3M Company et al v. National Union Fire Insurance Company of Pittsburgh, PA et al
Filing
70
ORDER. IT IS HEREBY ORDERED THAT: 1. Defendants' motion for summary judgment 45 is GRANTED as to the ownership issue and DENIED AS MOOT in all other respects. 2. Plaintiffs' motion for partial summary judgment 54 is DENIED as to th e ownership issue and DENIED AS MOOT in all other respects. 3. Plaintiffs' complaint [1-1] is DISMISSED WITH PREJUDICE AND ON THE MERITS. LET JUDGMENT BE ENTERED ACCORDINGLY. (Written Opinion) Signed by Judge Patrick J. Schiltz on September 28, 2015. (CLG)
UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
3M COMPANY, a Delaware corporation;
3M EMPLOYEES WELFARE BENEFITS
ASSOCIATION, a Minnesota
corporation; EMPLOYEE RETIREMENT
INCOME PLAN OF MINNESOTA
MINING AND MANUFACTURING
COMPANY, a citizen of New York,
Case No. 14‐CV‐1058 (PJS/JSM)
Plaintiffs,
ORDER
v.
NATIONAL UNION FIRE INSURANCE
COMPANY OF PITTSBURGH, PA, a
Pennsylvania corporation; GREAT
AMERICAN INSURANCE COMPANY,
an Ohio corporation; ST. PAUL FIRE &
MARINE INSURANCE COMPANY, a
Connecticut corporation; FEDERAL
INSURANCE COMPANY, a New Jersey
corporation; ZURICH AMERICAN
INSURANCE COMPANY, a New York
corporation,
Defendants.
James R. Murray, Jared Zola, and Omid Safa, DICKSTEIN SHAPIRO LLP;
Thomas A. Boardman, Thomas C. Mielenhausen, and Christopher H.
Yetka, BARNES & THORNBURG LLP; Ann Marie Hanrahan, 3M
COMPANY, for plaintiffs.
David P. Pearson, Brent A. Lorentz, and Reid J. Golden, WINTHROP &
WEINSTINE, P.A., for defendant National Union Fire Insurance Company
of Pittsburgh, Pa.
Richard M. Hagstrom and Nicholas A. Dolejsi, ZELLE HOFMANN
VOELBEL & MASON LLP; Stephen N. Dratch and Martin L. Fenik,
FRANZBLAU DRATCH, P.C., for defendant Great American Insurance
Company.
Joel T. Wiegert, MEAGHER & GEER, PLLP; Arthur N. Lambert and
M. Diane Duszak, FRENKEL LAMBERT WEISS WEISMAN & GORDON,
LLP, for St. Paul Fire & Marine Insurance Company.
Eric J. Magnuson and Richard B. Allyn, ROBINS KAPLAN MILLER &
CIRESI LLP; Jeanne H. Unger, BASSFORD REMELE, for Federal
Insurance Company.
Peter G. Van Bergen and Andrea E. Reisbord, COUSINEAU MCGUIRE
CHARTERED, for defendant Zurich American Insurance Company.
Plaintiffs 3M Company, 3M Employee Welfare Benefits Association, and
Employee Retirement Income Plan of Minnesota Mining and Manufacturing Company
(collectively “3M”) bring this action against their insurers seeking coverage for the loss
of the returns that 3M says it earned on certain of its investments but lost through the
fraud of its investment advisors.1
1
3M originally brought this action in state court. Defendants removed the action
under 28 U.S.C. § 1352, which confers federal jurisdiction over “any action on a bond
executed under any law of the United States . . . .” See Ohio Sav. Bank v. Progressive Cas.
Ins. Co., 521 F.3d 960, 962 n.2 (8th Cir. 2008). Under the Employee Retirement Income
Security Act (“ERISA”), 29 U.S.C. §§ 1001 et seq., 3M is required to maintain bond
coverage for fiduciaries and officials of its ERISA plans, 29 U.S.C. § 1112, which means
that this Court has jurisdiction under § 1352.
Commentators have suggested that cases over which there is § 1352 jurisdiction
arise under federal law. 13D Charles Alan Wright et al., Federal Practice and Procedure
§ 3572 (3d ed. 2008) (“It has long been clear that a suit on a bond executed under federal
(continued...)
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This matter is before the Court on the insurers’ motion for summary judgment
and 3M’s cross‐motion for partial summary judgment. For the reasons that follow, the
Court grants the insurers’ motion and denies 3M’s. Specifically, the Court holds that
there is no coverage for 3M’s alleged losses because 3M does not meet the conditions of
coverage set forth in the “ownership” provision of the primary insurance policy.
