Bankmanagers Corporation v. Federal Insurance Company ( 2013 )

In the
United States Court of Appeals
For the Seventh Circuit
Nos. 12-3202 & 13-1506
B ANKMANAGERS C ORPORATION and P ARK B ANK,
Plaintiffs-Appellants,
v.
F EDERAL INSURANCE C OMPANY,
Defendant-Appellee.
Appeals from the United States District Court
for the Eastern District of Wisconsin.
No. 11-C-871—Rudolph T. Randa, Judge.
A RGUED F EBRUARY 26, 2013—D ECIDED A PRIL 5, 2013
Before E ASTERBROOK, Chief Judge, and R OVNER and
W ILLIAMS, Circuit Judges.
E ASTERBROOK, Chief Judge. From 1997 through 2009
Sujata Sachdeva, the vice president for accounting at
Koss Corporation, instructed Park Bank, where Koss
had an account, to prepare more than 570 cashier’s
checks. The checks were payable to Sachdeva’s creditors
and used to satisfy her personal debts. She embezzled
about $17.4 million this way, pleaded guilty to several
2 Nos. 12-3202 & 13-1506
federal crimes, and was sentenced to 11 years’ imprison-
ment. The SEC sued Sachdeva and an accomplice
because their scheme (of which the checks from Park
Bank were only a part) caused Koss to misstate its
financial position. SEC v. Sachdeva, 2011 U.S. Dist. L EXIS
32544 (E.D. Wis. Mar. 16, 2011).
Koss and Park Bank are litigating in Wisconsin about
which of them bears the loss. This federal suit, under
the diversity litigation, pits Park Bank (and its parent,
which we ignore) against its insurer. The Bank contends
that Federal Insurance must defend and indemnify it
under a financial-institution bond, sometimes called a
fidelity bond, but which for simplicity we call an insur-
ance policy.
Park Bank relies on Clause 2 of the policy, which prom-
ises indemnity for “Loss of Property resulting directly
from . . . false pretenses, or common law or statutory
larceny, committed by a natural person while on the
premises of” the Bank. The parties agree that Sachdeva
did not enter the Bank’s premises. She gave instructions
by phone, then sent one of Koss’s employees to fetch
the checks. The district court concluded that this makes
Clause 2 inapplicable and entered judgment in the in-
surer’s favor. 2012 U.S. Dist. L EXIS 129647 (Sept. 12, 2012).
Two jurisdictional issues require attention. The first
is that the parties described Federal Insurance as a
“stock insurance company.” The question under 28 U.S.C.
§1332 is whether it is a “corporation.” See Indiana Gas
Co. v. Home Insurance Co., 141 F.3d 314, rehearing denied,
141 F.3d 320 (7th Cir. 1998). An amendment to the com-
Nos. 12-3202 & 13-1506 3
plaint, filed after oral argument under 28 U.S.C. §1653,
specifies that it is. Our own research supports this char-
acterization.
The second problem stems from the fact that the com-
plaint named Koss as a defendant. Park Bank is a citi-
zen of Wisconsin; so is Koss. The complaint thus failed
to invoke the diversity jurisdiction and should have
been dismissed promptly. After the suit had been
pending for a while, the parties noticed the problem. The
Bank tried to have Koss realigned as a plaintiff—an
inappropriate step, since Koss is not insured under the
bond. Federal Insurance suggested that Koss be dis-
missed as irrelevant, a permissible way of securing juris-
diction. See Newman-Green, Inc. v. Alfonzo-Larrain, 490
U.S. 826 (1989). The district court agreed but incongru-
ously also entered judgment in Koss’s favor on the mer-
its. No one paid attention to this discrepancy until
we alerted counsel at oral argument. With this court’s
permission, see Circuit Rule 57, the district judge has
fixed the problem. Koss is out of the case, so jurisdic-
tion is established.
The Bank concedes that every court that has con-
sidered the subject has held that a fraud orchestrated
from outside a financial institution’s premises is not
covered under Clause 2 (which is industry-wide language
from Form 24 of a fidelity bond). See, e.g., Private Bank
& Trust Co. v. Progressive Casualty Insurance Co., 409 F.3d
814, 818 (7th Cir. 2005) (Illinois law); Oritani Savings &
Loan Ass’n v. Fidelity & Deposit Co., 989 F.2d 635, 642 (3d
Cir. 1993) (New Jersey law); Southern National Bank of
4 Nos. 12-3202 & 13-1506
North Carolina v. United Pacific Insurance Co., 864 F.2d 329,
332 (4th Cir. 1989) (North Carolina law). The objective
of an “on premises” clause is to exclude coverage of
schemes such as Sachdeva’s. See American Bankers’
Association, Digest of Bank Insurance §1.3.12 (4th ed. 1981 &
Supp. 1984). All of the decisions we have just cited
are by federal courts, but no state court has disagreed—
and if the Bank wanted Wisconsin to be the first
(perhaps by holding that on-premises acts of a wrong-
doer’s agent suffice), it should have filed this suit in
state court. A federal court is supposed to enforce
state law as it is rather than predict novelties.
According to the Bank, the decisions we have cited
are irrelevant because they concern fraud, while it
contends that Sachdeva committed larceny. Yet the
on-premises requirement is the same whether the crime
is fraud or larceny. The Bank belabors the contention
that Sachdeva committed larceny, citing decisions for the
proposition that if A sends an agent to steal B’s prop-
erty, then A has committed a crime even though A did
not enter B’s land. That’s true enough but has nothing
to do with Clause 2. To come within it, the Bank would
need to establish that B (who does enter the victim’s
premises) commits larceny even if B is A’s dupe and
lacks the mental state required for conviction. Unsur-
prisingly, the Bank has not produced a decision from
any of the 50 states establishing that the dupe can be
convicted of larceny. Had Sachdeva asked the Bank to
send the checks by mail or FedEx, the postal carrier or
courier could not have been convicted of a crime. The
Bank lacks an answer to the question why it should
Nos. 12-3202 & 13-1506 5
matter, under Clause 2, why the criminal rather than
the financial institution chooses the guiltless person
who transports the checks.
Because the insurer need not defend or indemnify the
Bank in its litigation against Koss, the parties’ disputes
about deductibles and attorneys’ fees need not be ad-
dressed. The judgment is affirmed.
4-5-13