Colorado Court of Appeals - CBA-CLE Legal Connection

Summary Judgment?Damage Suffered by Investors?Direct Financial Loss?Distinction Between Liability Policy and Fidelity Bond.

Plaintiffs (investors) appealed the trial court?s summary judgment in?favor of Certain Underwriters at Lloyd?s London (Lloyd?s). The judgment was affirmed.

Investors alleged that the chief executive officer (CEO) of Commercial Capital Inc. (CCI) formed CCI as a real estate lending company providing short-term financing for commercial construction projects. During 2006 and 2007, CCI solicited private investors to invest funds in the company. The proposed investment involved the acquisition of debt securities documented by a subscription agreement and promissory note from CCI (notes). Seminars were held by CCI to describe the investment.

Investors alleged that the CEO was involved in all day-to-day operations and made misrepresentations that included: (1) CCI had a $5 million policy in place to protect investors? principal against loss; (2) the investments had high guaranteed rates of return; (3) the interests sold were registered with the Securities and Exchange Commission; (4) the investments were ?more liquid than other private real estate strategies? and ?enjoyed a superior risk return profile due to inefficiencies in the commercial lending market?; (5) CCI would conduct vigorous due diligence before granting any loans; and (6) the investments and any interest would be personally guaranteed by the CEO. Investors alleged that, based on these and other misrepresentations, they invested or loaned money to CCI in an amount in excess of $1 million. CCI is allegedly in default on the notes and the CEO has not honored his personal guarantee.

It appeared that CCI loaned investors? funds to developers at lower interest rates than those payable to investors but with very high loan origination fees. On April 22, 2009, CCI filed a voluntary petition for Chapter 11 bankruptcy. Certain creditors, including investors, moved for relief from the automatic stay to pursue CCI?s rights under Insuring Clause A1(b) of the Mortgage Bankers Bond No. MBB-06-00090 (bond), which was issued to CCI by Lloyd?s. The relief was granted and the bankruptcy trustee assigned all of CCI?s rights, title, and interest in the bonds to investors, retaining 30% of the gross recovery less reasonable attorney fees and $50,000 to be paid to investors, with the balance to the investors.

Investors filed a complaint against CCI, the CEO, and Lloyd?s, alleging that CCI and the CEO officer violated the Colorado Securities Act, sold unregistered securities, committed common law fraudulent misrepresentation, constructive fraud, negligent misrepresentation or omission, civil theft, breach of fiduciary duty, and vicarious liability. Investors also asserted two first-party claims against Lloyd?s: (1) as assignee of the bond, and (2) as a garnishment claim asserting a right to garnish Lloyd?s after obtaining judgment against CCI. Lloyd?s, following some discovery, filed a motion for summary judgment, which the trial court granted. Investors appealed.

Investors conceded on appeal that the policy was a fidelity bond. As such, it is analogous to an insurance policy. As far as an assignment was concerned, an assignee stands in the assignor?s shoes ?and takes ?only as good a claim as his assignor had.?? Therefore, investors? third-party claims were not first-party losses merely because investors were now in CCI?s shoes as first-party claimants. Investors may recover only those losses that CCI could have recovered for itself.

The Court of Appeals framed the issue presented as whether, under the agreed-on coverage, Lloyd?s would be liable to CCI for the damages suffered by investors arising out of the wrongful acts of its officers and employees in marketing interests in CCI to investors. The Court held this was not the case, because the losses asserted by investors did not constitute direct losses to CCI as contemplated by the bond. The bond provided coverage for ?direct financial loss? sustained by CCI. The phrase was not defined. However, the Court again noted that this was a fidelity bond and not a liability policy. CCI could have purchased such insurance, but it did not. Thus, the Court held that ?direct financial loss? unambiguously refers only to the immediate loss of CCI?s property through the dishonesty of its own officers and employees. It does not provide coverage to CCI for acts that cause damages to third parties. The summary judgment in favor of Lloyd?s was affirmed.

Source: http://cbaclelegalconnection.com/2012/10/colorado-court-of-appeals-summary-judgment-in-favor-of-insurance-company-appropriate-where-insurance-company-would-not-have-been-liable-if-in-insureds-shoes/

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