Bird v. Centennial Insurance

United States Court of Appeals
For the First Circuit

No. 93-1363

ALLAN S. BIRD, ETC.

Plaintiff, Appellant,

v.

CENTENNIAL INSURANCE COMPANY,

Defendant, Appellee.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MASSACHUSETTS

[Hon. Walter Jay Skinner, Senior U.S. District Judge]

Before

Torruella and Stahl, Circuit Judges,

and DiClerico,* U.S. District Judge.

Robert B. Carpenter, with whom Louis J. Scerra, Jr., Donnalyn B.

L. Kahn, and Goldstein & Manello, P.C., were on brief for appellant.

George C. Rockas, with whom Paul R. Devin and Peabody & Arnold,

were on brief for appellee.

December 1, 1993

*Of the District of New Hampshire, sitting by designation.

STAHL, Circuit Judge. In this appeal, plaintiff-

appellant Allan S. Bird challenges the district court's entry

of summary judgment against him and in favor of defendant-

appellee Centennial Insurance Company on his claim that

defendant breached two fidelity insurance policies ("the

Policies"). After careful consideration of plaintiff's

arguments, we affirm.

I.

BACKGROUND

Plaintiff is the general partner of fifteen limited

partnerships that own and operate residential multi-family

housing projects throughout the United States. The projects

are subsidized to varying degrees by the United States

Department of Housing and Urban Development ("HUD"). To

assist in the operation of the projects, the partnerships had

entered into certain management agreements with Capital Site

Management Company ("Capital") and/or Asset Management

Corporation ("Asset"). Capital managed all of the projects

until September 1987, at which time it became inactive. The

agreements were then taken over by Asset, which can fairly be

described as the corporate reincarnation of Capital.

John Panagako was the president and treasurer of

Capital and owned 50% of the company's stock. Panagako's

wife, Janice Panagako, owned the other 50%. John and Janice

Panagako were also the only directors of Capital; however,

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Janice Panagako's duties were clerical and secretarial in

nature. No formal directors' meetings were ever held.

Asset's structure was identical to Capital's except for the

fact that John Panagako was Asset's sole shareholder. It is

clear from the record that John Panagako had complete control

over both of these corporations.

Each of the management agreements contained a

provision requiring the managing agent, i.e., Capital or

Asset, to procure fidelity insurance to protect against loss

due to fraudulent or dishonest acts committed by its

employees. In relevant part, the provision states:

19. Fidelity Bond. The Agent will

furnish, at his [sic] own expense, a
fidality [sic] bond in the principal sum
of at least an amount equal to the
[project's] gross potential income for
two months and is [sic] conditioned to

protect the Owner and [the Secretary of

HUD and the mortgagee] against

misapplication of project funds by the
Agent and its employees.1

1. Plaintiff contends that the inclusion of this provision
was mandated by HUD "regulations." However, the record does
not reflect, and we cannot locate, any HUD regulation which

affirmatively requires managing agents of HUD-subsidized
properties to purchase fidelity bonds. Rather, it appears
that plaintiff's argument is premised upon (1) a provision of
the HUD Handbook, 4381.5 REV-1, which requires property
managers to obtain fidelity coverage for both principals of
the management entity and "all persons who participate
directly or indirectly in the management and maintenance of
the project and its assets, accounts and records"; and (2)
the affidavit of G. Richard Dunnells, former Deputy Assistant
Secretary for Housing Management at HUD, which states that
the aforementioned Handbook provision was promulgated in
response to 24 C.F.R. 207.10, which requires the mortgagor
of HUD-insured properties "to keep the property insured by a

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(Emphasis supplied). Apparently in response to this

provision, Capital and Asset secured from defendant the

Policies at issue in this litigation. In relevant part, the

Policies provided coverage for the "[l]oss of money,

securities and other property which the insured shall sustain

. . . through any fraudulent or dishonest act or acts

committed by any of the employees acting alone or in

collusion with others." (Emphasis supplied). The term

"employee" was then, in relevant part, defined as follows:

[A]ny natural person (except a director
or trustee of the insured, if a
corporation, who is not also an officer
or employee thereof in some other
capacity) while in the regular service of
the insured in the ordinary course of the
insured's business during the Effective
Period of this insuring form and whom the

insured . . . has the right to govern and

direct in the performance of such

service, but does not mean any broker,

factor, commission merchant, consignee,
contractor or agent or other
representative of the same general
character.

