BancInsure, Inc. v. BNC National Bank ( 2001 )

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
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No. 00-2118
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BancInsure, Inc., *
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Plaintiff/Appellee, *
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v. *
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BNC National Bank, N.A., *
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Defendant/Appellant, *
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Debra J. Gronlie, *
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Defendant. *
___________ Appeals from the United States
District Court for the
No. 00-3524 District of North Dakota.
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BancInsure, Inc., *
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Plaintiff/Appellant, *
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v. *
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BNC National Bank, N.A., *
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Defendant/Appellee, *
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Debra J. Gronlie, *
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Defendant. *
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Submitted: June 14, 2001
Filed: August 16, 2001
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Before WOLLMAN, Chief Judge, MAGILL, and HAMILTON,1 Circuit Judges.
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WOLLMAN, Chief Judge.
BNC National Bank, N.A., (BNC or the bank) sought to recoup its losses from
various loan and credit transactions handled by Debra J. Gronlie, a former employee,
under the terms of a financial institution bond issued by BancInsure, Inc. BancInsure
remitted $886,319.34 to BNC and then brought suit in federal district court2 for a
declaration of its obligation under the bond and for judgment based on its subrogation
rights. BNC appeals from the district court’s determination that BancInsure owed only
part of the $886,319.34 and that BNC must refund the balance, and from a subsequent
determination that BancInsure is entitled to subrogation of one-fourth of the proceeds
from a settlement. BancInsure appeals from the court’s decision denying it
prejudgment interest on the refund. We affirm.
I.
We draw the facts largely from the district court’s opinion. BancInsure is a
captive company for state bankers associations and provides insurance coverage for
1
The Honorable Clyde H. Hamilton, United States Circuit Judge for the Fourth
Circuit, sitting by designation.
2
The Honorable Patrick A. Conmy, United States District Judge for the District
of North Dakota.
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various banks. BancInsure issued BNC a financial institution bond that provided
fidelity coverage for certain acts of employees, stating in relevant part:
The Underwriter . . . agrees to indemnify the Insured for:
INSURING AGREEMENTS
FIDELITY
Loss resulting directly from dishonest or fraudulent acts committed
by an Employee acting alone or in collusion with others.
Such dishonest or fraudulent acts must be committed by the
Employee with the manifest intent:
(a) to cause the Insured to sustain such loss; and
(b) to obtain financial benefit for the Employee or another person
or entity.
However, if some or all of the Insured’s loss results directly or
indirectly from Loans, that portion of the loss is not covered unless the
Employee was in collusion with one or more parties to the transactions
and has received, in connection therewith, a financial benefit with a value
of at least $2,500.
Appellant’s Supp. App. at 63.
Gronlie was employed by BNC as a loan officer from May of 1991 until April
of 1997. She was promoted to the level of senior vice president and was awarded a
lending authority of $200,000, which meant that she could approve up to that amount
in a loan without seeking prior approval from a loan committee.
In the spring of 1995, Gronlie began to provide loans to James Thomas Harper
(Tom Harper), his company, Top Dog Productions (Top Dog), and various other
entities connected with Harper (collectively, Harper). Tom Harper and Top Dog
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distributed and managed motion simulators.3 Because BNC had little familiarity with
that industry, in May of 1995 a loan committee member instructed Gronlie to increase
her “due diligence” before going ahead with two loan transactions, but otherwise
approved them. Subsequent transactions were also approved by the loan committee,
including a $750,000 line of credit. From 1995 until her termination, Gronlie approved
numerous loans and lines of credit for Harper and Harper’s customers. Whether
inadvertently or intentionally, Top Dog submitted false documents, including a false tax
return, in support of the various loans.
In the summer of 1996, Gronlie’s husband and Tom Harper created a company
called Alamation, owned 50% by each, for the purchase of a motion simulator.
Financing was arranged through a bank other than BNC, and Gronlie personally
guaranteed the loan. After her termination, Gronlie and her husband bought out Tom
Harper’s interest in Alamation.