I. BACKGROUND
A. 3M’s Investment and Losses
In 1999, 3M began investing its employee‐benefit plan assets in WG Trading
Company LP (“WG Trading”). 3M’s investment was structured as a limited
partnership in WG Trading. Stephen Walsh and Paul Greenwood were the founders
and general managing partners of WG Trading as well as of two related entities:
Westridge Capital Management, Inc. (“Westridge”) and WG Trading Investors, LP
(“WG Investors”). Westridge was the marketing vehicle for WG Trading. Murray Decl.
Ex. 1 at 4. WG Investors was a limited partner in WG Trading. Murray Decl. Ex. 1 at 3.
WG Trading was a regulated and audited entity; WG Investors was neither regulated
nor audited. Murray Decl. Ex. 1 at 3‐4.
1
(...continued)
law arises under federal law and thus invokes jurisdiction under the general federal‐
question statute.”). The parties have treated Minnesota law as controlling, however,
and the Court therefore follows suit. Cf. Ohio Sav. Bank, 521 F.3d at 962 (following the
parties’ lead in applying state law in a § 1352 case).
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Walsh and Greenwood were, in fact, operating a huge Ponzi scheme, and over
many years Walsh and Greenwood fraudulently diverted hundreds of millions of
dollars from WG Trading and WG Investors for their personal use and to conceal their
fraud. As described by the Second Circuit:
For more than 13 years, beginning prior to 1996, [Walsh and
Greenwood] conducted their business—which offered
various investment vehicles for pursuing an index arbitrage
strategy—as a Ponzi scheme. Defendants issued fraudulent
account statements to their investors, withdrew invested
moneys in order to spend lavishly on themselves, and
funded investor withdrawals with moneys received from
other investors when there were no earnings.
Commodity Futures Trading Comm’n v. Walsh, 712 F.3d 735, 738‐39 (2d Cir. 2013). Walsh
and Greenwood ultimately pleaded guilty to federal criminal charges. Murray Decl.
Ex. 1 at 2, 9.
In February 2009, the U.S. Commodity Futures Trading Commission (“CFTC”)
and the U.S. Securities and Exchange Commission (“SEC”) initiated civil lawsuits
against Walsh, Greenwood, Westridge, WG Trading, WG Investors, and other related
entities and individuals. See Walsh, 712 F.3d 735. The United States District Court for
the Southern District of New York froze the defendants’ assets and placed them into
receivership. Murray Decl. Ex. 11 ¶¶ 15, 22. The court appointed Robb Evans &
Associates, LLC as the receiver. Murray Decl. Ex. 11 ¶ 22.
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The receiver was responsible for investigating and recovering receivership assets
and recommending a plan for distributing those assets among the defrauded claimants.
Murray Decl. Ex. 11 ¶ 23; Pearson Decl., Nov. 21, 2014 [hereinafter “Pearson Decl.”]
Ex. 6; Walsh, 712 F.3d at 742. The receiver had considerable success. As a result of the
receivership proceeding, 3M was able to recover every penny of the capital
contributions that it had invested in WG Trading (and had not already withdrawn).
Pearson Decl. Ex. 35 at 9. 3M argues, however, that it nevertheless suffered a loss
because, it says, at least some of its capital was invested by WG Trading in legitimate
vehicles and produced legitimate earnings, and 3M was never paid those legitimate
earnings. 3M further argues that, with the help of forensic accountants, it can
“untangle” the massive Ponzi scheme operated by Walsh and Greenwood and quantify
the amount of legitimate earnings that it lost on account of their fraud.
