Case: 16-20539 Document: 00514267503 Page: 1 Date Filed: 12/11/2017
REVISED December 11, 2017
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
November 20, 2017
No. 16-20539
Lyle W. Cayce
Clerk
COOPER INDUSTRIES, LIMITED; COOPER US, INCORPORATED,
Plaintiffs-Appellants Cross-
Appellees
v.
NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH,
PENNSYLVANIA,
Defendant-Appellee Cross-
Appellant
Appeals from the United States District Court
for the Southern District of Texas
Before STEWART, Chief Judge, and KING and JONES, Circuit Judges.
KING, Circuit Judge:
Cooper Industries, Ltd., invested its pension-plan assets in what turned
out to be a Ponzi scheme. It submitted a claim under a commercial-crime
insurance policy underwritten by National Union Fire Insurance Company.
National Union denied the claim, and Cooper sued. Both parties eventually
moved for summary judgment. The district court subsequently entered a take-
nothing judgment against Cooper. The court held that Cooper could not recover
Case: 16-20539 Document: 00514267503 Page: 2 Date Filed: 12/11/2017
No. 16-20539
under its policy with National Union because the claimed loss occurred only
after Cooper loaned its funds to the fraudsters, at which point Cooper did not
own either the earnings or the principal, as required under the policy. Cooper
appealed, and National Union cross-appealed. We now AFFIRM the judgment
of the district court.
I.
A.
In the late 1970s, Paul Greenwood and Stephen Walsh decided to go into
business together and formed an investment company. One of their company’s
investments was in Westridge Capital Management, Inc. (“WCM”), a Delaware
corporation. One of Walsh’s former clients convinced Greenwood and Walsh to
lend him money to start WCM in 1983. The former client owned 49 percent of
WCM, and Greenwood and Walsh owned the remainder. The former client ran
WCM from Santa Barbara, California, and began operating as a registered
investment advisor in 1996. Greenwood and Walsh served as directors of WCM
from their New York offices until they resigned from the WCM board in
January 2000.
Greenwood and Walsh shuttered their first investment company in 1990
and formed WG Trading Company, L.P. (“WGTC”), a Delaware limited
partnership. WGTC was a registered broker-dealer under the Securities
Exchange Act of 1934 and a commodity pool under the Commodity Futures
Trading Commission (“CFTC”) regulations. Shortly after founding WGTC,
Greenwood and Walsh established WG Trading Investors, L.P. (“WGTI”), 1
another Delaware limited partnership, as a conduit for investment in WGTC.
WGTI was unregulated. Greenwood and Walsh intended to use these two
1 We refer to WCM, WGTC, and WGTI collectively as the “Westridge Entities.”
2
Case: 16-20539 Document: 00514267503 Page: 3 Date Filed: 12/11/2017
No. 16-20539
entities to pursue equity index arbitrage, a strategy (as described in
Greenwood’s deposition 2) we explain below.
WCM and WGTC began a joint venture in 1995 to market an “enhanced
equity index strategy.” Greenwood and Walsh claimed that their strategy
could offer higher returns than the indexes alone without a corresponding
increase in risk. The strategy had an “alpha” portion and a “beta” portion. The
beta portion was a small percentage of each investor’s portfolio that WCM
would invest in stock or bond index futures. WGTC then used the remaining
funds for equity index arbitrage, which was the alpha portion of the investment
strategy. WGTC would buy all of the stocks in an index (like the S&P 500) and
sell futures against those stocks. This made sense as a trading opportunity
when the price of the futures exceeded the price of the index. 3 The prices of the
two assets must, by definition, converge at the expiration of the futures
contract. By going short on (i.e., selling) the futures and long on (i.e., buying)
the index, WGTC could (at least as Greenwood described the strategy) capture
not only capital appreciation and dividends from the underlying stocks, but
also the premium on the futures. WGTC used computers to monitor indexes
for arbitrage opportunities. Greenwood called WGTC’s strategy “a perfect
hedge.” Any increase in the price of the futures would theoretically be offset by
a one-to-one increase in the value of the stocks. The strategy supposedly
mimicked the rate of return on the index while providing extra income from
the arbitrage.
2 Greenwood’s deposition is attached to Cooper’s motion for partial summary
judgment.
3 If, by contrast, the price of the index exceeded the price of the futures, WGTC would
reverse the trade. It would take a long position in (i.e., buy) the futures, and a short position
in (i.e., sell) the stocks. In doing so, however, it had to take into account that it would pay a
premium to hold the futures and would not receive dividends from the underlying stocks.
According to Greenwood, if WGTC could not find any price discrepancies, it would not execute
trades.
3
Case: 16-20539 Document: 00514267503 Page: 4 Date Filed: 12/11/2017
No. 16-20539
Investors could invest in the alpha portion in one of two ways. First, they
could buy into WGTC’s limited partnership, which would invest the
partnership funds and distribute any profits back to the limited partners.