Various of the Harper loans and lines of credit were insufficiently secured and
have not been repaid. After receiving proofs of loss from BNC on these transactions
in 1997, BancInsure paid BNC several installments totaling $886,319.34. A September
18, 1998, letter sent by BancInsure with a payment of $124,179.19 states that
“BancInsure tenders the sum . . . subject to a complete and full reservation of rights
which shall be deemed continuing and mutual between BancInsure and BNC . . . .
BancInsure shall not require execution of release or satisfaction by BNC at this time
in recognition of the reservation of rights between the parties.”
On September 21, 1998, BancInsure filed this declaratory judgment action
against BNC and Gronlie, seeking a determination of its obligation under the bond.
3
A motion simulator is a large enclosed capsule with seats and a video screen in
the capsule’s interior. The capsule is individually mounted on a hydraulic or
mechanical system that moves it in coordination with a video playing on the inside.
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BNC counterclaimed against BancInsure and cross-claimed against Gronlie, who, in
turn, asserted cross-claims against BNC. The district court severed the cross-claims
and proceeded to trial on the bond issue. On March 22, 2000, the court issued its
judgment that BancInsure owed BNC $300,000 on a separate policy provision, a
finding not disputed on appeal. The court then ruled that only two of the remaining
transactions listed in BNC’s proofs of loss were covered under the bond and ordered
that $404,810.15 be returned to BancInsure. The court also held that BancInsure was
not precluded from collecting the refund by failing to specifically reserve its right to a
refund in the letters it sent to BNC with payment. In June of 2000, the court denied
BancInsure’s request for prejudgment interest on the refund under the bond.
While the court was considering the claims under the bond, the United States
Department of the Treasury Office of the Comptroller of the Currency (Comptroller)
commenced administrative proceedings against Gronlie seeking various debarments
from the banking industry and ultimately brokered a settlement with her and others.
The settlement, signed by Gronlie on May 31, 2000, purports to resolve all claims
between the Comptroller, Gronlie, her husband, Alamation, BNC, and BancInsure.
Under the terms of the settlement, Gronlie and her husband, individually and on behalf
of Alamation, agreed to pay $473,400 in installments, secured by Alamation’s assets
and a $100,000 personal guaranty from Gronlie, “to BNC and/or BancInsure” as
restitution for the losses BNC suffered. BNC and BancInsure signed the settlement
agreement in July of 2000.
In August of 2000, BancInsure moved the district court for a decision on its
subrogation claim, asserting that it was entitled to step into the shoes of BNC under the
terms of the bond and the doctrine of legal subrogation to the extent of its payment and
that it should receive some of the funds remitted by Gronlie in settlement. After further
briefing and a hearing, the court issued an amended judgment on September 13, 2000,
holding that BancInsure was entitled to subrogation rights and some of the settlement
money. BNC appeals from that decision.
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II.
In this diversity action, we review the court’s determination of state insurance
law de novo, Bell v. Allstate Life Ins. Co., 160 F.3d 452, 455 (8th Cir. 1998), and its
factual findings for clear error, Chicago Title Ins. Co. v. FDIC, 172 F.3d 601, 604 (8th
Cir. 1999).
A. Coverage Under the Bond Language
For BNC to obtain coverage under the fidelity portion of the financial institution
bond for its loss, Gronlie must have had the “the manifest intent: (a) to cause the
Insured to sustain such loss; and (b) to obtain financial benefit for the Employee or
another person or entity.” For loan transactions, Gronlie must also have received a
financial benefit of $2500. The district court found that BNC had proved that only two
of the transactions in question, ones in which “funds were sent to [Tom] Harper in
direct violation of the advice given to the bank regarding the use of the money,”
reflected the manifest intent required as a condition of coverage under the bond. In
making this finding, the district court relied on the definition of “manifest intent” used
by this court in First Dakota National Bank v. St. Paul Fire & Marine Insurance
Company, 2 F.3d 801 (8th Cir. 1993).
