[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FILED
FOR THE ELEVENTH CIRCUIT U.S. COURT OF APPEALS
ELEVENTH CIRCUIT
___________________________ APRIL 19, 2002
THOMAS K. KAHN
No. 01-12446 CLERK
___________________________
D.C. Docket No. 99-01568 CV-ODE-1
AMERICAN CASUALTY COMPANY
OF READING, PENNSYLVANIA,
Plaintiff-Counter-
Defendant-Appellant,
versus
ETOWAH BANK,
Defendant - Counter-
Claimant-Appellee,
REGIONS FINANCIAL CORPORATION,
Counter-Claimant,
FEDERAL INSURANCE COMPANY,
Counter-Defendant.
____________________________
Appeal from the United States District Court
for the Northern District of Georgia
____________________________
(April 19, 2002)
Before EDMONDSON, CARNES and SILER*, Circuit Judges.
CARNES, Circuit Judge:
This appeal involves a coverage dispute arising out of a financial institution
bond issued by American Casualty Company of Reading, Pennsylvania (“CNA”)1
to Etowah Bank (“Etowah”), before Etowah was acquired by Regions Financial
Corporation (“Regions”).2 A financial institution bond is a type of fidelity bond
that is designed to insure financial institutions against fraudulent or unfaithful
dealings by employees and certain outside parties which could damage the
institution. Insofar as the law applicable to the interpretative question at the center
of this case is concerned, the bond is just another insurance policy. As is often the
case with insurance term coverage disputes, the pivotal issue is whether a policy
term is ambiguous and therefore to be interpreted against the insurer, meaning that
there is coverage, or is plain, meaning that there is no coverage.
*
Honorable Eugene E. Siler, Jr., U.S. Circuit Judge for the Sixth Circuit,
sitting by designation.
1
CNA is a registered service mark and trade name of the CNA Financial
Corporation. Surety from CNA is underwritten by one of the CNA Insurance
Companies, including American Casualty Company.
2
The district court and the briefs refer to Regions Bank instead of Etowah
Bank because Regions Bank, a wholly owned subsidiary of Regions Financial
Corporation, is the successor in interest to Etowah by merger effective April 22,
1999.
2
The term in question here is “taking over,” as used in a provision saying that
“upon the taking over of [Etowah] by another institution,” the bond and coverage
under it terminates. The meaning of this term matters because after CNA issued
the bond to Etowah, Regions purchased 100 percent of Etowah’s stock. If
Regions’ acquisition of all of Etowah’s stock constituted a taking over of that
institution, the coverage terminated before the loss was discovered in this case,
and CNA is not liable. The district court concluded that the term “taking over” was
ambiguous, so Regions prevailed. We conclude that it is not, so CNA prevails.
I. BACKGROUND
CNA issued a financial institution bond to Etowah that insured it against
losses resulting from, among other things, certain kinds of theft, forgery, fraud, or
employee dishonesty. The bond took effect on December 9, 1996 and ran through
either December 9, 1998 or 1999,3 unless terminated by one of the “conditions”
listed in § 8 of the supplemental agreement to the bond, which is entitled
“Termination or Cancellation.” Subsection (B) of that section provides:
3
The district court’s order and briefs of the parties give the ending year for the bond as
1998, but the bond itself specifies the ending year as 1999. It does not matter either way,
because Regions’ acquisition of Etowah and its claimed discovery of the loss occurred prior to
December 9, 1998.
3
This bond shall be terminated immediately as an entirety (1) upon the taking
over of any Insured by a receiver or other liquidator or by any State or
Federal official or agency, or (2) upon the taking over of any Insured by
another institution, or (3) upon the exhaustion of the Aggregate Limit of
Liability..., or (4) upon the expiration of the Bond Period.... (emphasis
added).
The term “taking over” is not defined in the bond.
On September 10, 1998, during the period of the bond, Regions acquired
Etowah by purchasing 100 percent of its outstanding stock. As a result of the
transaction, Etowah became a wholly-owned subsidiary of Regions. After the
acquisition, Etowah continued to operate under the same bylaws, continued making
loans and accepting deposits just as it had before, did not divest itself of significant
assets or acquire significant new liabilities, and maintained separate books and
records from Regions. Etowah’s Board of Directors remained the same, at least
through the period relevant to this case, except that a new President was named and
acquired a seat on the board, while the former President and Chairman of the Board
stayed on only as Chairman.
On November 17, 1998, Regions notified CNA of its claim under the bond
for indemnity from a loss that it contends was discovered on October 30, 1998, less
than two months after acquiring Etowah and during the bond period. The details of
the loss are not really important for our purposes. Suffice it to say that the loss was
of the kind that the bond was arguably intended to cover, if the bond was in effect,
4
and the loss was well in excess of the $2 million limit of the bond.
