Canada: Cooper Industries: Fifth Circuit Applies Crime Policy's Ownership Condition In Finding No Coverage For Loss Of Funds In Ponzi Scheme

Last Updated: December 4 2017
Article by David S. Wilson and Christopher McKibbin

On November 20, 2017, the Fifth Circuit Court of Appeals released its decision in Cooper Industries, Limited v. National Union Fire Insurance Company of Pittsburgh, PA. The Court applied a crime policy's ownership condition in ruling that the insured did not have coverage for the loss of funds incurred when an investment entity to which it had provided funds in exchange for promissory notes collapsed due to the entity's principals' Ponzi scheme.

The dispute arose out of the same Ponzi scheme that gave rise to the decision of the Eighth Circuit in 3M Company v. National Union Fire Insurance Company of Pittsburgh, PA (see our June 13, 2017 post). Although there are important factual distinctions between the two losses, the Fifth Circuit reached the same conclusion as the Eighth Circuit in finding that the insured had not demonstrated that it owned the property in issue.

The Facts

Cooper Industries, Ltd. ("Cooper") was a publicly-traded electrical equipment supplier. Cooper provided its employees with a pension plan, which was managed by Cooper's Pension Investment Committee (the "Committee"). The Committee divided the plan assets into two funds: a bond fund and an equity fund.

In 2004, Cooper began dealing with the principals of WG Trading Company LP ("WGTC") in respect of investing the benefit plan assets. The principals of WGTC had another entity, WG Trading Investors, LP ("WGTI"), which was a limited partner in WGTC. WGTC was a regulated and audited entity, whereas WGTI was not. The Committee invested approximately $175 million from both its equity and bond funds with the WG entities. Some of the funds were provided to WGTI in exchange for promissory notes.

Unbeknownst to Cooper, the principals of WGTC and WGTI were running a Ponzi scheme and, over the course of several years, diverted over $130 million from WGTI for their personal use. The Court noted that, during the course of the fraud, one of the principals spent over $3 million to amass a collection of 1,348 teddy bears, and another $32 million on a hunter pony farm.

In February 2009, the SEC and the CFTC initiated an enforcement action against the WG entities and the principals, and obtained receivership orders. The receiver had considerable success in recovering assets (including liquidating the teddy bears). As of the time of the Court's decision, Cooper had recovered all of its equity fund principal, and all but $1.1 million of its bond fund principal from WGTI.

The Ownership Condition

Cooper claimed under its crime coverage with National Union in respect of the loss. The policy's ownership condition provided that:

The property covered under this policy is limited to property:

  1. That you own or lease; or
  2. That you hold for others whether or not you are legally liable for the loss of such property.

Before both the District Court and the Fifth Circuit, Cooper maintained that it "owned" the funds in issue, on the basis that it had a beneficial interest in the funds and that the term "own" should encompass both legal and equitable ownership.

Like the District Court before it, the Fifth Circuit rejected Cooper's contention:

The Policy clearly does not use "own" in such a broad sense. ... Cooper did not "own" the principal and earnings in the way most people would use that word. It loaned money to WGTI in exchange for promissory notes. When it made that loan, it gave up possession and control of the funds. Rather, it "owned" the notes, and the [WG] Entities "owned" the funds. ... Cooper has cited no case where a Texas court has held that a party continues to "own" funds it was fraudulently induced to loan to someone else. [emphasis added]

The Fifth Circuit also rejected Cooper's attempts to rely on case law from other areas to expand the meaning of the term "own" in the policy:

Courts have recognized that "own" can vary with the context. However, in insurance disputes, courts have generally used the common, everyday definition of the word "own." ... Cooper also touts the cases it has identified in a number of other legal contexts — criminal, tax, trust, forfeiture, and takings laws — that recognize that the common meaning of "own" includes equitable ownership. That entirely misses the point. Just because courts have interpreted "own" in certain legal contexts to include equitable ownership does not mean that equitable ownership has been imported into the common definition of "own" as a result. [emphasis added; citations omitted]

The Court also rejected Cooper's efforts to distinguish the 3M decision:

The Eighth Circuit has likewise held that another victim of Greenwood and Walsh's fraud did not "own" funds invested through WGTC. ... Cooper attempts to distinguish 3M because the insured did not argue that "own" included equitable ownership. We have already rejected that argument and, in doing so, interpret Cooper's policy not to cover property no longer in the insured's possession but given over to the [WG] Entities, much as the Eighth Circuit interpreted 3M's policy. Adopting Cooper's position would result in inconsistent interpretations of similar policy provisions — a result we strive to avoid.

As a consequence, Cooper could not establish that it "owned" the funds in issue.

Conclusion

Like 3M and the recent decision of the U.S. District Court for the District of New Jersey in Posco Daewoo (see our November 6, 2017 post), Cooper Industries provides another example of a court applying the ownership condition using the accepted meaning of legal ownership, and rejecting an attempt to unduly broaden the scope of the condition. While the structure of Cooper's investments in the WG entities was significantly different from the structure of the investment in issue in 3M, the courts reached the same result. In each case, the court applied the ownership condition by reference to the concept of legal ownership only, to conclude that neither arrangement satisfied the ownership condition.

Cooper Industries, Limited v. National Union Fire Insurance Company of Pittsburgh, PA, 2017 WL 5562300 (5th Cir.)

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Authors
David S. Wilson
Christopher McKibbin
 
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