United States District Court, District of New Jersey
October 3, 1991
ORITANI SAVINGS & LOAN ASSOCIATION, A CORPORATION ORGANIZED UNDER THE BANKING LAWS OF NEW JERSEY, PLAINTIFF,
FIDELITY & DEPOSIT COMPANY OF MARYLAND, DEFENDANT.
The opinion of the court was delivered by: Harold A. Ackerman, District Judge.
This is a declaratory judgment action in which the plaintiff,
Oritani Savings & Loan Corporation, ("Oritani"), seeks a ruling
that the defendant, Fidelity & Deposit Company of Maryland,
("Fidelity"), is obligated to indemnify it under a Savings and
Loan Blanket Bond. Presently before the Court is a motion by
Fidelity for partial summary judgment dismissing the Third Count
of plaintiff Oritani's Amended Complaint, or in the alternative
seeking leave to file a Third-Party Complaint against John Rowe.
I will decide this matter on the papers without oral argument as
permitted by Federal Rule of Civil Procedure 78.
The parties have twice previously appeared before this Court.
On July 9, 1990, the Court denied Fidelity's motion for summary
judgment, holding, inter alia, that Oritani's complaint could be
said to have asserted a claim under Insuring Agreement (A) and
that as a question of fact existed as to whether Insuring
Agreement (A) provided coverage in the matter, summary judgment
was inappropriate.*fn1 Oritani Savings & Loan Association v.
Fidelity & Deposit Company of Maryland, 741 F. Supp. 515, 524
(D.N.J. 1990.) The parties again appeared before the Court in
October, 1990 on Fidelity's motion for reconsideration of this
Court's June, 1990 decision denying their motion for summary
judgment, and on the Oritani Cross-Motions for summary judgment
and leave to amend the Complaint to unambiguously assert a claim
under Insuring Agreement (A) of the bond. Fidelity asserted three
grounds in support of its motion for reconsideration, including,
that the Court had erred in finding that a question of fact
exists as to whether coverage is afforded under Insuring
Agreement (A) of the blanket bond. Fidelity contended that the
Court had misapplied the case of National Newark & Essex Bank v.
American Insurance Co., 76 N.J. 64, 385 A.2d 1216 (1978) in
interpreting Insuring Agreement (A) of the Oritani bond because
the language in National Newark differs from that of Insuring
Agreement (A). Specifically, the bond in National Newark lacked
the definition of "Dishonest and Fraudulent Acts" present in
Insuring Agreement (A) of the Oritani bond. This Court rejected
Fidelity's first two grounds for reconsideration, and about the
contention that the Court misapplied National Newark, concluded
In light of the difficulty of the issue, the absence
of controlling authorities, and the fact that it is
wholly unnecessary for me to decide it, (since I have
already decided that there is coverage under section
(B)), I decline to rule on this issue at this time.
Oritani, 744 F. Supp. at 1316. Consequently, the Court denied
Fidelity's motion for reconsideration, granted Oritani's motion
for partial summary judgment, and granted Oritani's motion for
leave to amend. Oritani Savings and Loan Association v. Fidelity
& Deposit Company of Maryland, 744 F. Supp. 1311 (D.N.J. 1990).
Presently, the Court has once again been asked to consider
Fidelity's motion for summary judgment holding that no coverage
is afforded under Insuring Agreement (A) of the blanket bond. In
light of what counsel for Fidelity have correctly pointed out to
be the misapplication of National Newark & Essex Bank v.
American Insurance Co., in my prior opinion (See Oritani,
supra, 741 F. Supp. at 524), and for the reasons set forth below,
I find that summary judgment in favor of Fidelity, the defendant,
is appropriate. I have no need to discuss the factual background
out of which these claims arise, as it
has been completely set forth in this Court's July 1990 opinion.
See Oritani, supra, 741 F. Supp. at 517-519.
Fidelity's Motion for Partial Summary Judgment
Fidelity, the defendant, is moving for partial summary judgment
on Count Three of the plaintiff's Amended Complaint, in which the
plaintiff seeks recovery under Insuring Agreement (A). The issue
to be decided is whether the "Dishonest or Fraudulent Acts"
clause of this blanket bond, including its definition of
dishonest and fraudulent acts, covers the loss resulting from an
act by an employee which complies with all company policies and
was undertaken without the intent to cause loss to the bank or to
financially benefit himself. The clause, contained in Insuring
Agreement (A), provides:
Loss resulting directly from dishonest or fraudulent acts of an
Employee committed alone or in collusion with others.
Dishonest or fraudulent acts as used in this Insuring Agreement
shall mean only dishonest or fraudulent acts committed by such
Employee with the manifest intent
(a) to cause the Insured to sustain such loss, and
(b) to obtain financial benefit for the Employee or
for any other person or organization intended by the
Employee to receive such benefit, other than
salaries, commissions, fees, bonuses, promotions,
awards, profit sharing, pensions or other employee
benefits earned in the normal course of employment.
