CEDAR LAKE HOMEOWNERS ASSOCIATION, an Oregon domestic nonprofit corporation; and DECATUR BRIDGEWATER HOMEOWNERS ASSOCIATION, an Oregon domestic nonprofit corporation, Plaintiffs, v. NORTHWEST EMPIRE COMMUNITY MANAGEMENT, INC., fka Professional Community Management, Inc., an Oregon corporation, Defendant, and SENTINEL INSURANCE COMPANY, LTD., a Connecticut corporation, Garnishee.
3:14-cv-00599-PK
IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF OREGON
August 21, 2015
PAPAK, Magistrate Judge:
FINDINGS AND RECOMMENDATION
Plaintiffs Cedar Lake Homeowners Association and Decatur Bridgewater Vista
Now before the court are Plaintiffs’ and Sentinel‘s cross-motions for summary judgment on Plaintiffs’ garnishment claim. I have reviewed the record, the relevant exhibits, and all of the briefings. For the following reasons, Plaintiffs’ Motion (#19) should be denied and Sentinel‘s Cross-Motion (#23) should be granted.
FACTUAL BACKGROUND
I. The Parties
Plaintiffs are two homeowners associations incorporated in Oregon and located in Portland, Oregon. Both are former clients of Northwest Empire. See Stipulated Order Concerning Facts (“Stip‘d. Facts“), #22, 2. Northwest Empire formerly provided community management and financial services to Plaintiffs and other HOAs. Id. Sentinel is a fire and casualty insurance company organized in and incorporated under the laws of the state of Connecticut with its principal place of business in Connecticut. Id.
In November 2010 and June 2011, Plaintiffs entered into separate Management Agreements with Northwest Empire, which stayed in effect until June 2012. The Management Agreements contained specific provisions regarding financial services, including: (1) creation and maintenance of separate custodial bank accounts; (2) distribution of funds from operating and reserve accounts; (3) maintenance of accounting records; (4) preparation of monthly financial statements for client boards; and (5) fraud control systems and methods for protection of the custodial funds. Stip‘d. Facts, 4.
Plaintiffs filed suit and obtained a judgment of $149,014.89 against Northwest Empire arising from a theft of $1,666,000 of various HOA funds from custodial accounts held by Northwest Empire by David Kobbeman, Northwest Empire‘s Corporate Secretary, Vice President, and Chief Financial Officer. Id. at 2, 4. Kobbeman was also a forty percent owner of King Magsulit Holdings, which is Northwest Empire‘s parent company, and his holdings in that company are second only to those of Gregory Lloyd, Northwest Empire‘s President, who at the time owned the other sixty percent of King Magsulit Holdings. Decl. Janis Puracal, #24, Ex. 22 (#24-3), 2. Essentially, Kobbeman diverted funds from custodial accounts held by Northwest Empire for its various client homeowners’ associations (“HOA“) to his own accounts. Id. at 3-4.
On November 7, 2012, Plaintiffs filed suit against Northwest Empire, alleging vicarious liability for Kobbeman‘s actions. On March 27, 2013, Plaintiffs obtained a default judgment in that suit in the amount of $149,014.89, including costs and attorney fees (“the Judgment“). Id. at 4; Default Judgment, #1-2, 56-59. On March 21, 2014, Plaintiffs obtained a supplemental judgment for attorney fees and costs in the amount of $15,164.51. Id.
III. The Underlying Policy and Claim
During the relevant time period, Northwest Empire was insured under the Hartford Spectrum Business Insurance Policy, no. 52 SBA ZV 5572 (“the Policy“). Stip‘d. Facts, #22, 5. The Policy was issued by Sentinel and gives rise to the current dispute. The Policy provided a maximum Employee Dishonesty Coverage of $250,000, as well as “Super Stretch for Business Services,” which provides additional Employee Dishonesty Coverage of $25,000. Policy, #22-11.
Northwest Empire submitted a claim so Sentinel (“the Claim“) for the losses arising from Kobbeman‘s actions. In response, Sentinel informed Northwest Empire that the information provided was insufficient to trigger coverage based upon the terms and conditions of the Policy, and Sentinel requested additional information which Northwest Empire did not provide. Sentinel proceeded to close its file on the Claim, under the condition that it would reopen the file should Northwest Empire provide the requested information. Stip‘d. Facts, #22, 5-6.
