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Fidelity National Financial, Inc. v. National Union Fire Insurance Co. of Pittsburg, P.A.

United States District Court, S.D. California

September 30, 2014



GONZALO P. CURIEL, District Judge.

This case involves the aftermath of the collapse of a Ponzi scheme masterminded by Rollo Richard Norton which was executed with the assistance of certain employees of Chicago Title. The case raises a host of insurance coverage issues relating to the losses and claims resulting from the Ponzi scheme. The parties have filed competing motions for summary judgment that raise questions regarding policy coverage, discovery of claims and the termination of coverage.[1] The Court grants Plaintiffs' motion for partial summary judgment as the evidence leaves no doubt that Defendant breached the fidelity bond and acted in bad faith. Plaintiffs sought a determination as to liability, but reserve the issue of compensatory and punitive damages for trial. The Court denies Defendant's cross motion for summary judgment.

I. Background[2]

A. "Tower of Insurance"

Plaintiffs Fidelity National Financial, Inc., Chicago Title Insurance Co., and Chicago Title Co. (hereinafter collectively and interchangeably referred to as either "FNF" or "Chicago Title") are insured by a "Tower of Insurance." Every year, FNF purchases several types of policies, and in each category, FNF buys a primary policy and four excess policies. Def.'s Opp. Ex. 173 (Loverich Decl. ¶ 9).

1. The Financial Institution Bond

This lawsuit concerns the primary Financial Institution Bond ("FIB") issued by Defendant National Union Fire Insurance Co. of Pittsburg, PA ("NU") for the policy period of November 18, 2005 through November 18, 2006 with a policy limit of $15 million per single loss. Pls.' Opp. Ex. 1.

The primary purpose of a fidelity bond is to protect the employer from dishonest conduct by an employee. Id. (Insuring Agreement A); State Farm General Ins. Co. v. Wells Fargo Bank, N.A., 143 Cal.App.4th 1098, 1108 & n.6 (2006); 44 C.J.S. Ins. § 9 (2013). These summary judgment motions focus on the allegedly dishonest actions of two Chicago Title employees - Zuzzette Nieto, a Senior Escrow Officer, and her boss, Vice President and Sales Manager Craig Gainor.[3]

The FIB also covers other perils, including Forgery. Pls.' Opp. Ex. 1 (Insuring Agreement D). Here, the acts of forgery were allegedly committed by Rollo Richard Norton, who does not work at FNF. Norton invested the victims' savings in the Crown Point condominium project; forged signatures on various escrow documents; had his associates notarize those signatures; and hired Chicago Title to process escrow transactions. Norton subsequently testified that Nieto and Gainor watched him sign the victims' names to documents.

2. Errors and Omissions Policy

Although most of FNF's other insurance policies are not relevant to the instant motions, the parties mention that FNF also purchased "Errors and Omissions" coverage ("E&O" or Miscellaneous Professional Liability Policy). FNF purchased a $15 million primary E&O policy from NU. Pls.' Ex. 2. [Doc. No. 374-4]

There are important differences between this E&O policy and the FIB. First, the E&O policy covers any losses caused by an employee's negligence, and excludes claims "arising out of a dishonest... act." Id. (§ III.A); Century Transit Sys., Inc. v. Am. Empire Surplus Lines Ins. Co., 42 Cal.App.4th 121, 127 n.4 (1996) ("Arising out of' is a broad concept requiring only a slight connection' or an incidental relationship' between the injury and the excluded risk.") (citation omitted). The E&O policy also obligates the insurance company to defend the insured when the third-party victim sues for damages arising from the employee's wrongful act. Pls.' Ex. 2; 46 C.J.S. Ins. § 1298.

B. Norton's Ponzi Scheme

This section outlines the facts relevant to whether the FIB covered the claimed loss. The Court outlines the facts pertaining to NU's claims handling process below, in connection with the cause of action for breach of implied covenant of good faith and fair dealing.

The Ponzi scheme victims alleged they had entrusted their savings to Norton, who had inherited his father's financial planning business. In 1998, Norton's Safe Harbor company purchased a 116-unit apartment complex on Crown Point Drive with his own and his clients' money. E.g., Pls.' Ex. 7 ¶¶ 3, 50-51. When the complex later converted to condominium units, Norton devised a scheme to extract equity from the property by using his clients' identities to sell and refinance individual units.

Between 2002 and 2005, Norton instigated over 300 escrow transactions to steal his clients' money for his personal use. Id. ¶ 82. The victims focused on Gainor and Nieto as willing participants in Norton's fraud, but also mentioned other Chicago Title employees. E.g., id. ¶ 4, 67, 76, 81; see id. ¶¶ 131, 133, 136 (branch manager and claims counsel). Nieto, who had been hired by Gainor, was the escrow officer on each transaction. The complaints specifically alleged that Gainor and Nieto were present when Norton "routinely forged signatures on the documents." Id. ¶ 88.

