Joseph W. McAninch v. Kansas Bankers

Damian Sinclair and Susan Wintermute, former directors of Sinclair National
Bank ("SNB"), brought breach of contract claims and tort claims against their insurer,
Kansas Bankers Surety Company ("KBS"), arguing that KBS wrongfully refused to
indemnify and defend them under a Directors, Officers and Employees Indemnity and
Bank Lender Liability Policy DL 1859 AR ("D&O Policy"). The district court1
granted summary judgment to KBS on all the claims and subsequently denied
Wintermute's motion for reconsideration of its grant of summary judgment. The
administrator of Sinclair's estate, Joseph McAninch, and Wintermute appeal. We
affirm in part and reverse in part.

I. Background

Sinclair and Wintermute2 purchased Northwestern National Bank ("NWNB")
of Gravette, Arkansas, on March 3, 2000, and changed its name to SNB. They served
as the principal shareholders of SNB. KBS issued a D&O Policy to SNB for the policy
period of October 7, 2000, to October 7, 2001. Sinclair and Wintermute were listed
as directors of SNB in the application for insurance.

The D&O Policy provided that KBS "shall" indemnify each bank director,
officer, or employee "for personal Loss which the Director or Officer or Employee is
legally obligated to pay by reason of any Wrongful Act solely in their capacities of
Director or Officer or Employee of the Bank which is first Discovered during the
Policy Period."3

On September 7, 2001, the Office of the Comptroller of the Currency (OCC)
closed SNB, and the Federal Deposit Insurance Corporation (FDIC) was appointed
receiver of SNB's assets. KBS initially sent a letter to SNB purporting to cancel
existing policies but followed that letter one day later with a corrected notification
advising SNB that it would not renew the D&O Policy and that the policy would
expire by its terms on October 7, 2001.

By letter dated September 26, 2001, Eli Greenburg, Wintermute's attorney,
advised KBS that the FDIC might assert possible claims against officers and directors
of SNB. The letter specifically stated that "[t]he FDIC has provided oral, informal
notice that there may be claims against the officers and directors of Sinclair National
Bank for negligence, breach of fiduciary duty and possibly other wrongful conduct."
The letter named Sinclair and Wintermute, among others, as individuals against whom
claims may be made.

By letter dated September 27, 2001, Helen Davis Chaitman, Wintermute's
attorney, provided notice to KBS that her law firm received a subpoena from the OCC
demanding production of files of SNB's officers and directors. The next day, Charles
M. Towle, Vice President of KBS, spoke with Chaitman by telephone and advised her
that the D&O Policy provided no coverage for any future claims made against any
officer or director of SNB by the OCC, FDIC, or any other state or federal officials
or agencies. Towle subsequently wrote a letter to Chaitman, affirming his previous
statement that Exclusion No. 3 of the D&O Policy applied and excluded coverage for
any future claims made against the officers and directors of SNB.

On June 17, 2003, Sinclair filed the instant action against KBS in the circuit
court of Green County, Missouri. The case was removed to the United States District
Court for the Western District of Missouri on August 4, 2003. The third amended
complaint alleged three causes of action: (1) a declaratory judgment that KBS had a
duty to defend Sinclair in any legal or other proceeding brought that alleged any
"wrongful act" as the term is defined in KBS's insurance policy; (2) breach of
contract; and (3) libel and slander per se.

On September 12, 2003, the State of Missouri filed an indictment against
Sinclair, charging him with 24 counts of securities fraud. Five days later, a federal
grand jury indicted Wintermute on charges of conspiracy and making false statements.
Sinclair's attorney, William McDonald, notified KBS on September 25, 2003, about
Sinclair's state indictment and Wintermute's federal indictment. In response, Towle
told McDonald that Exclusion No. 3 applied.

On November 20, 2003, a nine-count superseding federal indictment was
returned against Wintermute and Sinclair. Count I charged them with conspiracy to
commit five of the substantive offenses. Count II charged them with filing a false statement, alleging that on December 8, 1999, before they purchased NWNB, Sinclair
and Wintermute "knowingly and willfully falsified, concealed and covered up by a
trick, scheme and device a material fact in an application to the [OCC] . . . ." Count
III only charged Sinclair with filing a false statement in August 2000 to the OCC.
Count IV charged both Wintermute and Sinclair with illegal participation, alleging
that Wintermute and Sinclair, "as owners and directors of [SNB,] caused [SNB] to
purchase loans from Stevens Financial Group while concealing their financial
relationship with Stevens Financial Group." (Emphasis added). Under Count V, only
Sinclair was charged with obstructing examination of a financial examination in May
2000. Both Wintermute and Sinclair were charged with misapplication of funds under
Count VI for "being directors and otherwise connected in any capacity with [SNB]"
that "knowingly and willfully embezzled, abstracted, purloined and misapplied
monies, funds, and credits belonging to and entrusted to the care and custody of
[SNB]" by causing SNB "to purchase and acquire loans for approximately $15 million
from Stevens Financial Group." Count VII and Count VIII charged them both with
bank fraud. Finally, Count IX - Criminal Forfeiture - stated that, if convicted of
certain counts, Wintermute and Sinclair would forfeit property gained through the
violations.5