(Emphasis supplied). Importantly, however, despite the

directives of paragraph 19 of the management agreements, (1)

only Capital and Asset were named as insureds under the

Policies, and (2) the terms of the Policies excluded from

standard policy or policies against fire and such other
hazards as the Commissioner, upon the insurance of the
mortgage, may stipulate."

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coverage misapplications by the managing agents, i.e., the

insureds, themselves.2

By February 1989, plaintiff had become concerned

that John Panagako was making improper payments from project

funds. Accordingly, plaintiff terminated the management

agreements. Subsequently, plaintiff filed a state court

action against John Panagako, Capital, and Asset for breach

of fiduciary duty, breach of contract, conversion,

misrepresentation, fraud, money had and received, breach of

the covenant of good faith and fair dealing, and violation of

the Massachusetts Unfair Trade Practices statute. See Bird

v. Capital Site Management Co., Civil No. 89-1713-C (Mass.

Super. Ct. 1989). A jury verdict was returned in plaintiff's

favor on all counts, and damages were ultimately assessed at

nearly $1.2 million.

In July 1990, plaintiff initiated the instant

action in Massachusetts Superior Court, asserting that he was

entitled to collect as a third-party beneficiary under the

Policies. Defendant removed the case to the district court

and subsequently moved for summary judgment, arguing that no

coverage existed because plaintiff was not an insured under

the Policies. Thereafter, plaintiff obtained an assignment

2. Specifically, Exclusion A of the Policies provided:
"This insuring form does not apply . . . to loss due to any
fraudulent, dishonest or criminal act by any insured or a
partner therein, whether acting alone or in collusion with
others . . . ."

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of all the right, title, and interest of Capital and Asset in

the Policies, and moved for leave to file an amended

complaint so as to jettison his third-party beneficiary

theory and assert in its place an entitlement to coverage as

a direct beneficiary under the Policies. The motion for

leave to file the amended complaint was allowed.

In January 1992, defendant filed a second motion

for summary judgment, arguing primarily that plaintiff could

not collect under the Policies because the fraudulent and

dishonest acts giving rise to the claim were not committed by

an "employee" of the insureds, but instead were committed by

the insureds' "alter ego."3 Plaintiff opposed the motion,

arguing inter alia, that defendant should be estopped from

denying coverage under the policies. He also filed a

conditional motion, pursuant to Fed. R. Civ. P. 56(f),4 for

3. We use the term "alter ego" as a shorthand way of
identifying any natural person whom the corporate insured
does not have "the right to govern and direct in the
performance of [his/her] service." As noted previously,
under the terms of the Policies, such an alter ego is not
considered an employee of the corporate insured. And,
because the Policies only cover fraudulent or dishonest acts
by employees of the corporate insureds, fraudulent or
dishonest acts by an alter ego of the insureds are outside
the scope of coverage.

4. Rule 56(f) provides:

When Affidavits are Unavailable. Should it
When Affidavits are Unavailable.
appear from the affidavits of a party opposing the
[Rule 56] motion that the party cannot for reasons
stated present by affidavit facts essential to
justify the party's opposition, the court may
refuse the application for judgment or may order a

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further discovery relevant to his newly-raised estoppel

argument. In February 1993, the district court issued a

memorandum and order granting defendant's second motion for

summary judgment. In so doing, the court held that John

Panagako was not an employee of the insureds, and that the

Policies therefore did not cover his fraudulent and/or

dishonest acts. See supra note 3. It also rejected

plaintiff's estoppel argument, reasoning that the doctrine of

"unclean hands" barred any recovery by plaintiff. Finally,

the court denied plaintiff's Rule 56(f) motion. It is from

these decisions that plaintiff appeals.