BNC argues that the district court clearly erred in not finding that all of its losses,
which total approximately two million dollars, resulted from Gronlie’s fraudulent or
dishonest acts. It urges us to elaborate on our discussion of manifest intent in First
Dakota National Bank. Reminding us that BNC had successfully prevailed upon the
district court to adopt the definition in First Dakota National Bank that it now argues
against, BancInsure contends that we should affirm the court’s factual determinations.
North Dakota courts have not ruled on the definition of “manifest intent.” North
Dakota contract law requires courts to “principally look to the plain, ordinary meaning
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of the undefined term to guide . . . interpretation.” Hanneman v. Continental Western
Ins. Co., 575 N.W.2d 445, 450-51 (N.D. 1998) (internal citations omitted). “The
dictionary is a good source to determine the plain, ordinary definition.” Id. at 451. In
the dictionary, “manifest” is defined as “readily perceived by the senses . . . [and/or]
easily understood or recognized by the mind: obvious.” Merriam-Webster’s Collegiate
Dictionary 707 (10th ed. 1993). We believe that the dictionary definition aptly
comports with our discussion of manifest intent in First Dakota National Bank.
In First Dakota National Bank, 2 F.3d at 813, we upheld a jury instruction that
stated that manifest intent under South Dakota law means a “clearly evident intent.”
The instruction stated: “You may consider any statement made or act done or omitted
by a party whose intent is in issue, and all of the facts and circumstances which indicate
his state of mind.” Id. “You may consider it reasonable to draw the inference and find
that a person intends the natural and probable consequences of acts knowingly done or
knowingly omitted.” Id.; see FDIC v. United Pacific Ins. Co., 20 F.3d 1070, 1077-78
(10th Cir. 1994) (approving similar jury instructions); FDIC v. Oldenburg, 34 F.3d
1529, 1539 (10th Cir. 1994) (holding that manifest intent “exists when a particular
result is substantially certain to follow from the employee’s conduct”); but see
Resolution Trust Corp. v. Fidelity and Deposit Co. of Maryland, 205 F.3d 615, 637-42
(3d Cir. 2000). Because BNC will not now be heard to complain of the definition that
it urged the district court to apply, and because North Dakota’s contract law comports
with the interpretation of manifest intent adopted in First Dakota National Bank, we
hold that the district court did not err in utilizing the definition of manifest intent set
forth in First Dakota National Bank.
We turn next to BNC’s argument that the district court’s factual findings are
clearly erroneous. The court determined that Gronlie and her husband both had a
financial interest in Alamation, thus “[a]ll transactions from [the time of its creation]
carry the taint of conflict of interest.” Although the court found many “bad banking
practices” by Gronlie and others at BNC, it found that only two loan transactions, one
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in September and one in November of 1996, reflected a manifest intent on Gronlie’s
part to cause harm to BNC.
In these two transactions, Gronlie had involved herself in such a way as to secure
her own (Alamation’s) rights to a simulator at the expense of the bank’s security. The
district court observed that Gronlie’s loan history comments pertaining to these
transactions recited that all of the funds from the loans would stay with the bank and
be applied against Top Dog’s outstanding line of credit, but that, under Gronlie’s
direction, this is not what had happened. The court found that in one of the transactions
$131,508.85 left the bank and was wired to Top Dog, and that $50,000 left the bank
and went to Top Dog in the second transaction, “resulting in the line of credit remaining
at least $181,508.85 greater than that contemplated when the officer’s comments were
circulated.” The court found that these funds were sent to Top Dog so that Alamation
could obtain a simulator. The court concluded that these transactions, in which money
“earlier earmarked to reduce the loan balances left the bank in a time frame where the
funds were needed by Top Dog to obtain delivery of the machine owned jointly by
Alamation and Harper[,] do meet the policy criteria.”