Second, they could loan funds to WGTI (itself a limited partner in WGTC) in
exchange for a promissory note. WGTI would invest the funds and use any
profits to make payments on the notes. WGTI set the interest rate on the notes
equal to the investment returns of WGTC. Whereas a limited partner in WGTC
could potentially lose money if WGTC lost money, a holder of a promissory note
from WGTI would simply receive no interest.
B.
Cooper Industries, Ltd. (together with Cooper US, Inc., “Cooper”), 4 was
a publicly-traded electrical-equipment supplier. 5 Cooper provided its
employees with a pension plan, which was managed by Cooper’s Pension
Investment Committee (the “Committee”). The Committee had divided the
plan assets into two funds: a bond fund and an equity fund. In 2002, the
Westridge Entities presented a pitch to the Committee. Two years later, the
Committee contracted with WCM to invest some of the equity- and bond-fund
assets.
The contracts provided that WCM would be a fiduciary of the pension
plans under the Employee Retirement Income Security Act of 1974 (“ERISA”).
Pub. L. No. 93-406, 88 Stat. 829 (codified as amended in scattered sections of
26 and 29 U.S.C.). The Committee also entered into a side agreement with the
Westridge Entities. WCM was to invest 15 percent of the equity-fund assets in
S&P 500 futures through a JP Morgan trust account and the remaining 85
4 Cooper US, Inc., is a subsidiary of Cooper Industries, Ltd., and the sponsor of the
employee benefit plans at issue in this litigation.
5 See Eaton Corporation plc Completes Acquisition of Cooper Industries to Form
Premier Global Power Management Company, Eaton (Nov. 30, 2012), http://www.eaton.com/
Eaton/OurCompany/NewsEvents/NewsReleases/PCT_428107.
4
Case: 16-20539 Document: 00514267503 Page: 5 Date Filed: 12/11/2017
No. 16-20539
percent in a promissory note from WGTI. For the bond fund, WCM was to
invest 5 percent of the assets in U.S. Treasury Bond futures through a different
JP Morgan trust account and the remainder in another promissory note from
WGTI.
Cooper ultimately invested more than $140 million of its equity-fund
assets and $35 million of its bond-fund assets through the Westridge Entities.
Cooper redeemed its equity-fund investments in May 2008. It recovered its
roughly $140 million in principal, as well as about $42 million in gains. Of
those gains, about $20.3 million came from the beta portion of the portfolio—
i.e., the S&P 500 futures purchased with funds from the trust account. The
remaining $21.8 million came from the alpha portion—i.e., WGTC’s equity
index arbitrage. Cooper did not redeem its $35-million bond-fund investment.
C.
The stellar returns were illusory: Greenwood and Walsh were running a
Ponzi scheme. The National Futures Association (“NFA”) discovered the fraud
during a February 2009 audit and suspended their membership. Later that
month, the CFTC and the Securities and Exchange Commission (“SEC”) filed
an enforcement action in the U.S. District Court for the Southern District of
New York. The court appointed a receiver to collect and liquidate any assets,
and to determine how to distribute the assets among the victims.
The receiver found that WGTC and WGTI operated as a single entity
with elements of a classic Ponzi scheme. The entities commingled funds and
used fraudulent accounting practices to conceal their true financial condition
from investors and regulators. They were financially inseparable; neither
entity could have survived without financial support from the other. At the
same time, WGTC and WGTI had generated substantial legitimate earnings
through equity index arbitrage. From 1996 to 2008, WGTC and WGTI
generated about $330.6 million of actual net earnings. But Greenwood and
5
Case: 16-20539 Document: 00514267503 Page: 6 Date Filed: 12/11/2017
No. 16-20539
Walsh had promised investors much more. They had reported earnings of
about $981.7 million—$651 million more than they had actually earned. 6
According to the receiver’s report, in addition to reporting fictitious
returns, Greenwood and Walsh also stole over $130 million from WGTI. They
used that money to fund extravagant lifestyles. Greenwood, for instance, spent
over $3 million on a collection of 1,348 teddy bears 7 and $32 million on a hunter
pony 8 farm. The thefts only exacerbated the discrepancy between actual and
reported returns by reducing the amount of money available for arbitrage.
Greenwood and Walsh’s fraud depended on a steady inflow of new money. If
an investor wanted to withdraw funds, they would have to use other investors’
principal and earnings in order to cover the shortfalls they created through
misrepresentations and theft. In order to maintain a steady inflow of investors,
Greenwood and Walsh lied to prospective investors, including Cooper, about
WGTC’s returns. Greenwood and Walsh ultimately pleaded guilty to securities
fraud, commodities fraud, wire fraud, money laundering, and conspiracy.
After completing his investigation, the receiver submitted an initial
distribution plan to the court. He proposed returning about 85 percent of each
investor’s net investment (i.e., contributions minus withdrawals) for a total
first-round distribution of $815 million. These distributions excluded earnings
and interest. In fact, the plan proposed clawing back any earnings that
Greenwood and Walsh had paid to investors. The district court approved that
plan on March 21, 2011. 9
6When asked why he reported inflated returns, Greenwood responded, “Uh, greed.”
7The receiver discovered that the most valuable bear in the collection was worth over
$100,000.