In November 2013, Northwest Empire‘s President, Gregory Lloyd, provided Sentinel with supplemental documents and information for the Claim. Those documents included: (1) a notarized claim request signed by Lloyd; (2) an October 2013 email from Northwest Empire‘s attorney submitted in support of the Claim; (3) Lloyd‘s affidavit regarding the attached documents; (4) Northwest Empire‘s file regarding Kobbeman, including his I-9, W-4, and W-2 Forms, as well as a letter of termination of Kobbeman dated June 4, 2012; (5) an October 2013 letter from Northwest Empire‘s attorney; (6) an email from Assistant United States Attorney Michelle Kerin regarding Kobbeman‘s guilty plea; and (7) a copy of the “Information” against Kobbeman submitted by Kerin in support of Kobbeman‘s wire fraud charge. See Supplemental Information #22-14 (documents (1)-(6)); Information, #22-6 (document (7)).
Sentinel responded to the submission with a letter dated November 21, 2013, in which Sentinel detailed reasons the documents provided were insufficient to establish an employee dishonesty loss triggering coverage under the Policy. Sentinel‘s Supplemental Response No. 1, #22-15.
On January 28, 2014, Plaintiffs submitted additional information regarding the Claim. Additional Supplemental Information, #22-16. On March 10, 2014, Sentinel submitted a letter similar in form to the November 2013 letter, again stating reasons the documents provided were
On January 30, 2015, Plaintiffs served a Writ of Garnishment for Supplemental Judgment (“Writ“) on Sentinel under the Claim in the amount of $16,290.01, which included the $15,164.51 awarded in the supplemental judgment in addition to post-judgment interest and garnishment costs. Writ, #22-18.
On February 6, 2015, Sentinel responded to the Writ. Writ Response, #22-19. Sentinel did not deliver any funds pursuant to the Writ, and states that it is not able to make any coverage determination. Id.
IV. Relevant Policy Provisions
A. Special Property Coverage Endorsement
This endorsement provides coverage against the loss of money or securities in a bank from theft. Policy Provisions, #22-11, 31. This coverage, however, excludes theft by an officer, manager, employee, or director. Id. at 42. Plaintiffs maintain the relevance of this section, despite its exclusions, because it does not include a definition of “employee.”
B. Employee Dishonesty Coverage Endorsement
The Employee Dishonesty Coverage Endorsement provides the coverage relevant to the current dispute.
1. Covered Property
“Covered Property” is defined as “money“, “securities“, and other tangible property of intrinsic value and not otherwise excluded.
Covered Causes of Loss means dishonest acts committed by an “employee“, except you, whether identified or not, acting alone or in collusion with other persons, with the manifest intent to:
- Cause you to sustain a loss; and also
- Obtain financial benefit (other than salaries, commissions, fees, bonuses, promotions, awards, profit sharing or pensions or other employee benefits earned in the normal course of employment) for:
- That “employee“; or
- Any person or organization intended by the “employee” to receive that benefit.
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3. Additional Coverages
b. Employees at Client or Customer Premises
We will pay for any loss caused by your “employee” while at the premises of your client or customer and covered by this policy may only be made by you in your proof of Loss. No third party has a direct right against this insurance and no third party may make a direct claim against as the writer of your insurance.
Policy Provisions, #22-11, 95 (emphasis added).
“You” is defined in the policy as the named insured, which is Northwest Empire for the purposes of this case. E.g., id. at 51 (explaining “‘you’ and ‘your’ refer to the Named Insured shown in the Declarations“). This section does not contain a definition of the term “employee.”
This endorsement includes an “Exclusions” to coverage provision that states “[t]he following Exclusions apply in addition to the Exclusions in the Crime Common Conditions and Exclusions,” thereby incorporating that endorsement by reference, as discussed below Id. at 96.
This endorsement provides the additional coverage for losses incurred from employee dishonesty. It is “subject to the provisions of Employee Dishonesty Coverage ....” Policy Provisions, #22-11, 110. This endorsement does not include a definition of “employee.”