Prior to Wintermute's criminal trial, Wintermute's counsel, Devon Sherwood,
subpoenaed Towle to appear at Wintermute's trial; the subpoena directed Towle to
bring the crime-bond file with him to trial. KBS had written a separate policy which
indemnified the bank from criminal defalcations of its officers and employees (which
the parties called the "crime bond"), and the FDIC, acting as Receiver on behalf of the
failed Bank, had filed a proof of loss with KBS seeking to recover on the crime bond
for Sinclair's alleged criminal activities. On Towle's behalf, Ann Hoover, an attorney for KBS, made an offer to Sherwood that KBS would produce a copy of the file in
response to the subpoena without Towle's attendance at trial. Sherwood accepted the
offer, on the condition that the government stipulated to the documents. Because KBS
was unable to obtain the stipulation, Hoover filed a motion to quash the subpoena on
the ground that it was "unreasonable and oppressive." Because the court never issued
an order on the motion to quash, Towle and Hoover attended Wintermute's trial on
July 29, 2004. They were present in the courthouse from 1:15 p.m. until 5:05 p.m.
Towle brought the KBS file with him as the subpoena directed. Wintermute's
attorneys, however, never called Towle to testify, nor did Hoover or Towle identify
themselves to Wintermute's attorneys to notify them of their presence.

On August 4, 2004, Wintermute was convicted of Counts I and II of the
superseding indictment: conspiracy to file a false statement and filing a false statement
in connection with her application for a change in control of the bank. She was
acquitted of Counts IV, VI, VII, and VIII of the superseding indictment, as well as the
charges of conspiracy to commit those offenses. The court dismissed Count IX after
the return of the verdict because Wintermute was acquitted on the counts on which
Count IX depended.

On October 19, 2004, Wintermute filed her second amended complaint in the
instant action, setting forth three causes of action against KBS: (1) declaratory
judgment as to coverage under the D&O Policy; (2) breach of contract for failure to
reimburse Wintermute for her legal expenses in successfully defending against the
claims of the indictment covered by the D&O Policy; and (3) malicious interference
with Wintermute's defense.

On February 14, 2005, Wintermute filed a motion to compel KBS to produce
documents responsive to Wintermute's written document demand. Specifically, she
sought the production of documents relating to the crime bond that KBS issued to
SNB. Sherwood requested the same documents in Wintermute's criminal trial. On
March 1, 2005, the district court ordered KBS to produce all responsive documents
for in camera inspection and, on March 11, 2005, granted in part Wintermute's motion
to compel, ordering KBS to produce 525 pages of documents. Among the 525 pages
of documents is a September 7, 2001 "Proof of Loss" filed in the name of SNB,
attributing losses in the amount of $ 838,884.22 to the "dishonest actions of Damian
Sinclair." The 525 pages of documents included the communications between Towle
and the FDIC concerning the Proof of Loss.

According to Wintermute, the Proof of Loss and supporting documents
included 12 documents containing her forged signature. In addition, she claims that
the crime-bond file contained communications between the FDIC and Towle
concerning the Proof of Loss under the crime bond. Therefore, on March 30,
2005 - two weeks after receiving the crime-bond file - Wintermute filed a motion for
leave to serve additional expedited discovery, arguing that the documents exculpated
her of criminal liability. Wintermute's theory was that KBS deliberately avoided
production of the crime-bond file because it hoped that she would be convicted; if the
jury convicted her on the counts relating to her conduct as a bank director, KBS would
have no liability under the D&O Policy. The district court denied Wintermute's
motion to serve additional discovery.

The parties subsequently submitted cross-motions for summary judgment. In
support of its motion for summary judgment, KBS argued that the D&O Policy did
not cover Sinclair and Wintermute's criminal defense costs because the loss did not
arise by reason of a "wrongful act" as defined by the policy. In addition, KBS argued
that certain policy exclusions applied. Regarding Wintermute's separate tort claim for
malicious interference with her criminal defense, KBS argued that Wintermute's claim failed as a matter of law because she could not prove the elements of a prima facie
tort. Regarding McAninch's separate tort claim for defamation, KBS argued that
Sinclair's claim abated on his death and no showing was made that the contested
statements were untrue or were published.

In response, Wintermute argued that, by its terms, the D&O Policy did provide
her coverage for losses sustained in connection to her criminal defense. She asserted
that the policy's definition of "wrongful act" is ambiguous, meaning that the court
must construe it in favor of the insured. Additionally, she argued that issues of
material fact precluded summary judgment on her malicious interference claim.