8 A hunter pony is a type of show horse.
9 Several victims, not including Cooper, appealed the order approving the plan, which
the Court of Appeals for the Second Circuit affirmed. See Commodity Futures Trading
Comm’n v. Walsh, 712 F.3d 735, 738 (2d Cir. 2013).
6
Case: 16-20539 Document: 00514267503 Page: 7 Date Filed: 12/11/2017
No. 16-20539
By that point, Cooper had already received $140.1 million in principal
from its equity-fund investment, as well $20.3 million in earnings from the
beta portion of its portfolio (the index futures) and $21.8 million from the alpha
portion of its portfolio (the arbitrage). As for the bond-fund investment, the
court determined that Cooper’s first pro rata distribution would be $29.9
million. However, the court allowed the receiver to withhold $21.8 million—
the purported earnings Cooper actually received from the alpha portion of its
equity-fund investment—and directed him to file a claw-back action for that
amount. The receiver did so, and he eventually settled with Cooper, returning
$9.8 million of what he withheld. Cooper has since received an additional $4.2
million in distributions. Although Cooper has revised its claim of loss several
times, it now claims to have lost about $17.2 million, with $8.7 million of that
loss attributable to the bond fund and $8.5 million attributable to the equity
fund. 10 To date, Cooper has recovered all of the equity-fund principal and all
but about $1.1 million of the bond-fund principal. In National Union’s view,
however, Cooper is a net winner because it still received more than it invested
in the Westridge Entities.
D.
Cooper bought annual commercial-crime insurance policies (also known
as fidelity bonds) from National Union Fire Insurance Company of Pittsburgh
(“National Union”) that provided coverage from October 1, 2003, until October
1, 2012. The policy relevant to this dispute began on October 1, 2008 (the
“Policy”). As relevant here, it covered Cooper’s employee-benefit plans (as
10 Cooper’s alleged loss is based on its expert’s calculation of the “actual interest”
Cooper should have received. We have no judgment as to the propriety or accuracy of these
calculations and use the amounts merely to illustrate Cooper’s allegations. The actual
amount of loss is in dispute, a dispute we do not (and need not) resolve for the purpose of
reviewing the ruling on the motions for summary judgment.
7
Case: 16-20539 Document: 00514267503 Page: 8 Date Filed: 12/11/2017
No. 16-20539
additional insureds) against various types of employee misconduct, including
theft and fraud:
We will pay for loss of or damage to “funds”[11] and “other
property”[12] resulting directly from fraudulent or dishonest acts
committed by an “employee”, whether identified or not, acting
alone or in collusion with other persons.
The Policy’s definition of “employee” was broadened in two separate
endorsements to ultimately include “[a]ll U.S., U.K. and Canadian
Fiduciaries,” as well as “[a] trustee, administrator, employee or manager,
including any outside administrator or manager who is an independent
contractor, of any Employee Welfare or Pension Benefit Plan(s).” Coverage was
limited to property that Cooper “owned”:
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.
The Policy did not define two terms that are central to this appeal: “own” and
“loss.”
There were also several exclusions in the Policy, two of which are
relevant here. The “Trading” exclusion barred coverage for any “[l]oss resulting
from trading, whether in your name or in a genuine or fictitious account.” The
“Indirect Loss” exclusion barred coverage for any “[l]oss that is an indirect
result of an ‘occurrence’ covered by this policy.” The Policy provided illustrative
examples of “indirect losses,” including “[y]our inability to realize income that
you would have realized had there been no loss of or damage to ‘money,’
‘securities’ or ‘other property’” and “[p]ayment of damages of any type for which
11 The Policy defined “funds” as “‘money’ and ‘securities’.”
12 The Policy defined “other property” as “any tangible property other than ‘money’
and ‘securities’ that has intrinsic value.”
8
Case: 16-20539 Document: 00514267503 Page: 9 Date Filed: 12/11/2017
No. 16-20539
you are legally liable.” The Policy also had a limit of $10 million per occurrence,
with a deductible of $250,000.
Cooper notified National Union of a potential loss to its pension plan of
about $35 million on May 8, 2009. On January 29, 2010, Cooper filed a proof of
loss, estimating that it could ultimately experience a loss of between $15
million and $57 million. National Union’s claims administrator denied
Cooper’s claim on March 9, 2012.
Two months later, Cooper sued National Union in the U.S. District Court
for the Southern District of Texas. National Union moved for summary
judgment, and Cooper moved for partial summary judgment. The district court
granted both motions but entered a take-nothing judgment against Cooper. It
granted National Union’s motion for summary judgment on two grounds. First,
the district court held that “Cooper did not ‘own’ its lost earnings within the
meaning of the Policy.” Cooper Indus., Ltd. v. Nat’l Union Fire Ins. Co. of
Pittsburgh PA, No. 4:12-CV-01591, 2016 WL 3405295, at *12 (S.D. Tex. June
21, 2016). Although a party that does not have legal title to property can still
be a beneficial owner, the court “reject[ed] the notion that the parties intended
the word ‘own’ in the Policy to include this concept of beneficial ownership.” Id.
at *13. The district court also held that Cooper suffered no “loss” under the
Policy when it loaned funds to WGTI because it gave up ownership of the
principal at the moment it made the loan. See id. at *14.
