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Greenwald v. Western Surety Co.

Supreme Court of Idaho

March 15, 2019

BRENT H. GREENWALD dba, GREENWALD NEUROSURGICAL, P.C., an Idaho Corporation, Plaintiff-Respondent-Cross Appellant,
v.
WESTERN SURETY COMPANY, Defendant-Appellant-Cross Respondent.

          Appeal from the District Court of the Seventh Judicial District, State of Idaho, Bonneville County. Joel E. Tingey, District Judge.

         The judgment of the district court is vacated and the case is remanded for further proceedings consistent with this opinion.

          Elam & Burke, P.A., Boise, for appellant. Joshua S. Evett argued.

          Swafford Law, P.C., Idaho Falls, for respondent. Larren K. Covert argued.

          STEGNER, JUSTICE.

         This appeal arises out of a Dishonesty Bond (the bond) issued by Western Surety Company (Western) that insured Greenwald Neurosurgical, P.C. (the P.C.), for up to $100, 000 in losses caused by any fraudulent or dishonest act of any employee of the insured.

         At the summary judgment stage, the district court found that an employee of the P.C. caused over $100, 000 in losses to the P.C., while he was acting in the ordinary course of the P.C.'s business. The district court then issued a judgment to the P.C. for the policy amount of $100, 000. Western appeals the district court's determinations that the employee caused the loss while acting in the ordinary course of business and that the P.C. actually suffered the loss. The P.C. cross-appeals from the district court's findings that it was the only entity insured under the bond and argues it was awarded too little by way of attorney's fees. For the reasons set out, we reverse the order granting summary judgment, vacate the judgment, and remand the case for further proceedings.

          I. FACTUAL AND PROCEDURAL BACKGROUND

         Brent H. Greenwald, M.D. (Greenwald), is a neurosurgeon practicing in Idaho Falls, Idaho. Greenwald practices medicine under a professional corporation named Greenwald Neurosurgical, P.C. The P.C. was created in 2001. According to Greenwald, his medical office functioned as headquarters not only for the P.C., but also for his personal financial dealings and investments, as well as his real estate business.

         The original bond application indicates that on November 5, 2002, Greenwald applied for a $100, 000 Dishonesty Bond to insure "Greenwald Neurosurgical" from losses caused by its employees. On November 11, 2002, Western issued a $100, 000 Dishonesty Bond insuring "Brent H. Greenwald dba Greenwald Neurosurgical" against the criminal acts of any employee as defined by the bond.

         On December 8, 2009, the P.C. hired Matthew Udy (Udy) as a business and financial manager. According to Greenwald, Udy's responsibilities included receiving income from all sources, making payments on accounts payable, payments to credit card accounts, payments for other miscellaneous charges and services, and managing information technology issues at the medical office. Greenwald referred to Udy as his personal assistant and as a "financial manager of [the] medical practice." However, as evidenced by a 2012 W-2, the P.C. is the sole entity that employed Udy and paid for his services. (During the course of this litigation, Western conceded that the P.C. is an insured entity under the bond. However, it also maintained that only the P.C. was an insured because of language in the policy that limited coverage to fraudulent or dishonest acts of an employee of the insured.)

         Also in 2009, Greenwald formed a real estate company, Allagash Realty, LLC (Allagash). According to Greenwald, Udy was responsible for managing Allagash, which included collecting Allagash's rents and other payments, as well as paying its creditors.