Every neutral observer who has been involved in this matter—including the
receiver, the CFTC, the SEC, the United States District Court for the Southern District of
New York, and the Second Circuit—appears to believe that what 3M proposes to do is
impossible. In the words of the Second Circuit:
The Receiver observed that WGTC [i.e., WG Trading] and
WGTI [i.e., WG Investors] had “a long history” of not only
commingling funds, but also “employing fraudulent
accounting practices in an apparent attempt to conceal the
true financial condition of the entities from,” among others,
their investors. Thus, WGTC received money from WGTI’s
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investors; WGTI received money from WGTC’s investors;
WGTC made payments to or for WGTI’s investors; WGTI
made payments to WGTC’s investors. At the behest of
WGTI, WGTC made employee advances to Greenwood and
Walsh and charged WGTI’s capital account. When WGTC
lost $121 million by financing and investing in Signal
Apparel Company, WGTC charged those losses against the
capital account of WGTI. And “when WGTC was short of
funds, WGTI advanced the funds to WGTC”; “neither entity
could have survived without the financial support of
investor funds raised by the other.” “WGTC allocated actual
yearly earnings to its limited partners based on an arbitrary
earnings rate and then allocated the remaining income or
loss to WGTI.” Given the long history of commingling,
defendants’ operation of WGTC and WGTI as if they were a single
entity, and defendants’ employment of fraudulent accounting
practices, the record supported the view of the CFTC and the SEC
that the assets of WGTC and WGTI could not be reliably
unraveled. Acceptance of the 3M Group’s argument that the
court should grant its requested premium on the theory that
the financial records found by the Receiver were accurate
would . . . let “the whim of the defrauder . . . control[ ] the
process that is supposed to unwind the fraud.”
Walsh, 712 F.3d at 753‐54 (citations omitted; second emphasis added).
For present purposes, however, the Court will assume that 3M can “reliably
unravel[]” the Ponzi scheme and quantify some amount of legitimate returns that were
earned on 3M’s investments but not paid to 3M because of the fraud of Walsh and
Greenwood. The question before the Court is whether, assuming that such losses can
be established, those losses are covered under the policies issued by the insurers.
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B. The Policy
3M is insured under a “Blanket Crime Policy” (the “Policy”) issued by defendant
National Union Fire Insurance Company of Pittsburgh, Pa. (“National Union”). See
Pearson Decl. Ex. 1 [hereinafter “Policy”]. Under Endorsement 3 to the Policy (the
“ERISA Rider”), 3M’s employee‐benefit plans are included as insureds.
The Policy is the primary policy under which 3M seeks coverage for its lost
earnings. The remaining insurers’ excess policies follow form to the Policy.
Accordingly, only the terms of the Policy are at issue in the parties’ motions.
II. ANALYSIS
A. Standard of Review
Summary judgment is warranted “if the movant shows that there is no genuine
dispute as to any material fact and the movant is entitled to judgment as a matter of
law.” Fed. R. Civ. P. 56(a). A dispute over a fact is “material” only if its resolution
might affect the outcome of the suit under the governing substantive law. Anderson v.
Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). A dispute over a fact is “genuine” only if
“the evidence is such that a reasonable jury could return a verdict for the nonmoving
party.” Id. “The evidence of the non‐movant is to be believed, and all justifiable
inferences are to be drawn in [its] favor.” Id. at 255.
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B. 3M’s Coverage Claim
3M seeks coverage under the “Employee Dishonesty” insuring agreement,
which, as amended by Endorsement 10, reads as follows:
The Company shall be liable for direct losses of Money,
Securities or other property caused by Theft or forgery by
any Employee of any Insured acting alone or in collusion
with others.
Policy End. 10 § 1.
The insurers argue that 3M is not entitled to coverage under this provision
because (1) 3M is collaterally estopped from contending that its investment generated
legitimate returns that can be quantified and attributed to 3M, and therefore 3M cannot
prove that it suffered a “direct loss[]”; (2) even if 3M suffered a “direct loss[]” as a result
of legitimate earnings on investments being stolen, 3M did not own those earnings at the
time that they were stolen, which is a condition of coverage; and (3) neither Walsh nor
Greenwood were employees of 3M, which is also a condition of coverage. Because the
Court agrees with the insurers’ argument concerning the ownership provision, it need
not address the parties’ remaining arguments.
1. Ownership Provision
Endorsement 8 of the Policy provides, in relevant part, as follows:2
2
Endorsement 8 replaces § 5 of the “Conditions and Limitations” section of the
Policy. Although the relevant language in § 5 differs slightly from the relevant
(continued...)
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The insured property may be owned by the Insured, or held
by the Insured in any capacity whether or not the Insured is
legally liable, or may be property as respects which the
Insured is legally liable.
The insurers contend that the “Employee Dishonesty” insuring agreement is explicitly
made subject to this provision. The insurers further contend that, as a result, there is no
coverage under the “Employee Dishonesty” insuring agreement unless the “Money,
Securities or other property” to which the clause refers: (1) is owned by the insured;
(2) is held by the insured in any capacity, even if the insured would not be liable for its
loss; or (3) is property with respect to which the insured is legally liable.3 The insurers
2
(...continued)
language in Endorsement 8, it does not appear that any substantive change was
intended. Rather, the point of Endorsement 8 appears to be to add a limited form of
liability coverage for the loss of property owned or held by clients of 3M. That liability
coverage is not at issue here.