McAninch argued that KBS waived or was estopped from asserting any defense
to coverage because KBS "insured over" a Memorandum of Understanding and other
documents filed by federal regulatory agencies, which he argued constituted a
continuing claim under both the D&O Policy and the crime-bond policy indemnifying
the bank for losses sustained due to criminal acts of its employees and officers.
Regarding his claim for defamation, McAninch argued that the claim arose before
Sinclair's death and that the court should not allow KBS to assert the defense of truth
in connection to "actions which were wrong in the first place, i.e., denial of a defense
of coverage."

The district court granted KBS's motion for summary judgment as to all claims
and all parties and denied McAninch's and Wintermute's motions for summary
judgment. Wintermute subsequently filed a motion for reconsideration, arguing that
the court erroneously granted summary judgment on her tort claim on a ground not
previously raised. In addition, Wintermute argued that the court erroneously found
that she did not act solely in her capacity as a director. The district court denied
Wintermute's motion.

Both McAninch and Wintermute appeal the judgment of the district court.

* * *
A district court called upon to decide whether grand jury transcripts should be
released is "infused with substantial discretion." Douglas Oil Co. of Cal. v. Petrol
Stops Northwest, 441 U.S. 211, 223 (1979). The district court should consider "the
extent of the need for continuing grand jury secrecy, the need for disclosure, and the
extent to which the request was limited to that material directly pertinent to the need
for disclosure." Id. This amounts to a showing of a "particularized need" for the
materials. United States v. Warren, 16 F.3d 247, 253 (8th Cir. 1994).

* * *

"In reviewing an insurance policy, when the terms of the policy are clear, the
language in the policy controls." Curley v. Old Reliable Cas. Co., 155 S.W.3d 711,
713 (Ark. App. 2004). The court will give effect to the policy's plain language without
resorting to rules of construction if the policy provision is unambiguous. Id. "A policy
will not be interpreted to bind the insurer to a risk that it plainly excluded and for
which it was not paid." Id. However, if "the policy language is ambiguous, and thus
susceptible to more than one reasonable interpretation, the policy will be construed
liberally in favor of the insured and strictly against the insurer." Id. Because the court
is to construe language in an insurance policy in its "plain, ordinary, and popular
sense," the fact that a term is not defined in the policy "does not automatically render
it ambiguous." Id. The court must read the different clauses of the contract together
and construe the contract so all parts harmonize. Id.

* * *

In Federal Savings & Loan Insurance Corp. v. Mmahat, 97 B.R. 293, 298 (E.D.
La. 1988), an attorney acted as corporate attorney and corporate director. The court
held that the definition of "Wrongful Act" included coverage for wrongful conduct but
held Mmahat's conduct fell within an exclusion triggered when the insured's actions
are designed to gain personal profit or illegal advantage. Id. at 299. In Bank of
Carbondale v. Kansas Bankers Surety Co., 755 N.E.2d 543, 545 (Ill. App. 2001), the
court was called upon to apply policy language identical to the provision at issue in
this case. The court easily concluded that the policy was intended "to indemnify the
officers and directors for any loss that they are legally obligated to pay by reason of
any wrongful act in their capacity as an officer or director." Id. at 545–46; see also
Ratcliffe v. Int'l Surplus Lines Ins. Co., 550 N.E.2d 1052, 1053–54 (Ill. App. 1990)
(finding coverage for corporate officers sued for alleged wrongful acts committed
while acting as officers of a privately held corporation and as trustees or agents of
trustees for family-member shareholders).

* * *

In Beck, two individual purchasers of the stock of a savings and loan association
had brought suit in Texas state court against several of its selling shareholders - some
of whom had served as directors - alleging misrepresentation in connection with the
sale. 1990 WL 598573, at *4. The allegations of misrepresentation against the
shareholders were asserted "in their capacity as 'Inside Shareholders,' not as officers
or directors of the Association." Id. at *14. A third plaintiff (another savings and loan)
asserted claims only against the former directors, alleging that they mismanaged the
savings and loan while serving as directors. Id. at *4. The state law suit was settled
and the selling shareholders/directors sought indemnification from the savings and
loan's D&O carrier in federal court. The federal district court granted summary
judgment to the insurer, finding that the claims by the two individual state court
plaintiffs had only alleged wrongful acts against the insureds in their capacity as
selling shareholders, not against them as directors or officers. Id. at *14–15. Thus, as
in Olson, there was no allegation that the shareholders were acting in a dual capacity.

* * *

Arkansas law provides that an insurer waives the defense of noncoverage only
when the insurer's conduct misleads the insured into believing that coverage exists and
the insured takes action in reliance on that misrepresentation. Harasyn v. St. Paul
Guardian Ins. Co., 75 S.W.3d 696, 701–02 (Ark. 2002). Courts may not find
restrictions from coverage void as against public policy unless the legislature has
specifically prohibited a particular exclusion from coverage. Id. at 699. Regarding
waiver and estoppel, the Arkansas Supreme Court has

noted that coverage in a contract of insurance cannot be extended by
waiver or estoppel. The doctrine of waiver or estoppel cannot be given
the effect of enlarging or extending the coverage as defined in the
contract, nor can it create a contract of insurance, since a cause of action
cannot be based on a waiver.

* * *