II.

SUMMARY JUDGMENT STANDARD

Summary judgment permits a court to "`pierce the

boilerplate of the pleadings and assay the parties' proof in

order to determine whether trial is actually required.'"

Santiago v. Sherwin Williams Co., 3 F.3d 546, 548 (1st Cir.

1993) (quoting Wynne v. Tufts Univ. Sch. of Medicine, 976

F.2d 791, 794 (1st Cir. 1992), cert. denied, 113 S. Ct. 1845

(1993)). It must be granted when "the pleadings,

depositions, answers to interrogatories, and admissions on

file, together with the affidavits, if any, show that there

is no genuine issue as to any material fact and that the

continuance to permit affidavits to be obtained or
depositions to be taken or discovery to be had or
may make such other order as is just.

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moving party is entitled to a judgment as a matter of law."

Fed. R. Civ. P. 56(c). Our review of the allowance of a

summary judgment motion is plenary. Levy v. FDIC, No. 92-

2135, slip op. at 6 (1st Cir. Oct. 19, 1993).

It is against this backdrop that we evaluate

plaintiff's contentions.

III.

DISCUSSION5

DISCUSSION5

Plaintiff essentially makes three arguments on

appeal: (1) that the district court erred in concluding, as

a matter of law, that the fraudulent and dishonest acts

giving rise to plaintiff's claim were not committed by an

employee of the insureds, but instead were committed by the

insureds' alter ego; (2) that the court erred in rejecting

his claim that defendant should, as a matter of law, be

estopped from denying coverage under the Policies; and (3)

that the court erred in denying his alternative Rule 56(f)

motion for additional discovery on the issue of estoppel. We

discuss each argument in turn.

A. Was John Panagako an Employee of Capital and Allied

or was he their Alter Ego?

5. Because the parties agree that Massachusetts law governs
this dispute, and because there is at least a "reasonable
relation" between the dispute and the forum whose law has
been selected by the parties, we will forego an independent
analysis of the choice-of-law issue and apply Massachusetts
law. See Commercial Union Ins. Co. v. Walbrook Ins. Co.,

Ltd., No. 92-2415, slip op. at 2, n.1 (1st Cir. Sept. 28,

1993).

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The bulk of plaintiff's brief is directed at

attacking the district court's ruling that Panagako was an

alter ego, and not an employee, of the corporate insureds.

The attack primarily is carried out on two fronts. First,

accepting the district court's conclusion that the definition

of the term "employee" is unambiguous, plaintiff argues that

the court erred in concluding that John Panagako fell outside

the definition's boundaries. Second, and alternatively,

plaintiff argues that the definition of the term employee is

ambiguous, and that this ambiguity must be resolved in his

favor under Massachusetts law. E.g., Massachusetts Bay

Transp. Auth. v. Allianz Ins. Co., Inc., 597 N.E.2d 439, 441

(Mass. 1992).6 We disagree with both of plaintiff's

positions.

1. Plaintiff's First Argument
1. Plaintiff's First Argument

In addressing plaintiff's first argument, that the

Policies unambiguously provide coverage for the fraudulent

and/or dishonest acts committed by John Panagako, we begin

6. Relying on a series of cases regarding corporate "veil
piercing," and defining the "alter ego defense" here at issue
as the mere defensive application of this veil piercing
doctrine, plaintiff also devotes several pages of his brief
to arguing that Massachusetts courts would not recognize the
defense. Plaintiff's argument in this regard is
fundamentally flawed. The alter ego defense asserted by
defendant is not a common law defense; rather, it is a

defense derived from the language of the Policies themselves.

As such, the common law tort cases relied upon by plaintiff
in his reverse veil piercing argument are inapposite to the
contract dispute before us.

