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June 2, 2004.


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

This dispute arises from the theft of $5.25 million belonging to Plaintiff Humboldt Bank ("Humboldt"). Humboldt initiated the present action claiming that this loss is covered through a bond issued by Defendant Gulf Insurance Company ("Gulf"), and that Gulf is liable for any unrecovered amounts. Gulf disagrees. Presently before the Court are Gulf's Motion for Summary Judgment or Summary Adjudication of Issues, and Humboldt Bank's Cross-Motion for Summary Adjudication of Issues. The Court, having reviewed the plain language of the bond along with the submissions and arguments of the parties, finds that this money is not covered by Humboldt's bond with Gulf. Accordingly, Gulf's motion for summary judgment is hereby granted, and Humboldt's cross-motion for summary adjudication is hereby denied. I. BACKGROUND

A. The Stolen ATM Currency

  This case concerns a common practice in the banking industry whereby banks allow owners of automated teller machines ("ATMs") to use the bank's vault cash for dispensement in the ATMs in exchange for interest and other fees on the money. In December of 2000, Tehama Bank*fn1 entered into an ATM vault cash agreement with an Independent Sales Organization ("ISO") named Direct Connect. The sole principal of Direct Connect was a man named Michael Schwartz ("Schwartz") who owned or leased a number of ATMs on the East Coast. In an effort to find cash for his ATMs, Schwartz applied for a Cash Services Agreement with Tehama in the latter part of 2000. As part of his application, Schwartz supplied Tehama with tax returns, financial statements, and submitted to on-site inspection of his business. Despite his dubious credit history and the fact that both of his companies were run out of his personal residence, Tehama entered into a Cash Services Agreement ("CSA") with Schwartz on December 21, 2000. The relevant portions of the CSA are as follows:
• Upon Schwartz's request, Tehama would supply currency for use in the ATMs. The funds were to be delivered to the ATMs by a third-party, armored service provider. See Ex. C to Barkley Decl. at §§ 2.1, 2.2.
• In exchange for use of the money, each month Schwartz would pay Tehama 11.5% of the average outstanding daily balance allotted to each ATM terminal, along with various other set fees. Id. at Ex. A.
• "Title to and the right to possession of all such currency [supplied by Tehama], unless and until paid to a customer lawfully withdrawing funds [from an ATM] . . . shall at all times belong to [Tehama]." Id. at § 2.1.
• Upon termination of the agreement or the request of Tehama, Schwartz would immediately pay Tehama the full amount of any outstanding advances and fees. All such amounts not so paid following demand would thereafter bear interest at a rate of 18%. Id. at § 3.9.
  One aspect of the relationship between Tehama and Schwartz warrants further discussion. Normally, banks do not deliver cash to ISOs directly. Generally speaking, the money is wire transferred to a correspondent bank, the money is then placed into cassettes and picked up by an armored carrier service. The armored carrier service then delivers the cash to the ATMs and inserts it into the machines. All of this is done without the ISO ever having access to the funds. See Def.'s Mot. For S.J. at 5. In the instant case, Tehama allowed Schwartz to use his own armored carrier service, Schwaz Armored LLC, to load his ATMs. Schwartz was the sole owner of Schwaz Armored LLC, which shared the same principal place of business as Direct Connect. Over the course of this relationship, Schwaz Armored was used to transport Tehama's cash to the ATMs and load it into the machines. Consequently, Schwartz was given direct access to the funds.

  In or about April of 2001, pursuant to its merger with Tehama, Humboldt agreed to become the servicer for Tehama's ATM program. All contracts between Tehama and its ISOs, including Direct Connect, were transferred or assigned to Humboldt. Complaint, ¶ 12. Humboldt had a set policy against providing ISOs direct access to the funds being lent. Ex. 20 to Valeriano Decl. As a consequence, in or about August of 2001, Humboldt informed Schwartz that he would either have to procure another armored carrier to transport the cash or the relationship between Humboldt and Direct Connect would be terminated. Id. at Ex. 21. Humboldt's letter stated that if Schwartz decided "not to have a third party involved, please let this letter serve as [the bank's] 120-day notice of termination." Id. at Ex. 21. During this 120-day period, however, Humboldt satisfied cash-requests from Schwartz in the amount of $5.25 million. Schwartz then absconded with the bulk of this money and was later found dead in Florida. Gulf's Mot. For S.J. at 1. An investigation by the FBI and local authorities recovered approximately $3.7 million of this money which has been returned to Humboldt. Complaint, ¶ 15. Approximately $1.3 million remains outstanding.