As further evidence of Chicago Title's negligence in regard to the Norton scheme, the victims cited two transactions from 2004. The victims alleged that Nieto assisted Norton by artificially inflating the price of units sold to third parties in order to create more equity for Norton and to generate higher fees for Chicago Title. Id. ¶¶ 6, 92-101, 121-29. The victims cited the Medhi transaction as an early example of an artificially inflated price. Id. ¶¶ 91-101. They further alleged that Norton was "flipping" properties so quickly that he lost track of the liens. They cite the Kaplan transaction as an early example of this problem. Id. ¶¶ 119-30. (The Kaplan and Medhi transactions are discussed in detail below in the Discovery section.).

In July 2006, FNF submitted a claim notice to NU under the FIB when dozens of victims alleged that three Chicago Title employees actively participated in a Ponzi scheme orchestrated by Norton.[4] Def.'s Opp. Ex. 173 (Loverich Decl. ¶ 23 & Ex. 1F); see id. Ex. 4 (Tolling Agreement ¶ B) (notice of claim given July 7, 2006). FNF notified all of the carriers in its "Tower of Insurance" when this "First Wave" of lawsuits was filed in State Court.[5]

After the litigants conducted extensive discovery, and Norton entered a guilty plea, most of this "First Wave" of lawsuits settled in 2007.[6] This federal case, filed in 2008, is based upon FNF's settlement with nine of those victims.[7]

Norton's guilty plea establishes the material fact that he used forged documents. "As part of the scheme, [Norton] and others signed the names of individual investors on grant deeds and other escrow closing documents, and caused those signatures to be notarized by notaries working in [Norton's] office and elsewhere. Pls.' Ex. 8 at 4, ¶ 9; accord Case No. 07-CR-2260 [Doc. No. 16 (RT at 21-28)]. In addition, the victims testified in the underlying litigation that the signatures were forgeries. For example, Keith Holdaway confirmed that multiple documents had not been signed by him or his wife Joni but had been forged. Def.'s Opp. Ex. 8 (Ex. A at 17-19) (citing K. Holdaway 2007 Depo.); accord Pls.' Ex. 44 (K. Holdaway 2011 Depo. at 169-212) ("Those look like forgeries to me.... Yeah, those are definitely forgeries. The whole document is forgeries.... This whole document has never been signed by my wife or I, any portion of it.") (citing Escrow Transaction 38047468, Short Form Deed of Trust, and Note Secured by Deed of Trust).

Norton operated a complex scheme with many variations, but a few specific examples are sufficient to analyze the pending summary judgment motions. FNF's summary judgment motion focuses on Jr. Holdaway as sufficient to establish liability. The Court briefly describes three additional victims to illustrate other arguments raised by the parties.

1. Jr. and Sr. Holdaway

In 2002, Jr. Holdaway inherited 85 acres of undeveloped land in Utah with a fair market value of at least $6.3 million from Sr. Holdaway. Def.'s Opp. Ex. 8 (Ex. A ¶ 16 to July 2008 Proof of Loss Form).[8]

Sr. Holdaway had deeded the land to his son in exchange for three promissory notes. Pls.' Ex. 43 (K. Holdaway Depo. at 524). Norton bundled the Sr. Holdaway investment, and promised them monthly income. Id. (K. Holdaway Depo. at 525). The promissory notes were initially secured by liens on the Utah acreage, but Norton convinced them to substitute three Crown Point condominiums as security. Def.'s Opp. Ex. 9 (Ex. A ¶¶ 2, 11, 41-43). "The deeds of trust against the Three Condominiums were the [Sr.] Holdaways' nest egg, ' providing them with financial security in their later years." Id. (Ex. A ¶ 43). Norton "used forged signatures" and other methods "to steal the equity out of them and cheat the [Sr.] Holdaways' out of their retirement security." Id. (Ex. A ¶¶ 44-49) (describing fraudulent escrow transactions). Thus, Sr. Holdaway's assets can also be traced to Norton.

In April 2007, Chicago Title settled the Sr. Holdaway law suit for $4 million. Id. ¶ 4.

Jr. Holdaway met and hired Norton in September 2002. Pls.' Ex. 7 ¶ 58 (July 2006 First Amended Complaint from First Wave of State Court litigation); Def.'s Opp. Ex. 8 (Ex. A).

