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FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
GULF USA CORPORATION,
No. 99-35881
Plaintiff-Appellant,
D.C. No.
v. CV-93-02987-EDL
FEDERAL INSURANCE COMPANY,
OPINION
Defendant-Appellee.
Appeal from the United States District Court
for the District of Idaho
Edward J. Lodge, Chief Judge, Presiding
Argued and Submitted
March 8, 2001--Seattle, Washington
Filed August 7, 2001
Before: Harry Pregerson, Sidney R. Thomas, and
Ronald M. Gould, Circuit Judges.
Opinion by Judge Gould,
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10194
10195
COUNSEL
David R. Lombardi, Givens, Pursley & Huntley, Boise, Idaho,
Laurence May, Angel & Frankel, New York, New York, for
the plaintiff-appellant.
Stephen R. Thomas, Moffatt Thomas Barrett Rock & Fields,
Boise, Idaho, Frederick D. Baker and Joseph K. Powers,
Sedgwick, Detert, Moran & Arnold, New York, New York,
for the defendant-appellee.
_________________________________________________________________
OPINION
GOULD, Circuit Judge:
This case requires us to determine the standard for discovery
of loss for purposes of notice under a fidelity policy. Gulf
USA Corporation ("Gulf") sued Federal Insurance Company
("Federal"), seeking a declaratory judgment that Federal
breached its obligations under the employee theft coverage
clause of Crime Policy No. 80948166-D ("Crime Policy").
Gulf contended that Federal improperly denied coverage for
losses Gulf sustained as a result of thefts allegedly perpetrated
by a group of former officers and directors ("The Rowland
Group") in connection with certain transactions of Gulf in
New Zealand. The district court granted summary judgment
to Federal, holding that Gulf discovered the loss on the New
Zealand transactions not later than October 1991 rendering
the Crime Policy inapplicable. Because the district court erro-
10196
neously applied a discovery standard that conflicts with settled
Supreme Court precedent, we reverse and remand for
trial.
FACTS AND PROCEDURAL BACKGROUND
The facts giving rise to the present action are tortuous and
the truth may yet be obscured.
The Rowland Group1 acquired control of Gulf in 1989
when Inoco PLC and its subsidiary purchased thirty-four percent
of Gulf's common stock. David Rowland became president
and chief executive officer of Gulf, while other members
of the Rowland Group became officers and directors. At a
Gulf board meeting in September 1989, Rowland suggested
that Gulf invest in commercial real estate in New Zealand.
Shortly thereafter, Gulf's board of directors authorized Rowland
to commit up to [US]$50 million of Gulf funds as an
equity investment in such real estate.2
Beginning in fall 1989, Gulf, through its subsidiary DeValdor,
acquired the rights to twenty-four New Zealand properties.
The New Zealand acquisitions involved two sets of
_________________________________________________________________
1 The Rowland Group consists of David Rowland, former president and
chief executive officer of Gulf; Jeremy James, former director and executive
vice president of Gulf; Derek Moran, former senior vice president of
Gulf; and David Hudd, former director and executive vice president of
Gulf.
2 Certain corporate relationships are central to the resulting real estate
transactions. The basic relationships are as follows: Gulf wholly owned
Gulfpac Ltd. Gulfpac wholly owned a New Zealand subsidiary, DeValdor
Ltd. DeValdor, in turn, acquired subsidiaries that owned property. Two
entities appeared between DeValdor and the entities that sold property to
DeValdor. These two entities -- known as Felpark Ltd. and Kingsley
Finance Ltd. -- received payment by virtue of the respective DeValdor
purchases. At issue in this case is the contention that Felpark and Kingsley
were shell corporations controlled by the Rowland Group, which were
used to siphon money out of the New Zealand real estate transactions to
the benefit of the Rowland Group.
10197
purchase and sale contracts -- one contract involved Felpark's
sale of nineteen properties; the second contract
involved Chase's sale of five properties. The Felpark contract
provided for the sale of the nineteen properties to Gulf for
[NZ]$122 million. The contract also provided for the payment
to Felpark of a "procurement fee" of [NZ]$2.4 million for
procuring the nineteen properties. Gulf also paid Felpark a
two percent "finders fee," amounting to [NZ]$2.1 million, in
connection with the Chase acquisitions.
One of the properties acquired under the Felpark contract
was an office building known as the Unisys House. The
Unisys House was owned by a corporation known as Sunflower
Services Ltd., which was owned by Citibank. The
equity in Sunflower consisted of 100 shares of ordinary stock,
100 shares of redeemable preferred stock, and the Unisys
House. For the purchase price of [NZ]$43.94 million, the
Unisys House and the Sunflower ordinary shares were transferred
to a Gulf subsidiary. However, at the cost of one dollar,
the preferred shares of Sunflower were transferred to Kingsley.
