Opinion ID: 767887
Heading Depth: 2
Heading Rank: 1

Heading: Discovery of the Loss

Text: 34 The RTC contends primarily that the district court erred in concluding that City Federal failed to discover the basis for its claim under the bond prior to the bond's expiration on March 22, 1989, as required for there to be coverage. It maintains that the issue of when the loss was discovered under the bond is inherently factual and thus properly is reserved for the trier of fact. It claims that the facts City Federal knew as of the expiration of the bond period, when considered in combination, were sufficient under the bond's discovery standard so that the issue should have been presented to a jury. 35 F&D contends in response that the district court's disposition of the discovery issue was correct, as the court recognized that the information that City Federal learned prior to the expiration of the bond period was insufficient to warrant a jury finding that it discovered the loss as of that time. It argues that, at most, the facts and circumstances City Federal knew gave rise to suspicions about the individual defendants' misconduct, but that mere suspicion of employee dishonesty or wrongdoing during the bond period does not constitute discovery. Br. at 24. Citing cases in which the courts ruled in favor of the insurer on the issue of discovery, F&D claims they support its position because the insureds in those cases possessed far more knowledge of facts about the alleged dishonesty than City Federal possessed during the bond period. See id. at 25-28. 36 The bond at issue is known in the industry as a Standard Form No. 22 bond. It is a discovery bond, which by its terms requires that the insured discover the loss during the bond period as a condition to coverage. Thus, coverage expressly is limited by the following section, which defines discovery as the term is used throughout the various provisions in the bond: 37 Section 4. This bond applies to loss discovered by the Insured during the bond period. Discovery occurs when the Insured becomes aware of facts which would cause a reasonable person to assume that a loss covered by the bond has been or will be incurred, even though the exact amount or details of loss may not then be known. 38 App. at 100. Moreover, section 5 of the General Agreements section of the bond states that [a]t the earliest practicable moment, not to exceed 30 days after discovery of the loss, the Insured shall give the underwriters notice thereof. Id. 39 During the summary judgment proceedings before the district court, the RTC argued that a reasonable jury could find that City Federal discovered the loss during the bond period, given the information City Federal knew prior to the expiration of the bond period, and the discovery standard that applied. It relied on several pieces of information of which members of City Federal's legal department were aware as of March 20, 1989, the date City Federal sent its Notice of Possible Loss letter to F&D. Thus, its position essentially was that the facts City Federal knew showed that it possessed more than mere suspicions of dishonesty. Specifically, it cited Stein's deposition testimony which detailed the various pieces of information City Federal's legal department discovered during the bond period. Because the nature and extent of City Federal's knowledge is central to resolving the discovery issue, we will set forth in some detail the factual basis for the RTC's argument. 40 First, Stein testified that she knew that the Northwest loss essentially dropped out of the sky without City Federal management receiving prior warning from any of the individuals responsible for monitoring the loan. She testified that it was unprecedented that a multi-million dollar loss would just appear out of nowhere, without prior warning signs being noticed by the employees working on the account. Yet, to the best of her knowledge at that time, none of the responsible employees revealed any warning signs to City Federal personnel. 41 Second, Stein knew that HonFed specifically excluded the Northwest credit line from its purchase of City Collateral's assets. Stein testified that it was incredible and very peculiar that HonFed would single out the Northwest loan and exclude it from the sale, particularly while City Federal employees responsible for the loan seemingly were unaware of its troubled status. Her testimony in this regard was: 42 MS. STEIN: I mean, I can't imagine how HonFed could come up to a conclusion like that [i.e., that the loan should be excluded], having no ownership of the loan, where we had bank employees or City Collateral employees who were responsible for this loan. It just didn't square up. I mean, why does a buyer kick out a loan from a purchase? It's just not, you know, karma. 43 . . . . 44 I just knew the HonFed deal was going down right around this time, and it seemed very peculiar to me that another financial institution kicks this loan out of its purchase. 