In February 2003, Jr. Holdaway finalized an exchanged of the Utah real estate for interest in 26 Crown Point condominiums. Pls.' Ex. 7 ¶¶ 2, 4, 13, 16, 53, 56, 59-61, 76 (Norton represented excellent loan to value ratio and 50% net equity in excess of $6 million). Norton promised to manage the 26 condominiums and provide a monthly income of at least $22, 000, though some funds would be reinvested by Norton. Id. ¶¶ 68, 71. Aside from this initial, consensual transaction, Norton used Jr. Holdaway's identity to process sham refinances without his knowledge, power of attorney, or consent. Id. ¶¶ 79-80, 184-89; Def.'s Opp. Ex. 8 (Ex. A at pp. 17-19) (summarizing K. and C. Holdaway's depositions). Norton co-mingled Jr. Holdaway's funds with other clients' money. Pls.' Ex. 7 ¶¶ 50-51, 81. Beginning in October 2003, Norton stole from Jr. Holdaway by forging signatures on several letters, deeds of trust, and other escrow documents directing that funds be deposited into Norton's accounts. E.g., id. at pp. 17-19 (summarizing K. Holdaway deposition in which he identified several forgeries).

In August 2007, FNF settled with Jr. Holdaway for $19, 985, 000. Def.'s Opp. Ex. 8; Pls.' Notice of Errata Ex. C (Barrett Expert Report at 8) (listing 56 escrow files involving the Jr. Holdaways).

2. Ramsour

Like Jr. Holdaway, Ramsour initially hired Norton as a financial advisor and consented to let him manage her money. Def.'s Opp. Exs. 8 (Ex. A ¶ 38) (Ramsour invested approximately $6 million with Norton), 12 (Ramsour's nephew, Steven Lillie, was childhood friend of Norton's; Ramsour invested in Crown Point project in 1998).

Norton followed the same pattern, and thereafter used Ramsour's identity to process sham escrows, often at inflated prices. Def.'s Opp. Ex. 14 (Ex. A ¶¶ 21-26 & pp. 12-15) (summarizing Ramsour's deposition); Pls.' Notice of Errata Ex. C (Barrett Expert Report at 9) (listing 6 escrow files involving Ramsour). For example, in 2001, Unit 306 was conveyed to Ramsour at a sales price of $346, 000. Three months later, Norton arranged to have the unit deeded to himself at a purported sales price of $205, 000 using Ramsour's forged, notarized signature. Def.'s Opp. Ex. 14 (Ex. A ¶¶ 17-18). One month later, Norton arranged for that unit to be purchased in the name of another investor for $486, 000. Id.

The Kaplan transaction, described below, also illustrates how Norton churned individual units to redirect the equity to himself. Def.'s Opp. Ex. 12 (Ex. A ¶¶ 8-13); see Pls.' Ex. 7 ¶¶ 82, 91.

In 2003, Norton forged Ramsour's signature on loans approaching $900, 000 on Unit 37/39, then defaulted. Def.'s Opp. Ex. 14 (Ex. A ¶¶ 24, 27-29 & p. 12-13) (citing Ramsour Depo. at 73-83). Ramsour had lived in Unit 37/39 but then moved to a home on Caminito Corriente, which she believed she paid in full with the proceeds from the sale of her Crown Point condominium. See Def.'s Ex. 109 (Money's Expert Report at 15).

In October 2007, FNF settled Ramsour's negligence suit for $19, 750, 000. Def.'s Opp. Ex. 14 ¶ 4.

3. Reyes

Reyes was a "straw buyer" who did not invest her own funds with Norton. She allowed Norton to use her name on a particular condominium unit in exchange for a return on the investment.[9] Def.'s Exs. 23 (Ex. A at pp. 4-5, 23-26). Reyes entered into a Partnership Agreement with Norton (Cross Properties). Def.'s Ex. 57. It purported to be a "contract... to purchase property" that was secured by a note and deed of trust. Id. at 1. Reyes promised to "qualify for and obtain an adequate loan" to buy Unit P6. Id. Norton, as managing partner, agreed to make the $107, 800 down payment, collect the monthly rent of $1, 750, pay the substantial "outflow" (including all closing costs, mortgage payments, management fees, property taxes Norton calculated these to total over $170, 000), and then divide any gains or losses 50/50. Id. at 1-3. Norton represented that Unit P6 was worth $539, 000 but would increase in value by 15% to $712, 827 in two years. Id. at 1-2.

Part of Norton's scheme involved telling the lenders that a unit was owner-occupied, which allowed him to borrow funds at a higher loan to value ratio and a lower-interest rate. Pls.' Ex. 7 ¶ 94.

Norton then signed her name on another escrow and Reyes incurred debt without her consent. Def.'s Opp. Ex. 23 (Ex. A ¶¶ 56-58, 62). Specifically, Norton forged Reyes' name to refinance Unit 313 and had the funds sent to one of his entities. Id.; Pls.' Opp. Br. at 18. When Norton's scheme collapsed and the banks foreclosed on the sham loan, Reyes' credit was destroyed. Def.'s Opp. Ex. 23 (Ex. A ¶¶ 6, 8, 11, 63).