The district court also granted partial summary judgment to Cooper on
several issues. The district court held that neither of the policy exclusions
applied. The trading exclusion did not apply because “Cooper’s losses were
caused by theft, not market forces.” Id. at *7. And the indirect loss exclusion
did not apply because Cooper invested directly with the perpetrators of the
fraud, even if Cooper did not invest in the specific entity they used to commit
the fraud. See id. The district court also held that Cooper could recover lost
9
Case: 16-20539 Document: 00514267503 Page: 10 Date Filed: 12/11/2017
No. 16-20539
legitimate earnings because Greenwood and Walsh’s fraud also generated
substantial earnings. See id. at *8–9. Moreover, the court held that National
Union was not entitled to credit Cooper’s earnings on some investments
against its losses on others. See id. at *8 & n.9. Finally, the Court concluded
that WCM was liable for Greenwood and Walsh’s fraud because it had entered
into a joint venture with WGTC. See id. at *11.
Cooper appealed, and National Union cross-appealed.
II.
Before we consider the substance of the parties’ arguments, we must
decide Cooper’s motion to dismiss National Union’s cross-appeal. Despite
prevailing in the district court, National Union cross-appealed the portions of
the district court’s order granting Cooper’s motion for partial summary
judgment. Cooper argued that the cross-appeal was unnecessary and moved to
dismiss. We agree and grant Cooper’s motion.
It is “more than well-settled” that only an “aggrieved” party may appeal
a judgment. In re Sims, 994 F.2d 210, 214 (5th Cir. 1993) (citing Deposit Guar.
Nat’l Bank v. Roper, 445 U.S. 326, 333–34 (1980)). National Union argues that
it is an aggrieved party because the district court’s “order” rejected several of
its arguments. National Union is conflating the district court’s opinion (i.e., the
order) with its judgment. Appellate courts review judgments, not opinions.
Jennings v. Stephens, 135 S. Ct. 793, 799 (2015); Ward v. Santa Fe Indep. Sch.
Dist., 393 F.3d 599, 603–04 (5th Cir. 2004) (collecting cases). “A cross-appeal
is generally not proper to challenge a subsidiary finding or conclusion when
the ultimate judgment is favorable to the party cross-appealing.” Nat’l Union
Fire Ins. Co. of Pittsburgh v. W. Lake Acad., 548 F.3d 8, 23 (1st Cir. 2008).
There is nothing unfavorable to National Union in the district court’s
judgment. In fact, the district court even used National Union’s proposed order
and simply crossed out “[PROPOSED]” and stamped the date. Although even
10
Case: 16-20539 Document: 00514267503 Page: 11 Date Filed: 12/11/2017
No. 16-20539
a prevailing party must file a cross-appeal to seek a modification of a judgment,
see Ward, 393 F.3d at 604, National Union seeks no such modification because
it won dismissal of the action in its favor, as well as costs. To the extent that
the district court rejected the arguments in National Union’s cross-appeal, “an
appellee may urge any ground available in support of a judgment even if that
ground was . . . rejected by the trial court.” Castellano v. Fragozo, 352 F.3d 939,
960 (5th Cir. 2003) (collecting cases); see United States v. Raines, 362 U.S. 17,
28 n.7 (1960).
National Union contends that it is seeking relief beyond mere affirmance
of the judgment because the district court’s conclusions on the offset and fraud-
imputation issue could dictate how the case is presented to a jury if we reverse
and remand. 13 National Union characterizes its appeals on these issues as
“conditional” or “protective” cross-appeals, citing ART Midwest Inc. v. Atlantic
Ltd. P’ship XII, 742 F.3d 206 (5th Cir. 2014). However, ART Midwest is entirely
distinguishable. There, the plaintiffs brought fraud claims against the
defendants and sought a declaratory judgment that they properly terminated
their contract with the defendants. See id. at 209. The jury found in the
plaintiffs’ favor on the breach of contract claim but in the defendants’ favor on
the fraud claim. See id. The defendants appealed the jury’s findings on their
breach of contract claim, but the plaintiffs did not cross-appeal the fraud
findings. See id. This court reversed and remanded for a second trial, which
resulted in a jury verdict in the defendants’ favor. See id. at 210. We then held
that the plaintiffs could not appeal the dismissal of the fraud claims because
they had not raised them in their first appeal. See id. at 212–13. The key
difference between ART Midwest and this case is an adverse judgment. Here,
13 National Union thus concedes (at least by implication) that presenting its
arguments regarding the indirect and trading loss exclusions by way of cross-appeal is
improper.
11
Case: 16-20539 Document: 00514267503 Page: 12 Date Filed: 12/11/2017
No. 16-20539
there is no adverse judgment against National Union, such that it might need
to protect its rights—just some adverse reasoning. The judgment is a total
victory for National Union. 14 Indeed, the district court entered National
Union’s proposed order verbatim.