Gulf then paid [NZ]$4.9 million to Kingsley to redeem
the 100 shares of preferred stock.3 Gulf recorded a total purchase
price of [NZ]$48 million as its cost basis for acquisition
of the Unisys House.
In January 1990, the Rowland Group began negotiating
with City Realties Ltd. ("CRL")4 for the purpose of merging
CRL and DeValdor, which would effectively vest control of
CRL in Gulf. As part of the merger process, CRL's chief
financial officer, Rex Saunders, performed due diligence
inquiries into the New Zealand properties to verify the costs
_________________________________________________________________
3 Gulf's payment of the [NZ]$4.9 million to Kingsley was not direct:
Gulf made a shareholders' advance to Sunflower of[NZ]$4.9 million and
then these funds were paid to Kingsley when Sunflower redeemed the preferred
shares.
4 CRL was later renamed and is now Gulf Resources Pacific Limited.
When applicable, our opinion will continue to refer to the entity as CRL.
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Gulf incurred in acquiring its interests. During the course of
his investigation, Saunders learned that Gulf paid Felpark
[NZ]$4.5 million in fees and that Gulf paid Kingsley
[NZ]$4.9 million to redeem the 100 shares of Sunflower preferred
stock.
CRL also retained a New Zealand investment banking firm,
Buttle Wilson Ltd., to obtain an opinion about the fairness and
feasibility of the proposed merger. Regarding the New Zealand
acquisitions, Buttle Wilson reported that Gulf had paid
[NZ]$4.5 million in fees to third party companies and that
"the estimated margin before holding and related costs accruing
to the third party companies was up to [NZ]$7.3 million."
As described in the Buttle Wilson report, the total amount
paid to third parties was [NZ]$11.8 million, which equated to
approximately [US]$7 million at the then-prevailing exchange
rate. The report also stated that Buttle Wilson had received
"written assurances by . . . Gulf . . . that the third party companies
have no association or relationship with . . . Gulf . . .
or any party related to [it]."
At the CRL shareholders' meeting convened to consider
and approve the merger, a minority shareholder named Brierley
Investments attempted to postpone the vote to ascertain
the accuracy of the information contained in the Buttle Wilson
report relating to fees paid to third parties. Brierley subsequently
commenced an action in New Zealand courts in
which it unsuccessfully sought to enjoin the CRL/Gulf merger
on several grounds. Specifically, Brierley alleged that the
entities who were paid fees were not unassociated or unrelated
third party entities. In response to the denial of its
request for an injunction, Brierley issued a press release stating
that "given the [New Zealand] High Court did determine
that there was a serious question on the issue of who in fact
received the fees and margins totaling at least[NZ]$11.8M
. . . , [Brierley's] actions to date on this matter have been fully
justified." The press release further noted that the "ultimate
beneficiaries of these margins were not identified .. . [and
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Brierley] intends to continue its investigations into the identity
of the third party companies." Shortly thereafter, Gulf
purchased Brierley's CRL shares at twice the market value.
In May 1990, Forbes magazine published an article on
Rowland and his relationship to Gulf. Entitled "Used and
abused," the Forbes article recounted Brierley's opposition to
the CRL/Gulf merger and the subsequent buyout of Brierley
at "twice the market price." Forbes, May 28, 1990, at 71. The
article alleged that "Brierley management suspected that
Rowland took $7 million in improper fees and profits out of
the [New Zealand real estate] deal . . . . " Id.
After publication of the Forbes article, Gulf and its directors
were named as defendants in a shareholder derivative
suit. The complaint asserted that [US]$7 million in fraudulent
fees had been paid to Rowland in conjunction with the New
Zealand acquisitions. The derivative suit was voluntarily dismissed
in 1991.
In early 1991, Nycal Corporation, led by Graham Lacey,
entered into negotiations with the Rowland Group and Inoco
to acquire their controlling interest in Gulf.5 On July 12, 1991,
the Rowland Group sold its controlling interest in Gulf to
Nycal and resigned as officers and directors. Lacey became
president, chief executive officer, and a director of Gulf.
Within days of the takeover, Lacey launched an investigation
into the suspected fraudulent transactions engineered by
Rowland during Rowland's tenure at Gulf. Lacey suspected
that Rowland had defrauded Gulf and CRL on a transaction
known as the "Kidderminster" acquisition, an industrial site
located in England that had been purchased by a subsidiary of
_________________________________________________________________
5 For additional background relating to Nycal's purchase of the majority
interest in Gulf, see Nycal Corp. v. Inoco PLC , 949 F. Supp 1115
(S.D.N.Y. 1997), Nycal Corp v. Inoco PLC, 968 F. Supp. 147 (S.D.N.Y.
1997), and Nycal Corp. v. Inoco PLC, 988 F. Supp. 296 (S.D.N.Y. 1997).