FNF seeks partial summary judgment of liability on (1) its breach of contract claim because it suffered a direct loss covered by the Forgery provision and (2) its tort claim because the undisputed facts establish NU never conducted an investigation, did not make a timely coverage determination, asserts unreasonable interpretations of policy language, and engaged in bad faith conduct during this litigation. FNF defers the determination of damages for the trial in this action.

NU opposes the motion, and filed its own motion for summary judgment on all three counts.[10] In connection with the breach of contract action, NU contends FNF cannot satisfy the direct loss requirement nor establish that it first discovered the loss during the 2005-2006 bond period. NU also invokes the Termination provision in regard to Nieto, the escrow officer at Chicago Title.

II. Summary Judgment Motions in Insurance Cases

Summary judgment is appropriate when the "pleadings, depositions, answers to 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.P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986); e.g., First Am. Title Ins. Co. v. St. Paul Fire & Marine Ins. Co., 971 F.2d 215, 217 (9th Cir. 1991). "In ruling on cross motions for summary judgment, we evaluate each motion separately, giving the nonmoving party in each instance the benefit of all reasonable inferences." ACLU of Nev. v. City of Las Vegas, 333 F.3d 1092, 1097 (9th Cir. 2003).

"Contractual terms of insurance are honored whenever possible." Olympic Ins. Co. v. Employers Surplus Lines Ins. Co., 126 Cal.App.3d 593, 599 (1981); accord Waller v. Truck Ins. Exch., Inc., 11 Cal.4th 1, 18-19 (1995) (insurance policy is a contract); Truck Ins. Exch. v. Unigard Ins. Co., 79 Cal.App.4th 966, 974 (2000) ("courts should not impose an obligation on an insurer that contravenes a provision in its insurance policy"); Maryland Cas. Co. v. Nationwide Ins. Co., 65 Cal.App.4th 21, 28-29 (1998) (courts enforce obligations, conditions, and scope of particular policy).

"Interpretation of an insurance policy presents a question of law governed by the general rules of contract interpretation. We must give effect to the intent of the parties when they formed the contract and, if possible, infer this intent solely from the written provisions of the contract. In so doing, we must look first to the language of the [insurance policy] in order to ascertain its plain meaning or the meaning a layperson would ordinarily attach to it.' The language of the policy must be read in the context of the instrument as a whole under the circumstances of the case." Universal City Studios Credit Union v. Cumis Ins. Soc. Inc., 208 Cal.App.4th 730, 737 (2012) (quotations, alterations, & citations omitted); accord McHugh v. United Serv. Auto. Ass'n, 164 F.3d 451, 453 (9th Cir. 1999) ("the interpretation of the insurance policy is a question of law for the court").

"Coverage clauses are interpreted broadly so as to afford the greatest possible protection to the insured, exclusionary clauses are interpreted narrowly against the insurer." State Farm Mut. Auto. Ins. Co. v. Partridge, 10 Cal.3d 94, 101-02 (1973). Any ambiguity is resolved against the insurance company and "if semantically permissible, the contract will be given such consideration as will fairly achieve its objective of providing indemnity for the loss to which the insurance relates." White v. Western Title Ins. Co., 40 Cal.3d 870, 881 (1985) (citation omitted). "In determining what benefits or duties an insurer owes his insured pursuant to a contract of title insurance, the court may not look to the words of the policy alone, but must also consider the reasonable expectations of the public and the insured as to the type of service which the insurance entity holds itself out as ready to offer.'" Id. (citation omitted); id. at 882 n.7 (" Construction of the policy, however, depends not on the intent of the drafter but on the reasonable expectations of the insured.") (citations omitted). "In the absence of any ambiguity, the courts have no alternative but to give effect to the contract of insurance as executed by the parties. Accordingly, when the terms of the policy are plain and explicit the courts will not indulge in a forced construction so as to fasten a liability on the insurance company which it has not assumed.'" First Am. Title Ins. Co. v. XWarehouse Lending Corp., 177 Cal.App.4th 106, 114-15 (2009) (quotations & citations omitted).

III. NU Breached its Contractual Obligations Under Forgery Insuring Agreement D to Investigate, Evaluate, and Pay Benefits Due

FNF argues that it is entitled to summary adjudication that NU breached the FIB policy. In its cross motion, NU argues the FIB does not cover the claim. Resolution of the motions requires a step-by-step analysis of several provisions of the FIB.

A. Overview

NU's arguments are framed in such broad strokes that it often blurs critical distinctions that exist in the written contract. Maryland Cas., 65 Cal.App.4th at 28-29. Many of the FIB provisions were drafted specifically for Chicago Title's escrow business. Universal City Studios, 208 Cal.App.4th at 737. In an attempt to bring some clarity to the flurry of NU's overlapping contentions, the Court outlines its analysis of the language of the FIB. McHugh, 164 F.3d at 453.