D. Crime Common Conditions and Exclusions
The parties do not assert that the coverage provided for in the Crime Common Conditions and Exclusions Endorsement of the Policy is triggered by Kobbeman‘s actions, but this section does define the types of individuals or entities that constitute an “employee” as well as what “‘Employee’ does not mean.” Policy Provisions, #22-11, 106. As stated above, the exclusions covered in this section are incorporated by reference into the Employee Dishonesty Coverage Endorsement.
This section of the Policy defines “employee” to include:
- Any natural person:
- While in your service (and for 60 days after termination of service); and
- Whom you compensate directly by salary, wages, or commissions; and
- Whom you have the right to direct and control while performing services for you.
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- Any natural person who is a non-compensated officer.
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- Any natural person who is a director or trustee while acting as a member of any of your elected or appointed committees or while acting with the scope of the usual duties of an employee.
Id. (emphasis added).
(2) Any manager, director, partner, member or trustee, except while acting within the scope of the usual duties of an “employee“.
Id. (emphasis added).
PROCEDURAL BACKGROUND
On April 3, 2014, Plaintiffs served on Sentinel allegations against it that were filed in the Circuit Court of Oregon for the Multnomah County (#1-1). Thereafter, Sentinel removed to this court based on diversity jurisdiction, pursuant to
[B]ecause defendant Northwest Empire Community Management, Inc. is merely a nominal party in the present garnishment action, it can be disregarded in determining the question whether diversity of citizenship requisite for jurisdiction exists. As such, complete diversity exists among the parties and this court has original jurisdiction over the present action pursuant to
28 U.S.C. § 1332(a) . In regards to the procedural posture of the case, the court finds that, in the previous state proceeding, garnishors requested an examination of garnishee pursuant toOregon Revised Statute (ORS) 18.778 . Based on a plain reading ofORS 18.778 , an examination and a hearing to determine liability pursuant toORS 18.782 are distinct procedures. The regulatory scheme requires the garnishor to serve written allegations upon the garnishee only after the court orders a garnishee to appear for a hearing underORS 18.782 . Therefore, garnishee is not, at this time, obligated to respond to [garnishor‘s] allegations ...
November 11, 2014, Order (#10) (internal citations omitted).
On June 19, 2015, Plaintiffs filed their Motion for Summary Judgment (#19) and Sentinel filed its Cross-motion for Summary Judgment (#23). The parties also filed the Stipulated Facts
LEGAL STANDARDS
I. Motion for Summary Judgment
Summary judgment is appropriate “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.”
Summary judgment is not proper if material factual issues exist for trial. See, e.g., Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986); Warren v. City of Carlsbad, 58 F.3d 439, 441 (9th Cir. 1995). In evaluating a motion for summary judgment, the district courts of the United States must draw all reasonable inferences in favor of the nonmoving party, and may neither make credibility determinations nor
On cross-motions for summary judgment, the court must consider each motion separately to determine whether either party has met its burden with the facts construed in the light most favorable to the other. See
II. Interpreting and Construing the Policy
Under Oregon law, the interpretation of an insurance policy is a question of law. N. Pac. Ins. Co. v. Hamilton, 332 Or. 20, 24-28, 22 P.3d 739, 741-43 (2001) (citation omitted). The reviewing court must determine the intent of the parties by looking to the terms and conditions of the policy as a whole. Id. In making that determination, “[courts] first determine whether the policy defined the term at issue and, if it did not, [courts] look to the plain meaning of the term.” American Hardware Ins. Group v. West One Automotive Group, Inc., 167 Or. App. 244, 248, 2 P.3d 413 (2000).
If a term is ambiguous, then the court must construe that term against the drafter. Id. Ambiguity, in this context, exists “only if two or more plausible interpretations of that term withstand scrutiny, i.e., continues to be reasonable, after the interpretations are examined in the light of, among other things, the particular context in which the term is used in the policy and the broader context of the policy as a whole.” Hoffman Construction Co. v. Fred S. James & Co., 313 Or. 464, 470 (1992) (emphasis in original).