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with some general ground rules for interpreting insurance

contracts. The construction of language in an insurance

contract is a legal determination, see J.I. Corp. v. Federal

Ins. Co., 920 F.2d 118, 119 (1st Cir. 1990) (collecting

Massachusetts cases), which we review de novo, see Falmouth

Nat'l Bank v. Ticor Title Ins. Co., 920 F.2d 1058, 1061 (1st

Cir. 1990). Where there is no ambiguity in the language at

issue, we will interpret it "according to the ordinary

meaning of the words contained in its provisions." J.I.

Corp., 920 F.2d at 119. The language of a contract is

considered ambiguous only if its terms "are fairly

susceptible to more than one construction." Id.

Where the intention of the parties as to who are

employees is expressed in a fidelity policy, that intention

will be given effect. See 13 Ronald A. Anderson and Mark S.

Rhodes, Couch on Insurance 2d, 46:25 at 33 (1982). Here,

the parties agreed that, inter alia, only those natural

persons "whom the insured . . . has the right to govern and

direct in the performance of [their] service" would be

"employees" covered by the Policies. Thus, if John Panagako

was not subject to governance and direction by Capital and/or

Allied, he was not an employee of the insureds as that term

is defined by the Policies.

As we have said, the record clearly reveals that

John Panagako was not subject to governance and direction by

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Capital or Allied, in that he was in complete control of both

corporations. He owned 50% of Capital's and 100% of Allied's

stock and was the president and treasurer of both

corporations. He and his wife Janice, whose duties were

clerical and secretarial in nature, were the only two

directors of the corporations. No formal directors' meetings

were ever held.

Indeed, plaintiff does not dispute the fact that

John Panagako was in complete control of Capital and Allied.

Instead, he premises his challenge to the district court's

determination that Panagako was not an employee upon two

contentions: (1) that the corporations had the theoretical

right to govern and direct Panagako, making him an employee

under the terms of the Policies; and (2) that "the right to

govern and direct language was merely intended to distinguish

those persons within the corporation[s] whose acts are not

covered by the Policies (i.e., employees) from those persons

outside of the corporation[s] whose acts are not covered by

the Policies (i.e., independent contractors and the like)."

With respect to plaintiff's first contention, we

join those courts that have passed on the issue and reject

the claim that the theoretical right to govern and direct a

dominant corporate actor is sufficient to render that actor

an employee under the definition of employee set forth in the

Policies. See Employer's Admin. Servs., Inc. v. Hartford

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Accident and Indem. Co., 709 P.2d 559, 562-63 (Ariz. App.

1985); Kerr v. Aetna Casualty & Surety Co., 350 F.2d 146,

154-55 (4th Cir. 1965); see also, e.g., Matter of World

Hospitality Ltd., 983 F.2d 650, 651-53 (5th Cir. 1993)

(interpreting identical "right to govern and direct" language

in a fidelity policy as excluding from the definition of

employee a majority shareholder who dominated his

corporation); California Union Ins. v. American Diversified

Sav. Bank, 948 F.2d 556, 566 (9th Cir. 1991) (same); Three

Garden Village Ltd. Partnership v. United States Fidelity &

Guar. Co., 567 A.2d 85, 90-92 (Md. 1989) (same). We think it

apparent that the "right" to govern and direct referred to in

the Policies must be more than an ephemeral right inhering

generally in the corporate form; rather, it must have some

grounding in reality. Cf. Kerr, 350 F.2d at 154 (describing

corporation's "right," under circumstances similar to those

presented here, as "unrealistic" and "theoretical"). In this

case, the argument that Capital and Allied had the right to

govern and direct John Panagako lacks any credible basis.