NU promised to indemnify "[l]oss resulting directly from Forgery or alteration of, on, or in any... transferring, paying or delivering any funds or Property... on the faith of any written instructions or advices directed to the Insured and authorizing or acknowledging the transfer, payment, delivery or receipt of funds or Property, which instructions or advices... purport to have been signed by or endorsed by any customer of the Insured... but which... bear a signature which is a Forgery...." Pls.' Opp. Ex. 1 at 7 & 47 (Rider 25 to Insuring Agreement D). "Forgery means the signing of the name of another person or organization with the intent to deceive...." Id. at 12, § 1(g).

The Forgery provision was triggered by Norton's conduct in signing the victims' names to escrow documents. Norton was not an employee of FNF or Chicago Title. Nothing in the Forgery Insuring Agreement ties its application to any other Insuring Agreement. It is a peril separate and apart from the standard fidelity bond coverage for Employee Dishonesty.

The insured, FNF, incurred a direct loss because the victims' property was misappropriated while in its legal possession and control. Vons, 212 F.3d at 490 (fidelity bond would cover a claim arising from the theft of property for which the insured was legally liable). Chicago Title held funds and title to real property that belonged to the victims and other creditors in its capacity as an escrow company.

FNF relied on notarized documents in its possession. The Forgery Insuring Agreement did not impose an additional "in good faith" requirement.

Later, it was revealed that an employee (Nieto) knew that Norton forged the signatures because she watched him. This fact bears on the "discovery of loss" element. The legal department did not have knowledge, at the relevant time, that Norton forged documents.

The Court now turns to NU's contract arguments. NU argues that FNF cannot satisfy the FIB policy requirements of (1) direct loss; (2) "instructions or advices"; and (3) "on the faith of." These arguments raise questions of law about the interpretation of the Forgery Insuring Agreement. Century Transit, 42 Cal.App.4th at 125 ("Absent any factual dispute as to the meaning of policy language, the interpretation, construction and application of an insurance contract is strictly an issue of law.").

B. Direct Loss and Ownership

In opposition, NU emphasizes the FIB is an indemnity bond that protects the insured's assets ( i.e., first party coverage). NU states that "[a] fidelity bond is a first party policy that does not cover third party settlements." Def.'s Br. at 6 n.3. NU contends that FNF errs by seeking coverage for third party losses.

NU relies on Vons Cos. Inc. v. Fed. Ins. Co., 212 F.3d 489, 491 (9th Cir. 2000). This case, however, supports FNF's position.

In Vons, the insured was a retail grocery store. To state the obvious, it sold products to customers in exchange for money. It did not have a fiduciary duty toward its retail or wholesale customers.

The employee (Gene Shirley) diverted products to another entity (Premium Sales Co.). Id. at 490. The mechanics of the legitimate practice of diversion are not relevant to our case; it is sufficient to state that the insured was selling products to another retailer. The problem arose because Premium was itself a Ponzi-scheme. The investors had entrusted funds to Premium. Premium invested in the diversion market. The fraud occurred when Premium paid Shirley (Vons' employee) to falsely confirm 500 fictitious transactions, thereby defrauding its own investors of over $40 million. Id.

The investors sued Premium for their losses, and named Vons as a defendant on theories that the employee had actual or apparent authority to act for Vons and that Vons had negligently supervised its employee. Id. at 491. Vons settled with the investors for $10 million and submitted an Employee Dishonesty claim to its fidelity bond.

The Ninth Circuit held that the insured had not shown a "direct loss." "Vons, for its part, lost no money." Id. at 490. Rather, the employee took bribes to assist an entity that stole money from its own investors. "Under the insuring clauses, Vons is covered only for direct losses to Vons caused by its employee's dishonesty, not for vicarious liability for losses suffered by others arising from its employee's tortious conduct." Id. The Ninth Circuit enforced the basic rule that a fidelity bond does not cover an insured's vicarious liability to a third party. Id .; accord Simon Marketing v. Gulf Ins. Co., 149 Cal.App.4th 616 (2007) (insured did not incur a direct loss when it lost customers after employees stole property).[11] An indirect loss is outside the obligation of indemnity owed the insured. Vons, 212 F.3d at 491 ("direct' means direct'").

Importantly, the Ninth Circuit went on to state that: "A direct loss to Vons may, of course, be caused by its employees theft of property for which it is legally liable, the typical case being where the insured is a bailee or trustee of property." Id. (citing Alberts v. Am. Cas. Co. of Reading, Pa., 88 Cal.App.2d 891 (1948) and Ins. Co. of N. Am. v. Gibralco, Inc., 847 F.2d 530, 533 (9th Cir. 1988)).