45 MR. KASLOW: Do you know if HonFed conducted any due diligence? 46 MS. STEIN: Well, my point is this. If HonFed conducted due diligence and saw something that made it believe that this loan was not, you know, acceptable, where were our employees who were managing this loan and dealing with this borrower, why didn't they also discover that and why wasn't that brought to management's attention? 47 Third, Stein knew that DeVany learned of Movroydis's fraudulent scheme in late December 1988, but failed to report his admission to management at City Federal or City Federal's legal department. She knew that DeVany met with Movroydis at or around the same time as the HonFed closing, and learned at that time that Movroydis converted monies Northwest owed to City Collateral and used the funds to cover marketing losses Northwest sustained in 1987. Stein testified that it was bizarre and contrary to bank policy that DeVany concealed that information rather than promptly notifying the legal department that one of its borrowers perpetrated a fraud. She explained: 48 A borrower walks in, sits down with an account officer [DeVany], confesses to a multimillion dollar fraud, and the account officer doesn't call the legal department for months, the legal department doesn't even find out about it through the account officer? That is, you know, clearly weird. That's just not the way things worked in the real world, it's just not the way it works. 49 App. at 352. Stein explained later in her deposition that City Federal policy required its employees to notify the legal department of matters that had a legal consequence or a legal issue involved. In view of her belief that certainly fraud or theft by a borrower would fall into that category, Stein thought DeVany's concealment particularly telling. App. at 349, 362. 50 Finally, Stein cited DeVany's demeanor as an additional factor that led her to believe that he had engaged in fraudulent or dishonest behavior causing the Northwest loss. According to Stein, DeVany did not seem credible during his interview with Hull, which occurred shortly before the bond period expired and prior to City Federal's Notice of Possible Loss letter dated March 20, 1989. The RTC also cited Hull's assessment of both DeVany's and Merkle's demeanor when he interviewed them. Hull testified that he did not find either of them forthcoming with information about the Northwest loss, which seemed contrary to what one would expect given the circumstances. 51 After reviewing each piece of information, the district court concluded that no reasonable jury could find that discovery had occurred as of the bond's expiration date. It explained that while the circumstances apparently gave rise to concern or suspicions that employees concealed information from City Federal, there was no evidence in the record to indicate that as of [March] 22, 1989, City Federal was aware of any specific dishonest conduct by the employees which proximately caused the Northwest loss. See Op. at 32. Specifically, the court noted that Stein's knowledge of the manner in which Northwest learned of the loss and her awareness of the fact that HonFed decided to exclude the account from the purchase did not provide a basis for assuming that the employees responsible for the administration of the credit lines caused the loss. Moreover, the court discounted the significance of the fact that Stein knew that DeVany was aware of Movroydis's scheme prior to the HonFed closing but failed to alert City Federal management or its legal department, stating: 52 DeVany's failure to notify the legal department of the confession is not a definite basis for a careful and prudent person to charge him with fraud or dishonesty. At that time, his omission may have just as easily been classified as neglect. Further, this particular concealment was not the dishonest conduct that directly resulted in the Northwest loss: the culprits were the earlier ongoing misrepresentations of the condition of the credit line that proximately caused the claimed loss from the unpaid loans. 53 Op. at 33. The court also cited City Federal's failure to respond promptly to F&D's requests for additional information, and its admission in litigation with its subsequent insurer that as of the expiration of the F&D bond, City Federal had not determined the specifics of any employee dishonesty in connection with those problem loans to Northwest. Op. at 33-34. 