The primary issue in this action is whether Northwest Empire submitted a valid claim to Sentinel based on David Kobbeman‘s theft, thus triggering the Employee Dishonesty Coverage Endorsement. That issue hinges upon whether Kobbeman was an “employee” of Northwest Empire, as that term is defined in the Policy. Based on the Policy‘s definition of “employee” and relevant case law, I find that Kobbeman was not an “employee” of Northwest Empire and the Claim is therefore invalid.
I. Kobbeman‘s Employment Status and the Policy‘s Definition of “Employee”
The parties first disagree upon whether Kobbeman was an “employee” whose dishonesty could trigger the relevant coverage of the Policy. Plaintiffs argue that Kobbeman was in fact an employee and his theft from Northwest Empire and the HOAs triggered the Employee Dishonesty Coverage under the Policy. Sentinel argues that Kobbeman was not an employee because an “employee” under the Policy includes only those individuals that the insured has the “right to direct and control.” Policy Provisions, #22-11, 106.
As indicated above, the Policy includes a definition of “employee” and the section containing that definition is incorporated by reference into the Employee Dishonesty Coverage Endorsement, thus providing the court with a working analytical definition of “employee.” See American Hardware Ins. Group, 167 Or. App. at 248. For that reason, the Hoffman ambiguity analysis is unnecessary to determine the definition of “employee.” Hoffman, 313 Or. at 470.
The parties stipulate to the fact that “Kobbeman held a seat on the Board of Directors and served in the role of corporate Secretary, Vice President, and Chief Financial Officer.” Stip‘d. Facts, #22, ¶ 7. Nonetheless, Plaintiffs assert that Kobbeman was an employee, as it is defined
The crux of this issue is the nature of Kobbeman‘s position at Northwest Empire. I reiterate that, under the Policy, an “employee” is “[a]ny natural person ... whom [Northwest Empire has] the right to direct and control while performing services ....” Policy Provisions, #22-11, 106. Beyond individuals over whom Northwest Empire may direct and control, this definition extends to “a non-compensated officer” or “a director or trustee while acting as a member of any of [Northwest Empire‘s] elected or appointed committees or acting within the scope of the usual duties of an employee.” Id. Finally, as the Policy clearly expresses, the definition of “employee” does not extend to “[a]ny manager, director, partner, member or trustee,
Several items are of particular significance in determining whether Kobbeman was at any point acting within the scope of the usual duties of an employee at Northwest Empire. First, a questionnaire completed by Gregory Lloyd completed in pursuit of the Claim that describes Kobbeman‘s thievery answers the question “Who did employee report to?” with “Employee did not report to anyone, David [Kobbeman] worked with autonomy and the accounting department reported to him.” Decl. of Janis Puracal, #24, Ex. 21 (#24-2), 3. The same questionnaire asked whether Kobbeman was on the board of directors, to which Lloyd responded “David Kobbeman was on the board of directors through 06/05/2012 and served as the Secretary.” Id. In the same questionnaire, Lloyd stated Kobbeman was solely responsible for managing the client accounts from which he ultimately stole. Id. at 5. Moreover, the record includes Kobbeman‘s correspondence with Northwest Empire‘s insurance agent, prior to discovery of Kobbeman‘s theft and while he was still serving in his roles, regarding employee dishonesty coverage. In that exchange, Kobbeman asked whether the Northwest Empire had a surety bond to protect funds held for clients. Kobbeman told the insurance agent, with regard to additional employee dishonesty coverage: “I‘m sure I filled this application [out] a few years ago.” Decl. of Janis Puracal, #24, Ex. 24 (#24-4), 6.1 This shows that Kobbeman had attempted to and was still
Plaintiffs argue that Kobbeman was subject to Northwest Empire‘s control, and was therefore an “employee,” because he was bound to the terms of various agreements with the company‘s HOA clients. See, e.g., Plaintiffs’ Response, #27, 5. I find that argument unpersuasive. The critical question here is whether Northwest Empire had a right to “direct and control” Kobbeman or whether he was acting within “the scope of the usual duties of an ‘employee,‘” not whether Kobbeman‘s practices as Vice-President, Corporate Secretary, and CFO were required to conform to client agreements. Policy Provisions, #22-11, 106.