For our purposes, the critical distinction is that the bailee exception did not apply to the facts in Vons because the employee did not steal property that Vons was holding for the benefit of Premium's investors (the third parties). Not only were the diversion transactions fictitious, but they were sales transactions.

NU's reliance on Vons fails because it ignores the firmly-established bailee exception. A fidelity bond covers a loss that occurs while the insured is legally responsible for holding another's property. Scott L. Schmookler, The Compensability of Third-Party Losses Under Fidelity Bonds, 7 Fidelity L. J. 115, 115 (Oct. 2001) ("It is important to distinguish between claims based upon the insured's liability for damages caused by an employee's perpetration of fraud on a third party, and claims based upon the employee's misappropriation of a third party's property while the possession of the insured."); H. Walter Croskey, et al., Cal. Prac. Guide Ins. Litig. Ch. 6J-B ¶ 6:4108 (2014) (fidelity bond covers insured who acts in capacity of a bailee and is legally liable (directly) to a customer).

The Vons decision recognized that the bailee exception applies when a direct loss is caused by theft of property for which the insured is legally liable, as when the insured acts as a bailee to a third-party's property. Vons, 212 F.3d at 491. When the insured holds a third person's property as a bailee or trustee, a fidelity bond covers the loss of that property "not because the insured may be liable to the owner for the misappropriation of its property, but rather because the ownership provision in standard form fidelity bonds extends coverage to the property itself while [in] the possession and control of the insured." Schmookler, supra, at 7 Fidelity L.J. at 115, 156.

In Vons, the Ninth Circuit cited two cases to illustrate the bailee exception. The first case, Gibralco, 847 F.2d at 533, arose in the Ninth Circuit. There, the insured physically held the client's bearer bonds, but the trader sold them and kept the proceeds from "the rightful owners." The Ninth Circuit held that the loss was caused by the employee's dishonesty and therefore covered.

The second case applied California law. In Alberts, 88 Cal.App.2d 891, the insured was a hotel. The hotel manager held a guest's money for "safekeeping, " then disappeared. The California Court of Appeal concluded that the insured suffered a direct loss because its employee stole the guest's property and the guest had sued the hotel to recover the funds. Id. at 897-98.

This line of bailee cases - Vons, Gibralco, and Alberts - supports FNF's claim for benefits under the FIB.[12] Here, Chicago Title, an escrow company, held title in real property and monies for safekeeping until the buyer, seller, and banks settled the account and closed the sale of each condominium. The purpose of an escrow company is to "hold" property. Schmookler, supra, 7 Fidelity L.J. at 139-40 & n. 115 (collecting cases when insured takes possession of a third party's property in the normal course of business and using escrow as an example). The dictionary defines "escrow" as "[m]oney, property, a deed, or a bond put into the custody of a third party [ i.e., FNF or Chicago Title] for delivery to a grantee only after the fulfillment of specified conditions." Webster's II New College Dictionary 383 (1995) (emphasis added). The FIB broadly defines "property" to include the interest held in escrow. Pls.' Opp. Ex. 1 at 13, §1(m). The funds in escrow represent the value of the Crown Point condominiums. Chicago Title was responsible for those assets at the time Norton wrongfully diverted them to his criminal enterprise by forging the victims' signatures.

Furthermore, the Court agrees with FNF's observation that its claimed loss is consistent with the ownership provision of the FIB. "This provision ensures that the insured has an insurable interest in the property that is the subject of the claimed loss." Croskey, supra Ch. 6J-D ¶ 6:4250. Section 10 of the FIB, as amended by Rider 23, states that:

This bond shall apply to loss of Property (1) owned by the Insured, (2) held by the Insured in any capacity, or (3) for which the Insured is legally liable. This bond is for the sole use and benefit of the Insured named in the Declarations.
However, coverage provided under the Insuring Agreement of this bond shall be deemed to include amounts which the Insured is legally liable to pay a third party as a direct result of loss otherwise meeting the conditions and limitations of this bond. It is understood by the Underwriter and the Insured that the addition of this Rider to the bond is not an admission that such coverage did or did not already exist under the bond.

Pls.' Opp. Ex. 1 at 45 (Rider 23) (emphasis added). The FIB defines "Property" broadly to include "[m]oney, ... deeds and mortgages on real estate, ... and other records." Id. at 13, § 1(m).

The undisputed facts clearly satisfy two components of the first paragraph of this provision. Chicago Title "held" the victims' "Property" in its "capacity" as an escrow company at the time forged documents diverted the victims' equity to Norton. As such, Chicago Title is "legally liable" for the "loss of Property." As stated by FNF, "the entire claim arises out of liability for the loss of property of the third party claimant over which Chicago Title exercised dominion and responsibility as the escrow agent." Pls.' Opp. Br. at 15; Schmookler, supra, 7 Fidelity L.J. at 133-35, 156.