54 In reviewing the district court's grant of summary judgment, we must determine whether there is a genuine issue of material fact for trial on the issue of whether City Federal discovered the loss during the bond period. See FDIC v. Insurance Co. of N. Am., 928 F. Supp. 54, 58 (D. Mass. 1996), aff'd on other grounds, 105 F.3d 778 (1st Cir. 1997). In this connection, we must view the facts in the light most favorable to City Federal and determine if a reasonable jury could conclude that a reasonable person would have assumed, based on the information City Federal knew as of March 22, 1989, that a covered loss had or would be incurred. Stated differently, summary judgment against the RTC on this issue of discovery was warranted only if there was no material dispute that the information City Federal knew provided an insufficient basis for a reasonable person to assume that a loss covered by the bond had or would be incurred. See In re ContiCommodity Servs., Inc., Sec. Litig., 733 F. Supp. 1555, 1578 (N.D. Ill. 1990). 6 55 For the reasons we explain below, we disagree with the district court's conclusion that no reasonable jury could find that City Federal discovered the Northwest loss during the bond period. Given the standard of discovery set forth in section 4 of the bond, we find that a reasonable jury could conclude, based on the information that City Federal knew as of the expiration of the bond period, that it was aware of sufficient facts that would cause a reasonable person to assume that a loss covered by the bond had or would be incurred. Accordingly, we will reverse the district court's summary judgment on this issue. 56 To explain our result, we first must set forth our understanding of the concept of discovery under the standard set forth in the bond. While we recognize that we addressed the general idea of discovery of a loss under a fidelity bond in Fidelity & Deposit Co. v. Hudson United Bank, 653 F.2d 766 (3d Cir. 1981), this case presents an issue of first impression in this circuit inasmuch as it requires us to interpret the meaning of the discovery standard found in the Standard Form No. 22 bond. 7 To reiterate, discovery occurs under section 4 of the bond when the Insured becomes aware of facts which would cause a reasonable person to assume that a loss covered by the bond has or will be incurred, even though the exact amount or details of the loss may have not then been known. App. at 565. The date of discovery of the loss is of practical significance because it not only determines whether the loss is covered by the bond, but also triggers the insured's obligation to give notice of the possible loss to its carrier at the earliest practical moment, not to exceed 30 days. Id. 57 We understand this discovery standard as comprised of a subjective and objective component: the trier of fact must identify what facts and information the insured actually knew during the relevant time period, and it must determine, based on those facts, the conclusions that a reasonable person could draw from them. Our understanding in this connection comports with prior case law addressing the concept of discovery in the fidelity bond context. See United States Fidelity & Guar. Co. v. Empire State Bank, 448 F.2d 360, 365 (8th Cir. 1971) (In determining when discovery has taken place, the trier of fact must find the pertinent underlying facts known to the insured and must further determine the subjective conclusions reasonably drawn there from by the insured.) (applying Missouri law in absence of governing definition in bond); see also Wachovia Bank & Trust Co. v. Manufacturers Cas. Ins. Co., 171 F. Supp. 369, 375 (M.D.N.C. 1959) (adopting rule of law that mirrors discovery standard of Standard Form No. 22 bond, and stating that The facts must be viewed as they would have been by a reasonable person at the time discovery is asserted, and not as they later appeared in the light of subsequently acquired knowledge.). 58 We also agree with F&D's position that the discovery definition requires that the insured possess more than mere suspicions of employee dishonesty or fraud. See Hudson United, 653 F.2d at 774 (citations omitted). Courts long have recognized the principle that unsupported suspicions of employee misconduct do not constitute discovery in the fidelity bond context, see, e.g., National Newark & Essex Bank v. American Ins. Co., 385 A.2d 1216, 1224 (N.J. 1978), and we believe that the language of the bond incorporates that requirement by tying the concept of discovery to facts within the insured's knowledge. Indeed, the language facts which would cause a reasonable person to assume defines the nature of information that the insured must possess in order for it to be charged with discovery, and we agree with those courts of appeals which have stated that discovery of a loss under section 4 does not occur until the insured discovers facts showing that dishonest acts occurred and appreciates the significance of those facts. See, e.g., FDIC v. Fidelity & Deposit Co., 45 F.3d 969, 974 (5th Cir. 1995) (quoting FDIC v. Aetna Cas. & Sur. Co., 903 F.2d 1073, 1079 (6th Cir. 1990)); see also California Union Ins. Co. v. American Diversified Savs. Bank, 948 F.2d 556, 564 (9th Cir. 1991) (same); Aetna Cas., 903 F.2d at 1079 (citing Empire State Bank, 448 F.2d at 36466); cf. Royal Trust Bank, N.A. v. National Union Fire Ins. Co., 788 F.2d 719, 721 n.2 (11th Cir. 1986) (stating that same discovery definition does not require that the bank have enough information to charge its employee with fraud or dishonesty; All that is required is that it have enough information to assume that the employee has acted fraudulently or dishonestly.). Moreover, we understand the objective, reasonable person component as permitting the trier of fact to analyze the full range of information the insured knew so as to determine whether a reasonable person would assume, based on all of the circumstances, that a covered loss had or would be incurred. See Wachovia Bank, 171 F. Supp. at 376-77. 