See Brief in Support of Defendant's Motion for Partial Summary
Judgment, Exhibit F.
Fidelity contends that Insuring Agreement (A) only covers that
specific loss which the employee dishonestly or fraudulently
intended to cause his employer, and then only if, in causing that
loss, the employee had the subjective intent to cause that loss
by his deliberate fraudulent or dishonest conduct with the
deliberate intent of gaining a benefit for himself or for someone
else whom he intended should receive the benefit. The defendant
further argues that as Oritani's admissions establish that John
Rowe can be accused of no more than negligence or poor judgment,
that he followed all company procedures, and that he did not
intend to cause Oritani loss or to benefit himself, the loss is
not covered by the bond as a matter of law.
Oritani, the plaintiff, contends that an issue of fact exists
as to whether the plaintiff is entitled to coverage under
Insuring Agreement (A). Oritani argues that the "manifest intent"
to cause loss to the Insured, and gain to the employee or a third
party required under the bond encompasses both actions taken by
the employee with the subjective intent to act dishonestly or
fraudulently and cause loss, and those actions which, though
taken without the subjective intent to act dishonestly and cause
a loss, are nonetheless sufficiently reckless or wanton about
causing a loss that intent may be inferred. Oritani further
argues that a fact issue exists as to whether Mr. Rowe's conduct
was sufficiently reckless to warrant coverage under the bond.
A. Standard of Review
Rule 56 of the Federal Rules of Civil Procedure provides that
"judgment . . . shall be rendered forthwith if the pleadings,
depositions, answers to the interrogatories, and admissions on
file, together with the affidavits, if any, show that there is no
genuine issue as to any material fact and that the moving party
is entitled to judgment as a matter of law." Fed.R.Civ.Pro.
56(c). Put differently, "summary judgment may be granted if the
movant shows that there exists no genuine issues of material fact
that would permit a reasonable jury to find for the nonmoving
party." Miller v. Indiana Hospital, 843 F.2d 139, 143 (3rd Cir.
1988), cert. denied, 488 U.S. 870, 109 S.Ct. 178, 102 L.Ed.2d 147
(1988). A fact is material if it influences the outcome under the
governing law. Anderson v. Liberty Lobby, Inc. 477 U.S. 242,
248, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986).
The moving party has the initial burden of production; they
must make a prima facie showing that they are entitled to summary
judgment. Celotex Corp. v. Catrett, 477 U.S. 317, 327, 106
S.Ct. 2548, 2554, 91 L.Ed.2d 265 (1986); Peters Twp. School
Dist. v. Hartford Acc. & Indemn., 833 F.2d 32, 34 (3d Cir.
1987). Once such a showing is made, the
burden switches and the nonmoving party must show the moving
party is not entitled to summary judgment. In opposing summary
judgment, the nonmoving party cannot rely upon the allegations of
his pleadings; he must come forward with evidence supporting a
claim that there is a material fact in dispute to be resolved by
the trier of fact. Matsushita Elec. Indus. v. Zenith Radio
Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538
(1986); First Nat'l Bank v. Cities Serv. Co., 391 U.S. 253,
289, 88 S.Ct. 1575, 1592, 20 L.Ed.2d 569 (1968). All inferences
to be drawn from the facts should be resolved in favor of the
nonmoving party. Tigg Corp. v. Dow Corning Corp., 822 F.2d 358,
361 (3d Cir. 1987). The burden of persuasion is stringent and
remains on the moving party. If there remains any doubt as to
whether a trial is necessary, summary judgment should not be
granted. See Celotex Corp., 477 U.S. at 330-33, 106 S.Ct. at
2556-58; Adickes v. S.H. Kress & Co., 398 U.S. 144, 157-61, 90
S.Ct. 1598, 1608-10, 26 L.Ed.2d 142 (1970).
Because jurisdiction in this case is founded on diversity of
citizenship, I am bound to apply New Jersey law to the present
controversy. See Erie Railroad Co. v. Tompkins, 304 U.S. 64,
78, 58 S.Ct. 817, 822, 82 L.Ed. 1188 (1938); Wilson v.
Asten-Hill Manufacturing Co., 791 F.2d 30, 32 (3d Cir. 1986).
Under New Jersey law, the construction of contracts is a question
of law for the court. Northeast Custom Homes, Inc. v. Howell,
230 N.J. Super. 296, 301, 553 A.2d 387 (Law Div. 1988).
Ultimately, at trial, the Court must instruct the jury as to what
coverage the policy provides. Davis v. Equitable Life Assur.
Soc., 90 N.J. Super. 328, 331, 217 A.2d 459 (App. Div. 1966).