Moreover, the Court agrees with FNF that the second paragraph applies. Upon settlement of the underlying lawsuits, FNF was "legally liable to pay a third party" for a "loss otherwise meeting the conditions and limitations of this bond." This language can be read to provide coverage for any portion of a settlement payment to a third party that is "attributable to a loss directly resulting from one of the insuring agreements." Pls.' Opp. Br. at 16. As set forth above, Insuring Agreement D(5), as amended by Rider 25, covers Chicago Title's transfer, payment, or delivery of "any funds or Property" based on specified forged documents. Chicago Title relied on forged signatures to close escrows that stole equity from the victims and transferred that wealth to Norton.

FNF satisfied the direct loss element because it was legally liable for the funds held in escrow. FNF's loss is covered, and the ownership clause of the FIB further clarifies that the policy covers the third-party settlement.

Next, NU argues that three types of transactions do not satisfy the direct loss definition of the FIB. NU argues that Chicago Title did not hold assets of the victims who "never contributed funds to a FNF escrow" nor those transactions characterized as "no cash-out refinances" and "contingent loan liabilities."

1. Contribution of Funds into Escrow Accounts

NU contends that eight victims did not contribute or lose their own assets. NU argues that some "were straw buyers who never contributed assets to a FNF escrow." Def.'s Opening Br. at 8; Def.'s Exs. 53 (L. Reyes Depo. at 6), 61 (J. Marino Depo. at 15).[13] These investors "permitted Norton to use their name and credit to purchase condominiums and secure loan financing." Def.'s Br. at 8, 22-24; Def.'s Exs. 53 (L. Reyes Depo. at 23-24), 54 (W. Burke Depo. at 13-14), 60 (A. Marino Depo. at 22, 29, 113). NU relies on the terms of the Partnership Agreements that the victims signed when they invested their savings with Norton. E.g., Def.'s Br. at 23 (citing Def.'s Ex. 66 (Ramsour Depo. at 21, 24, 28, 44, 49)). The Partnership Agreements specify that the condominium units were assets of Safe Harbor or Cross Properties, and that Norton would distribute profits from the rents and appreciation to the investors. Def.'s Br. at 25; Def.'s Exs. 56-58 (sample Partnership Agreements); e.g., Def.'s Ex. 54 (W. Burke Depo. at 11-14). NU contends that a shareholder's failure to receive profits is not a direct loss. Def.'s Reply Br. at 7.

NU's argument blurs the distinction between the victims who invested money with Norton by hiring him as their financial advisor, and the victims who did not personally invest with Norton but did sign a Safe Harbor Partnership Agreement. The Court finds it useful to discuss these two groups separately. In the end, however, the result is the same because Norton forged their signatures to process other escrows.

a. Victims who Invested Money with Norton

As to the victims who hired Norton to manage their personal investments, the Court rejects NU's argument for the reason stated by FNF. "While [the victims] obviously did not deposit the monies [into escrow] themselves, Norton's scheme often involved debiting his investors' account and making purchase deposits with those investors' monies." Pls.' Opp. Br. at 18 (citing Norton's Depo.). Though Norton co-mingled monies, "it is reasonable to conclude that deposits were made on behalf of [the victims] using their money" based upon their investments. Id. (citing Barrett Expert Report). The victims lost their funds through Norton's sham escrow transactions. E.g., Def.'s Exs. 55 (W. Burke invested his $348, 816 retirement account with Safe Harbor in 2002), 59 (S. Burke letter describes investment in Crown Point with Safe Harbor); Def.'s Opp. Exs. 11 (Ex. A at 1) (alleging Norton convinced his childhood friend, Steven Lillie to invest "personal funds and the assets of Euro-Canadian into the Crown Point condo project"), 13 (Ex. A at 1) (alleging that "Marino moved funds from his annuities, teachers' retirement funds, and other monies" with Norton). In any event, the guilty pleas by Norton and Greer conclusively established the material facts that Norton defrauded his investors by forging their signatures on escrow documents. United States v. Cazares, 121 F.3d 1241, 1246-47 (9th Cir. 1997) (collecting cases).

Furthermore, the Court finds that NU's argument muddies the analytical waters. NU suggests that FNF must show that the victims suffered a direct loss from forgery, but that was an issue in the underlying tort litigation between the victims and FNF. The liability question was resolved by the settlement of the victims' lawsuits. By contrast, in this breach of insurance contract action, NU must honor its promise to indemnify if the insured suffered a direct loss from forgery. As discussed above, FNF satisfies this term of the FIB by holding a third party's "funds or Property" when it was misappropriated by forgery.