         On September 11, 2013, Janeene Ditmore (Ditmore), the P.C.'s office manager, was notified that a questionable purchase had been made with one of Greenwald's credit cards. Udy was suspected of making the questionable purchase. Greenwald, along with Ditmore and Troy Clayton (Clayton), the CPA for the P.C., confronted Udy about the purchase. Udy confessed to wrongfully appropriating money and was fired that day. Due to the admitted wrongdoing, Clayton conducted an internal financial audit for the P.C. The audit consisted of an analysis of the P.C.'s financial records, Allagash's financial records, and Greenwald's personal credit card accounts. Greenwald reported Udy's financial embezzlement to the police. Ultimately, on November 10, 2014, Udy pleaded guilty to felony Unauthorized Use of an Access Device (in violation of 18 U.S.C. § 1029) in federal court. He was subsequently sentenced on March 17, 2015. As a result of pleading guilty to Unauthorized Use of an Access Device, Udy was ordered to pay $275, 488.32 in restitution.[1]

         A. Prelitigation communication between Western and the P.C.

         By letter dated October 10, 2013, Larren Covert, the lawyer for Greenwald and Greenwald Neurosurgical, notified Western of their claim pursuant to the bond, that an employee had "stolen funds from the business."[2] As a result of this notification, Ginger Barnes (Barnes), Western's claim manager, alerted the firm representing Greenwald and the P.C. by letter dated October 17, 2013, that a sworn proof of loss form, along with other documentation, needed to be submitted to Western in order for her to process the claim.

         Clayton responded to Western by letter dated January 19, 2014, with an attached sworn proof of loss form dated January 22, 2014. The proof of loss form identified the "approximate loss" in the amount of $347, 395. Greenwald also submitted an affidavit dated January 15, 2014, with an attached, undated Summary Of Total Amounts Stolen (the prelitigation summary), in support of his claim. In his affidavit, Greenwald commented that Udy paid for the fraudulent credit card purchases "with stolen/embezzled funds from my checking accounts using a complex scheme of transfers between accounts."

         Greenwald also broke down the estimated losses as follows: $32, 000 in resulting legal fees and costs; $23, 907.74 in "unauthorized charges, accounts, and expenses[;]" $161, 396.52 embezzled from accounts; and $130, 091.20 in "[f]raudulent use of business credit card accounts." Totaling these amounts equals $347, 395.46, which is almost identical to the "approximate loss" identified in the proof of loss.

         The undated prelitigation summary submitted to Western attempted to substantiate the amounts listed by Greenwald. Regarding the $161, 396.52 embezzled from accounts, the prelitigation summary itemized that amount as follows: $140, 095 stolen "from Allagash[;]" and $21, 301.52 stolen from Idaho Spine & Brain. The latter amount (stolen from Idaho Spine & Brain) was further broken down into three separate checks from "ReHabAuthority." Those checks were made out to "Allagash," and each check's memo reads "Allagash c/o Idaho Spine & Brain 3155 Channing Way, Suite B Idaho Falls, ID 83404," which is also the address of the P.C.'s office. (The P.C.'s letterhead reads "The Spine & Brain Specialty Center;" however, the record does not explain the relationship between the Spine and Brain Specialty Center and the P.C.) The police report, submitted in support of the P.C.'s claim, indicated that the $140, 095 "from Allagash" was an estimated amount of Allagash rents collected and stolen by Udy.

         The prelitigation summary broke down the $130, 091.20 in fraudulent charges to credit card accounts into five separate amounts specific to the following credit card accounts: Citibank, Chase Marriott, CapitalOne Visa, Amex Personal, and Zions. (This total is substantially different from the $25, 102.10 found owed to the various credit card companies in the restitution order. See supra note 1.)

         On January 27, 2014, Barnes spoke with Clayton on the phone about the claim. Western contends that Barnes told Clayton on the phone that if any losses were to be reimbursed, they had to be sustained by the P.C. The reason for Western's position was the language of the bond itself. The Bond only covers the fraudulent or dishonest "act of an employee of the Insured . . . ." Western contended that Udy was only an employee of the P.C. and consequently only the P.C. would be insured under the bond. A few months later, on March 21, 2014, Barnes once again informed Greenwald that Western was still awaiting documentation demonstrating that the P.C. incurred a loss caused by Udy.[3]

         On May 29, 2014, counsel for Greenwald and the P.C., Ronald Swafford (Swafford), wrote Western, requesting a response regarding the P.C.'s claim and attached Greenwald's previous January 15, 2014, affidavit with the prelitigation summary. Barnes responded by letter on June 3, 2014, outlining the previous communications and again noting that Western still required documentation of the P.C.'s actual losses. Barnes noted that the $21, 301.52 loss in checks appeared to be a loss attributable to the P.C. but noted that it was unclear who suffered the $130.091.20 loss in credit card charges. Barnes concluded by again requesting documentation showing the P.C.'s actual losses.