3
The last condition refers to legal liability that predates the loss; it does not refer
to third‐party property for which the insured only bears vicarious liability because, for
example, one of its employees negligently damaged the third‐party property. Cargill,
Inc. v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., No. A03‐187, 2004 WL 51671, at *13
(Minn. Ct. App. Jan. 13, 2004) (“The language providing coverage for a loss ‘for
which . . . the insured is liable’ does not change the policy’s status as a fidelity bond.”);
Lynch Props., Inc. v. Potomac Ins. Co. of Ill., 140 F.3d 622, 629 & n.3 (5th Cir. 1998) (“the
words ‘legally liable’ refer to the property interest that Lynch Properties must have to
trigger coverage under the employee dishonesty policy” and “do[] not transform the
policy into a liability policy”); Foster v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., 902 F.2d
1316, 1318 (8th Cir. 1990) (“A fidelity bond is not ordinarily liability insurance which
covers third parties.”), abrogated on other grounds by Salve Regina Coll. v. Russell, 499 U.S.
225 (1991); Mass. Mut. Life Ins. Co. v. Certain Underwriters at Lloyd’s of London, No. 4791‐
VCL, 2010 WL 2929552, at *20 (Del. Ch. July 23, 2010) (“The phrase . . . extends coverage
(continued...)
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argue that even if 3M’s investment with WG Trading generated legitimate earnings that
can be quantified and attributed to 3M, those legitimate earnings are not covered
because, at the time that they were stolen, they were not (1) owned by 3M; (2) held by
3M in any capacity, even if 3M would not be liable for their loss; or (3) property with
respect to which 3M was legally liable.
3M disagrees. 3M concedes that the “Employee Dishonesty” insuring agreement
is subject to the ownership provision in Endorsement 8—in the same general way that,
for example, every provision of an insurance policy is subject to the definitions section
or notice provisions of that policy. But 3M argues that the ownership provision in
Endorsement 8 is simply irrelevant to its claim for coverage under the “Employee
Dishonesty” insuring agreement because the ownership provision only applies to
“insured property,” and the “Employee Dishonesty” insuring agreement does not use
the term “insured property” or limit its coverage to such property. Instead, 3M argues,
the “Employee Dishonesty” insuring agreement covers “direct losses of Money,
Securities or other property caused by Theft or forgery.” Similarly, the “Employee
3
(...continued)
to property which, prior to its misappropriation, was the legal responsibility of the
Assureds.”); Aetna Cas. & Sur. Co. v. Kidder, Peabody & Co., 246 A.D.2d 202, 212 (N.Y.
App. Div. 1998) (“Insurance covers the liability of the insureds to a third party, while
fidelity bonding covers the loss of property owned by the insureds or held by the
insureds, as a consequence of employee dishonesty.”); see also Policy Exclusion (m)
(excluding coverage for “damages of any type for which the Insured is legally liable,
except direct compensatory damages arising from a loss covered under this Policy”).
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Dishonesty” insuring agreement defines “Theft” to mean “the unlawful taking of
Money, Securities or other property”—again without referring to “insured property.”
Because the “Employee Dishonesty” insuring agreement is not limited to
“insured property,” 3M argues, the ownership provision’s discussion of “insured
property” is simply irrelevant—in the same way that, say, the Policy’s definition of the
term “Messenger” is irrelevant to the “Employee Dishonesty” insuring agreement
because that insuring agreement does not use the term “Messenger.”
The problem with 3M’s argument is that it treats the ownership provision in
Endorsement 8 as though it defined the term “insured property.” It plainly does not.
When the Policy seeks to define terms, it does so with explicit definitional language
(“The following terms, as used in this Policy, shall have the respective meanings stated
in this Section”) and it does so in § 3 of the Policy (which is labeled “DEFINITIONS”).
And when Endorsement 8 seeks to define a term, it does so by explicitly amending § 3
of the Policy. Policy End. 8 § 4.
Clearly, then, Endorsement 8 is not intended to define “insured property,”as 3M’s
argument implies. Instead, Endorsement 8 simply uses the term “insured property” to
limit the coverage afforded under the “Employee Dishonesty” insuring agreement.
And giving that phrase its plain and ordinary meaning, see Mattson Ridge, LLC v. Clear
Rock Title, LLP, 824 N.W.2d 622, 632 (Minn. 2012), the phrase “insured property” can
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only be understood as a shorthand way of saying “property whose loss is insured under
this Policy”—that is, property that is insured under at least one of the insuring
agreements in the Policy, such as the “Employee Dishonesty” insuring agreement.