10200
CRL for #E1#9 million. At a Gulf board meeting on August 7,
1991, Lacey reported that Kidderminster had previously been
acquired from a receiver by a third party and was resold to
CRL two months later for double the price. The minutes of
the board meeting state that "based on circumstantial evidence
developed to date, . . . it is entirely possible the Kidderminster
acquisition was a related party transaction." In a memorandum
dated August 20, 1991, Lacey reported to the Gulf board
that the "acquisition of the Kidderminster property is an outrageous
fraud on [CRL], Gulf and their respective shareholders."
The memorandum identified several other suspected
fraudulent transactions. Lacey's memo concluded that"Gulf
and its subsidiaries have been consistently looted by Rowland
and his mob," and recommended that Gulf commence a lawsuit
against Rowland "if, having presented Rowland et al with
the facts and evidence, they do not within 48 hours make full
and adequate recompense."
During this period, Lacey asked Peter Wall, the chief executive
officer of CRL, to furnish details on additional suspected
frauds committed by Rowland. In a memorandum to
Lacey dated August 28, 1991, Wall recounted the circumstances
surrounding the New Zealand acquisitions and the
allegations by Brierley regarding the fees paid to third party
entities. Specifically, Wall stated that Brierley"believed
shareholders had not been told the full story about the companies
that acted as intermediaries when Gulf bought its properties
and took an $11.8 million cut on the transaction." Wall
characterized these fees as "rake-off" in the memo.
In early September 1991, Lacey met with Rowland to discuss
a settlement of Gulf's claims against Rowland. At a September
17, 1991 meeting of Gulf's board, Lacey outlined his
discussions with Rowland. In late September 1991, Gulf
agreed to settle with Inoco and the Rowland Group. The terms
of the agreement included the transfer of the Kidderminster
property to Inoco for securities and cash in an amount equal
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to Gulf's full investment in Kidderminster and a general release6
of Gulf's claims against Inoco and its officers.
Approximately six months after Gulf's settlement with
Rowland, Gulf submitted to Federal a renewal application for
the Crime Policy. In the renewal application, under a section
entitled "Loss Experience," Gulf responded to a request to list
"all employee dishonesty, burglary, robbery, disappearance,
destruction and forgery losses discovered by the Insured in
the last six (6) years" by answering "none. " Federal renewed
the Crime Policy, and it became effective on April 22, 1992.
By letter dated May 5, 1993, Gulf provided Federal notice
that "[o]n March 8, 1993, employees of a Gulf. . . subsidiary
. . . obtained information which indicates that a subsidiary of
Gulf . . . may have suffered a loss by virtue of an unlawful
taking of money by an employee to the deprivation of Gulf
. . . or its subsidiary." The "employees" referred to in this letter
-- Wall and Saunders -- stated that on March 8, 1993,
they met with a senior bank officer of Citibank who informed
them that Citibank had received approximately [NZ]$43 million
for the Unisys House transaction, as opposed to the
[NZ]$48 million recorded as Gulf's cost basis.
Gulf filed a proof of loss on October 27, 1993, which
claimed that Felpark and Kingsley were "shell corporations
created in the Cook Islands at [the Rowland Group's] direction
immediately prior to the transactions." The proof of loss
further claimed that the fees paid to Felpark in conjunction
with the New Zealand acquisitions and the funds paid to
Kingsley as part of the Unisys House transaction had been
routed through those corporations to Interallianz Bank of
Zurich ("IBZ"). Although Gulf alleged that the funds were
transferred at the direction of the Rowland Group, it cautioned
_________________________________________________________________
6 Lacey reported to the Gulf board that "Rowland insisted upon a general
release from any potential future claims based on the former management's
actions during their tenure with [Gulf]."
10202
that the "identity of the recipient accounts, and the legal and
beneficial owners thereof, have not been determined. " After
a year-long investigation, Federal confirmed the factual allegations
contained in Gulf's proof of loss. However, Federal
denied coverage because it concluded that Gulf had materially
breached the terms of the Crime Policy. Gulf then filed the
present action.7
Federal moved for summary judgment, asserting three
grounds. First, Federal alleged that Gulf's notice of its loss
was untimely under the Crime Policy because Gulf knew of
Rowland's fraudulent conduct no later than October 1991, but
failed to notify Federal until May 5, 1993. Second, Federal
contended that Gulf misrepresented its loss history in its
Crime Policy renewal application by failing to disclose its
prior discovery of Rowland's fraud. Third, Federal maintained
that the release Gulf provided to Rowland destroyed
Federal's subrogation rights in violation of the Crime Policy.
Federal submitted deposition excerpts taken from two unrelated
matters, but primarily from Nycal Corp. v. Inoco PLC,
988 F. Supp. 296 (S.D.N.Y. 1997). Gulf moved to strike the
Nycal depositions, but the district court denied the motion.