National Union was required to raise these arguments to avoid
forfeiture, see, e.g., Med. Ctr. Pharmacy v. Holder, 634 F.3d 830, 834 (5th Cir.
2011), but it was not required to do so in a cross-appeal. Rather, it should have
simply raised them as alternate grounds for affirmance in its opposition brief.
This is not just formalism. “A cross-appeal filed for the sole purpose of
advancing additional arguments in support of a judgment is ‘worse than
unnecessary’, because it disrupts the briefing schedule, increases the number
(and usually the length) of briefs, and tends to confuse the issues.” In re Sims,
994 F.2d at 214 (quoting Jordan v. Duff & Phelps, Inc., 815 F.2d 429, 439 (7th
Cir. 1987)). We are not inclined to allow parties to make an end run around the
briefing limits of the Federal Rules of Appellate Procedure and multiply the
usually streamlined appellate briefing process by raising alternate grounds for
affirmance through unnecessary cross-appeals. In this case, National Union’s
improper cross-appeal resulted in an over-length opposition brief and an
additional reply (giving National Union over four thousand words of additional
briefing).
“Because the district court’s final judgment was in favor of National
Union . . . , National Union’s cross-appeal from this favorable judgment is not
proper, and is dismissed.” W. Lake Acad., 548 F.3d at 23. We instead construe
14 National Union’s reliance on Conwill v. Greenberg Traurig, L.L.P., is misplaced for
the same reason. 448 F. App’x 434 (5th Cir. 2011) (per curiam). Although a party may appeal
a judgment that “itself contains prejudicial language on issues immaterial to the disposition
of the case,” id. at 436–37, that rule has no relevance here. There is nothing adverse in the
judgment itself.
12
Case: 16-20539 Document: 00514267503 Page: 13 Date Filed: 12/11/2017
No. 16-20539
National Union’s cross-appeal arguments as additional arguments in support
of the judgment.
III.
“We review a grant of summary judgment de novo, applying the same
standard as the district court.” Vela v. City of Houston, 276 F.3d 659, 666 (5th
Cir. 2001). A court must enter summary judgment if “there is no genuine
dispute as to any material fact and the movant is entitled to judgment as a
matter of law.” Fed. R. Civ. P. 56(a). A fact is material if it “might affect the
outcome of the suit under the governing law.” Anderson v. Liberty Lobby, Inc.,
477 U.S. 242, 248 (1986). And a dispute is genuine “if the evidence is such that
a reasonable jury could return a verdict for the nonmoving party.” Id. This
means that a party cannot survive summary judgment with just “a scintilla of
evidence” in its favor. Id. at 252. Although we view the evidence in the light
most favorable to the non-movant, the non-movant must still “come forward
with specific facts indicating a genuine issue for trial” and cannot merely rely
on the allegations in the complaint. Vela, 276 F.3d at 666 (citing Celotex Corp.
v. Catrett, 477 U.S. 317, 324 (1986)). The proper interpretation of an insurance
policy is a question of law. Royal Ins. Co. of Am. v. Hartford Underwriters Ins.
Co., 391 F.3d 639, 641 (5th Cir. 2004). As a result, insurance disputes are often
resolved on summary judgment. 3M Co. v. Nat’l Union Fire Ins. Co. of
Pittsburgh, 858 F.3d 561, 565 (8th Cir. 2017); accord Martco Ltd. P’ship v.
Wellons, Inc., 588 F.3d 864, 878 (5th Cir. 2009); Snelling & Snelling, Inc. v.
Fed. Ins. Co., 205 F. App’x 199, 201 (5th Cir. 2006) (per curiam).
13
Case: 16-20539 Document: 00514267503 Page: 14 Date Filed: 12/11/2017
No. 16-20539
IV.
Jurisdiction in this case is based on diversity. Thus, Texas law governs
our interpretation of the Policy. 15 See RSR Corp. v. Int’l Ins. Co., 612 F.3d 851,
857 (5th Cir. 2010). Texas courts “interpret insurance policies . . . according to
the rules of contract construction.” Am. Mfrs. Mut. Ins. Co. v. Schaefer, 124
S.W.3d 154, 157 (Tex. 2003). The primary objective in interpreting an
insurance policy is to “ascertain and give effect to the parties’ intent as
expressed by the words they chose to effectuate their agreement.” RSUI Indem.
Co. v. Lynd Co., 466 S.W.3d 113, 127 (Tex. 2015) (quoting In re Deepwater
Horizon, 470 S.W.3d 452, 464 (Tex. 2015)). In doing so, we give those words
“their ordinary and generally accepted meaning” unless the parties intended
to “impart a technical or different meaning.” In re Deepwater Horizon, 470
S.W.3d at 464. To determine the ordinary meaning of a term not defined in the
contract, courts typically begin with the dictionary definition. See, e.g., Epps v.