Indeed, because “insured property” is not a defined term, the Court is at a loss to
know what else it could mean. If it does not refer to property whose loss is insured
under one or more of the various insuring agreements, then the Policy itself becomes
nonsensical. Notably, although the phrase “insured property” appears in the original
version of § 5 of the “Conditions and Limitations” section of the Policy (as well as in
several other places in the Policy), the phrase does not appear in any of the original
versions of the insuring agreements. This means that, if 3M’s interpretation were
correct, then § 5 in the original version of the Policy—a provision that was clearly
intended to limit the coverage available under the insuring agreements—would not
have applied to a single one of those insuring agreements. That cannot be what the
drafters intended, nor is that reading compelled by the language of the Policy.
3M points out that the phrase “insured property” appears in other contexts in the
Policy, including in the insuring agreement that appears in Endorsement 7, which is
labeled “Computer & Funds Transfer Fraud Coverage.” That endorsement provides
coverage for “[t]he theft of any Insured property by Computer Fraud,” and “theft” is
defined to be “the intentional and unlawful taking of insured property to the
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deprivation of the Insured.” 3M argues that this usage demonstrates that when the
Policy intends for the ownership provision of Endorsement 8 to apply, it uses the
precise phrase “insured property,” and when the Policy does not intend the ownership
provision of Endorsement 8 to apply, it uses the word “property” or some other phrase.
The Court is not persuaded that these uses of the phrase indicate that “insured
property” means something other than “property that is insured under an insuring
agreement in the Policy.” Again, because “insured property” is not defined in the
Policy, Endorsement 7 would make no sense unless it refers to the property described
more particularly in various other insuring agreements in the Policy. When read this
way, Endorsement 7 ensures that the types of property whose loss is already insured
under the Policy are also insured when that loss is caused through computer or
electronic fraud. This reading is the only reasonable one in light of the fact that
“insured property” is not a term of art in the context of the Policy.
3M also points to the permissive language of Endorsement 8, noting that
Endorsement 8 merely says that the insured property “may” be owned or held by the
insured, not that it “must” or “shall” be. While Endorsement 8 could be clearer, the
Court does not believe that it is reasonable to interpret Endorsement 8 as simply
reciting a list of some (but not all) of the ways in which the property may (or may not)
be held. Read in such a way, Endorsement 8 would have no purpose; it would amount
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to little more than meaningless verbiage. 3M contends that Endorsement 8 is intended
to broaden coverage to property other than that strictly owned by the insured. If that
were its purpose, however, Endorsement 8 would accomplish nothing, as nothing in the
insuring agreements requires the insured to own the lost property. A more reasonable
reading of Endorsement 8—a reading that also gives it a purpose—is that
Endorsement 8 establishes three different conditions, any one of which the property
may meet, but at least one of which the property must meet. See Eng’g & Constr.
Innovations, Inc. v. L.H. Bolduc Co., 825 N.W.2d 695, 705 (Minn. 2013) (if possible, courts
construe insurance contracts to give effect to all of their provisions).
Finally, 3M relies heavily on Transtar Electric, Inc. v. Charter Oak Fire Insurance Co.,
No. 13‐1837, 2014 WL 252023 (N.D. Ohio Jan. 22, 2014) (Transtar I), for the proposition
that coverage under the “Employee Dishonesty” insuring agreement is not limited to
property in which 3M has some kind of interest. In Transtar I, the court accepted the
insured’s argument that a third party’s loss, for which the insured contended that it was
liable in tort, was a “direct” loss to the insured that was covered under the policy. Id.
at *3‐4. Transtar I did not examine an ownership provision like that at issue here,
however.4 More importantly, the Transtar court later reversed course and held that the
4
3M asserts that the policy at issue in Transtar I had an ownership provision.
Given the court’s failure even to mention it, however, Transtar I is not persuasive
authority on the applicability or meaning of that (unmentioned) provision.
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loss was only an “indirect” loss excluded from coverage.5 Transtar Elec., Inc. v. Charter
Oak Fire Ins. Co., No. 13‐1837, 2015 WL 1524069, at *3 (N.D Ohio Apr. 3, 2015) (Transtar
II). Like Transtar I, Transtar II did not cite or discuss any ownership provision. Thus, to
the extent that Transtar I or II is even relevant, it does not help 3M.