The district court granted Federal's motion for summary judgment,
holding that "there are no genuine, disputed issues of
material fact that by October of 1991, Graham Lacey had
_________________________________________________________________
7 This action was originally commenced as an adversary proceeding in
Gulf's Chapter 11 bankruptcy proceeding brought in the United States
Bankruptcy Court for the District of Idaho. In a decision dated October 26,
1995, the bankruptcy court found that Gulf's claims against Federal constituted
a non-core proceeding pursuant to 28 U.S.C.§ 157(b)(2). Thereafter,
Federal filed a motion in the United States District Court for the
District of Idaho seeking withdrawal of the reference of the action from
the bankruptcy court to the district court and transferring venue to the
United States District Court for the District of Massachusetts. On April 4,
1996, the district court denied Federal's motion to transfer venue as well
as its motion for an immediate withdrawal of the reference. On November
6, 1998, the district court entered an order withdrawing the reference to
the bankruptcy court.
10203
actual knowledge of events sufficient to trigger Gulf's obligation
under the Crime Policy to notify Federal that the New
Zealand acquisitions may have involved a loss by theft." The
district court rejected Gulf's contention that Federal was due
notice only after Gulf learned of a an actual theft. Relying on
Ellenberg v. Underwriters at Lloyd's (In re Prime Commercial
Corp.), 187 B.R. 785, 801 (Bankr. N.D. Ga. 1995), the
district court held that "Gulf was required to give Federal
notice once it possessed knowledge `of some event or events
short of actual knowledge of a theft that nonetheless . . . may
involve a loss by theft.' " The district court granted summary
judgment to Federal and dismissed the action.8
This appeal followed.
DISCUSSION
I
This is a diversity action in which the factors relevant to the
choice of law analysis favor the forum state. See Indus.
Indem. Ins. Co. v. United States, 757 F.2d 982, 986 (9th Cir.
1985). We therefore apply Idaho substantive law. Stone v.
Millstein, 804 F.2d 1434, 1438 (9th Cir. 1986).
We review a grant of summary judgment de novo. Robi v.
Reed, 173 F.3d 736, 739 (9th Cir. 1999). Viewing the evidence
in the light most favorable to Gulf, we must determine
whether there are any genuine issues of material fact and
whether the district court correctly applied the relevant substantive
law. Id. To survive a motion for summary judgment,
Gulf must present specific facts establishing a genuine issue
on all essential elements of the case. Celotex Corp. v. Catrett,
477 U.S. 317, 322-24 (1986).
_________________________________________________________________
8 The district court did not address the remaining two grounds asserted
by Federal in support of its motion for summary judgment.
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II
Gulf contends that the district court erroneously considered
sworn deposition testimony taken in an unrelated case. Gulf
asserts that the district court erred "by basing its factual findings
on the statements of . . . Lacey when: (a) those statements
were made in an unrelated matter in which neither Gulf
nor Federal was a party; (b) the testimony would not be
admissible at trial; (c) the statements were not based upon his
own knowledge; (d) the testimony was internally inconsistent
and contradictory; and (e) substantial contrary testimony
existed in the record . . . ." Despite this assertion of error, Gulf
provides no argument or authority as support. We deem this
issue to be abandoned. See Am. Int'l Enters. v. FDIC, 3 F.3d
1263, 1266 n.5 (9th Cir. 1993) (issue mentioned in"statement
of issues," but not fully developed in argument, may be considered
abandoned).
Even were we to consider the merits, alternatively we hold
that Gulf's assertion of error is without merit. Sworn deposition
testimony may be used by or against a party on summary
judgment regardless of whether the testimony was taken in a
separate proceeding. Curnow v. Ridgecrest Police , 952 F.2d
321, 324 (9th Cir. 1991). Such testimony is considered to be
an affidavit pursuant to Federal Rule of Civil Procedure 56(c),
and may be used against a party on summary judgment as
long as the proffered depositions were made on personal
knowledge and set forth facts that were admissible in evidence.
Id. The depositions challenged here satisfy this rule.
See Nycal, 988 F. Supp. at 300 (Lacey and Rowland deposition
testimony deemed to be sworn, based on personal knowledge,
and set forth facts admissible in evidence).
III
Gulf contends that the district court erroneously concluded
that there was no genuine dispute that Gulf "discovered" the
theft loss no later than October 1991, thereby precluding it
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from recovering under the Crime Policy. Specifically, Gulf
argues that: (1) the district court's decision "is based largely
on inferences, improperly drawn in Federal's favor"; (2) the
district court adopted a discovery standard "which is at odds
with almost one hundred years of well-established case law";
and (3) the district court's reading of the Crime Policy was
flawed.
Our review begins with the language of the Crime Policy.
The Crime Policy affords "Employee Theft Coverage " to Gulf
up to a limit of [US]$10 million, subject to a[US]$100,000
deductible. The policy provides: "The Company shall be liable
for direct losses of Money, Securities and other property
caused by Theft or forgery by any identifiable Employee(s)
of any Insured acting alone or in collusion with others."