Accordingly, we do not accept it. Cf. J.I. Corp., 920 F.2d

at 119 (insurance contracts should be construed according to

the "`fair and reasonable meaning of the words in which the

agreement of the parties is expressed'") (emphasis supplied)

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(quoting Cody v. Connecticut Gen. Life Ins. Co., 439 N.E.2d

234, 237 (Mass. 1986)).7

With respect to plaintiff's second contention, we

think it sufficient to state that the interpretation

plaintiff would have us ascribe to the "right to govern and

direct" language in the Policies is tortured to the point of

absurdity. It is obvious that this language, far from being

included merely to distinguish employees from those non-

employee actors specified in the Policies, materially limits

the definition of the term "employee" to those persons over

whom the corporate insureds have control. Accordingly, we so

7. Our conclusion also is supported by policy
considerations. As the Fifth Circuit has observed:

A corporation can only act through its officers and
directors. When one person owns a controlling
interest in the corporation and dominates the
corporation's actions, his acts are the
corporation's acts. Allowing the corporation to
recover for the owner's fraudulent or dishonest
conduct would essentially allow the corporation to
recover for its own fraudulent or dishonest acts.
The [fidelity] bonds, however, were clearly
designed to insure the corporations against their
employee's [sic] dishonest acts and not their own
dishonest acts.

Matter of World Hospitality, 983 F.2d at 652 (citing

California Union Ins., 948 F.2d at 566). The fact that

plaintiff, and not the insureds, is seeking coverage under
the Policies does not diminish the force of these
considerations in this case, for plaintiff is pressing his
claim as an assignee. As such, his rights under the Policies
are limited to those of the assignors. See 17 Couch on

Insurance 2d, 63A:267 at 146 (1983) ("It must be recognized

that the assignee can receive no greater rights than those of
the assignor.").

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read it. Cf. Plymouth Rubber Co. Inc. v. Insurance Co. of N.

Am., 465 N.E.2d 1234, 1238 (Mass. App. 1984) (declining to

"torture" the meaning of a clause in an insurance contract

where it was understandable in its "usual and ordinary

sense") (citation omitted).

2. Plaintiff's Second Argument

Plaintiff's second and alternative argument, that

the definition of the term "employee" is ambiguous and that

this ambiguity must be resolved in his favor, requires little

discussion. In making his alternative argument, plaintiff

does not explain how the definition of the term might be

ambiguous. Nor does he make any attempt either to

distinguish or to disagree with the several cases which have

treated this very definition as unambiguous. See, e.g.,

Matter of World Hospitality, 983 F.2d at 651-53; California

Union Ins., 948 F.2d at 566-67; Three Garden Village, 567

A.2d at 90-92; Employer's Admin. Servs., 709 P.2d at 562.

Accordingly, his argument being perfunctory, we deem it

waived. See United States v. Innamorati, 996 F.2d 456, 468

(1st Cir.) (issues adverted to in a perfunctory manner and

without developed argumentation deemed waived on appeal),

cert. denied, 62 U.S.L.W. 3320 (Nov. 2, 1993).8

8. In that section of his brief where plaintiff
perfunctorily asserts that the terms "employee" and
"insured," see infra note 9, are ambiguous, he also seeks to

introduce extrinsic evidence that the Policies at issue were
mandated by HUD "regulations," but see supra note 1. In so

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In sum, we reject plaintiff's challenge to the

district court's determination that John Panagako was not an

employee, but rather was an alter ego, of the insureds.9

B. Should Defendant be Estopped from Denying Coverage

Under the Policies?

Plaintiff's second argument, that the district

court erred in refusing, as a matter of law, to hold

defendant estopped from denying coverage, is based upon his

claim that defendant knew of Capital's and Allied's corporate

structures at the time the Policies were issued. See

Fidelity and Deposit Co. v. USAFORM Hail Pool, Inc., 318 F.

