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Diebold, Inc. v. Continental Casualty Co.

June 21, 2010


The opinion of the court was delivered by: Irenas, Senior District Judge



This is an insurance coverage dispute between Plaintiff Diebold, Inc. ("Diebold"), the insured, and Continental Casualty Company ("Continental"), the insurer.*fn1 Presently before the Court are the parties' motions for summary judgment.

For the reasons set forth below, summary judgment will be granted to Continental on the basis of its "discovery" affirmative defense. Diebold's corresponding cross-motion for summary judgment will be denied. The Court also grants Continental's Motion for Summary Judgment on Diebold's bad faith claim. Both Continental's and Diebold's motions for summary judgment regarding all other issues will be dismissed as moot.


Diebold and Tri-State Armored Services, Inc. Diebold contracts with various banks and credit unions to service ATM machines. In 1992, Diebold introduced its "Fastline" service, consisting of "two separate and distinct ATM service pieces": "non-technical fixes, such as clearing paper jams and card jams," and "cash replenishment" of the ATM machines, i.e., physically loading and unloading cash from the machines. (Continental Ex.*fn2 50) While Diebold itself performed the nontechnical fixes, it subcontracted out to armored car carriers the cash handling portion of the Fastline service.

The loss at issue in this case has its origins with one of Diebold's subcontractors, Tri-State Armored Services, Inc. ("TSA"). Several TSA employees, including Barry Chesla, TSA's CEO and secretary, and William Mottin, TSA's president and treasurer, were convicted of various criminal charges in connection with TSA's mishandling of bank customers' cash. In a related suit, the Bankruptcy Court found that [f]rom the commencement of Tri-State's business in October 1997 through on or about March 1, 2001, when Tri-State closed its doors and terminated operations, Tri-State never made a profit. . . . The company routinely comingled the funds of the various financial institutions which it served, both in its wire account and its cash vault. Funds from one bank would routinely be used to service the ATMs of another bank. . . . . . . Within a month of its formation, the company began to make unauthorized 'borrowings' from its wire account and cash vault to pay operating expenses, notwithstanding the fact that the money belonged exclusively to customers and was required to be used only to replenish ATM machines.

Great American Ins. Cos. v. Ch. 7 Trustee (In re: Tri-State Armored Services, Inc.) , 332 B.R. 690, 699-700 (Bankr. D.N.J. 2005).*fn3

Diebold and Continental

Diebold's contracts with its bank customers stated that Diebold would not be liable for losses caused by its armored carriers while money is in transit or at the carrier's vault. (See, e.g., Continental Ex. 3) But Diebold nevertheless made the business decision to compensate its customers, in the form of deferred receivables and product credits, for losses caused by TSA. (Continental Ex. 50; Fortune Affidavit ¶¶ 14-15)*fn4

Diebold first sought to recover its loss from TSA's insurer, Great American Insurance Companies. However, Great American succeeded in its lawsuit to rescind TSA's insurance on the basis of equitable fraud. See Great Am. Ins. Cos., 366 B.R. at 332.

Diebold now seeks to recover its losses from Continental under the parties' Commercial Crime Policy.

The insurance policy states, in relevant part, This company shall be liable for direct loss of Money . . . caused by . . . disappearance or Theft while . . . in the care and custody of an armored vehicle company. . . .

This bond applies to actual or potential loss discovered by an Insured during the Policy Period. Discovery occurs when the Risk Management Department of the Insured . . . first becomes aware of facts which would cause a reasonable person to assume that a loss of a type covered by this bond, without regard to the amount[,] has been or will be incurred, regardless of when the acts or acts causing or contributing to such loss occurred, even though the exact amount or details of loss may not then be known. This includes receipt of notice of an actual or potential claim in which it is alleged that an Insured is liable to a third party under circumstances which, if true, would constitute a loss under this bond. There is no coverage under this bond for any loss caused by a wrongdoer after discovery of an actual or potential loss caused by that wrongdoer. (Amend. Compl. Ex. A)

Diebold filed its Proof of Loss with Continental on March 6, 2007 (three days after this Court affirmed the Bankruptcy Court's decision in Great American ) asserting that it discovered the TSA loss on March 2, 2001 (i.e., the day TSA filed for bankruptcy). Diebold seeks to recover approximately $5.8 million dollars from Continental.*fn5