After Regions submitted its claim, CNA initiated this lawsuit, seeking a
declaration that it was not liable for a number of reasons, one of which is that the
bond had terminated upon Regions’ acquisition of Etowah. Regions
counterclaimed against CNA for breach of contract, seeking a declaration that its
loss was covered up to the policy limits of the bond.4
CNA and Regions each moved for summary judgment. The district court
denied CNA’s motion and granted Regions’ motion, and it entered judgment
against CNA for $2 million. The court believed that the “taking over” language in
the bond is ambiguous, and for that reason has to be interpreted, if it reasonably
can be, against CNA as the insurer and in favor of Regions as the insured.5
4
Regions also named Federal Insurance Company (“Federal”) as a
defendant, because when Etowah merged with Regions, it obtained coverage from
Federal under a financial institution bond issued by Federal to Regions. After
Regions settled with Federal, it was dismissed from the case.
5
The court also determined that no genuine fact issues existed with regard to
whether a loss resulting from an event covered by the bond occurred, whether the
event was “discovered” during the bond term, and whether proof of loss with full
particulars was provided to CNA. CNA contends the court erred in each of those
determinations, but as it turns out we need not address those contentions.
5
II. DISCUSSION
This is a diversity action to which Georgia substantive law applies, and that
law is not in dispute. Under Georgia law, parties to an insurance bond are bound by
its plain and unambiguous terms. See Richards v. Hanover Ins. Co., 299 S.E. 2d
561, 563 (Ga. 1983). However, if a term is ambiguous it must be construed against
the insurer, as the drafter, and in favor of the insured. See Georgia Baptist
Children’s Homes & Fam. Ministries v. Essex Ins. Co., 427 S.E.2d 798, 801 (Ga.
Ct. App. 1993); Georgia Farm Bureau Mut. Ins. Co. v. Huncke, 524 S.E.2d 302,
303 (Ga. Ct. App. 1999). Words of an insurance contract must be given their
usual, ordinary, and common meaning. See Bold Corp. v. Nat’l Union Fire Ins.
Co., 454 S.E.2d 582, 584 (Ga. Ct. App. 1995). A term is ambiguous if it is
susceptible to more than one reasonable interpretation. See Hurst v. Grange Mut.
Cas. Co., 470 S.E.2d 659, 663 (Ga. 1996). Contract interpretation is a question of
law and is subject to de novo review. See Gibbs v. Air Canada, 810 F.2d 1529,
1532 (11th Cir. 1987).
The question is whether Regions’ acquisition of 100 percent of Etowah’s
stock terminated the bond, because it was “the taking over of [Etowah] by another
institution” within the meaning of § 8(B)(2) of the supplemental agreement relating
to the bond. We think that the term “taking over” is not ambiguous, and our
6
understanding of its plain meaning is confirmed by general, legal, and business
dictionaries. The Random House Dictionary (2d ed. 1987) defines “takeover” as an
“acquisition or gaining control of a company through the purchase or exchange of
stock.” Black’s Law Dictionary (7th ed. 1999) defines it as “[t]he acquisition of
ownership or control of a corporation.” The Dictionary of Business (3rd ed. 2001)
defines a “takeover” as “buying a controlling interest in a business by buying more
than 50% of its shares.” See also Longman Business English Dictionary 484
(2000) (“[T]o take control of a company by buying more than 50% of its shares.”).
That is what Regions did. It acquired more than fifty percent of the stock of
Etowah, thereby “taking over” Etowah.
The district court thought not. It saw an ambiguity – not so much in the term
itself as in the context in which that term was used, the surrounding subsections.
In the court’s view, § 8 of the supplemental agreement dealt generally with
regulatory-type takeovers, leading to the conclusion that § 8(B)(2) referred only to
takeovers of one private failing institution (the insured) by another at the behest of
a state or federal regulatory agency. Or at least there was enough ambiguity to
make that a reasonable interpretation. We disagree. Section 8(B) has four
subparts, each describing a different contingency which will cause the bond to
terminate. One of them, the first one, explicitly refers to and plainly encompasses
7
the taking over of a failing institution by a liquidator or governmental official or
agency. The last two clearly are not limited to failing institutions, because the third
one is the exhaustion of the aggregate limit of liability, and the fourth one is the
expiration of the bond period. So, there is no contextual reason to conclude that
the contingency at issue, the second one, is restricted to cases involving failing
institutions. And nothing in the language of the second contingency – “upon the
taking over of any Insured by another institution” – indicates that either. Financial
institution takeovers occur just as frequently, or more so, when the institutions
taken over are doing just fine financially as when they are failing.
Regions’ argument that “taking over” as used in the bond does not mean
what it ordinarily does, or that there is at least an ambiguity about it, relies upon
the doctrine set forth in the “core function” decisions of the Fifth Circuit. Those
decisions say that in order to determine whether a transaction has resulted in a
“takeover,” courts should examine whether the transaction caused a change in who
has control over the performance of the “core functions” of the insured entity and
the extent to which that control is exercised to affect the “core functions” of the
entity, including, for example, looking to the extent of change in management of
the bank. See United States Fire Ins. Co. v. Fed. Dep. Ins. Co., 981 F.2d 850, 851-
52 (5th Cir. 1993) (to determine if “takeover” occurred so that the bond terminated
8
under the automatic termination provision dealing with regulatory takeovers, a
court should look to actual authority and control exercised by the conservator after
taking supervisory control over the insured bank); Sharp v. Fed. Sav. and Loan Ins.
