Opinion ID: 765488
Heading Depth: 2
Heading Rank: 1

Heading: Adverse Domination Doctrine

Text: 44 Adverse domination is an equitable doctrine which operates to toll the statute of limitations for a corporation's claims against its officers or directors when the persons in charge of the corporation cannot be expected to pursue claims adverse to their own interests. Republic of the Philippines v. Westinghouse Elec. Corp., 714 F. Supp. 1362, 1371 n.3 (D.N.J. 1989). The adverse domination theory initially gained prominence in failed bank and thrift litigation. See generally Matthew G. Dore, Statutes of Limitation and Corporate Fiduciary Claims: A Search for Middle Ground on the Rules/Standards Continuum, 63 Brook. L. Rev. 695, 713-14 (1997). At the same time, the FDIC began to argue with limited success that the doctrine should serve to toll notice provisions relating to discovery of loss in insurance policies that covered failed financial institutions. See, e.g., FDIC v. Oldenburg, 34 F.3d 1529, 1544 (10th Cir. 1994)(citing cases); California Union Ins. Co. v. American Diversified Sav. Bank, 948 F.2d 556, 565 (9th Cir. 1991)(recognizing the validity of the doctrine, but holding no equitable tolling on the facts presented). 45 In making his argument, the Trustee relies heavily on Shields v. National Union Fire Ins. Co. (In re Lloyd Securities, Inc.), 153 B.R. 677 (E.D. Pa. 1993). In that case the Trustee brought suit against the debtor's insurance company trying to enforce a fidelity bond. The two corporate officers of the debtor had been misappropriating funds belonging to the debtor's customers at the time the debtor applied for the fidelity bonds. The officers made fraudulent misrepresentations on the bond application. Id. at 680. The district court in Lloyd Securities agreed with the bankruptcy court that the theory of adverse domination applied to toll the date of discovery under the terms of the bond until the debtor was put on notice by a third party of the officers' wrongdoing. As a result, the district court found that the officers' conduct could not be imputed to the debtor to rescind the bond because the corporation had knowledge of its employees' dishonesty, but failed to give the insurance company timely notice. Id. at 685. Without discussion, the court also held that the theory of adverse domination prevented the insurance company from terminating the bond due to the misrepresentations on the application. Id. 46 For several reasons we disagree with the Trustee's contention that the district court erred by declining to apply the adverse domination doctrine in the present case. We first note that New Jersey has not adopted the adverse domination theory. See Levitt v. Riddell Sports, Inc. (In re MacGregor Sporting Goods, Inc.), 199 B.R. 502, 515 (Bankr. D.N.J. 1995)(noting absence of decisions of New Jersey courts expressly adopting adverse domination theory). Fortunately, it is unnecessary for us to predict whether the New Jersey Supreme Court would choose to do so, since the adverse domination theory does not apply under the present circumstances in any event. 47 Adverse domination is a tolling doctrine. It was originally developed to toll the statutes of limitations applicable to a corporation's claims against its officers and directors. In the fidelity insurance context, it has been applied to toll the time a corporation has to notify its insurer of employee theft. In both contexts in which the doctrine has been applied it is based on the recognition that since a defalcating officer or director cannot be expected to protect the interests of the corporation, knowledge of the theft should not be imputed to the corporation for the purpose of tolling an otherwise applicable time limitation on bringing a claim. See Resolution Trust Corp. v. Gardner, 798 F. Supp. 790, 795 (D.D.C. 1992)(discussing the rationale underlying the doctrine). 48 The Trustee appears to argue that the same rationale should apply to misrepresentations made on an insurance application by a defalcating employee. The difficulty with the Trustee's attempt to apply the adverse domination theory to the LEU policies is that no otherwise applicable time period, and therefore no tolling is implicated by the district court's decision. The district court held that the LEU policies were void ab initio because Robert Felzneberg made material misrepresentations on the application. That holding has nothing to do with the timing of the corporation's discovery of the wrongdoings for notice purposes. 49 To the extent that the court in Lloyd Securities based its determination that the material misrepresentations on the fidelity bond application should not be imputed to the debtor corporation on the adverse domination doctrine, the decision was, at best, an extension of the doctrine well beyond its equitable tolling roots. Whereas the equitable tolling of statutes of limitations and other time periods only exposes an insurer to losses of a sort the insurer has already agreed to absorb, extending this doctrine to the concealment of fraud in a policy application exposes the insurer to risks the insurer otherwise would not have assumed. We decline to extend the doctrine in such a manner, particularly in the absence of any indication that the New Jersey Supreme Court would recognize even a traditional version of the theory. Cf. Trans World Metals, Inc. v. Southwire Co., 769 F.2d 902, 908 (2d Cir. 1985) (declining to extend the application of a state statute where the New York courts had not adopted the urged interpretation).