Facts and circumstances in the years prior to March 2, 2001

The documentary record demonstrates that large "shortages" or "out-of-balance" conditions arose with ATMs serviced by TSA as early as 1998.*fn6 On January 20, 1998, Sharonview Federal Credit Union wrote to Diebold regarding "Cash Shortage-- New Jersey Cash Dispensers." (Continental Ex. 22) The letter stated, "Diebold should reimburse Sharonview Federal Credit Union . . . $102,075.00 currently being held by [TSA] as a direct result of funds removed by them from Sharonview's Cash Dispensers, from the period August 1, 1997 - December 31, 1997." (Id.) There is no evidence in the record regarding how this claim was resolved.

Then on March 31, 1998, Sharonview wrote to TSA President William Mottin (carbon copying three Diebold managers) concerning a "serious problem with our cash account currently serviced by [TSA]." (Continental Ex. 23) The letter went on to request TSA's payment of $32,075.00, which, the letter indicates, TSA agreed was is its possession, and requested TSA's cooperation in locating $68,540.00 in "unaccounted funds." (Id.) The letter also stated that Sharonview was "very concerned about the delay that has occurred in the resolution of this matter." (Id.) There is no evidence in the record about whether this letter was related to the previous Sharonview letter. There is also no evidence in the record concerning the resolution of this claim.

In 1999, the problems with TSA continued.

On April 22, 1999, Automated Technology Machines Incorporated ("ATMi") wrote to both TSA and Diebold formally requesting reimbursement of $4,400.00. (Continental 2 Ex.*fn7 13) The letter states, "[TSA] cannot provide ATMi with any balancing receipts from the ATM . . . . Therefore, we cannot determine if there is a discrepancy in the ATM totals." (Id.) There is no evidence in the record concerning the resolution of this claim.

On May 12, 1999, NIH Federal Credit Union wrote to Diebold concerning "several unexplained settlement differences" occurring in ATMs serviced by TSA. (Continental Ex. 26) The letter reported that NIH met with TSA to discuss the differences, that TSA returned $27,240.00 to NIH and agreed that an additional $13,975.00 was "their responsibility." (Id.) NIH also requested that Diebold reimburse them $67,420.00 for other "differences" that TSA claimed were Diebold's responsibility. (Id.)

Just a month later, on June 15, 1999, NIH wrote Diebold again about "several unexplained settlement differences [that] continue to occur." (Continental Ex. 27) The letter stated, [s]ince [our May 12, 1999 letter] we have 3 additional large shortages. . . . Previously reported shortages of $67,420.00 bring the total shortage to $119,570.00! We expect to see immediate action on this issue! . . . We have taken all necessary means to research these differences. Please consider this a claim for shortages as described above. (Id.) (boldface type in original).

Jack Fortune responded to these letters on July 1, 1999: Your letters of 5-12-99 and 6-15-99 regarding ATM shortages have been referred to me for reply and action.

As we discussed during our telephone conversation yesterday, Diebold and Tri-State are actively investigating the shortage claims detailed in your letters. Ms. Debra Ward, Fastline Manager in Charlotte, will have primary responsibility for the investigation. In support of her efforts, in addition to her immediate staff, Diebold will employ the services of an outside investigator from Chicago. . . .

I stated in our conversation that Diebold will send a check to you for all of the 1999 claims within 10 days. This amounts to $81,860. . . . (Continental Ex. 28)

Also during 1999, Diebold reimbursed four banks for shortages caused by TSA:

C On October 8, 1999, Jack Fortune approved a $950.00 check to Crestar Bank. (Continental 2 Ex. 27) The accompanying memorandum explains, "Diebold . . . attempted to have [TSA] send a check directly to [Crestar]. [TSA] is responsible for cash replenishment and deposits. Due to the delay waiting for [TSA] to act, [Diebold is] going to send the customer a check and deduct from the [TSA] invoice." (Id.)*fn8

$170.00 check to Fredericksburg Savings Bank for "Reimbursement For [TSA's] Error." (Continental Ex. 40)

