Opinions of the United
2000 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


2-4-2000

Resolution Trust Corp. v. Fidelity & Deposit Co. of
MD,et al. (Part II)
Precedential or Non-Precedential:

Docket 98-6368




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Volume 2 of 2

Filed February 4, 2000

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

No. 98-6368

RESOLUTION TRUST CORPORATION,
as Receiver for City Savings, F.S.B., in Receivership,

v.

FIDELITY AND DEPOSIT COMPANY OF MARYLAND;
WILLEM RIDDER; JOHN T. HURST; LYNDON C. MERKLE;
GREGORY DEVANY

Federal Deposit Insurance Corporation, as statutory
successor to Resolution Trust Corporation,

       Appellant

On Appeal from the United States District Court
for the District of New Jersey
(D.C. Civ. No. 92-01003)
District Judge: Honorable William H. Walls

Argued December 15, 1999

BEFORE: MANSMANN, GREENBERG, and MCKEE,
Circuit Judges

(Filed: February 4, 2000)
b.     Whether there is evidence from which a reasonable
       jury could conclude that the employees acted with the
       manifest intent to obtain a financial benefit for
       themselves or a third person (subsection b's
       requirement)

Given the standard of manifest intent described above,
we turn our analysis to the specific requirements of
subsection (a) and subsection (b) of the fidelity provision.
As previously mentioned, the plain language of the fidelity
provision covers only those losses caused by employee
misconduct undertaken with the manifest intent (1) to
cause a loss, and (2) obtain a certain type of financial
benefit for the employee or a third person. Wefirst will
address in this section the scope of the latter requirement,
found in subsection (b) of the fidelity provision, because it
informs the remainder of our analysis of the coverage
issues raised in this appeal.

At the outset, it is important to note that the plain
language of that subsection indicates that an insured may
meet its requirements in two ways. First, the insured may
satisfy subsection (b) by demonstrating that the dishonest
employee acted with the purpose of obtaining for himself or
herself a financial benefit other than "salaries,
commissions, fees, bonuses, promotions, awards, profit
sharing, pensions or other employee benefits earned in the
normal course of employment." Alternatively, the insured
may meet the requirements of subsection (b) by showing
that the dishonest employee acted for the purpose of
obtaining for a third party a financial benefit not included
within the list just enumerated. F&D contends that it is
entitled to summary judgment because the individual
defendants' actions do not satisfy either aspect of
subsection (b). We will address its arguments separately
below.

i. Whether the evidence could support a finding that the
individual defendants acted with the manifest intent to
obtain a financial benefit for themselves "other than
salaries, commissions, fees, bonuses, promotions, awards,
profit sharing, pensions or other employee benefits earned
in the normal course of employment"

In the district court, the RTC contended that Hurst,
Merkle and Ridder committed their fraudulent or dishonest

                                50
acts because they were motivated by a desire to obtain the
golden handcuff payments, and that DeVany was motivated
by his desire to receive a $1,000 payment at the close of the
HonFed sale. See SA at 206-07. It also asserted that Hurst,
Ridder and Merkle acted with the intent to obtain lucrative
employment opportunities with HonFed. In response, F&D
claims that there is no evidence indicating that Ridder,
Hurst and Merkle acted with the manifest intent to obtain
for themselves employment opportunities with HonFed or
signing bonuses with that company. Focusing next on the
plain language of the exclusionary clause in subsection (b),
F&D argues that both the golden handcuff payments and
the $1,000 payment constitute bonuses or awards. From
that premise, F&D contends that because the plain
language of subsection (b) excludes coverage for losses
resulting from employee misconduct motivated by a desire
to receive, inter alia, bonus payments and other forms of
compensation from the insured, the employees' desire to
obtain the handcuff payments does not provide a basis for
indemnity.

To reiterate, subsection (b) of the fidelity provision
requires that the employee engage in the dishonest or
fraudulent conduct with the manifest intent "to obtain
financial benefit for the Employee . . . , other than salaries,
commissions, fees, bonuses, promotions, awards, profit
sharing, pensions or other employee benefits earned in the
normal course of employment." App. at 562. As a matter of
contract construction, it is evident that the clause
beginning with "other than" is exclusionary. Thus, if the
employee committed the fraudulent or dishonest act
motivated only by a desire to gain one of the enumerated
financial benefits for himself or herself, the insured could
not recover under the fidelity provision, as the requirements
of subsection (b) would not be satisfied.

The district court held that the golden handcuff
payments were not the type of financial benefits excluded
under subsection (b) by adopting the following construction
of the relevant language:

       It is clear that the uniquely final `one-time only' nature
       of these payments prevents them from being classified
       as bonuses `earned in the normal course of

                               51
       employment.' F&D maintains that the clause precludes
       coverage for acts done with the intent to obtain any
       type of bonus, not just those earned in the normal
       course of business. Although grammatically the phrase
       `earned in the normal course of employment' modifies
       `other employee benefits,' it is at least unclear whether
       this clause intended to exclude coverage for dishonest
       acts committed with an intent to obtain a one-time
       payment such as the handcuff bonus in the context of
       the generic thrust of excluded types of remuneration.
       The litany of compensation kinds excluded from
       coverage are all payments which are generally received
       on a regular basis as part of an employee's
       compensation scheme. The handcuff payments
       certainly do not fall within that category.

