theft or forgery by any Employee of any Insured acting alone or in collusion with others." Insuring Clause 4 covered Vons for "direct losses caused by forgery [of certain types of documents] made or drawn by, or drawn upon the Insured, or made or drawn by one acting as agent of the Insured. " Federal denied the claim and this action followed. The district court had jurisdiction under 28 U.S.C. S 1332(a)(1) and granted Federal's motion for summary judgment. See The Vons Companies, Inc. v. Federal Ins. Co., 57 F. Supp. 2d 933 (C.D. Cal. 1998). We have jurisdiction under 28 U.S.C. S 1291 and affirm.
Vons's principal contention is that the district court erred in rejecting its interpretation of the policy as providing liability coverage. Vons's argument rests on section 11 of the policy which provides in relevant part that coverage "shall apply only to Money, Securities or other property owned by the Insured or for which the Insured is legally liable, or held by the Insured . . . whether or not the Insured is liable." (Emphasis added.) By its plain language, Vons argues, the policy covers "money for which the insured is legally liable." According to Vons, it became legally liable for the $10 million attributable to Shirley's actions when it entered into the settlement agreement with the plaintiffs in the Premium litigation.
The problem with the argument is that it is founded on the interest clause of the policy ("ownership"), not the insuring clauses. Under the insuring clauses, Vons is covered only for direct losses to Vons caused by its employee's dishonesty, not for vicarious liability for losses suffered by others arising from its employee's tortious conduct. A direct loss to Vons may, of course, be caused by its employee's theft of property for which it is legally liable, the typical case being where the insured is a bailee or trustee of property. See, e.g., Alberts v. American Cas. Co., 88 Cal. App. 2d 891 (Cal. Dist. Ct. App. 1948) and Ins. Co. of N. Am. v. Gibralco, Inc. , 847 F.2d 530, 533 (9th Cir. 1988). Vons's reliance on these cases is inapposite because the claim against it does not arise from the theft of property for which it is legally liable. Instead, the loss Vons suffered resulted from the threat of vicarious liability for Shirley's tort which caused damage to third parties.
Vons's argument was squarely rejected in Lynch Properties, Inc. v. Potomac Ins. Co., 140 F.3d 622 (5th Cir. 1998). A bookkeeper employed by Lynch Properties had misappropriated funds from the personal bank account of Mrs. Lynch, for whom Lynch Properties performed bookkeeping and management services....
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