The Court therefore concludes that Endorsement 8 limits the coverage available
under the “Employee Dishonesty” provision to the three types of property that it
describes.
2. Whether 3M “Owned” the Lost Earnings
The next question, then, is whether the lost earnings for which 3M seeks
indemnification qualify as one of the three types of property described in
Endorsement 8. Again, under Endorsement 8, the property must meet one of the
following conditions: (1) it is owned by the insured; (2) it is held by the insured in any
capacity, even if the insured would not be liable for its loss; or (3) it is property with
respect to which the insured is legally liable.
5
Notably, a similar exclusion appears in the Policy at issue in this case. See Policy
Exclusion (m) (excluding coverage for “damages of any type for which the Insured is
legally liable, except direct compensatory damages arising from a loss covered under
this Policy”).
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3M contends that it “owned” the lost earnings.6 The Court agrees with National
Union, however, that what 3M owned was a limited‐partnership interest in
WG Trading. Up until the point at which earnings were distributed to the partners, the
earnings of WG Trading were owned by WG Trading, and not by 3M or any of the
other limited partners.
As noted, 3M’s investment was structured as a limited‐partnership interest in
WG Trading. WG Trading’s partnership agreements are governed by Delaware law.
Pearson Decl. Ex. 24, Fourth Am. Ltd. P’shp Agmt. § 18.6; Fifth Am. Ltd. P’ship Agmt.
§ 18.7. Delaware law is crystal clear that a limited partner such as 3M has “no interest
in specific limited partnership property.” Del. Code Ann. tit. 6, § 17‐701; In re Bernard L.
Madoff Inv. Secs. LLC, 708 F.3d 422, 427 (2d Cir. 2013) (under Delaware law, “the limited
partnership interests sold by the Feeder Funds to investors . . . did not confer an
ownership interest in money that the Feeder Funds ultimately invested in BLMIS”); In
re Marriott Hotel Props. II Ltd. P’ship, No. CIV.A.14961, 2000 WL 128875, at *15 (Del. Ch.
6
3M also argues that it had fiduciary duties with respect to the lost earnings and
that therefore those earnings are “property as respects which the Insured is legally
liable.” Policy End. 8. 3M raised this argument for the first time in its reply brief,
however, and therefore the Court will not consider it. See Torspo Hockey Int’l, Inc. v. Kor
Hockey Ltd., 491 F.Supp.2d 871, 878 (D . Minn. 2007) (“federal courts do not, as a rule,
entertain arguments made by a party for the first time in a reply brief”); see also Smith v.
United States, 256 F. App’x 850, 852 (8th Cir. 2007) (“the district court did not err in
dismissing claims raised for the first time in a . . . reply brief”); Navarijo‐Barrios v.
Ashcroft, 322 F.3d 561, 564 (8th Cir. 2003) (“It is well settled that we do not consider
arguments raised for the first time in a reply brief.”).
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Jan. 24, 2000) (Section 17‐701 “has been interpreted to preclude the attempt to equate
ownership interests in a partnership with ownership of partnership property.”). The
partner’s right to receive distributions of the partnership’s assets does not change this
fact. See SEC v. Aragon Capital Advisors, LLC, No. 07‐0919, 2011 WL 3278907, at *19
(S.D.N.Y. July 26, 2011) (“The right to receive distributions . . . is distinct from having an
ownership interest in those assets of the partnership.”). Moreover, there is no reason
why the common practice of maintaining separate capital accounts for each partner
should change the default rule, and 3M cites no cases or other authority suggesting that
it does. See Karen T. Lohnes et al., Value Equals Basis and Partners’ Distributive Share:
Stuffing, Fill‐Ups, and Waterfalls, 105 J. of Tax’n 109, 110 (2006) (“It is typical for
partnerships . . . to maintain Section 704(b) book capital accounts in accordance with the
rules of Reg. 1.704‐1(b)(2)(iv).”); Pearson Decl. Ex. 24 § 8.1 (“[t]he Partnership shall
establish and maintain an account (a ‘Capital Account’) for each Partner in accordance
with regulation 1.704‐1(b)” of the Internal Revenue Code).
3M cites a dictionary definition of “own,” arguing that ownership encompasses
the right to possess a thing, regardless of actual or constructive control. See Black’s Law
Dictionary 1138 (8th ed. 2004). Delaware law is clear, however, that even though 3M
had a general right to receive distributions from the partnership, 3M did not own any
specific earnings or any other “specific limited partnership property.” Del. Code Ann.