Fowler, 351 S.W.3d 862, 866 (Tex. 2011) (collecting cases). They then consider
the term’s usage in other authorities, such as prior court decisions, statutes,
and treatises. See Evanston Ins. Co. v. Legacy of Life, Inc., 370 S.W.3d 377,
382–84 (Tex. 2012). If we find that the Policy is ambiguous (i.e., susceptible to
two or more reasonable interpretations), we “must adopt the interpretation
favoring the insured.” Tesoro Ref. & Mktg. Co., L.L.C. v. Nat’l Union Fire Ins.
Co. of Pittsburgh, 833 F.3d 470, 474 (5th Cir. 2016).
The parties raise five issues in this appeal. Cooper argues first that the
district court erred when it concluded that Cooper did not “own” its lost
15 In order to determine which law to apply to this dispute, we look to the choice-of-
law rules of the forum state—here, Texas. See Smith v. EMC Corp., 393 F.3d 590, 597 (5th
Cir. 2004). National Union concedes that Texas law applies because it contends that there is
no difference between Texas and Delaware law on any of the issues on appeal. See SAVA
Gumarska In Kemijska Industria D.D. v. Advanced Polymer Scis., Inc., 128 S.W.3d 304, 314
(Tex. App.—Dallas 2004, no pet.).
14
Case: 16-20539 Document: 00514267503 Page: 15 Date Filed: 12/11/2017
No. 16-20539
principal and interest. Second, Cooper argues that the district court should
have held that it suffered a “loss” at the moment it bought the promissory
notes. National Union contends that even if that were error, the district court
erred by ruling that Cooper was not required to offset its bond-fund investment
losses with its profits from the equity-fund investment. Third, National Union
argues that the district court erroneously imputed Greenwood and Walsh’s
knowledge to WCM. And finally, in the fourth and fifth issues on appeal,
National Union argues that the district court wrongly concluded that the
Policy’s indirect and trading loss exclusions did not apply. We ultimately
conclude that Cooper suffered a “loss” only after it loaned the principal to
Greenwood and Walsh and that Cooper did not “own” the funds when they were
in the fraudsters’ possession. Because those holdings are sufficient to preclude
coverage, we need not consider the parties’ remaining contentions. Cf. Shamloo
v. Miss. State Bd. of Trustees of Insts. of Higher Learning, 620 F.2d 516, 524
(5th Cir. 1980) (“[C]ases are to be decided on the narrowest legal grounds
available.”).
A.
Cooper argues on appeal that the district court erred when it concluded
that Cooper did not “own” its lost principal and interest. The word “own,” in
Cooper’s view, encompasses both legal and equitable ownership. It claims that
this understanding of “own” is widespread throughout Texas law—in areas as
diverse as criminal, tax, trust, forfeiture, takings, and insurance law.
Importantly, Cooper does not contend that the parties intended to adopt a
technical, legal meaning of “own”; rather equitable ownership is part of the
common definition of “own,” according to Cooper. Finally, Cooper maintains
that there is a genuine dispute of material fact over whether it equitably owned
the lost profits and principal.
15
Case: 16-20539 Document: 00514267503 Page: 16 Date Filed: 12/11/2017
No. 16-20539
The Policy clearly does not use “own” in such a broad sense. A common
dictionary definition of the verbal form of “own” is to “have or possess property
. . . to have control over.” Own, The American Heritage Dictionary of the
English Language (5th ed. 2011); accord Own, Merriam-Webster’s Collegiate
Dictionary (11th ed. 2007) (defining “own” as “to have or hold as property:
POSSESS” or “to have power or mastery over”); see also Own, Black’s Law
Dictionary (10th ed. 2014) (“To rightfully have or possess as property; to have
legal title to.”). As one court noted, the defining features of “ownership” are
“possession, control, and dominion.” Twichel v. MIC Gen. Ins. Corp., 676
N.W.2d 616, 622 (Mich. 2004) (citing various dictionaries). None of these
dictionaries defines ownership in equitable terms, as Cooper does. 16 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 Westridge Entities “owned” the funds.
Even legal interpretations of “own” do not help Cooper’s case. Courts
have recognized that “own” can vary with the context. Cf. Dole Food Co. v.
Patrickson, 538 U.S. 468, 474 (2003) (distinguishing “colloquial sense” of
“ownership” from use of that term in corporate law); Realty Tr. Co. v. Craddock,
112 S.W.2d 440, 443 (Tex. 1938). 17 However, in insurance disputes, courts have
generally used the common, everyday definition of the word “own.” See
16 Black’s Law Dictionary does define an “equitable owner” as “[o]ne recognized in
equity as the owner of something because use and title belong to that person, even though
legal title may belong to someone else; esp., one for whom property is held in trust.” Equitable
Owner, Black’s Law Dictionary (10th ed. 2014). However, it does not include “equitable
ownership” in its definition of “own.” See Own, Black’s Law Dictionary (10th ed. 2014).
17 “When we come to define the word or term owner, we find that it has no definite
legal meaning. Strictly speaking, it is not a legal term. The meaning of the term owner is not
the same under all circumstances. It is not a technical term or word at all, but one of wide
application in various connections. In all instances its meaning must be ascertained from the
context and subject matter.” Realty Tr. Co., 112 S.W.2d at 443.
