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Jacobson Family Investments, Inc., et al v. National Union Fire Insurance Company of Pittsburgh

December 11, 2012


The opinion of the court was delivered by: Mazzarelli, J.

Appellate Division, First Department

Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.

This opinion is uncorrected and subject to revision before publication in the Official Reports.

Decided on December 11, 2012

Angela M. Mazzarelli, J.P. David B. Saxe Leland G. DeGrasse Rosalyn H. Richter Sheila Abdus-Salaam, JJ.

Plaintiffs appeal from the order, Supreme Court, New York County (Richard B. Lowe, III, J.), entered July 13, 2011, which, to the extent appealed from, denied plaintiff insureds' motion for partial summary judgment, and granted defendant insurers' cross motion for summary judgment to the extent of limiting any recovery by plaintiffs under the fidelity bonds at issue to the loss of their investment interest and dismissing plaintiffs' claim for breach of the implied covenant of good faith and fair dealing. Order, same court and Justice, entered February 29, 2012, which, to the extent appealed from, granted plaintiffs' motion for leave to renew and adhered to the original determination, and denied so much of defendants' motion for summary judgment as sought dismissal of the "net loser" plaintiffs' claims. Kasowitz, Benson, Torres & Friedman LLP, New York (Adam S. Ziffer, Marc E. Kasowitz and Robin L. Cohen of counsel), for appellants-respondents. Bressler, Amery & Ross, P.C., New York (Robert Novack and Charles W. Stotter of counsel), for National Union Fire Insurance Company of Pittsburgh, PA., respondent-appellant. Carroll McNulty & Kull, LLC, New York (Joseph P. McNulty and Douglas Eisenstein of counsel), for Continental Casualty Company, respondent-appellant. Eckert Seamans Cherin & Mellot, LLC, White Plains (Geraldine A. Cheverko of counsel), and F. Joseph Nealon of the bar of the State of Pennsylvania and the District of Columbia, admitted pro hac vice, for Fidelity and Deposit Company of Maryland and Great American Insurance Company, respondents-appellants. MAZZARELLI, J.P.

Plaintiff Jacobson Family Investments (JFI) is an investment management company that manages the assets and businesses of the 16 other plaintiffs, which are various limited liability companies, limited partnerships, foundations and trusts established by various members of the Jacobson family and another family. JFI manages the assets of these entities by selecting outside investment advisors. In 1998, JFI made the fateful decision to select Bernard L. Madoff and his firm, Bernard L. Madoff Investment Securities LLC (BLMIS), as one of those outside investment advisors.

JFI attempted to protect its investments by purchasing fidelity bonds insulating it from theft or other dishonest acts of the outside investment advisors. The primary bond at issue in this case was sold to JFI by defendant National Union and covered the policy period from October 19, 2007 to November 1, 2008, and was later extended to March 2009. JFI also purchased several layers of excess fidelity bonds (the excess bonds) from National Union and the remaining defendants [FN1]. The bond had a $10 million single loss limit of liability, an aggregate limit of liability of $20 million, and a deductible of $3 million per single loss. The operative portion of the bond provided that coverage would be afforded for "[l]oss resulting directly from dishonest or fraudulent acts committed by an Employee [FN2] acting alone or in collusion with others." The term "loss" is not defined anywhere in the bond.

As part of its application to National Union for the bond, JFI disclosed that the amount of assets being managed by BLMIS on behalf of the various entities was at the time $123,805,948. Unbeknownst to JFI or National Union, a substantial portion of that figure represented fictitious gains in JFI's initial investment with BLMIS. Rider 9 to the bond constituted JFI's representation that the information disclosed in the application was complete, true and correct and provided that the application "constitutes part of this policy."

After Madoff's fraud was exposed in December 2008, following his arrest, it was revealed that six of the plaintiffs had contributed more money to BLMIS than they had withdrawn from it, or, in the common parlance, were "net losers." The remaining plaintiffs were "net winners," because over time they had withdrawn more money than they had invested. When the "net wins" and "net losses" of the individual plaintiffs are aggregated, the entities are shown to have had a total net win of $3,142,677. Nevertheless, JFI submitted a single proof of loss to National Union in the amount of $107,619,369.33 [FN3], which was based on the last account statement furnished by BLMIS prior to Madoff's arrest. That statement, of course, and the proof of loss which was based on it, included the millions of dollars in "gains" which Madoff infamously conjured out of thin air.

National Union denied coverage, asserting, inter alia, that JFI suffered no losses from Madoff's wrongdoing because "the non-existent profits that Mr. Madoff fraudulently attributed to his purported investments" did not constitute a loss under the bond. The excess insurers denied JFI's claim on the same grounds. JFI commenced this action, seeking a declaratory judgment that the entire claimed loss was covered by the bond, as well as damages for breach of contract and breach of the implied covenant of good faith and fair dealing.

Before discovery commenced, JFI moved for partial summary judgment declaring, inter alia, that the bond covered the full extent of the losses it claimed. Defendants jointly cross-moved for summary judgment declaring that coverage under the bond was limited to JFI's "actual losses" in its Madoff accounts, and also moved to dismiss JFI's claim for breach of the covenant of good faith and fair dealing. In an argument which they withdrew before the court decided the motions, defendants further asserted that, if their "actual losses" theory was adopted, the gains and losses of the various JFI entities should be aggregated. Because this would result in a total net win for JFI, defendants submitted that the entire complaint should be dismissed.

Supreme Court denied JFI's motion, and granted the cross motion, to the extent of finding that the bond limited coverage to JFI's "actual losses." The court concluded that because the fictitious gains recorded by BLMIS were "never owned" by JFI, they could not have been "lost." The court also dismissed JFI's claim for breach of the covenant of good faith and fair dealing, since defendants had an "arguable basis" for denying coverage.

After the parties had begun discovery, JFI moved for leave to renew its motion on the basis that it had gained access to information in the possession of defendants and third parties which warranted a different conclusion than the court had reached. The first new development presented by JFI had to do with the fact that a fidelity bond that National Union had issued to JFI in 2003 was expressly limited to losses of JFI's "investment interest" because of the dishonest acts of outside investment advisors, that is, the actual amount of cash which JFI entrusted to them. JFI claimed that it had discovered that National Union representatives had specifically insisted on the inclusion of that limitation in the 2003 bond, and argued that the omission of this limitation in the bond at issue was thus a purposeful act which established that National Union expected to cover more than simply lost "investment interest." The second new development which formed the basis of the renewal motion was JFI's having learned that, in calculating the bond's premium, National Union multiplied the premium by 375% to cover the total "assets ...

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