59 Inevitably, a court must assess each case on its own facts, keeping in mind the general principle that the discovery threshold is low. See California Union, 948 F.2d at 563; see also Oldenburg, 34 F.3d at 1542 (quoting California Union and stating that the  `discovery threshold is low' ). Indeed, by adhering to that general principle, we remain true to the plain language of the bond. All that it requires is that the insured possess sufficient information to lead to a reasonable assumption of a covered loss; it states specifically that the insured need not know the exact amount or details of the loss to be charged with discovery under section 4. 8 60 With these basic precepts in mind, we may consider the specific facts of this case. As we have indicated, our review of the record leads us to conclude that a reasonable jury could find that City Federal possessed sufficient knowledge of facts that would cause a reasonable person to assume that a covered loss had or would be incurred as of March 22, 1989. Put simply, we believe that there is more than one reasonable conclusion that could be reached based on the facts City Federal learned during the crucial days just prior to the bond's expiration. First, City Federal knew for a fact that DeVany was aware of the Movroydis scheme, and committed a dishonest act by concealing the admission from City Federal and perhaps more significantly, its legal department. 9 This is an important piece of information, and it indicates to us that a jury could conclude that City Federal possessed more than mere unsupported suspicions of dishonest conduct. Compare California Union, 948 F.2d at 564-65 (affirming summary judgment for insurer on discovery issue where the evidence arguably showed that the insured knew of infractions of banking regulations, but there was no testimony to indicate that the non-wrongdoing employees knew of dishonest acts by other employees); Aetna Cas., 903 F.2d at 1079 (reversing summary judgment for FDIC and finding that discovery had not occurred during the bond period where the insured had suspected employee dishonesty was involved in a potential loss, but the suspicions grew from general conditions of bank and not from knowledge of any facts which indicated that its employee committed any dishonest acts). Moreover, City Federal was aware of the circumstance that, even after the HonFed sale, DeVany did not inform City Federal or its legal department of the Movroydis fraud; instead, City Federal learned of it because of Movroydis' admission to its management in February 1989. 61 Of course, a reasonable person would evaluate the significance of these facts in the context in which they occurred: on or about the same date that Movroydis supposedly revealed his fraudulent scheme to DeVany, the HonFed deal closed. And in evaluating the importance of the timing of the Movroydis admission and DeVany's concealment, a reasonable person could find it telling that HonFed specifically excluded this account from the City Collateral assets it purchased. Indeed, this circumstance would appear exceptionally suspect in view of the fact that the Northwest loan loss dropped out of the sky in the sense that City Federal management possessed no knowledge of any significant problems with this account, or the existence of any loss, until after the closing date. Finally, Stein testified that she and Hull perceived DeVany's demeanor as elusive when they questioned him. While their assessment of his behavior would be insufficient, standing alone, to satisfy the discovery standard in the bond because mere suspicions are not enough to constitute discovery, it certainly lends support to the conclusion that a jury could find in favor of the RTC on the discovery issue when it is considered in conjunction with the other factual information in City Federal's possession during the relevant time period. 