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U.S. Alliance Federal Credit Union v. Cumis Insurance Society

September 11, 2009


The opinion of the court was delivered by: Paul G. Gardephe, U.S.D.J.


In this action concerning a claim against an employee fidelity bond, Defendant Cumis Insurance Society, Inc. has moved for summary judgment on Plaintiff U.S. Alliance's ("Alliance") two remaining claims*fn1 and has moved to strike the affidavits of Robert Ambrose, Richard Murray and Philip Farber. For the reasons set forth below, Cumis's motion for summary judgment is granted in part and denied in part, and its motion to strike is denied as moot.

As discussed in more detail below, Cumis issued an employee fidelity bond that protected Alliance from losses caused by the "dishonest acts" of employees who acted "with the manifest intent to: (a) Cause [Alliance] to sustain such [a] loss; and (b) Obtain financial benefit for the 'employee' . . . or for any other person or entity." (Def. Ex. 50) ("Dishonesty Provision") The bond also protected Alliance from losses caused by an employee's "failure to faithfully perform his/her trust," which the bond defines as "acting in conscious disregard of [Alliance's] established and enforced share, deposit or lending policies." (Id.) ("Faithfulness Provision")

Alliance's claim against the bond arises from the alleged misconduct of Alliance employee Albert Menard in connection with Prime Time Holdings ("PTH"), a car leasing company in which Alliance invested. Menard served as the liaison between Alliance and PTH. Alliance's investment in PTH began in May 1996 (Def. Ex. 9) and grew from $484,000 in September 1996 to more than $14 million in May 1998. (Def. Exs. 7, 33) PTH collapsed in October 1998, however, causing large losses to Alliance. (Pltf. Ex. 30)

Alliance claims that its losses were caused by Menard's dishonest and unfaithful conduct and seeks recovery under the employee fidelity bond. On June 21, 2002, Alliance filed a proof of loss with Cumis stating that Menard's conduct caused it to suffer losses of $6.9 million. Cumis denied Alliance's claim on April 10, 2003, and this litigation ensued. (Pltf. Ex. 54; Cmplt., ¶ 30)*fn2

Cumis has now moved for summary judgment, claiming that Alliance has not offered evidence demonstrating that Menard was dishonest or unfaithful within the meaning of the Dishonesty and Faithfulness Provisions. As explained below, Cumis's motion concerning Alliance's claim under the Dishonesty Provision must be denied, because, inter alia, there are disputed issues of material fact as to whether Menard committed "dishonest acts" and had the "manifest intent" to cause a loss to Alliance and to obtain a benefit for himself. Alliance has offered evidence demonstrating, for example, that (1) Menard withheld critical information from Alliance concerning the operation of the car leasing program, including the fact that a PTH co-owner had embezzled from PTH but remained in place at the Company; (2) Menard did not disclose to Alliance that PTH had offered Menard an option to purchase a 5% interest in PTH and suggested that he would become CEO of PTH; and (3) Menard went into business with the wife of a PTH principal shortly after he was fired by Alliance and soon bought out the wife's interest on what appears to be highly favorable terms. With respect to causation, this Court cannot rule as a matter of law that Alliance's losses were not caused by Menard's alleged misconduct, because there are disputed issues of material fact as to whether Alliance would have continued its participation in the leasing program absent Menard's alleged misconduct.

Cumis is entitled to summary judgment on Alliance's claim under the Faithfulness Provision, however, because Alliance has not offered evidence demonstrating that Menard "acted in conscious disregard of [Alliance's] established and enforced share, deposit or lending policies." (Def. Ex. 50) Indeed, Alliance has not offered evidence that it had any policies in place concerning its investment in PTH.

Finally, the Court will deny Cumis's motion to strike as moot, because the Court has relied only on admissible evidence in deciding this motion.


Alliance is a non-profit financial cooperative established under the Credit Union Act. (Affidavit of Richard Murray dated July 11, 2006, ¶ 2) ("Murray Aff.") In 1996, when Alliance first invested in PTH, Menard served as Alliance's vice-president for credit union service organizations ("CUSO"). (Id., ¶ 9) CUSO's are for-profit companies created by credit unions to provide services in addition to traditional savings and loan offerings (Def. R. 56.1 Stat., ¶ 9; Murray Aff., ¶ 2), and the car leasing program was offered as part of a CUSO. Menard had had a 30-year relationship with Alliance, having been a founding member of the credit union and having previously served as a director, as treasurer and as president. (Murray Aff., ¶ 10)


