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Avon State Bank v. Bancinsure, Inc.

United States District Court, Eighth Circuit

January 10, 2014

Avon State Bank, Plaintiff,
BancInsure, Inc., Defendant.

Margaret S. Brownell, Joseph P. Ceronsky, Maslon Edelman Borman & Brand, LLP, Minneapolis, Minnesota, for Plaintiff.

Mark J. Johnson, Joseph A. Nilan, Joshua A. Dorothy, Gregerson, Rosow, Johnson & Nilan, Ltd., Minneapolis, Minnesota, for Defendant.


RICHARD H. KYLE, District Judge.


This insurance-coverage dispute between Plaintiff Avon State Bank ("Avon") and its insurer, Defendant BancInsure, Inc. ("BancInsure"), arises from an Avon employee's involvement in an advance-fee scheme.[1] The email-based scam promised victims a portion of a fictional $9 million estate if the victims helped transfer the estate from Senegal to the United States by wiring the perpetrator money for taxes and other fees. Avon's employee, Eric Carlson, fell prey to the scam, wiring $60, 000 of his own money. Though beginning to doubt the legitimacy of his "investment, " he nonetheless recruited others to invest as well. He had them write out cashier's checks to Avon and then used Avon to wire their money-almost $500, 000-to an offshore account. When these "investors" never received their promised portion of the estate, they demanded Avon return their money and sued. A state court jury concluded Carlson had fraudulently misrepresented the investment to them and Avon was liable for their losses. BancInsure, which had been defending Avon throughout the suit, refused to indemnify Avon for the judgment and sought reimbursement for its defense costs, asserting Avon's policy with BancInsure did not cover fraud. In response, Avon commenced this declaratoryjudgment action against BancInsure, asking the Court to determine its coverage. Both parties now cross-move for summary judgment on Avon's claims; for the reasons that follow, the Court will grant both Motions in part and deny both in part.


The "Investment" Scheme

In January 2007, long-time Avon customer Ambrose Herdering was contacted by "David Gibson, " who purported to be the son of an African associate with whom Herdering had done business. Gibson claimed his father had passed away and left the family a $9 million estate, which they wanted to transfer to America, to Herdering's bank (i.e. Avon). Gibson said the money was tied up in the Netherlands and he needed money to pay taxes and other fees. Herdering sent money multiple times, as each time Gibson would inform him of another problem or delay in transferring the estate requiring further cash advances. Herdering approached Carlson for help with the "Gibson estate, " promising him huge rewards. In summer 2007, Carlson issued Herdering a loan from Avon to invest in the estate and he contributed $60, 000 of his own money. Glenn Diedrich, President of Avon, was aware of the loan and contacted Herdering to express his concern that the Gibson estate may be a scam. At this time, Diedrich was not aware of Carlson's personal involvement.

In October 2007, Gibson asked them to pitch in half of a $750, 000 tax on the estate. Having received nothing yet in return, Carlson expressed doubt about the investment to Herdering, asking him in a letter, "Looking back, now that this looks to be impossible, are you sure you really know these people?" (Trial Ex. 7). Despite his apparent reservations, Carlson decided to act on Gibson's request for further funds and recruited new investors, Donald Imdieke and Mike Froseth, to provide them. In his letter to Herdering, Carlson acknowledged the move was "risky" but added, "what have we got to lose? Paying more tax is better than not getting anything out of this." He wrote, "I know I am going to lose what I put in, but I am not going to be on the hook to pay [Froseth] back." (Id.) So, in an effort to raise enough money to pay the alleged tax, Carlson told Imdieke and Froseth about the investment and assured him he had researched it and he was "100 percent sure that it was legit." (Trial Tr. at 145-46.) He promised them they could double their money in a matter of weeks. ( Id. at 146.) He had them write checks payable to Avon and led them to believe the bank was investing the money. ( Id. at 147, 172.) Froseth wrote a check to Avon for $405, 000 and Imdieke wrote a check for $80, 000.

Carlson first deposited Froseth's check and wired the money to the "Otua Auto Company" account at the "Taipei Fubon Bank" in Hong Kong on October 19. As neither Froseth nor Imdieke were Avon customers, it was against the bank's policy to wire money on their behalves. To get around this, Carlson told Avon's Vice President and Auditor, Rose Blascziek, that the people requesting the wire would not receive their "merchandise" if she did not approve the wires and so she did. ( Id. at 263-65.) He attempted to contact the bank in Hong Kong to confirm the wire transfer and the legitimacy of the destination account but did not hear back. On November 4, he accepted Imdieke's check and held the check in the bank while waiting for confirmation on the first wire transfer. Despite never receiving confirmation, he wired Imdieke's $80, 000 on November 30. Needless to say, none of the "investors, " including Carlson, ever received the promised returns.

The Underlying Lawsuit

More than a year later, on January 6, 2009, Froseth and Imdieke met with Diedrich about Carlson and the Gibson-estate transactions. They showed Diedrich copies of the checks they had made out to Avon and demanded the bank return their money. Until this meeting, Diedrich was unaware Carlson, Froseth, or Imdieke had been involved in the scheme. Suspicious, Diedrich called BancInsure and notified them he was concerned an employee might have been stealing from the bank, but was not yet sure. The BancInsure employee he spoke with suggested he call the Claims Department, but Diedrich declined.

Diedrich immediately suspended Carlson and eventually terminated him. Avon wrote to Froseth and Imdieke, expressing its position that any "investment" they made with Carlson was Carlson's personal dealing and did not involve the bank. Through counsel, Froseth and Imdieke continued to correspond with Avon periodically. In October 2009, Diedrich received a letter threatening litigation against the bank. The letter alleged Froseth and Imdieke made deposits "based on misrepresentations of a bank officer" that the bank was handling the transaction and that neither he nor the bank had authority to transfer the funds out of the bank.

Diedrich emailed a copy of this letter to BancInsure on November 2, with the subject line, "Bond #22FIB00372-8, " explaining he would keep BancInsure "apprised of the situation that started in January 2009." BancInsure responded, acknowledging "notice of a potential claim" under the bank's Directors' and Officers' Liability Policy ("D&O Policy"), [2] and assigned the file to a claims-adjustment firm for investigation. Several months later, in response to Diedrich's inquiry regarding coverage, BancInsure stated that it had "not denied the claim, " and since the claim was "under a D&O policy there [wa]s no claim at th[at] time, since there [wa]s no lawsuit" yet. In May 2010, Froseth and Imdieke sued Avon for negligent and fraudulent misrepresentation and BancInsure agreed to provide coverage under the D&O Policy and reserved its rights.

At trial, Froseth and Imdieke dropped their negligent misrepresentation claims and maintained only fraudulent misrepresentation claims against Avon, seeking to hold it vicariously liable for Carlson's conduct. In January 2012, the jury returned a special verdict in favor of the plaintiffs, concluding Carlson had breached his duty to disclose material information about the "investments" to plaintiffs and he did so within the course of his employment with Avon. The court entered judgment against Avon and in August 2012, while ...

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