As the Tenth Circuit has stated, “where an individual’s conduct falls somewhere
between the two extremes of embezzlement and simple poor judgment, intent becomes
a question of fact.” Oldenburg, 34 F.3d at 1540 (quotation marks omitted). In this case,
the determination of whether the requisite manifest intent was present required a
resolution of disputed facts and findings of credibility. “[W]here there are two
permissible views of the evidence, the factfinder’s choice between them cannot be
clearly erroneous.” Northgate Homes, Inc. v. City of Dayton, 126 F.3d 1095, 1101
(8th Cir. 1997) (citation omitted); see also Stanton v. Larry Fowler Trucking, Inc., 52
F.3d 723, 729 (8th Cir. 1995). We conclude that the court’s findings are not clearly
erroneous, and we thus affirm the district court’s determination that BancInsure must
pay only $181,508.85 under the fidelity coverage portion of the bond.
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B. Reservation of Rights
BNC argues that BancInsure did not reserve its right to seek a refund of the
money it paid to BNC. The district court found this to be “a naive attempt at a
‘gotcha’” and noted that the cases cited by BNC were inapposite.
In its letter accompanying the September 1998 funds transfer, BancInsure set out
a “full and complete” mutual reservation of rights. In its answer to BancInsure’s
complaint in the declaratory judgment action, BNC admitted that it had received the
funds pursuant to a full reservation of rights. We agree with the district court that
BNC’s argument that BancInsure should be precluded from seeking a refund is without
merit. Cf. Northwest Airlines, Inc. v. Federal Ins. Co., 32 F.3d 349, 356 (8th Cir.
1994) (noting that although reservation of rights language could have been more
specific, parties knew what the arguments and claims of each for coverage would be).
Additionally, district courts have broad power under 28 U.S.C. § 2202 to craft damages
awards in declaratory judgment actions to effectuate their judgment. See Insurance
Services of Beaufort, Inc. v. Aetna Cas. and Surety Co., 966 F.2d 847, 852 (4th Cir.
1992). We find no error in the district court’s determination.
C. Subrogation
On September 13, 2000, after briefing and a hearing on the matter, the district
court ruled on BancInsure’s request for an amended judgment resolving its subrogation
claim. During the hearing, the parties sought the court’s guidance on whether
BancInsure was entitled to any settlement proceeds. The court noted that the final
documents to effectuate the settlement brokered by the Comptroller had not been
executed because “BNC and BancInsure cannot agree on what amount, if any,
BancInsure is entitled to receive as it share of the payments (if any?) eventually
received under the settlement agreement.” BNC contends that BancInsure is entitled
to none of the settlement proceeds, even though the settlement binds BancInsure.
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BancInsure, in turn, argues that it is entitled to subrogation for its payment under the
bond and thus should be allowed to collect from the settlement, which includes
restitution for the loss for which it paid BNC.
In an effort to resolve the dispute, the court concluded that BancInsure was
entitled to subrogation on the $181,508.85 it was obligated to pay under the bond, but
reduced that amount to $118,350.00 as an equitable offset for the costs BNC expended
in related court and administrative proceedings that BNC used to pressure Gronlie and
Alamation to settle. The court then ruled that as payments of the settlement agreement
are received, they shall “be apportioned one fourth to Bancinsure and three fourths to
BNC.” The court dismissed the remaining cross-claims with prejudice in view of the
settlement agreement.
Because we have affirmed the district court’s determination of the amount owed
to BNC under the fidelity portion of the bond, BancInsure may properly invoke
subrogation for that amount. See Universal Title Ins. Co. v. United States, 942 F.2d
1311, 1315 (8th Cir. 1991) (“[T]he right to subrogation is predicated on the full
payment of the debt or claim of another by one who is not a mere volunteer or
intermeddler.”); cf. State Farm Mut. Auto. Ins. Co. v. Wee, 196 N.W.2d 54, 59-60
(N.D. 1971) (“Equitable subrogation . . . is based on the theory that the one invoking
it has rightfully discharged debt at the instance and for the benefit of the debtor.”).