A. The May 13, 1996 Alliance-PTH Agreement

On May 13, 1996, Alliance and PTH signed an agreement initiating the car leasing program. (Def. Ex. 9) Menard -- who executed the agreement for Alliance -- was largely responsible for its terms. (Def. Ex. 3 at 52:24-53:3; Def. Ex. 9) Under the agreement, Alliance agreed to "market PTH's consumer lease services to [its] Members" and PTH agreed to "offer and enter into vehicle lease agreements with qualified Members." (Def. Ex. 9, § 2.0) The agreement envisioned that PTH would be the legal owner of the leases and cars, credit union members would be the lessees, and Alliance would have the option to purchase a 75% interest in each lease. (Id., §§ 4.0(a), (c)) Under the agreement, Alliance retained the right to "make its own credit decisions in approving Leases and acquiring interests in Purchase Leases." (Id., § 4.12) For each lease in which Alliance purchased an interest, however, PTH would remit to Alliance a percentage of the funds it collected from the lessees. (Id., § 4.2) The agreement further provided that a purchase by Alliance of an interest in a lease "constitute[d] a non-recourse sale to [Alliance]." (Id., § 4.0(c))

The agreement obligated PTH to provide all services with respect to the leases and to act "in a fiduciary capacity on behalf of [Alliance] . . . [for the] collection and distribution of payments[,] . . . [the] distribution of proceeds from the disposition of a Vehicle, and [for] decision-making relating to the handling of defaults under Purchased Leases." (Id., §§ 3.4, 4.0(c)) The agreement also required PTH to ensure that Alliance was the first lienholder on all purchased leases (id., § 4.0(d)), and to provide Alliance with new lease reports, collection reports, termination reports, and delinquency reports. (Id., § 3.5) Finally, PTH represented that it had "all requisite licenses and governmental authority" to perform under the agreement. (Id., § 7.0)

Menard had primary responsibility for overseeing the PTH program for Alliance (Murray Aff., ¶ 15), and met with PTHemployees every two to three weeks (and sometimes more often) to discuss operations. (Def. Ex. 3 at 89:12-16) It is undisputed, however, that other Alliance employees were responsible for determining what leases Alliance would invest in. (Def. Ex. 1 at 26:2-6, 27:11-23; 29:14-18) It is likewise undisputed that Alliance never established any policy or criteria for reviewing the creditworthiness of the lessees even though the 1996 agreement provided that Alliance would make its own credit decisions in approving Leases and acquiring interests in Purchase Leases . . . [and would] make its own independent determination of the Member's creditworthiness in accordance with the loan policies of [Alliance] and not in reliance on any information, representation or advice from PTH. (Def. Ex. 9, § 4.12; Def. R. 56.1 Stat. ¶ 4; Def. Exs. 1 at 30:16-19; 2 at 31:17-32:3)*fn3

B. The January 23, 1997 Alliance-PTH Agreement

On January 23, 1997, Alliance entered into a new agreement with PTH that superseded the 1996 agreement. The 1997 agreement was signed by Menard and PTH employee Larry Sobel and differed from the 1996 agreement in only a few material respects. (Def. Exs. 14, 15) First, the 1997 Agreement raised the percentage of interest that Alliance purchased in each approved lease from 75% to 95%. (Def. Ex. 14, § 4.0(a)) Second, the 1997 agreement appeared to offer Alliance greater loss protection, because it changed Alliance's participation from non-recourse to recourse (id., § 4.0(c)); obligated PTH to repurchase Alliance's interest in any lease that was more than 31 days delinquent (id., § 4.14); and required PTH to make deposits into an escrow collateral account based on the amount of outstanding lease payments.*fn4 (Id., § 4.16)

C. The May 14, 1998 Amendment and the Termination of the Car Leasing Program

In April 1998, Alliance employee Robert Ambrose discovered that PTH was not fully funding the escrow collateral account as the 1997 agreement required. (Def. Ex. 1 at 125:21-23) By April 30, 1998, the account should have held $2,004,668, but PTH had deposited only $507,322.39. (Def. Ex. 30) Alarmed by this breach, Alliance executives scheduled a meeting with PTH employee Larry Sobel in early May 1998. (Def. Ex. 31)

At the meeting, Sobel explained that the shortfall in the collateral account stemmed from an embezzlement by PTH employee Mark Betz, who had been terminated.

(Def. Ex. 1 at 129:4-15) Sobel showed the Alliance employees a brokerage statement indicating that PTH had funds available to fund the collateral account, but explained that he preferred not to deplete the brokerage account in light of PTH's ongoing negotiations with Betz concerning his separation and termination agreement. (Id. at 129:16-25) Sobel offered to make an immediate deposit of $100,000 or $150,000 into the escrow account but asked that PTH be given additional time to address the remaining shortfall. (Id. at 129:24-130:7)

After speaking with Sobel, Menard and his Alliance colleagues discussed whether Alliance's funding of PTH should continue. Menard and Richard Murray -- Alliance's chief executive officer -- expressed the view that funding should be continued; Robert Canavan, another Alliance executive, opposed continued funding; and Alliance vice president Robert Ambrose expressed "reluctan[ce] to cut off" funding, given that PTH's other payments to Alliance were current and Sobel's claim that PTH would soon rectify the shortfall in the collateral account. (Id. at 132:3-24; 133:5-11)

Alliance ultimately decided to continue funding the car leasing program, and on May 14, 1998 (id. at 131:24-132:2), Alliance and PTH amended the 1997 agreement to provide a new timeline for PTH's payments into the escrow collateral account. (Def. Ex. 32) Under the May 1998 amendment, PTH agreed to transfer $150,000 into the account immediately and to pay off the balance of the shortfall within 120 days.*fn5 (Id.)