(Emphasis in original). The policy defines "Theft " as "the
unlawful taking of Money, Securities or other property to the
deprivation of the Insured." (Emphasis in original). There is
no dispute that the alleged actions of the Rowland Group
regarding the New Zealand acquisitions constitute a"theft"
under the Crime Policy.
In general, the Crime Policy covers loss discovered and
sustained both after the inception date of the policy (April 22,
1992), and during the effective period of the policy. The
Crime Policy also provides limited coverage for loss sustained
before April 22, 1992: "The liability of the Company for loss
sustained prior to . . . the effective date of this policy . . . is
subject to [the condition that] . . . the loss shall have been discovered
after the expiration of the time for discovery of such
loss under the last such bond or policy."9
_________________________________________________________________
9 Before obtaining coverage under the Crime Policy at issue here, Gulf
was insured under another Federal crime policy ("prior policy"), which
was effective until April 22, 1992. Although the prior policy was in effect
when Gulf sustained its loss from the Rowland thefts, Gulf has made no
claim under the prior policy. Thus, if Gulf first discovered the Rowland
thefts during the prior policy period, the Crime Policy would not afford
coverage for such loss.
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As to notice of such loss, Section 4.5 of the Crime Policy
provides:
Upon knowledge or discovery by a proprietor,
partner or officer of any Insured of loss or of an
occurrence which may become a loss, written notice
shall be given at the earliest practicable moment, and
in no event later than sixty days after such discovery.
Within four months after such discovery the Insured
shall furnish to the Company affirmative proof of
loss with full particulars.
(Emphasis added). The Crime Policy also states that"knowledge
possessed or discovery made by any Insured or by any
. . . officer of any Insured shall constitute knowledge possessed
or discovery made by all of the Insureds for the purposes
of this policy."
The parties agree, and we also conclude, that these provisions
establish that Gulf may recover for its theft loss under
the Crime Policy only if it first discovered the loss after the
April 22, 1992 inception date of the Crime Policy. To determine
whether the Crime Policy is applicable, the central issue
is the definition of "discovery of loss" under the policy.10
In granting summary judgment to Federal, the district court
relied on Prime Commercial and reasoned:
In that case, the court correctly observed that"the
Policy requires not just notice upon discovery of a
loss but upon discovery of `an occurrence which
_________________________________________________________________
10 The Crime Policy does not define the term "discovery." Idaho courts
have recognized that, "where a word or phrase used in an insurance contract
has a settled legal meaning or interpretation, that meaning or interpretation
must be given even though other interpretations are possible." Stein-
McMurray Ins. Inc. v. Highlands Ins. Co., 520 P.2d 865, 867 (Idaho
1974); see also Calif. Union Ins. Co. v. Am. Diversified Sav. Bank, 948
F.2d 556, 563-64 (9th Cir. 1991).
10207
may become a loss.' " Since a crime policy is concerned
only with a loss occasioned by a theft, the
Prime Commercial court reasoned that "if the Policy
had required notice only upon the discovery of theft,
it would have been sufficient to stop after the words,
`[u]pon knowledge or discovery by a proprietor,
partner or officer of any Insured of loss,' . . . because
knowledge of a loss is knowledge of a theft for purposes
of the Policy." Based on this reasoning, the
court concluded:
"It follows that the added words, `occurrence
which may become a loss,' cannot be
read as requiring notice where the insured
knows of a theft . . . . Therefore, the added
words, `occurrence which may become a
loss,' must refer to knowledge of some
event or events short of actual knowledge of
a theft that nonetheless requires notice to
the insurer because that event may involve
a loss by theft."
This Court agrees with the Prime Commercial
court's analysis, and adopts that court's interpretation
of the "discovery" language as its own.
(Emphasis and alterations in original) (quoting Prime Commercial,
187 B.R. at 801).
Gulf contends that "discovery of a loss under a fidelity type
policy requires actual knowledge by an insured of specific
fraudulent or dishonest acts of an employee." Conversely,
Federal contends that "once an insured has sufficient facts to
reasonably question an employee's honesty, a purported delay
in discovering a theft loss cannot be justified by the assertion
that the insured did not have enough detailed information."
Our precedent indicates that the proper standard falls in
between these two positions.
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[1] It has long been established, under authority declared by
the Supreme Court, that a loss is discovered once an insured
has obtained facts that would cause a reasonable person to
charge that there had been dishonesty or fraud resulting in
loss. One of the earliest and most pivotal cases interpreting
the phrase "discovery of loss" is American Surety Co. v.