62 It appears to us that the district court overlooked the reasonable inferences that a jury could draw from the totality of information that City Federal knew during the relevant time period. Rather than considering the probative force of the information in its totality, the district court focused on each piece of information in isolation and resolved a disputed factual issue in F&D's favor. We recognize that finding the point at which discovery occurred is difficult, given the inherently fact-driven nature of the inquiry. It may be extremely difficult, then, to determine on summary judgment when the insured discovered a loss caused by employee dishonesty. Given the set of facts before us, we disagree with the district court's ultimate finding that the only reasonable conclusion to be drawn was that City Federal possessed nothing more than unconfirmed suspicions of employee misconduct relating to the Northwest account. Compare United States Fidelity & Guar. Co. v. Maxicare Health Plans, No. 96-2457, 1997 WL 466802, at  (E.D. La. Aug. 12, 1997) (finding as a matter of law at motion for summary judgment that insured discovered the loss within the meaning of the same bond definition where the insured possessed a similar level of knowledge as City Federal); see also Boomershine PontiacGMC Truck, Inc. v. Globe Indem. Co., 466 S.E.2d 915, 917 (Ga. Ct. App. 1996) (reversing order of summary judgment in favor of insurer in fidelity bond dispute on discovery issue, stating that as long as there is room under the evidence for a reasonable difference of opinion as to whether insured discovered loss, summary judgment is inappropriate). 63 In reaching our conclusion we have considered but rejected F&D's arguments in support of the district court's resolution of the discovery issue. First, F&D asserts that City Federal's admissions in litigation against National Union Fire Insurance Company, its insurer that followed F&D, belie the RTC's contention that City Federal possessed sufficient factual information during the bond period for a jury to conclude that it had discovered the loss prior to its expiration. Specifically, it argues that [City Federal] acknowledged the limits of its information in the related National Union suit where it admitted that it knew of no specifics of any employee dishonesty in connection with the Loan prior to March 20, 1989, and further stated that much of the information in the proof of loss was learned after the Bond period had expired. 10 Br. at 32-33. Apparently, the district court ascribed significance to the RTC's position in the National Union litigation, as it noted that the RTC stipulated in the Final Pretrial Order in that case that prior to March 22, 1989, City Federal had not determined the specifics of any employee dishonesty in connection with those problem loans to [Northwest]. Op. at 34 (internal quotation marks omitted). It also noted that City Federal stipulated that it learned much of the information included in the proof of loss during the course of the investigation that took place during the late summer/early fall of 1989. See id. 64 F&D has not argued before us that the RTC's stipulations in the National Union litigation are binding in this case such that City Federal is precluded from asserting that it discovered the loss within the F&D bond period. See Hudson United, 653 F.2d at 777-78; see generally 9 Wigmore, Evidence S 2593 (Chadbourn rev. 1981) (discussing effect of judicial admissions and explaining that statement qualifying as a judicial admission generally is binding in subsequent parts of same proceedings between the same parties). Instead, we understand the thrust of its argument to be that the RTC's position in the National Union case undermines its assertion of discovery in this case. 65 In our view, the RTC has the better argument here, as it recognizes the logical flaw in F&D's argument. Specifically, the RTC's stipulation that City Federal learned much of the information included in the proof of loss, after March 1989, does not mean that sufficient information was not available to City Federal prior to the expiration of the F&D bond so as to constitute discovery as of that date. Similarly, the circumstance that City Federal did not have specific information about the nature and scope of the employee dishonesty that caused the Northwest loss does not mean that what it did know as of March 22, 1989, was insufficient to warrant a reasonable assumption that a covered loss had or would be incurred, which is all that the discovery definition in the bond at issue here requires. Therefore, the RTC's statements in the National Union litigation are not incompatible with its position here and do not persuade us that F&D was entitled to judgment as a matter of law. 66 F&D also contends that the vague and conclusory nature of City Federal's letters to F&D confirm that as of the expiration of the bond period, City Federal possessed nothing more than unsupported suspicions of employee misconduct. It appears that the district court also ascribed significance to the fact that F&D repeatedly sought more specific factual information from City Federal, but City Federal failed to respond to those requests. Apparently, the argument here is that the tone of the letters and City Federal's omissions provide objective evidence that it possessed no specific information of employee wrongdoing. 