         Having received no response, Barnes again wrote Swafford on August 26, 2014, seeking the information and documentation previously requested. On December 17, 2014, Swafford responded to Western and attached Udy's Plea Agreement. It does not appear from the record that Swafford provided any documentation evidencing the P.C.'s direct loss in that correspondence. On January 5, 2015, Barnes again wrote Swafford and requested the necessary documentation. That letter reads in pertinent part:

This bond covers loss due to an employee of Brent H. Greenwald dba Greenwald Neurosurgical only. The application states it is to cover the business of "Neurosurgery." Losses incurred involving the Allugash [sic] properties are not covered by this bond. Losses incurred to Brent Greenwald personally are also not covered. The Restitution portion of the Plea Agreement shows a loss of "$250, 386.22 payable to the doctor." There is nothing that sets out exactly what portion of the loss was caused to Greenwald Neurosurgical. It appears the credit card losses were resolved by each credit card company as restitution has been awarded five companies.
At this time, I request a break down as to what makes up the $250, 386.22 payable to the doctor. It appears at least $140, 095 is the loss regarding the Allugash [sic] properties. If the loss involves credit card companies other than the five who received restitution, please provide us with documentation showing whether those cards were personal accounts or business accounts and whether business funds were used to pay those personal charges by Mr. Udy. I requested this information from the accountant, Troy Clayton on January 27, 2013 [sic], but never received any documentation.
Once I receive this documentation, I will proceed accordingly.

(Italics added.)

         On April 17, 2015, just over four months later, Swafford wrote back to Western. Swafford failed to provide the documentation requested (although he confirmed the information regarding Udy's criminal charges), and again requested payment from Western. Subsequently, on May 15, 2015, Swafford wrote to Western's counsel, replying to a "response and explanation" that was presumably from Western but has not been included in the record. Swafford's May 15, 2015, letter stated for the first time that the P.C. took the position that the bond covered all of Greenwald's businesses, not just the P.C. Given the position taken, the P.C. deemed it unnecessary to provide Western with documentation demonstrating direct loss to the P.C. Swafford did not attach any substantiation of the P.C.'s losses.

         In sum, Western asked for documentation demonstrating the P.C.'s losses as contemplated by the bond at least four times (in the phone call on January 27, 2014, and in three letters dated March 21, 2014, June 3, 2014, and January 5, 2015), each time without success. As a result, Western denied the P.C.'s claim because the P.C. had never substantiated its losses to Western's satisfaction.

         B. District court proceedings.

         Due to Western's refusal to pay under the bond, Greenwald, doing business as the P.C., filed the complaint in this action on November 5, 2015, alleging breach of contract and unjust enrichment.[4] The P.C. demanded a jury trial. On April 20, 2016, the P.C. answered Western's first set of interrogatories and requests for production of documents.