Pauly, 170 U.S. 133, 147 (1898).11 There, in the context of an
insurance policy that required the insured to notify the insurance
company of a claim upon "discovery of the loss," the
Supreme Court approved the following jury instruction:
It is not sufficient to defeat the plaintiff's right of
action upon the policy that it be shown that the plaintiff
may have had suspicions of dishonest conduct
. . . . He may have had suspicions of irregularities;
he may have had suspicions of fraud, but he was not
bound to act until he had acquired knowledge of
some specific, fraudulent or dishonest act which
might involve the defendant in liability for the misconduct.
170 U.S. at 145. The Court held that the insured was required
to give notice to the insurer once it "had knowledge -- not
simply suspicion -- of the existence of such facts as would
justify a careful and prudent man in charging another with
fraud or dishonesty." Id. at 147.
Courts generally have followed American Surety, and
its statement has become the "well-established rule." See L.C.
Warden, Effect of Failure to Give Notice, or Delay in Giving
Notice or Filing of Proofs of Loss, Upon Fidelity Bond or
Insurance, 23 A.L.R.2d 1056, at § 6 (1952) (citing authorities
relying on American Surety). We have applied it, albeit in a
slightly different context, holding that under fidelity bond and
_________________________________________________________________
11 See also American Surety Co. v. Pauly, 170 U.S. 160, 164 (1898)
("Pauly II") (reaffirming the discovery standard enunciated in American
Surety).
10209
California law, "discovery" occurs once an insured becomes
aware of facts that would cause a reasonable person to assume
a loss had been or would be incurred. See Calif. Union Ins.
Co., 948 F.2d at 563. In other words, "discovery of loss does
not occur until the insured discovers facts showing that dishonest
acts occurred and appreciates the significance of those
facts; suspicion of loss is not enough." Id. (emphasis added)
(citing F.D.I.C. v. Aetna Cas. & Sur. Co., 903 F.2d 1073,
1079 (6th Cir. 1990)). See also, e.g., Resolution Trust Corp.
v. Fidelity & Deposit Co., 205 F.3d 615, 630-31 (3d Cir.
2000) (holding that "discovery . . . does not occur until the
insured `discovers facts showing that dishonest acts occurred
and appreciates the significance of those facts' ") (quoting
Calif. Union Ins. Co., 948 F.2d at 563); F.D.I.C. v. Oldenburg,
34 F.3d 1529, 1542 (10th Cir. 1994) (noting that
"[d]iscovery requires that the insured have more than `mere
suspicion' of loss"); F.D.I.C. v. Aetna Cas. & Sur. Co., 426
F.2d 729, 739 (5th Cir. 1970); Nike, Inc. v. Northwestern Pac.
Indem. Co., 999 P.2d 1197, 1202-03 (Or. App. 2000) (noting
that American Surety reflects the ordinary understanding of
the term "discovery," and adopting it as the applicable standard).
As a leading treatise has recognized, "[d]iscovery takes
place when the insured gains sufficient knowledge, greater
than mere suspicion, which would justify a reasonable and
prudent person to believe that an act of dishonesty[or theft]
and loss within policy coverage had taken place. " Lee R. Russ
& Thomas F. Segalla, 11 Couch on Insurance 3D § 160:97,
at 160-86 (1998) (footnote omitted).
Given the well-established adoption of the American Surety
standard in our circuit and others, we must disagree with the
district court's interpretation of the discovery rule. The district
court's adoption of Prime Commercial created an unduly
expansive discovery standard that conflicts with our precedent.
We decline to follow Prime Commercial because its language
would require notice when the insured simply
possesses "knowledge of some event or events short of actual
10210
knowledge of a theft," Prime Commercial, 187 B.R. at 801,
without providing adequate definition.
We also reject the interpretations of the discovery rule
urged by both Gulf and Federal. Although Gulf contends that
"actual knowledge of fraud" is required, this standard would
encourage an insured unduly to delay reporting fraud or dishonesty,
causing unnecessary loss. And while Federal contends
that the discovery rule is satisfied when an insured
simply has sufficient facts to "reasonably question" an
employee's honesty, this interpretation is too broad and would
encourage premature accusations of employee misconduct.
We reaffirm that American Surety and our precedent require
"knowledge -- not simply suspicion -- of the existence of
such facts as would justify a careful and prudent man in
charging another with fraud or dishonesty." Am. Sur., 170
U.S. at 147.
The American Surety standard has stood the test of time
and it also fares well when reexamined. This standard makes
sense because a careful and prudent person does not lightly
charge another with committing fraud or an act of dishonesty.
Such charges may disrupt the fabric of the employer's workplace
and may often set into motion further investigations by
responsible governmental agencies and affected parties. If
such a charge is later determined incorrect, the employer may
be liable for defamation, slander, breach of contract, or other
claims. For such reasons, it is reasonable to interpret the fidelity
bond's contractual language in a manner permitting the
employer to be careful and cautious before asserting that a
fraud or dishonesty has occurred. Cf. Utica Mut. Ins. Co. v.