67 Again, while these circumstances could be viewed as supportive of F&D's position, they do not demonstrate conclusively that F&D is entitled to judgment as a matter of law on the issue of the date of City Federal's discovery under the bond. In short, this argument does not overcome the fact that reasonable minds could differ on the discovery issue, given the nature of the RTC's proofs submitted at the summary judgment proceedings. 68 Next, F&D points out that throughout Stein's deposition testimony, she repeatedly used the word suspicious to describe her assessment of the circumstances surrounding the Northwest loan loss and the individual defendants' involvement in that loss. See Br. at 28-29. It claims that Stein's word choice is indicative of the quantity and quality of information City Federal possessed at the relevant time, and that her testimony actually supports its position that no reasonable jury could conclude that City Federal discovered the loss during the bond period. 69 We, however, do not share F&D's belief that Stein's deposition testimony demonstrates conclusively that she possessed only unsupported suspicions of employee misconduct insufficient to constitute discovery under the relevant standard. Indeed, review of the relevant deposition testimony demonstrates that F&D's argument focuses too narrowly on her use of the term suspicious without examining the context of her statements and the overall content of her testimony. We point out that while Stein stated that she was suspicious of Ridder, Hurst, Merkle and DeVany, she used the word suspicious in replying specifically to F&D's attorney's question, which asked her if she suspected that those employees engaged in misconduct. See SA at 293. In these circumstances, we do not find her responses particularly telling at all. In any event, they certainly do not demonstrate that, as a matter of law, City Federal did not discover the loss during the bond period. Cf. Interstate Prod. Credit Ass'n v. Fireman's Fund Ins. Co., 788 F. Supp. 1530, 1536-37 (D. Or. 1992) (rejecting insurer's argument that testimony of member of loan committee demonstrated that insured discovered loss where employee stated only that he had a feeling that the loans were questionable). 70 Moreover, other aspects of Stein's deposition testimony confirm that, in her view, the information she knew as of March 22, 1989, pointed to the conclusion that employee misconduct was involved in the Northwest loan loss, and thus that the loss was not the result of an employee's poor business judgment or negligence. For example, Stein stated specifically that with respect to DeVany's concealment of the Movroydis admission, she ruled out the concept that it was negligence versus misconduct in regard to the concealment. . . . I mean, there's no-no way to my way of thinking that that was the result of negligence. App. at 374. Thus, we are not faced with a situation where the evidence shows only that City Federal knew of the existence of the loss, but had not yet reached the subjective conclusion that employee dishonesty somehow was involved. Compare Block v. Granite State Ins. Co., 963 F.2d 1127, 1130 (8th Cir. 1992) (affirming district court's grant of summary judgment to insurer where not one bank official testified to a contemporaneous belief that bank employee misappropriated money during coverage period); cf. Maxicare Health Plans, No. 96-2457, 1997 WL 466802, at  (granting summary judgment to insurer where it argued that insured discovered loss prior to commencement of insurer's bond; court noted that insured's actions in terminating contract suggested that it subjectively believed it suffered a loss precipitated by employee dishonesty). 71 Finally, we note that F&D relies on cases in which the courts ruled in favor of the insurer on the issue of discovery, and contends that they are factually analogous to this case and thus support the district court's finding in its favor on that point. Br. at 26-27 (citing Block, 963 F.2d at 1129-30; California Union, 948 F.2d at 564-65; Aetna Cas., 903 F.2d at 1079). We need not tarry on this argument, however, as we do not agree with F&D's assessment that these cases are factually analogous. Put simply, the cases F&D cites in support of its position do not compel the conclusion it seeks because the outcome of each case, as in the present case, turned on its unique facts. Accordingly, a comparison of the quality and quantity of information within the insureds' knowledge in those cases ultimately does not persuade us that the district court's disposition of the issue at the summary judgment stage was appropriate. 72 As the foregoing discussion demonstrates, we disagree with the district court's assessment of the legal significance of the known facts as of March 22, 1989. We hold that the district court erred in concluding that no reasonable jury could find that City Federal discovered the loss during the bond period, and accordingly, we hold that summary judgment in F&D's favor was inappropriate.