         In answering discovery requests, the P.C. continued to avoid providing clear information on how the P.C. had been damaged. When asked to "itemize each element of damages . . . and state in dollars and cents the amount of money you are suing for each[, ]" the P.C. answered generally that Udy had converted $275, 488.32 dollars from Greenwald and his various businesses.[5] When asked to "provide an itemized list of amounts taken from accounts in the name of Greenwald's neurological practice[, ]" the P.C. responded that "Udy did not withdraw any funds from any account. Matt Utdy [sic] created and submitted fraudulent invoices or charges for unauthorized payments." (While this does not appear wholly inconsistent with Ditmore's and Clayton's later accounts of Udy's actions, no invoices were produced.) Finally, when asked to produce all exhibits, the P.C. responded that "Clayton previously provided all documents and source information to Western Surety. The documents clearly verify the amounts stolen." (The district court later found that "there is nothing in the 214 pages [representing everything the P.C. provided Western in discovery] that clearly identifies any transfers wrongfully made from the P.C. account to either Allagash, Greenwald's credit accounts, or some other destination.")

         On October 21, 2016, Western moved for summary judgment. Western argued that the P.C. could not recover because it failed to submit any evidence that the P.C. had sustained a direct loss, that Udy was not acting in the regular course of his employment at a neurology practice when the loss occurred, and that the bond application omitted material information, thus precluding the P.C. from recovering. (The last of these three arguments has not been appealed.) The P.C. contested these arguments, specifically maintaining that the bond covered all of Greenwald's businesses conducted at the office. On November 30, 2016, the district court denied Western's motion for summary judgment by finding the bond was ambiguous regarding who in fact was the "insured" party.

         On December 15, 2016, Western filed a motion to reconsider the November 30, 2016, order. Western contended that even if Greenwald intended to have three "insured" parties, Greenwald personally, the P.C., and Allagash, only the P.C. employed and paid Udy; therefore, it was the only entity that could recover under the bond. On January 13, 2017, the district court adopted the reasoning set forth by Western and granted its motion for reconsideration. The district court ruled that because the bond only protected against losses caused by employees who were compensated or paid by the insured, and only the P.C. had paid Udy, that only the P.C. could recover under the bond. (The P.C. has appealed this ruling.) The district court concluded that the remaining issues were whether the P.C. sustained losses as a result of Udy's actions, and if so, the amount of those losses.

         As a result of the district court's narrowing of the issues, the P.C. filed its motion for summary judgment on April 25, 2017. The P.C. argued that there was no genuine issue as to the amount of loss directly sustained by the P.C. In order to support its argument, the P.C. had to finally demonstrate how the P.C. suffered losses. The P.C. attempted to accomplish this by attaching the affidavits of Ditmore and Clayton. The two affidavits were both dated January 25, 2017, twelve days after the district court's ruling that only the P.C. could recover under the bond, but not served on Western until April 25, 2017, when the P.C. filed its motion for summary judgment.

         According to both Ditmore and Clayton, Udy fraudulently induced Ditmore to transfer money from the P.C.'s accounts to pay for both credit card charges made by Udy and for fraudulent Allagash expenses and debts. Both affiants claimed that the P.C. suffered $291, 487.72 in damages through this deceptive practice employed by Udy. The itemized amounts of losses established by both Ditmore's and Clayton's affidavits are identical as to the amounts claimed in the prelitigation summary.

         Each affidavit claims that $140, 095.00 in "Allagash expenses and debts" were caused to be fraudulently transferred from the P.C. This is the same amount of rents stolen "[f]rom Allagash." Clayton stated that Ditmore would transfer P.C. funds for Allagash expenses "into the fraudulent Allagash account" created by Udy. In contradiction to Clayton, Ditmore stated that "the office was unaware of" the second fraudulent Allagash account created by Udy, and that she would instead deposit P.C. funds into the "valid checking accounts." Ditmore continued stating that Udy would then transfer the recently deposited P.C.'s funds from the "valid Allagash or personal account for his own personal use . . . ."

         Both affidavits claim that Udy fraudulently induced Ditmore to transfer $130, 091.20 in P.C. funds for Udy's fraudulent credit card expenditures. This amount is identical to the amount claimed in the prelitigation summary. Additionally, the affidavits also state that Udy stole $21, 301.52 in tax payments from tenants in the Allagash properties, which was later repaid by the P.C. This is the same amount that was allegedly ...


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