Fireman's Fund Ins. Cos., 748 F.2d 118, 123 (2d Cir. 1984)
(noting that the adoption of a broader definition of discovery
"would effectively eliminate the insured's duty to inquire into
the facts").
Applying the objective American Surety standard here,
and viewing the facts and all reasonable inferences in the light
10211
most favorable to Gulf, we hold that the district court erroneously
determined that "there are no genuine, disputed issues
of material fact that by October 1991, Graham Lacey had
actual knowledge of events sufficient to trigger Gulf's obligation
under the Crime Policy to notify Federal that the New
Zealand acquisitions may have involved a loss by theft." After
reciting certain evidence in support of summary judgment, the
district court stated: "This evidence establishes that Lacey
believed Rowland had skimmed money off numerous Gulf
transactions."12 (Emphasis added). While Lacey may well
have believed Rowland perpetrated various frauds during his
tenure at Gulf, the evidence relied upon by the district court
does not establish that Lacey had knowledge of sufficient
facts to charge that the New Zealand acquisitions involved a
theft loss.
The district court also found that the information Saunders
learned on March 8, 1993 (the date Gulf claims it"discovered"
its loss) "did not differ materially from information
[Saunders] obtained during CRL's due diligence inquiry in
1990" -- namely, that Citibank received approximately
[NZ]$43 million for the Unisys House and not the [NZ]$48
million recorded as Gulf's cost basis. The district court further
found that during his due diligence, "Saunders learned that
Kingsley was a Cook Island corporation, that Kingsley had
received the preferred shares of Sunflower Services for no
consideration, and that the shares had been redeemed with
[NZ]$4.9 million in Gulf funds." (Emphasis added). This is an
improper inference that the record does not support. In fact,
although Saunders received a report indicating the author's
_________________________________________________________________
12 The district court also placed great emphasis on Lacey's Nycal deposition
testimony, wherein Lacey stated that during the period "15th of July,
1991 and the end of September 1991 . . . I believed that the . . . fees and
expenses that made up the total cost of [CRL] had found its way to companies
and entities that benefitted Rowland and other parties." (Emphasis
added). While this evidence again demonstrates Lacey's belief, it does not
establish any fact that would cause a reasonable person to charge another
with fraud or dishonesty.
10212
belief that "nothing was paid by Kingsley for the preference
shares," Saunders testified that "I believe[ed] that they were
making an assumption that they couldn't come to, based on
what they had there."
When viewed in a light most favorable to Gulf, the evidence
demonstrates that there are genuine, disputed issues of
material fact as to when Gulf possessed knowledge of the
existence of such facts that would justify charging Rowland
with dishonesty, fraud, or theft. Because it is unclear when
Gulf discovered facts indicating that the New Zealand acquisitions
involved a loss by theft, we hold that the district court
erroneously granted summary judgment to Federal. Instead,
factual issues pertinent to discovery of loss require trial.
IV
As an alternative basis for affirming the district court's
grant of summary judgment, Federal argues that the Crime
Policy should be rescinded because Gulf failed to disclose
pertinent loss history information in its renewal application
form.13 Specifically, Federal contends that there is no genuine
issue of fact in dispute that Gulf failed to disclose its loss
resulting from the Kidderminster transaction.14 We disagree.
Reviewing the record in the light most favorable to Gulf,
as we must in assessing summary judgment for Federal, we
conclude that material issues of fact exist as to whether Gulf
_________________________________________________________________
13 The district court did not address this issue in its order granting Federal
summary judgment. Nevertheless, we may affirm summary judgment
on an alternative ground to that given by the district court if the record
fairly supports the alternative ground. Fidelity Fin. Corp. v. Fed. Home
Loan Bank, 792 F.2d 1432, 1437 (9th Cir. 1986).
14 Idaho law provides that "[a] contract of insurance, and the liability of
an insurer, may be avoided by reason of fraud in the inception of the contract,
or a concealment, or a misstatement of matters material to the risk."
Matthews v. N.Y. Life Ins. Co., 443 P.2d 456, 460 (Idaho 1968); see also
I.C. § 41-1811.
10213
suffered a material loss on the Kidderminster transaction. If
Gulf did not suffer a material loss on the Kidderminster transaction
-- as it claims -- then its failure to mention the transaction
in the renewal application does not constitute a
material misrepresentation or omission such that the Crime
Policy should be rescinded.
The record reveals the following. An outside auditor delivered
a preliminary report to the Audit Committee of Gulf's
Board of Directors dated February 26, 1992, which stated:
"The exchange of CRL's Kidderminster property . .. to Inoco
resulted in no material gain or loss." We find highly relevant
that an independent auditor reported no material gain or loss
resulting from the Kidderminster transaction. Additionally,
Gulf filed two separate forms with the Securities and
Exchange Commission ("SEC") claiming no material gain or
loss. Gulf's Form 8-K filed with the SEC stated:
The effect of this transaction completes an
exchange by CRL of certain real estate property
located in the United Kingdom [Kidderminster] with
the Registrant's former largest shareholder in
exchange for approximately 22.6 percent (valued at
approximately $16 million) of the outstanding shares
of Nycal, currently the owner of approximately 44
percent of the outstanding Common stock of the
Registrant. There was no material gain or loss on the
exchange transaction.