C On November 12, 1999, Jack Fortune approved a

C On October 25, 1999, Jack Fortune approved a $2,380.00 check to One Valley Bank for "Cash shortage[s] on ATMs" that occurred from January, 1999 through July, 1999. (Continental Ex. 41) The internal memorandum accompanying the check request reads, "[p]lease approve the attached check request in the amount of $2,380.00. . . . The cash vendor, [TSA], has reimbursed One Valley for $1,600. I am planning to recover at least half if not all of the $2,380 from [TSA]." (Id.) C On December 27, 1999, Diebold wrote to National Bank of Sussex County verifying that an ATM shortage of $800 did exist for the period March 22, 1999 through June 26, 1999. (Continental Ex. 36) Fastline Operations Manager Arben Arifaj wrote, "I will request that a check be sent to you . . . to reimburse your organization for the loss. For your information, we have not discovered any unauthorized entry to the ATM, so that Diebold in turn will send a claim to our vendor, [TSA]." (Id.)

Complaints from banks continued in 2000. On February 2, 2000, Maryland Permanent Bank wrote to Diebold about the "numerous problems" the bank experienced with TSA. (Continental 2 Ex. 14) The bank's Vice President wrote, "I have never dealt with such an incompetent and inept group of people. What concerns me most is taking [TSA's] word for many of the shortages." (Id.)

Then, according to Diebold's own internal memorandum,*fn9 "[s]torm clouds began gathering over [TSA] in May of 2000." (Continental Ex. 50)

On May 5, 2000, Philadelphia Federal Credit Union ("PFCU") wrote to Diebold with a "detailed list of continuous [TSA] errors" beginning in 1999 and continuing apparently unremedied, to the present. (Continental 2 Ex. 9) Those repeated errors included missing deposit envelopes and missing or erroneous settlement paperwork. (Id.) Arben Arifaj forwarded PFCU's letter to Bill Mottin at TSA, writing, "[e]ven if 20% of their comments are accurate, there are problems here." (Id.)

Then on May 31, 2000, the FBI contacted Arben Arifaj concerning their investigation of Barry Chesla. (Continental Ex. 44) That same day, Arifaj wrote Jack Fortune an email: It appears that the FBI has been performing an extensive investigation on M. Barry Chesla. . . . In their visit to [TSA's] Ligonnier [Pennsylvania] facility they did interview several [TSA] employees and according to the agent-- they were made aware of some serious lapse [sic] in control.

When specifically asked about Bill Mottin, [TSA's] principal stake owner, [the agent] specifically stated that they did not have any case built against him at this time. It appears that this investigation was part of the*fn10 investigation that I made you aware of last October.

An alarming item is that the agent mentioned that there is a rough sum of about $2-5 mln [sic] dollars that they feel may have been taken by Mr. Chesla-- however-- they are not clear about the source of the funds, etc.

By coincidence I am at [TSA's] Liggonier facility tomorrow and I will be performing our annual audit. However the agent had suggested an actual cash audit (not only Liggonier, but the other facilities as well). Since most of [TSA's] accounts are done on a wire basis this complicates the issue severely.

By this email I wanted to make you aware of the situation. I will be calling you tomorrow to discuss this matter further so that we can take some more progressive steps. (Continental Ex. 44)

Then on July 10, 2000, Jack Fortune approved a $31,000.00 check to SunTrust Bank for "TriStates [sic] Shortages-- 1999." (Continental Ex. 30) The accompanying internal memo states, "[p]lease approve the attached check request for SunTrust Bank in the amount of $31000.00. My intentions are to withhold this sum from the [TSA] invoice payment as I had discussed with you on June 23. This amount represents 2/3 of the remaining outages for 1999. . . ." (Id.)

SunTrust continued having problems with TSA in 2000. Twice in July, 2000, SunTrust wrote to Diebold detailing out-of-balance conditions that occurred in over 20 TSA-serviced ATMs in May and June, 2000. (Continental Exs. 29, 30) The total amount of cash at issue was $717,680. (Id.)

On August 23, 2000, the FBI held a teleconference with Diebold. (Continental Ex. 45) George Kula's*fn11 handwritten notes from that ...

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