Supp. 1301, 1305, 1308-09 (M.D. Fla. 1970) (insurer estopped

from asserting alter ego defense where, inter alia, it (1)

stipulated that the dominant shareholder was an employee

doing, he asserts that this fact will help to enlighten us as
to the meaning of these purportedly ambiguous terms. See

Rodriguez-Abreu v. Chase Manhattan Bank, N.A., 986 F.2d 580,

586 (1st Cir. 1993) (extrinsic evidence admissible to clarify
ambiguous contractual provisions).
Even if we were to assume arguendo the truth of

plaintiff's assertion, we do not see how such fact would tend
to clarify anything at issue in this litigation. At most,
the "regulations" to which plaintiff draws our attention tend
to reinforce the perception that the Policies were not
written in accordance with the specifications of HUD and
paragraph 19 of the management agreements. They do not,

however, shed light on what the parties intended when they
included the disputed terms in the Policies.

9. Because we so rule, we need not reach defendant's other
proffered basis for affirmance, i.e., that Exclusion A, see

supra note 2, is applicable because John Panagako, as the

alter ego of Capital and Allied, was an "insured" under the
terms of the Policies. Nor, obviously, need we discuss
plaintiff's cursory argument that the meaning of the term
"insured" in Exclusion A is ambiguous.

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under the fidelity bond, and (2) "knew everything" about the

insured's operation), affirmed in part, vacated in part, 463

F.2d 4 (5th Cir. 1972). While we think that the USAFORM case

is easily distinguishable from the present situation, we

believe that plaintiff's estoppel claim founders for an even

simpler reason. As the district court noted, because

plaintiff is proceeding as the assignee of Capital's and

Allied's rights under the Policies, he is subject to any

defenses that defendant could have interposed against Capital

and Allied, the assignors. See Great Am. Ins. Co. v. United

States, 575 F.2d 1031, 1034 (2d Cir. 1978). One defense to

the equitable claim of estoppel is the doctrine of "unclean

hands." See Peabody Gas & Oil Co. v. Standard Oil Co., 187

N.E. 112, 113 (Mass. 1933) ("[O]ne must come into a court of

equity with clean hands in order to secure relief . . . .").

Here, Capital and Allied were adjudged liable for the

fraudulent and/or dishonest actions underlying this suit. As

such, the district court correctly ruled that any claim of

estoppel they might have asserted against defendant would

have failed because of their unclean hands. Plaintiff, as

their assignee, is therefore subject to the same fate.

Accordingly, we reject plaintiff's challenge to the

district court's refusal to hold defendant estopped from

denying coverage.

C. Should Plaintiff's Rule 56(f) Motion Have Been

Granted?

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Finally, plaintiff contends that the court erred in

denying his Rule 56(f) motion for additional discovery on the

issue of estoppel. Once again, his argument is without

merit.

Rule 56(f) offers an "`escape hatch'" to a party

opposing a summary judgment motion who "genuinely requires

additional time to marshal `facts essential to justify its

opposition.'" Mattoon v. City of Pittsfield, 980 F.2d 1, 7

(1st Cir. 1992) (quoting Paterson-Leitch Co. v. Massachusetts

Mun. Wholesale Elec. Co., 840 F.2d 985, 988 (1st Cir. 1988)).

Under Rule 56(f), the movant is required (1) to articulate a

plausible basis for its belief that the requested discovery

would raise a trialworthy issue, and (2) to demonstrate good

cause for failing to have conducted the discovery earlier.

Mattoon, 980 F.2d at 7. Our review of an order denying

relief under Rule 56(f) is only for an abuse of discretion.

Id.

As we have stated, plaintiff's estoppel argument is

doomed by the fact that, as an assignee, plaintiff is subject

to defendant's unclean hands defense. Moreover, the record

reveals that this defense must prevail as a matter of law.

It therefore follows that there is no need for discovery on

the issue of estoppel.

Accordingly, the district court did not abuse its

discretion in denying plaintiff's Rule 56(f) motion.

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IV.

CONCLUSION

For the reasons herein stated, the district court

did not err in granting defendant's second motion for summary

judgment and denying plaintiff's Rule 56(f) motion for

additional discovery.

Affirmed. Costs to appellee.
Affirmed.

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