  B. The Bond

  Gulf issued a Financial Institution Bond, bond number GA0426583 (the "Bond" or the "Policy"), to Tehama effective August 23, 1999. Complaint, Ex. C. That Policy provides coverage for a variety of risks to the bank's currency including employee dishonesty, theft in transit, loss or theft of property "on premises", etc. Id. at p. 1-2. The policy also contains a number of exclusions from coverage, and there is one in particular around which this case centers. Exclusion (e) provides in relevant part:
This bond does not cover:
(e) loss resulting directly or indirectly from the complete or partial nonpayment of or default upon
(1) any loan, or any transaction in the nature of a loan, including repurchase agreements, or extensions of credit, whether or not involving the Insured as a lender or borrower, or
(2) any false or genuine note, account, agreement, invoice or other evidence of debt assigned or sold to, discounted or otherwise acquired by the Insured, whether the Insured's participation was procured in good faith or through trick, artifice, fraud or false pretense. . . .
Id. at p. 15 (emphasis added).
  Exclusion (e) does not apply however if the loss was perpetrated by an "employee" of the bank. There are several categorical definitions of "employee" set forth in the Policy, and again, there is one in particular that is relevant to the present dispute. Subsection (g) under the definition of employee states in relevant part:
Employee means:
(g) any natural person and any organization authorized by the Insured to perform services for the Insured as electronic data processor of checks or negotiable orders of withdrawal or other accounting records of the Insured (hereinafter called "Processor") while performing such services. . . . A Federal Reserve Bank or clearing house, and customers of the Insured, shall not be deemed to be Processors.
Id. at p. 18.

  C. The Claim

  On April 15, 2002, Humboldt submitted a Proof of Loss to Gulf claiming that the unrecovered portion of the money stolen by Schwartz was covered under the Bond. After a period of discovery and investigation, Gulf formally denied Humboldt's claim on January 8, 2003. Ex. Q to Fisher Decl. In asserting that no coverage existed for this loss, Gulf argued, inter alia, that the money given to Schwartz was a loan, in the nature of a loan, and/or an extension of credit, and therefore was not covered under the Policy. Id. Humboldt then initiated the present action asserting two claims against Gulf: (1) Breach of contract; and (2) Breach of the implied covenant of good faith and fair dealing. Humboldt contends this money is covered under the Bond because it was not in the nature of a loan or extension of credit, and alternatively, that Schwaz Armored acted as a "data processor" for Humboldt and therefore the money would be covered even if it was deemed to be something in the nature of a loan. With respect to its second cause of action, Humboldt argues that Gulf's method of handling and ultimate decision on its claim under the Policy was unreasonable and conducted in bad faith. Complaint, ¶ 40. Gulf now moves for summary judgment or, alternatively, summary adjudication. Gulf makes three primary arguments in its moving papers: (1) The money supplied by Humboldt for use in the ATMs falls within exclusion (e) and therefore is not covered under the Policy; (2) Neither Schwaz Armored nor Schwartz acted as a "data processor" for Humboldt; and (3) In the event that the Court does not grant summary judgment on the issue of coverage, Gulf is entitled to summary adjudication on the question of bad faith because its construction of the Policy language and treatment of Humboldt's claim was reasonable as a matter of law. Humboldt has filed a cross-motion for summary adjudication on the question of whether exclusion (e) applies to the loss which is the subject of this action. Having reviewed the parties' submissions, and for the reasons articulated below, the Court finds as a matter of law that: (1) Exclusion (e) is applicable to the loss which forms the basis of this action; (2) Neither Schwaz Armored nor Schwartz acted as a "data processor" for Humboldt; and (3) Gulf's handling of Humboldt's claim was reasonable and not conducted in bad faith. Accordingly, Humboldt's motion for summary adjudication is hereby denied, and Gulf's motion for summary judgment is hereby granted.


  A. Summary Judgment

  A party moving for summary judgment bears the burden of persuasion that there is no triable issue of material fact and they are entitled to judgment as a matter of law. Aguillar v. Atlantic Richfield Co., 25 Cal.4th 826, 850 (2001). There is no "genuine" issue concerning the facts if a reasonable fact finder could only come to one conclusion. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586-87 (1986). The moving party has the initial burden to demonstrate the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). Once the moving party has met its burden, the nonmoving party "must do more than simply show that there is some metaphysical doubt as to the material facts." Matsushita Elec. 475 U.S. at 586. The nonmoving party has the burden of producing operative facts, and the "mere existence of a scintilla of evidence in support of the plaintiff's position will be insufficient; there must be evidence on which a jury could reasonably find for the plaintiff." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252 (1986). However, any inferences from the underlying facts must be viewed in the light most favorable to the party opposing the motion. Matsushita Elec., 475 U.S. at 587.

  Where the material facts are undisputed, the interpretation of an insurance policy is a question of law for the court. Blue Ridge Ins. Co. v. Stanewich, 142 F.3d 1145, 1147 (9th Cir. 1998); Ray v. Farmers Ins. Exch., 200 Cal.App.3d 1411, 1415-16 (1988). As we explain below, in the case before us the material facts appear undisputed. This case turns on the purely legal question of the proper application of the ...

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