Under traditional rules, a party seeking subrogation “would stand in the ‘shoes’”
of another. United States v. Lohman, 21 F.3d 844, 846 (8th Cir. 1994). “While
subrogation is generally defined as the substitution of one person in the place of another
with reference to a lawful claim or right, . . . there are actually two distinct types[:] . .
. conventional subrogation and legal subrogation, which is often confusingly called
equitable subrogation, due to its origin and basis in equity.” Universal Title, 942 F.2d
at 1315 (citation and quotation marks omitted). Conventional subrogation is generally
contractual, occurring where “one having no interest or any relation to the matter pays
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the debt of another, and by agreement is entitled to the rights and securities of the
creditor so paid.” Id. Legal subrogation, in contrast,“has for its purpose the working
out of an equitable adjustment and the doing of complete and perfect justice between
the parties by securing the ultimate discharge of a debt by the person who in equity and
good conscience ought to pay it.” Id.The district court, which had presided over a bench trial, listened to the
arguments of the parties and the testimony of their witnesses, and parsed out the
voluminous record, made a determination based on the various equities of the situation
and ruled that BancInsure was entitled to a reduced subrogation right. We discern no
error in this use of legal subrogation principles to work an “equitable adjustment,” id.,between the parties. Because BancInsure’s subrogation right to collect from Gronlie
was limited by the settlement, the court’s subrogation judgment was designed to ensure
that BancInsure, through its right to receive one-fourth of the payments made under the
settlement, will recover the $118,350.00 it is entitled to under its right of subrogation.
We find no error in the district court’s ruling on this point.
D. Prejudgment Interest
On June 13, 2000, the district court denied BancInsure prejudgment interest on
the amount of money to be refunded to it because the “sum or sums involved were
hardly capable of certain determination.” BancInsure argues that it is entitled to
prejudgment interest because the amount at issue was an amount certain.
Under North Dakota law, “[e]very person who is entitled to recover damages
certain or capable of being made certain by calculation, the right to recover which is
vested in the person upon a particular day, also is entitled to recover interest thereon
from that day . . . .” N.D. Cent. Code § 32-03-04 (1996). “Difficulty in computation
does not defeat one’s right to interest, if it is susceptible of being made certain by
mathematical calculation from known factors” but an “ambiguity in the contract terms
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[that] makes the claim uncertain as to both time and quantity” will defeat a claim for
prejudgment interest. Super Hooper, Inc. v. Dietrich & Sons, Inc., 347 N.W.2d 152,
156 (N.D. 1984).
In Koch Hydrocarbon Company v. MDU Resources Group, Inc., 988 F.2d 1529,
1547-48 (8th Cir. 1993), we considered this North Dakota statutory provision in the
context of a complicated gas-pricing and deregulation case, concluding that the
damages in the case were not “certain” as that term is used in the statute because of the
ambiguities in the contracts and the legal and factual complexities attendant to
determining an appropriate award of damages. The North Dakota statute was adopted
from California’s statutes. In Fireman’s Fund Insurance Company v. Allstate Insurance
Company, 286 Cal. Rptr. 146, 158 (Cal. Ct. App. 1991) (citation omitted), the court
stated that prejudgment interest is not authorized where the amount of damage
“depends on a judicial determination based upon conflicting evidence.” Id. (citation
omitted).
The district court in this case was faced with a dispute over how much of the loss
was covered and what computation methods should be used to determine the amount
of that loss. The court was required to resolve the factual and legal complexities of the
intertwined loans and interconnected parties to reach a determination of those issues.
Accordingly, we conclude that the court did not err in determining that the amount of
damages was not a “sum certain” and thus that BancInsure was not entitled to
prejudgment interest.
The judgment is affirmed.
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A true copy.
Attest:
CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.
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