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tit. 6, § 17‐701; see Aragon Capital Advisors, LLC, 2011 Wl 3278907, at *19. 3M cites no
authority for the proposition that, before the earnings were distributed, 3M had the right
to possess those earnings or exercise any of the other traditional attributes of ownership
over those earnings.
3M also cites Sears Roebuck & Co. v. National Union Fire Insurance Co. of Pittsburgh,
Pa., No. B187280, 2007 WL 2876149 (Cal. Ct. App. Oct. 4, 2007) for the proposition that
courts interpret the “ownership” provision broadly. But Sears Roebuck looked to state
law to determine whether the insured had an ownership interest in the stolen funds, id.
at *4‐6, precisely as the Court is doing in this case. Sears Roebuck confirms that “owned”
is normally understood to mean an ownership interest recognized by state law.
3M next points to regulations promulgated under ERISA that define an ERISA
plan’s assets in the context of a plan’s investment in another entity. See 29 C.F.R.
§ 2510.3‐101. With respect to an investment in a limited partnership, the regulations
provide that an ERISA plan’s assets include both the equity interest in the partnership
itself and an interest in the underlying assets owned by the partnership (with certain
exceptions that neither party has contended are relevant). 29 C.F.R. § 2510.3‐101(a)(2),
(j)(2).
The purpose of these regulations, however, is not to alter property rights, which
are traditionally governed by state law, but rather to ensure that ERISA imposes
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fiduciary duties broadly on anyone who, in functional terms, handles any property
“which is used or may be used as a source for the payment of benefits to plan
participants.” 29 C.F.R. § 2580.412‐4 (emphasis added). As the Department of Labor
explained when it promulgated the regulation defining “plan assets”:
The proposed plan assets regulation described the
circumstances under which the assets of an entity in which a
plan invests will be considered to include “plan assets” so
that the manager of the entity would be subject to the
fiduciary responsibility rules of ERISA. . . .
In the Department’s view, it would be unreasonable to
suppose that Congress intended that the protections of the
fiduciary responsibility provisions of the Act which are
applicable where a plan directly retains a manager of its
investments would not be applicable where the manager is
retained indirectly through investment by the plan in a
collective investment fund. It would also appear to be
inconsistent with the broad functional definition of
“fiduciary” in ERISA if persons who provide services that
would cause them to be fiduciaries if the services were
provided directly to plans are able to circumvent the
fiduciary responsibility rules of the Act by the interposition
of a separate legal entity between themselves and the plans
(for example, by providing services to a limited partnership
in which plans invest).
Final Regulation Relating to the Definition of Plan Assets, 51 Fed. Reg. 41262, 41262‐63
(Nov. 13, 1986). In other words, the purpose of the regulation is to ensure that fiduciary
responsibilities are spread broadly; it is not an attempt to redefine property rights
established under state law. See Sec. Inv’r Prot. Corp. v. Jacqueline Green Rollover Account,
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No. 12‐1039, 2012 WL 3042986, at *8 (S.D.N.Y. July 25, 2012) (“Even if the Plan
Claimants are correct that the Account‐Holder Entities’ assets qualify as ‘plan assets,’
this does not by itself confer upon the Plan Claimants an ownership interest in the
assets in question.”).
Setting that aside, the question in this case is not whether the lost earnings are
deemed to be plan assets under ERISA regulations. Instead, the question is one of
contract interpretation: Should the phrase “owned by the Insured” in Endorsement 8 be
construed to refer to a traditional notion of property rights, as governed by state law?
Or should it, as 3M argues, be construed to encompass anything defined as a “plan
asset” under an ERISA regulation, given that the purpose of Endorsement 3 (the ERISA
rider to the Policy) is to comply with ERISA’s bonding requirement?
Having carefully considered the issue, the Court concludes that “owned by the
Insured” should be interpreted in the traditional, state‐law sense, for several reasons.
First, because the Policy does not define “owned,” that word must be given its plain
and ordinary meaning. See Mattson Ridge, LLC, 824 N.W.2d at 632. The plain and
ordinary meaning of “owned” does not resemble ERISA’s expansive concept of “plan
assets,” which has nothing to do with defining ownership or property rights, and which
departs dramatically from the usual meaning of the word.