Gemma Ramsour's case illustrates the flaw in NU's logic. NU contends that Ramsour "admitted" she did not have a personal financial interest in Crown Point after she sold her residence, Unit 37-39. Pls.' Opp. Ex. 28 (Depo. at 44). Her testimony does not change the fact that she invested $5.7 million with Norton's Safe Harbor partnership and that Norton drained the equity from the condominiums using her identity to process fraudulent escrows. E.g., Pls.' Opp. Ex. 18 (Kenna Decl. Ex. H, Second Am. Compl. ¶ 83) (alleging that Norton wrongfully diverted $300, 000 in equity from unauthorized refinance of Unit 37-39 to his own use). Ramsour testified that she never authorized Norton to sign any documents for her - "No, never." Pls.' Opp. Ex. 28 (Ramsour Depo. at 75). When asked if she voluntarily sold a particular condominium unit, Ramsour answered, "No, Rick [Norton] stole it." Pls.' Opp. Ex. 29 (Ramsour Depo. at 37). Thus, the record shows that "Ramsour may have wanted Norton to sell Unit 37-39, but that cannot be stretched into an admission that Unit 37-39 was no longer her asset' such that Norton could sell it without her knowledge and then keep the proceeds to himself." Pls.' Opp. Br. at 19.

NU's argument incorrectly focuses on the source of the funds held in escrow.[14] The fact that the victims personally did not write checks to fund individual escrows does not change FNF's role as a bailee or trustee of the "Property." Pls.' Opp. Ex. 1 at 13, § 1(m). The FIB defines "Property" broadly to include, among other things, money, evidence of debt, letters of credit, abstracts of title, and "deeds and mortgages on real estate." Id. The undisputed facts establish that the escrow company held "Property" in trust while the seller, buyer, lien holders, and lenders sort out the proceeds. The direct loss requirement focuses on the insured's relationship to the "Property." It does not matter whether title was in the name of Safe Harbor, Norton, or Ramsour. The fact that FNF, the insured, was holding funds at the time Norton used forged documents to steal the victims' investments satisfies the direct loss requirement of the FIB. Like the hotel in the Alberts case or the broker in Gibralco, FNF had possession and control over a third person's property at the time it was misappropriated. The identity of the rightful owner of the property is a separate matter.

NU's flawed logic also assumes the validity of Norton's transactions based on the terms of the partnership agreements. But the evidence is clear that escrow funds were improperly diverted to various Norton-controlled entities. For example, Norton diverted the proceeds of the sale of Unit 319 to Norton Financial Ltd. See Def.'s Ex. 50 (Barrett Expert Report at 27-29). Ramsour testified that the escrow instructions on Unit 319 bore a forgery of her signature. Pls.' Opp. Ex. 28 (Ramsour Depo. at 47-48, 73). In short, the victims authorized Norton to invest their retirement savings in the Crown Point project, but they did not authorize theft through forgery. See generally Cunningham v. Brown, 265 U.S. 1 (1924) (describing scheme of Charles Ponzi, the namesake of this type of fraudulent venture), cited by Donell v. Kowell, 533 F.3d 762 (9th Cir. 2008).

b. Straw Buyers

A straightforward reading of the Forgery Insuring Agreement shows that NU promised to cover FNF for loss caused by transferring a customer's "funds or Property" in reliance on a forged document. NU also promised to indemnify FNF for "amounts which the Insured is legally liable to pay a third party as a direct result of loss otherwise meeting the conditions and limitations of this bond." Pls.' Opp. Ex. 1 at 45 (Rider 23).

Reyes was injured when Norton used her name, identity, and credit, without her consent or knowledge, in the second escrow transferring a condominium to another entity. Norton defaulted on the loan, which damaged Reyes' credit rating. Chicago Title processed the escrow on that unit by relying on a forged document. Reyes sued Chicago Title for its role in the transaction, and Chicago Title settled her claim in State Court.

NU's contention focuses on the question of whether Reyes, the purported customer, was the rightful owner of the "funds or Property" transferred on the authority of a forged document. It is as if the insurer in the Alberts case challenged whether the hotel guest had stolen the money that he deposited in the insured's safe. Cf. 88 Cal.App.2d 891. The Court concludes that it does not matter. As between NU and FNF, the question is whether FNF held the property when the forgery occurred. The concern is whether the insured has insurable interest in the property at the time of the loss, and here, that concern is met by Chicago Title's function as an escrow company. Croskey, supra, Ch. 1 ¶ 1:15 ("The insurable interest requirement prevents persons from gambling on the lives or property of others or profiting from their misfortune.") (citations omitted). For purposes of applying the FIB to FNF's insurance claim, the loss may be properly measured by the amount of the settlement payment in the underlying action. Any dispute about who owns the property held in safekeeping was between FNF and Reyes (or in the hypothetical, the hotel and the guest) in the underlying litigation. FNF determined that it was wiser to settle with Reyes than to proceed to trial and face the jury's likely assessment of ...

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