However, ordinarily the issue of whether the employee's act was
dishonest within the bond coverage is for the jury to decide
unless the facts reasonably permit of but a single conclusion.
Mortgage Corp. of N.J. v. Aetna Cas. & Surety Co., 19 N.J. 30,
38, 115 A.2d 43 (1955).
The precise language contained in the "Dishonest and Fraudulent
Acts" clause of the Oritani bond has apparently never before been
interpreted by any court in the state of New Jersey.*fn2 Thus,
under Erie Railroad Co. v. Tompkins, supra, I must predict how
the New Jersey State Supreme Court would rule on this issue if
presented with it. Aloe Coal Co. v. Clark Equipment Co.,
816 F.2d 110, 117 (3rd Cir.), cert. denied, 484 U.S. 853, 108 S.Ct.
156, 98 L.Ed.2d 111 (1987). In forecasting how the state Supreme
Court would rule, dicta or lower state court decisions are
"indicia of how the state's highest court might decide."
Pennsylvania Glass Sand v. Caterpillar Tractor Co.,
652 F.2d 1165, 1167 (3rd Cir. 1981); McKenna v. Ortho Pharmaceutical
Corp., 622 F.2d 657, 663 (3rd Cir.), cert. denied, 449 U.S. 976,
101 S.Ct. 387, 66 L.Ed.2d 237 (1980). In the absence of lower
court opinions, "[t]he policies underlying the applicable legal
doctrines, the doctrinal trends indicated by these policies, and
the decisions of other courts may also inform our analysis. In
addition, we may consult treatises, the Restatement, and the
works of scholarly commentators." Pennsylvania Glass, 652 F.2d
at 1167. See also McKenna, supra at 662; Aloe Coal, supra, at
117; McNeilab, Inc. v. North River Ins. Co., 645 F. Supp. 525,
532 & n. 9 (D.N.J. 1986), aff'd, 831 F.2d 287 (3d Cir. 1987).
As there are no lower court decisions interpreting this precise
language I must look to New Jersey policies concerning insurance
and cases in other jurisdictions interpreting identical language
in order to predict what the New Jersey Supreme Court would
decide. Under New Jersey law, insurance contracts are generally
considered to be "contracts of adhesion, prepared unilaterally by
the insurer, and have always been subjected to careful judicial
scrutiny to avoid injury to the public." Sparks v. St. Paul Ins.
Co., 100 N.J. 325, 335, 495 A.2d 406 (1985). It has long been
the policy in New Jersey that
[i]f the controlling language [of the policy] will
support two meanings, one favorable to the insurer,
and the other favorable to the insured, the
interpretation sustaining coverage must be applied.
Courts are bound to protect the insured to the full
extent that any fair interpretation will allow. . . .
[D]oubts as to the existence of coverage must be
resolved in favor of the insured.
Mazzilli v. Accident & Cas. Ins. Co., 35 N.J. 1, 7-8,
170 A.2d 800 (1961); Kopp v. Newark Ins. Co., 204 N.J. Super. 415, 420,
499 A.2d 235 (App. Div. 1985). This settled rule of law that
doubts and ambiguities must be resolved in favor of coverage
extends to fidelity bonds issued to banks. Fidelity & Deposit
Co. of Md. v. Hudson United Bank, 653 F.2d 766, 772 n. 8 (3d
Cir. 1981). Moreover, even if the contract language is not
necessarily ambiguous, the insurance contract should be
interpreted in accordance with the reasonable expectations of the
insured. See Sparks, supra, 100 N.J. at 336-38, 495 A.2d 406;
Meier v. New Jersey Life Ins. Co., 101 N.J. 597, 612,
503 A.2d 862 (1986) (courts will enforce only the restrictions and the
terms in an insurance contract that are consistent with the
objectively reasonable expectations of the average insured). See
also Perrine v. Prudential Ins. Co., 56 N.J. 120, 126-7,
265 A.2d 521 (1970); Gerhardt v. Continental Ins. Co., 48 N.J. 291,
297-300, 225 A.2d 328 (1966); Killeen Trucking v. Great Am.
Surplus Lines Ins. Co., 211 N.J. Super. 712, 716-17, 512 A.2d 590
(App. Div. 1986).
Plaintiff, Oritani, relies on this New Jersey policy of
construing ambiguities in favor of coverage, and argues that the
phrase "manifest intent" in Insuring Agreement (A) is susceptible
of two interpretations. Oritani, based on a discussion
distinguishing "motive" from "intent", contends that the bond's
requisite "manifest intent" to cause loss could be interpreted to
mean that coverage extends both to cases where the employee
intended to cause loss to the insured, and to those situations
where, though the employee had no subjective intent to cause loss
to the insured, it was sufficiently objectively foreseeable that
loss would result from his conduct that his behavior rose to the
level of recklessness. I am unpersuaded by this argument,
however, because I feel the plaintiff takes the phrase "manifest
intent" out of context and ignores the rest of the definition of
fraudulent or dishonest acts. The Insuring Agreement states:
Dishonest or fraudulent acts as used in this Insuring
Agreement shall mean only dishonest or fraudulent
acts committed by such Employee with the manifest
(a) to cause the Insured to sustain such loss,
(b) to obtain financial benefit for the Employee
or for any other person . . .