Similarly, Gulf's Form 10-K filed with the SEC for the fiscal
year ending December 31, 1991 stated:
During the first quarter of 1991, under the direction
of former directors, Gulf Pacific purchased a
property in the United Kingdom Midlands, and in
the opinion of Gulf Pacific's current Board of Directors,
this development property did not fulfill Gulf
Pacific's investment criteria. In October 1991, Gulf
10214
Pacific completed the exchange of this property with
Inoco, formerly Gulf's largest shareholder, for
3,953,700 shares of Nycal Corporation Common
Stock. There was no material gain or loss at the time
of the exchange.
This evidence indicates that Gulf did not suffer a material loss
on the Kidderminster transaction.
Notwithstanding the auditor's statements and the securities
disclosures indicating no material loss on the Kidderminster
transaction, there is evidence to the contrary. For example,
Gulf's proof of loss to Federal stated that despite the settlement
of its claims against Rowland, "Gulf and[CRL] nevertheless
suffered significant loss."
There is a genuine issue of material fact whether Gulf actually
suffered a material loss from the Kidderminster transaction.
15 We hold that summary judgment on the issue of
recission of the Crime Policy is inappropriate.
V
As a second alternative basis for affirming the district
court's grant of summary judgment, Federal argues that Gulf
breached the Crime Policy's subrogation clause by granting
Rowland a general release of liability.16 Again, material issues
of fact preclude summary judgment.
As previously explained, the subject release was the product
of a series of settlement negotiations that occurred in
August and September 1991 between Lacey and Rowland
after Lacey uncovered what he suspected to be fraudulent
_________________________________________________________________
15 We express no opinion whether there may be other factual or legal
issues pertinent to Federal's recission theory.
16 The Crime Policy provides that"[t]he Insured shall do nothing after
loss to prejudice [the Company's subrogation] rights."
10215
transactions perpetrated by Rowland. Gulf's release provided,
in pertinent part:
In consideration of the release to be given to it under
this clause by [Inoco], [Gulf] for itself and on behalf
of each of its subsidiaries (except [CRL] and its subsidiaries)
. . . hereby waives and releases [Inoco] and
each of its subsidiaries and each of [Inoco's ] officers
from all claims . . . liabilities, duties, debts and obligations
owed or alleged to be owed to [Gulf] as at
30 September 1991 or in respect of any period ended
on or prior to that date by [Inoco] or any officer or
subsidiary of [Inoco].
CRL granted Inoco an identical release on its behalf.
There is some evidence in the record that might indicate
that the Gulf officers and directors involved in negotiating the
settlement intended broadly to release Inoco and its officers
-- including Rowland and the Rowland Group. However, the
scope of the release is affected by the intent of the parties and
the factual record here has not been fully developed.
But even if the parties intended to grant a broad release,
summary judgment is nevertheless inappropriate. Gulf argues
that under English law,17 a provision in a contract that seeks
to release a director from claims of misfeasance is void as a
matter of statute. Section 310 of the Companies Act of 1985
provides that "any provision . . . in any contract with the company
or otherwise," which purports to exempt a director from
liability for "negligence, default, breach of duty or breach of
trust" in relation to an English company, is void. While the
Companies Act of 1985 expressly applies to English companies,
courts must construe the release in accordance with
_________________________________________________________________
17 The release explicitly states that "[t]his agreement shall be governed
by and construed in accordance with English law."
10216
English law. The statute appears to apply here -- despite
Gulf's incorporation in the United States.18
English common law provides that releases will not be
construed to apply to facts of which the releasing party is
unaware at the time of entering the agreement. See Ecclesiastical
Comm'n for England v. N.E. Ry, 4 Ch.D. 845 (1877)
(holding that release did not bar plaintiff's claim because
plaintiff had no ground to suspect that act complained of had
taken place when giving release). As we held above, the
record does not conclusively establish whether Gulf had sufficient
facts to determine the fraudulent nature of the New Zealand
acquisitions when it agreed to release Inoco and the
Rowland Group.
To the extent that Gulf was unaware of the fraud allegedly
committed by the Rowland Group in connection with the New
Zealand acquisitions, English law appears to provide that the
release does not operate to preclude such claims. We hold that
material issues of fact preclude summary judgment on this
issue.
REVERSED, and REMANDED.
_________________________________________________________________
18 In the present posture of the case, we need not find that English law
is in fact applicable; this is an issue for the district court to determine in
the first instance.
10217