Corp., 858 F.2d 1042, 1045-46 (5th Cir. 1988) (essence of whether “takeover” has
occurred under automatic termination provision dealing with regulatory takeovers
is whether the bank management which purchased the bond is no longer in control
of the bank’s core functions); First Nat’l Life Ins. Co. v. Fidelity & Deposit Co. of
Md., 525 F.2d 966, 969 (5th Cir. 1976) (stating in dicta in a case involving
promoters taking control of parent company that automatic termination provision
dealing with takeovers “‘by another concern’ makes liability for the risks assumed
by the bond depend upon a continuity of the same general management” that
controlled the “taken over” company when the bond was procured).
The “core functions” test arose and has been applied in the context of
takeovers by a liquidator, receiver, conservator, or federal or state official or
agency of a failing institution, and the test seems to have been developed for the
purpose of determining what other than acquisition of a controlling amount of the
stock of an insured institution constitutes a takeover. An insured institution can be
effectively taken over by exercise of regulatory authority even though stock
ownership does not change, and the “core functions” test enables a court to
9
determine whether in fact that kind of takeover has occurred by looking to changes
in who is in control of the core functions of the insured.6 By contrast, when an
institution acquires a controlling amount of the stock of another, it obtains control
of the other regardless of whether, how, or through whom it decides to exercise
that control.
Regions points to § 5 of the supplemental agreement to the bond, which is a
“change in control” provision, and argues that if we do not interpret “taking over”
in line with the “core functions” test, we will render § 5 functionless and we ought
not do that. We certainly accept the proposition that a contract ought to be
interpreted so that every section of it has a function. See O.C.G.A. § 13-2-2(4) (a
construction which upholds the contract, both in total, and in every part, should be
preferred to one that does not); Board of Regents v. A.B. & E, Inc., 357 S.E.2d
100, 103 (Ga. Ct. App. 1987). We disagree, however, that giving the term “taking
over” in § 8(B)(2) its plain meaning renders § 5 superfluous. Section 5 is as
follows:
If at any time the Insured shall obtain knowledge of a transfer of its
outstanding voting stock which results in a change in Control of the Insured,
the Insured shall as soon as practicable after obtaining such knowledge give
written notice to the Company.... As used in this...Agreement..., “Control”
6
All of the cited Fifth Circuit “core functions” decisions arose from
regulatory takeovers that did not involve stock acquisition.
10
means the power to determine the management or policy of the Insured by
virtue of voting stock ownership. A change in ownership of voting stock
which results in direct or indirect ownership by a stockholder or an affiliated
group of stockholders of ten percent (10%) or more of the outstanding
voting stock of the Insured shall be presumed to result in a change in Control
for the purpose of giving the Company the required notice. Failure to give
the required notice shall result in termination of coverage of this bond....
The purpose of this section is to ensure that CNA receives notice of any change in
“control,” as that term is defined in the section. It is a notice provision, not a
termination provision. There is nothing in that section to suggest that “control” as
defined in it is synonymous with “taking over” as that term is used in § 8(B)(2).
A change in control for § 5 notice purposes occurs when ten percent of the
insured’s stock is acquired, while a taking over for § 8(B)(2) termination purposes
usually occurs when more than fifty percent of the stock is acquired.7 While every
“taking over” which terminates the bond will involve a change in control, not every
change in control which requires that notice be given will involve a takeover. The
two provisions serve different purposes and have different, albeit sometimes
overlapping, fields of operation. It follows that both provisions can be applied
7
Of course, depending upon the number of shareholders and how stock is
dispersed among them, de facto or effective takeovers can occur when less than
fifty percent of the shares are acquired. But with most corporations, an acquisition
of more than ten percent of the shares is required for a takeover, which gives
significance to the difference between the ten percent measuring rod of § 5 and the
“takeover” standard of § 8(B)(2).
11
without rendering either meaningless. See First Am. Nat’l Bank v. Fidelity &
Deposit Co. of Maryland, 5 F.3d 982, 985 (6th Cir. 1993) (“Both [the takeover and
change in control] provisions can be applied without rendering either section
meaningless because the sections are distinguishable in purpose and
applicability.”).
III. CONCLUSION
Because Regions’ acquisition of 100 percent of the stock of Etowah
constituted a “taking over” of it for purposes of the termination provision of the
financial institution bond CNA issued to Etowah, CNA was not liable for any
losses Regions discovered after that acquisition.
The judgment in favor of Regions is REVERSED, and the case is
REMANDED with instructions that judgment be entered in favor of CNA.
12