I feel that it unduly strains the language of the Insuring
Agreement to construe the definition to include acts undertaken
by the employee with no dishonest motive or intent to cause loss
to the insured and to secure gain for himself. Thus I see no
ambiguity in the controlling language of the bond. It seems clear
that the provision was meant to cover only those actions taken by
an employee with some degree of dishonest intent to secure a
benefit for himself or another and cause a loss to the insured.
In the absence of an ambiguity, the New Jersey policy set forth
in Mazzilli and Kopp, supra, is inapplicable. See Mazzilli,
35 N.J. at 7-8, 170 A.2d 800
; Kopp, 204 N.J.Super. at 470,
499 A.2d 235
. Moreover, as Oritani cannot reasonably expect to
recover under an Insuring Agreement providing coverage for
"Dishonest or Fraudulent Acts" when they admit that the employee
in question acted with a "pure
heart," followed all company policies, and had no intention to
cause the company a loss or to secure a gain for himself, the
Sparks line of cases does not apply. See Oritani Opposition
Brief, p. 8; Plaintiff's Answers to Defendant's Second Demand for
Admissions; Sparks, supra, 100 N.J. at 336-38, 495 A.2d 406
Meier, supra, 101 N.J. at 612, 503 A.2d 862
Other jurisdictions, interpreting identical language defining
dishonest and fraudulent acts in similar blanket bonds, have
found that coverage under the bond requires a showing that the
employee not only committed a dishonest act, but that he did so
with the subjective intent: 1) to cause his employer loss and 2)
to incur a benefit for himself or confer it on a third party.
While such precedent is clearly not binding on me, it is
persuasive. In Glusband v. Fittin Cunningham & Lauzon, Inc.,
892 F.2d 208 (2d Cir. 1989), it was held that an investment
adviser's purchase of naked call options which the court
characterized as "reckless and imprudent" and which resulted in
large losses for the employer, was not covered under the bond
because the employee lacked the requisite manifest intent to
cause loss to his employer and to benefit himself. Id. at 210.
See Leucadia, Inc. v. Reliance Ins. Co., 864 F.2d 964, 972 (2d
Cir. 1988), cert. denied, 490 U.S. 1107, 109 S.Ct. 3160, 104
L.Ed.2d 1023 (1989), (holding an employee's authorization of
loans to uncreditworthy borrowers was not covered by the bond
because the employee lacked the requisite manifest intent to
cause loss to his employer and to secure a gain for himself). In
Municipal Securities v. Ins. Co. of North America, 829 F.2d 7
(6th Cir. 1987), the court held that a trader's violation of
inventory limits in an effort to cover up large trading losses
that would otherwise have threatened her job security, was
undertaken without the required intent to cause loss to the
employer and thus was not covered under the bond. The Court
Ms. Hargrave's [the trader's] manifest intent was to
make money. She intended to violate her standing
orders, to be sure, but not for the purpose of
causing a huge loss. Ms. Hargrave's deposition
testimony established without contradiction that her
purpose was to eradicate the losses, not to increase
Id. at 9. These cases illustrate that other jurisdictions have
not found the same language ambiguous, and that it has
universally been interpreted to exclude reckless or negligent
acts from coverage; I find them very persuasive.
As I find that Insuring Agreement (A) unambiguously covers only
those dishonest or fraudulent acts undertaken by employees with
the subjective intent both to cause loss to the insured and to
secure a gain for themselves or a third party; and as the
plaintiff, Oritani, has admitted that John Rowe, the employee in
question, acted with a "pure heart" and without the intent to
cause the company loss or to benefit himself or another, I find
that Fidelity has met their burden by proving that no genuine
issues of material fact exist. See Celotex, supra, 477 U.S. at
327, 106 S.Ct. at 2554. Accordingly, the bond does not cover Mr.
Rowe's actions and Fidelity is entitled to summary judgment as a
matter of law.
As I have found that partial summary judgment in favor of the
defendant is warranted, the relief the defendant sought in the
alternative, to file a third party complaint against John Rowe,
is rendered moot.
For all of the above stated reasons, I will grant the
defendant's motion for partial summary judgment dismissing Count
Three of the plaintiff's Amended Complaint. The defendant's
motion in the alternative, to file a third-party complaint
against John Rowe is denied.