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Federal Insurance Co. v. COR Clearing, LLC.

United States District Court, D. Nebraska

July 25, 2018




         This matter is before the Court on defendant and counter-claimant COR Clearing, LLC's (“COR”) Motion for Partial Judgment on the Pleadings (Filing No. 50) and Motion to Strike (Filing No. 77), and plaintiff and counter-defendant Federal Insurance Company's (“Federal”) Motion for Summary Judgment (Filing No. 85). See Fed. R. Civ. P. 12(c) and (f) and 56. With jurisdiction under 28 U.S.C. § 1332, [1] the Court grants the Motion for Summary Judgment and denies the remaining motions as moot.[2]

         I. BACKGROUND[3]

         COR is a settlement and clearing firm that allows independent broker dealers to buy and sell stock for their customers. COR maintains offices in Nebraska, California, and New Jersey. Its President and Chief Financial Officer (“CFO”) both work in the Nebraska office, and its Chief Executive Officer works in the California office.

         Indian Harbor Insurance Company (“Indian Harbor”)[4] issued liability policies to COR effective from December 27, 2013, to February 27, 2015, and February 27, 2015 to February 27, 2016 (the “XL policies”). Federal issued a financial institution bond (the “bond”) to COR effective from April 15, 2014, to April 15, 2015, and COR renewed the bond effective April 15, 2015, to April 15, 2016. The bond contains four insuring clauses-1.A, 1.B, 1.D, and 4-and six exclusions-2.e, 2.f, 2.1, 2.k, 2.m, and 3.a-that are at issue in this case.

         In August of 2013, COR hired Christopher Cervino (“Cervino”) as a registered representative to work at COR's Equity Desk located in Edison, New Jersey. Cervino's duties and responsibilities were limited to executing trades as directed by clients. He was prohibited from soliciting trades.

         In the summer of 2014, COR began to investigate customer complaints that accounts overseen by Cervino had allegedly been opened without the customers' knowledge or permission, and that unauthorized stock trades in a company named VGTel Inc. (“VGTL”) had been placed in those accounts. Cervino initially claimed the customer was always present on the phone when he was placing trades but later admitted that was not the case. COR ultimately terminated Cervino for violating COR's policy regarding acceptance of orders from someone other than the account holder without the proper authorization on file.

         Later that year, Helen Cherry named COR as a party in a Financial Industry Regulatory Authority (“FINRA”) arbitration (“Cherry Arbitration”) and filed a Statement of Claim (“Cherry Statement”) in the Cherry Arbitration alleging that Larry Werbel, who was not a COR employee, convinced her to invest in VGTL stock. Cherry averred she suffered financial loss resulting from her investment in VGTL.

         On April 29, 2015, Carl Alexen and twenty-one other claimants (collectively, the “Alexen Claimants”) filed a FINRA arbitration (“Alexen Arbitration”) against COR. The Alexen Claimants alleged they were the victims of unauthorized trades masterminded by Edward Andrew Durante (“Durante”), who was not a COR employee, and involving Cervino. The Alexen Claimants sought to recover “compensatory and other damages of approximately $6, 000, 000.”

         On December 18, 2015, the Securities and Exchange Commission (“SEC”) unsealed an indictment against Durante. On January 6, 2016, the SEC filed an amended criminal indictment against the alleged participants in the VGTL scheme including Cervino.[5]

         COR settled the Cherry Arbitration for $80, 000 on January 5, 2016, and settled the Alexen Arbitration for $2, 000, 000 in August of 2016. Also in 2016, COR submitted claims to both Indian Harbor under the XL Policies and Federal under the bond. COR ultimately received some funds from Indian Harbor, but the nature of the remuneration is disputed. COR has not received any funds from Federal.

         On December 22, 2016, Federal filed a five-count Complaint (Filing No. 1) in this case requesting declaratory judgment. Count I requested a declaration that COR's claim was not covered by any of the insuring clauses and that Exclusion 2.e applied. The remaining four counts requested declarations that Exclusions 2.f, 2.i, 2.k, and 2.m applied, respectively.

         In its Answer (Filing No. 18), COR included a counterclaim for breach of contract against Federal, alleging it was entitled to coverage under insuring clauses 1.A, 1.B, 1.D, and 4.[6] COR moved for partial judgment on the pleadings (Filing No. 50), and Federal moved to strike (Filing No. 77) one of COR's filings and also moved for summary judgment (Filing No. 85).


         “If there is ‘no dispute of material fact and reasonable fact finders could not find in favor of the nonmoving party, summary judgment is appropriate.'” Sieden v. Chipotle Mexican Grill, Inc., 846 F.3d 1013, 1016 (8th Cir. 2017) (quoting Shrable v. Eaton Corp., 695 F.3d 768, 770-71 (8th Cir. 2012)). In reviewing a motion for summary judgment, the Court will view “all facts and mak[e] all reasonable inferences favorable to the nonmovant.” Gen. Mills Operations, LLC v. Five Star Custom Foods, Ltd., 703 F.3d 1104, 1107 (8th Cir. 2013).

         A. Choice of Law

         COR asserts New Jersey law applies to the interpretation of the bond. Federal claims Nebraska law applies. A federal court sitting in diversity generally should apply the substantive law of the state in which it sits, including its choice-of-law rules. Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941). In cases involving a dispute over interpretation of an insurance contract or bond, Nebraska uses the Restatement (Second) of Conflict of Laws. See Johnson v. U.S. Fid. & Guar. Co., 696 N.W.2d 431, 441 (Neb. 2005) (analyzing the Restatement (Second) of Conflict of Laws §§ 188 and 193 to determine controlling law for interpreting a contract).

         The Court should interpret a fidelity bond under “the local law of the state which the parties understood was to be the principal location of the insured risk during the term of the policy, unless with respect to the particular issue, some other state has a more significant relationship under the principles stated in § 6.” Restatement (Second) of Conflict of Laws § 193. COR argues that the principle location of the insured risk is New Jersey because the bond covered employee misconduct in the New Jersey office. However, the bond would have also covered employee misconduct in the Nebraska and California offices.[7] Because there is no single principal location of the insured risk, the Court turns to § 188, which applies the principles of § 6 to contracts.

         Under § 188, the relevant state contacts to analyze are “(a) the place of contracting, (b) the place of negotiation of the contract, (c) the place of performance, (d) the location of the subject matter of the contract, and (e) the domicil, residence, nationality, place of incorporation and place of business of the parties.” Id. § 188.

         COR's primary place of business is Nebraska, [8] as evidenced by the presence of the company's President and CFO and the address COR listed on its renewal application. Federal's primary place of business is New Jersey. The contract was presumably negotiated from both companies' primary place of business. The record is unclear as to the place of performance, and the location of the subject matter are all three states in which COR maintains an office. Finally, “the place of contracting is the place where occurred the last act necessary, under the forum's rules of offer and acceptance, to give the contract binding effect[.]” Id. cmt. e. In this case, the last act necessary to make the contract binding was Federal's acceptance of the application for the bond. Although a close question, after analyzing the issue under § 188 the Court concludes New Jersey has a more significant relationship to the transaction and the parties than Nebraska.

         B. Coverage

         “[T]he words of an insurance policy should be given their plain meaning.” Benjamin Moore & Co. v. Aetna Cas. & Sur. Co., 843 A.2d 1094, 1103 (N.J. 2004). “The interpretation and construction of a contract is a matter of law for the trial court[.]” Cumberland Farms, Inc. v. ...

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