16
Case: 16-20539 Document: 00514267503 Page: 17 Date Filed: 12/11/2017
No. 16-20539
Republic Ins. Co. v. Luna, 539 S.W.2d 69, 70 (Tex. Civ. App.—Beaumont 1975,
writ ref’d n.r.e.). Cooper cites three Texas cases that it contends incorporate
equitable ownership into the definition of “own.” But none of these cases are
relevant here. Each involved the sale of personal or real property, and each is
consistent with the common understanding of “ownership”—i.e., the possession
or control of property. See Foust v. Old Am. Cnty. Mut. Fire Ins. Co., 977 S.W.2d
783, 788 (Tex. App.—Fort Worth 1998, no pet.) (holding that buyer of car who
took possession and made payment was “owner” within meaning of contract);
Bucher v. Emp’rs Cas. Co., 409 S.W.2d 583, 586 (Tex. Civ. App.—Fort Worth
1966, no writ) (holding that buyer of property who took possession and made
part payment was “owner” within meaning of contract); Liverpool & London &
Globe Ins. Co. v. Ricker, 31 S.W. 248, 249–51 (Tex. Civ. App.—Dallas 1895,
writ ref’d) (holding that buyer of property who took possession and made part
payment was “entire, sole, and unconditional owner” within meaning of
insurance contract). 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.
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.
The contract at issue here was between a Texas-based electrical-equipment
supplier and a New York-based insurer. The subtleties of Texas takings law
are not helpful in construing the meaning of an everyday or common word used
in a contract not controlled by Texas takings law. Cf. Nat’l Sur. Corp. v.
Rauscher, Pierce & Co., 369 F.2d 572, 578 (5th Cir. 1966) (“We look on this as
17
Case: 16-20539 Document: 00514267503 Page: 18 Date Filed: 12/11/2017
No. 16-20539
do the businessmen to this contract.”). The Policy is a standard form created
(and copyrighted) by Insurance Office Services, Inc., not a unique contract that
the parties negotiated anew. National Union sold fidelity bonds nationwide,
including to other victims of Greenwood and Walsh. See 3M Co., 858 F.3d at
563. It cannot have understood at the outset that the definition of an everyday
word like “own” would depart from the common understanding of that term
and instead turn on the subtleties of state criminal, tax, trust, forfeiture, or
takings law.
The Eighth Circuit has likewise held that another victim of Greenwood
and Walsh’s fraud did not “own” funds invested through WGTC. See 3M Co.,
858 F.3d at 568. The insured there argued that it “owned” its principal and
earnings as a limited partner of WGTC. See id. at 567. The court rejected that
argument, holding that “up until the point at which the earnings were
distributed to the partners,” they remained property of WGTC. Id. 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 Westridge 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. See Lynch Props., Inc. v. Potomac Ins. Co. of Ill., 140 F.3d 622, 625
(5th Cir. 1998) (citing Nat’l Union Fire Ins. Co. of Pittsburgh v. CBI Indus.,
Inc., 907 S.W.2d 517, 522 (Tex. 1995)).
Because we reject Cooper’s argument that “own” includes equitable
ownership in the Policy, we need not consider its arguments that it raised a
genuine issue of material fact regarding equitable ownership of the principal
and earnings. Cooper cannot establish, as a matter of law, that it “owned”
either.
18
Case: 16-20539 Document: 00514267503 Page: 19 Date Filed: 12/11/2017
No. 16-20539
B.
Cooper also argues that the district court should have concluded that it
suffered a “loss” under the Policy when it loaned the bond-fund principal to
WGTI. According to Cooper, a “loss” occurs at the moment a borrower
fraudulently induces a loan. Even if this is not the only interpretation of “loss,”
Cooper argues that it is at least a reasonable one that we are required to adopt.
In response, National Union argues that a fraudulently induced loan is not
void, but voidable. Ownership of the funds still passes to the borrower (WGTI
here) because the loan might ultimately benefit the lender. As a result, Cooper
did not suffer a “loss” when it was fraudulently induced to make the loan.
Moreover, National Union argues that even if there was some loss, Cooper was
required to offset the loss with the substantial profit it made on its equity-fund
investment.
The Policy does not define the term “loss.” In general, a “loss” under a
fidelity bond requires “the actual depletion of bank funds caused by [an]
employee’s dishonest acts.” FDIC v. United Pac. Ins. Co., 20 F.3d 1070, 1080
(10th Cir. 1994). “Bookkeeping or theoretical losses, not accompanied by . . .
pecuniary loss is not recoverable.” Id. (first citing Everhart v. Drake Mgmt.,
Inc., 627 F.2d 686, 691 (5th Cir. 1980); then citing Fid. & Deposit Co. of Md. v.
USAform Hail Pool, Inc., 463 F.2d 4, 6–7 (5th Cir. 1972)). To prove a “loss,”
then, an insured must show “some action which reduced the available assets
in the hands of these employees as against its liabilities to depositors,
creditors, and stockholders.” Cont’l Cas. Co. v. First Nat. Bank of Temple, 116
F.2d 885, 887 (5th Cir. 1941).