PTH did not address the shortfall in the collateral account by September 30, 1998, however, and Alliance immediately suspended its participation in the car leasing program. (Def. Ex. 1 at 199:19-22; Def. Ex. 43) Once Alliance stopped buying interests in PTH's leases, PTH laid off its staff and effectively went out of business. (Pltf. Ex. 30; Affidavit of Robert Ambrose dated July 14, 2006, ¶ 16) ("Ambrose Aff.") After PTH ceased operations on October 19, 1998, Alliance was forced to assume responsibility for the car leasing program. (Ambrose Aff., ¶ 39; Def. Ex. 43)

Alliance terminated Menard's employment in about April 1999 (Pltf. Ex. 34 at 1416:17-23; Def. Exs. 46, 47), and later secured a $3,750,000 judgment against PTH for breach of contract. See Prime Time Holdings, LLC v. U.S. Alliance Federal Credit Union, 98 Civ. 17406, 2004 WL 1516181 (N.Y. Sup. Ct. May 13, 2004).


In opposing Cumis's motion for summary judgment, Alliance cites a variety of evidence which it contends demonstrates that Menard was dishonest within the meaning of the fidelity bond.*fn6

1. Menard's Business Interest in PTH

In the fall of 1996, Sobel told Menard that he should "consider investing in and becoming a part of [PTH]." (Pltf. Ex. 32 at 396:5-6, 397:13-15) Sobel told Menard that he was "prepared to offer [him] a five percent interest in [PTH] for $100,000"; Menard believed that he could exercise this option at any time over the next two to three years. (Id. at 397:19-21, 400:16-19) Sobel also told Menard that he "anticipated that [Menard] would become chief executive officer of [PTH]." (Pltf. Ex. 24 at 216:23-217:3) Menard thanked Sobel for the offer, never rejected it, but also "never did anything about it." (Id. at 217:7-14) Although it is undisputed that Menard never exercised the option (Def. R. 56.1 Statement, ¶ 7), it is also undisputed that Menard never told Alliance about Sobel's offer. (Pltf. Ex. 32 at 405:16-406:6)

2. Menard Withholds Information from Alliance and Mischaracterizes PTH's Performance

Alliance alleges that Menard consistently and falsely reported to Alliance colleagues that the car leasing program was successful when, in truth and almost from the outset, PTH was experiencing a high delinquency rate and other serious financial challenges. (Def. Ex. 48; Murray Aff., ¶¶ 41, 46)For example, Alliance CEO Murray testified that Menard made "frequent, often weekly visits to Prime Time's offices . . . and reported back to Murray, to the executive staff . . . and to the Board of Directors monthly, that the program was successful and that delinquencies were low." (Murray Aff., ¶ 27) Similarly, Robert Ambrose, a vice president at Alliance, testified that Menard's reports "were always very positive" and that Menard claimed "that the program was doing well and the delinquencies were very low and in line with expectations." (Ambrose Aff., ¶¶ 1, 4)

Alliance also cites evidence indicating that Menard deprived Alliance of critical, highly negative reports that it was entitled to under its agreement with PTH. PTH co-owner Sobel testified that shortly after the 1996 agreement was signed, Menard and Sobel agreed that PTH would not provide any of the reports to Alliance required by the agreement, including the new lease report, the collection report, the termination report, and the lease delinquency report. (Pltf. Ex. 28 at 236:5-240:12)

3. Menard's June 1997 "Surprise Audit"

Alliance also contends that Menard -- in an effort to lull Alliance into a sense of security -- announced to CEO Murray on June 23, 1997 that he was conducting a surprise audit of PTH's records. (Def. Ex. 16) Menard stated that he had reviewed files maintained in PTH's record room, randomly selected fourteen leases, and would confirm that the cars associated with the leases existed. (Id.) Menard never reviewed the sample leases, however, nor did he verify that the cars existed. (Pltf. Ex. 38 at 294:23-295:17) And in January 1998, when Alliance employee John Torpey told Menard that a third-party audit of the car leasing program was necessary because Alliance did not have any "real picture of what the delinquency on these notes is" (Pltf. Ex. 18), Menard responded that he had shared the sample leases with the auditing firm of O'Rourke Sacher & Moultin and with the National Credit ...

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