Further, I look to the Ninth Circuit‘s holding in California Union Ins. Co. v. American Diversified Saving Bank, 948 F.2d 556 (9th Cir. 1991), to answer the question whether autonomous corporate officers can be considered employees in the context of similar insurance claims with similar definitions of “employee.” In that case, the Ninth Circuit considered whether a district court had erred in concluding that Federal Savings and Loan Insurance Corporation (“FSLIC“), acting as conservator for American Diversified Savings Bank (“ADSB“), could recover, under fidelity bonds issued to ADSB, losses incurred by ADSB due to wrongdoings of two of its principal officers and directors who were also the bank‘s sole shareholders. Id. The fidelity bonds in question provided coverage for losses caused by the dishonest or fraudulent conduct of FSLIC‘s employees. Id. The Ninth Circuit held that the bank‘s two principal officers and directors were not “employees” as that term was defined in the insurance contract—which contained a definition of “employee” mirroring that of the Policy in this case—in part due to the “public policy against permitting a corporation to collect insurance for the defalcations of its alter
Plaintiffs attempt to distinguish California Union by arguing that the court “relied on the fact that the principals owned 100 percent of the stock of the insured‘s parent company.” Plaintiffs’ Response, #27, 10. While the court mentions the fact that the officers in question owned complete stock in the company, it simply cited control of the insured company as the deciding factor in determining whether the officers met the policy definition of “employee,” without discussing any particular type of control. 948 F.2d at 566. Nonetheless, had the court relied solely on stock holdings and financial control rather than board positions or practical control, Kobbeman‘s forty percent share of King Magsulit Holdings, Northwest Empire‘s parent company, which was second only to Lloyd‘s sixty percent share, would lead to the same conclusion provided above under the California Union analysis.
Finally, I disagree with Plaintiffs’ proposed interpretation of “direct and control” as it applies to the definition of “employee,” above. Plaintiffs ask this court to construe that aspect of the Policy‘s general definition of “employee” in a light favorable to Plaintiffs but they effectively ignore, however, that Kobbeman was a compensated director of Northwest Empire, as reflected by Lloyd‘s admission, Decl. of Janis Puracal, #24, Ex. 21 (#24-2), 3, and therefore would be considered an “employee” only if he was “acting within the scope of the usual duties of an ‘employee‘” based on the Policy‘s express description of what “‘[e]mployee’ does not mean.”
Further, I find Plaintiffs’ attempted reliance on workers compensation cases to provide an interpretation of “direction and control” to be unpersuasive. While I agree that a court can soundly determine “direction and control” by looking to various factors of employment, I find those factors and the arguments asserted by plaintiffs inapposite in light of the fact that Kobbeman was not acting within the usual duties of an “employee” both due to his positions and because, as admitted by Northwest Empire‘s president, Kobbeman “did not report to anyone, [he] worked with autonomy[,] and the accounting department reported to him.” Decl. of Janis Puracal, #24, Ex. 21 (#24-2), 3.
For all of these reasons, I find that Kobbeman was not an “employee” under the Policy for the purposes of this action. I do not need to address the other issues raised by Sentinel in support of its Cross-Motion for Summary Judgment. Because the Employee Dishonesty Coverage was triggered only by dishonest acts of an employee, Sentinel‘s Cross-motion for Summary Judgment (#23) should be granted and Plaintiffs Motion for Summary Judgment (#19) should be denied.
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For the reasons set forth above, Plaintiffs’ Motion for Summary Judgment (#19) should be denied and Sentinel‘s Cross-Motion for Summary Judgment (#23) should be granted. Plaintiffs’ claims against Sentinel should be dismissed in their entirety.
SCHEDULING ORDER
The Findings and Recommendation will be referred to a district judge. Objections, if any, are due fourteen (14) days from service of the Findings and Recommendation. If no objections are filed, then the Findings and Recommendation will go under advisement on that date.
If objections are filed, then a response is due fourteen (14) days after being served with a copy of the objections. When the response is due or filed, whichever date is earlier, the Findings and Recommendation will go under advisement.
Dated this 21st day of August, 2015
Honorable Paul Papak
United States Magistrate Judge