Whether Cooper is entitled to recover the principal depends on whether
a “loss” occurred before or after title passed to Greenwood and Walsh. Under
Texas law, a fraudulently induced loan is voidable, not void. See PSB, Inc. v.
LIT Indus. Tex. Ltd. P’ship, 216 S.W.3d 429, 433 (Tex. App.—Dallas 2006, no
19
Case: 16-20539 Document: 00514267503 Page: 20 Date Filed: 12/11/2017
No. 16-20539
pet.); Harris v. Archer, 134 S.W.3d 411, 427 (Tex. App.—Amarillo 2004, pet.
denied). Even though Greenwood and Walsh procured the loan through fraud,
title to the funds still passed to WGTI. See BJ Servs. S.R.L. v. Great Am. Ins.
Co., 539 F. App’x 545, 552 (5th Cir. 2013) (per curiam) (first citing Akers v.
Scofield, 167 F.2d 718, 720 (5th Cir. 1948); then citing Harris, 134 S.W.3d at
427). The “loss,” however, did not occur when Cooper loaned the funds to
WGTI, but when Greenwood and Walsh stole them after the loan had been
made. By that time, title had passed, and Cooper no longer owned the funds.
Moreover, Cooper’s substantial profit on its equity-fund investment belies any
argument that it sustained a “loss” when it funded the loan. Cooper ultimately
recovered all of its equity-fund principal, as well as roughly $30 million in
earnings. 18 It makes no sense to say that it nonetheless suffered a “loss” of the
principal when it funded the loan because the loan actually yielded a
substantial profit for Cooper. Cooper may have ultimately earned less on the
equity-fund investment than it would have had it invested with honest money
managers, but that opportunity cost is a purely theoretical loss not covered by
the Policy.
Cooper cites two cases in which courts have held that the loss resulted
at the time of funding, but neither changes the outcome here. United Pac. Ins.
Co., 20 F.3d at 1080; Portland Fed. Emps. Credit Union v. Cumis Ins. Soc’y,
Inc., 894 F.2d 1101, 1105–06 (9th Cir. 1990) (per curiam). 19 Neither of these
18 This amount includes the $20.3 million in earnings from the beta portion of the
portfolio (the index futures) as well as the $9.8 million from the alpha portion of the portfolio
(the arbitrage) that Cooper received in its settlement with the receiver.
19 Cooper also cites Universal Mortgage Corp. v. Württembergische Versicherung AG,
which merely noted that the insured “may have suffered an actual, direct loss when it funded
[the] noncompliant loans.” 651 F.3d 759, 763 (7th Cir. 2011) (emphasis added) (first citing
United Pac. Ins. Co., 20 F.3d at 1080; then citing Portland Fed., 894 F.2d at 1105). The court
concluded, however, that the insured “recouped that loss in full when it resold the
noncompliant loans to investors” and was instead trying to recover for losses resulting from
the investors’ repurchase demands. Id.
20
Case: 16-20539 Document: 00514267503 Page: 21 Date Filed: 12/11/2017
No. 16-20539
cases applies Texas law, which controls the outcome here. See RSR Corp., 612
F.3d at 857. In addition, Portland Federal is distinguishable because the
fraudulently induced loan was secured by collateral of lesser value, resulting
in an immediate loss. See 894 F.2d at 1105–06. And in United Pacific Insurance
Co., the insured bank’s employee made an illegal loan in violation of an
agreement between the insured and the Federal Reserve and concealed the
loan from regulators. See 20 F.3d 1073–74. In that case, however, the FDIC as
receiver discovered that “no payment was ever made on the loan[] and [the
borrower] no longer exist[ed], making the loan uncollectible.” Id. at 1079. That
is distinguishable from the circumstances here, where the loss occurred not
when the loan was funded, but later when Greenwood and Walsh stole Cooper’s
principal. Cf. Universal Mortg. Corp. v. Württembergische Versicherung AG,
651 F.3d 759, 763 (7th Cir. 2011) (holding that even if insured suffered loss
when it funded fraudulent loans, it “recouped that loss in full when it resold
the . . . loans to investors” and was actually trying to recover for later losses
due to investor repurchase demands). Regardless of the outcome in United
Pacific Insurance Co., it would be anomalous to hold here that Cooper suffered
a loss at the time of funding when it actually made a substantial profit on one
of the loans.
Thus, under the Policy and the facts of this case, Cooper is not entitled
to recover its principal investment because it did not suffer a “loss” of that
principal until after title had passed to WGTI.
C.
We need not consider the parties’ remaining contentions because,
regardless of how we resolve those issues, Cooper does not meet the
requirements for coverage under the Policy. Cf. Shamloo, 620 F.2d at 524
(“[C]ases are to be decided on the narrowest legal grounds available.”).
21
Case: 16-20539 Document: 00514267503 Page: 22 Date Filed: 12/11/2017
No. 16-20539
V.
For the foregoing reasons, we DISMISS National Union’s cross-appeal
and AFFIRM the judgment of the district court.
22