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Second, when the parties to the Policy intended a word to have a more expansive
meaning in order to comply with ERISA, they explicitly broadened the definition. For
example, Endorsement 21 to the Policy expands the definition of “employee” to include
“any one or more natural persons while in the service of any Employee Benefit plan . . .
as fiduciary, trustee, administrator, officer or employee and any other natural person
required to be bonded” under ERISA. Policy End. 21 ¶ 2. Just as the parties explicitly
expanded the definition of “employee” far beyond its common meaning, the parties
could have explicitly expanded the definition of “owned” far beyond its common
meaning to mirror the far‐reaching definition of “plan assets” found in the ERISA
regulations. That the parties did not do so indicates that they intended to invoke the
ordinary meaning of the term.
Finally, it is worth noting that the “plan assets” regulation was originally
promulgated in 1986. Despite the fact that the regulation has existed for almost
30 years, and despite the fact that the ownership provision found in Endorsement 8 is a
standard part of form fidelity bonds,7 3M has been unable to cite—and the Court has
been unable to find—a single case interpreting the ownership provision to conform to
the ERISA regulation’s expansive notion of “plan assets.” Given the lack of authority
7
See Scott L. Schmookler, The Compensibility of Third‐Party Losses Under Fidelity
Bonds, 7 Fidelity L.J. 115, 115 (2001) (referring to “the ownership provision in standard
form fidelity bonds”).
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for such an unusual reading—and given the existence of authority indicating that
“owned” refers to ownership rights under state law, see Sears Roebuck & Co., 2007 WL
2876149, at *4‐6—the Court concludes that the ordinary, state‐law meaning of “owned”
should control.
3M nevertheless argues that the Policy should be interpreted to provide coverage
because (1) Endorsement 3, the ERISA rider, explicitly states that it is intended to
comply with ERISA’s bonding requirements and (2) Greenwood and Walsh were
required to be bonded under ERISA.
Even assuming that Walsh and Greenwood were required to be bonded under
ERISA—an assumption that may not be true8—the Court is not persuaded that a
statement in an ERISA rider to the effect that the rider is intended to comply with
ERISA’s bonding requirements justifies departing drastically from the plain meaning of
terms that do not even appear in the rider. The ERISA rider merely adds 3M’s ERISA
8
Under 29 U.S.C. § 1112(a)(2), no bond is required for any entity that (1) “is
registered as a broker or a dealer under section 78o(b) of Title 15” and (2) “is subject to
the fidelity bond requirements of a self‐regulatory organization (within the meaning of
section 78c(a)(26) of Title 15).” The insurers contend that, under this provision, WG
Trading was exempt from ERISA’s bonding requirements. Morever, the insurers
contend that Greenwood and Walsh were likewise exempt because they were officers or
employees of WG Trading. See U.S. Dep’t of Labor, Field Assistance Bulletin No. 2008‐
04 (Nov. 25, 2008), 2008 WL 5459779, at *5 (“As with section 412’s other statutory and
regulatory exemptions, this exemption for brokers and dealers applies to both the
broker‐dealer entity and its officers, directors and employees.”). The Court does not
rely on this ground, however, because the insurers did not cite admissible evidence
establishing that WG Trading was exempt under § 1112(a)(2).
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plans as insureds and, along with another endorsement, expands the definition of
“employee” in order to comply with ERISA. The rider does not expand the meaning of
“owned,” however. And critically, the rider states that “[n]othing herein shall be held
to vary, alter, waive or extend any of the terms, conditions, provisions, agreements or
limitations of the bond or policy, other than as stated herein.” Policy End. 3 ¶ 7. It
would be inconsistent with this limitation to use the ERISA rider as a reason to give a
broad and unusual meaning to “owned” when the ERISA rider says nothing about it.
The Court concludes that, because any lost earnings were not “owned” by 3M
within the meaning of the Policy, the insurers are not obligated to indemnify 3M.
Accordingly, the insurers’ motion for summary judgment on the ownership issue is
granted, and 3M’s cross‐motion on that issue is denied. In all other respects, the parties’
motions are denied as moot.
ORDER
Based on the foregoing, and on all of the files, records, and proceedings herein,
IT IS HEREBY ORDERED THAT:
1.
Defendants’ motion for summary judgment [ECF No. 45] is GRANTED as
to the ownership issue and DENIED AS MOOT in all other respects.
2.
Plaintiffs’ motion for partial summary judgment [ECF No. 54] is DENIED
as to the ownership issue and DENIED AS MOOT in all other respects.
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3.
Plaintiffs’ complaint [ECF No. 1‐1] is DISMISSED WITH PREJUDICE
AND ON THE MERITS.
LET JUDGMENT BE ENTERED ACCORDINGLY.
Dated: September 28, 2015
s/Patrick J. Schiltz
Patrick J. Schiltz
United States District Judge
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