Op. at 26. Invoking the well-settled principle that courts
resolve ambiguities in an insurance contract in favor of
coverage and construe exclusions narrowly, the court found
that the clause did not bar coverage for dishonest or
fraudulent acts committed with the manifest intent to
obtain the handcuff payments.

In support of its construction of the exclusionary clause,
F&D points out that "[c]ourts uniformly have construed the
Bond's exclusion language for financial benefits to mean
any payment that the insured voluntarily pays to an
employee, even if those payments are fraudulently earned."
Br. at 39. It explains that "[r]ecovery under a fidelity bond
is barred if the employer `knowingly paid the disputed
funds directly to the employees on the belief that the
employees were entitled to the payments as compensation
for honest work.' " 

(quoting FDIC v. St. Paul Fire &
Marine Ins. Co., 

, 1160 (M.D. Tenn.
1990), aff'd in relevant part, 

(6th Cir. 1991)).
F&D also points to Auburn Ford Lincoln Mercury, Inc. v.
Universal Underwriters Insurance Co., 

(M.D. Ala.), aff'd, 

(11th Cir. 1997) (table),
where the court rejected the insured's argument that the
phrase "earned in the normal course of employment"
permits coverage under subsection (b) if the commissions
the employee earned from his conduct were not "earned in
the normal course of employment" in the sense that they

                                52
were obtained fraudulently. See 

(noting that
the phrase "in the normal course of employment" serves
only to define the type of excluded benefits andfinding that
"[t]his phrase does not mean that allegedly dishonestly
obtained commissions are included within the policy").

We agree with F&D's argument that the district court
erred in finding that the phrase "earned in the normal
course of employment" could be construed as precluding
the "one-time payments" provided for in the closing
agreements. In this regard, we believe that the district
court's construction of the last phrase of subsection (b)
"`strain[s] the language of the policy tofind an ambiguity
where there is none in order to grant coverage that does not
exist.' " Oritani Savs. & Loan Ass'n v. Fidelity & Deposit Co.,

, 639 (3d Cir. 1993) (citation omitted). In our
view, the phrase "earned in the normal course of
employment" is unambiguous, and thus, the presumption
of construing the exclusion in the contract narrowly does
not apply here. This conclusion compels us to find that the
handcuff payments fall squarely within the definition of
"bonuses" or "awards," or alternatively qualify as a type of
benefit "earned in the normal course of employment."
Accordingly, the RTC cannot satisfy subsection (b) by
establishing that Ridder, Hurst and Merkle acted with the
"manifest intent" of obtaining the golden handcuff
payments for themselves.13

Our analysis begins with a review of the plain language
of subsection (b). First, we note that the position of the
phrase "earned in the normal course of employment"
strongly indicates that that phrase was meant to modify the
language "other employee benefits," as the modifying
language directly follows that phrase and describes the
types of employee benefits falling within the exclusion.
See id.; Hartford Accident & Indem. Ins. Co. v. Washington
_________________________________________________________________

13. Parenthetically, we observe that with respect to the $1,000 "bonus"
DeVany received after the HonFed closing, there simply is insufficient
evidence in the record concerning the nature and character of the
payment for us to determine in this appeal whether it falls within the
exclusionary language in subsection (b). Notably, the district court's
opinion did not address that issue, and we expressly leave that question
unresolved.

                               53
Nat'l Ins. Co., 

, 83 (N.D. Ill. 1986) (quoting
Berger v. Fireman's Am. Loss Control Co., No. 508, slip op.
(Md. Ct. App. Dec. 16, 1982)). Moreover, as there is no
comma between the two phrases, it is clear that they
should be read together, so that the "earned in the normal
course of employment" modifies only the general phrase
"other employee benefits" rather than the other specific
types of employee benefits previously enumerated. See
Hartford 

. As one article
explains:

       Attempts to limit the exclusion to financial benefits
       [such as salaries and commissions] earned in the
       normal course of employment have been rejected. The
       words `earned in the normal course of employment' do
       not modify the enumerated exclusions that precede
       them, but are intended to include in the list of
       excluded benefits other benefits typically earned by
       employees.

Foster, et al., supra at 789. Thus, under the plain language
of the bond, the phrase "earned in the normal course of
employment" cannot be viewed as a limitation on the
exclusion. Rather, it is reasonable to conclude that the
drafters included the phrase to provide a broader exclusion,
thereby shrinking the bounds of coverage under thefidelity
provision. This construction clearly undermines the district
court's reliance on the last phrase of the exclusionary
clause to conclude that the handcuff payments were not
within the exclusion. See Hartford 

; see also Morgan, Olmstead, Kennedy & Gardner, Inc. v.
Federal Ins. Co., 

, 977 (S.D.N.Y.)
(interpreting similar language and reaching same
conclusion), aff'd, 

(2d Cir. 1986) (table).

While recognizing that "earned in the normal course of
employment" did not modify "bonuses" or"awards" per se,
the district court found that language informative and
demonstrative of the types of financial benefits that came
within the exclusion. By relying on the phrase "earned in
the normal course," its appears that the district court
concluded that the one-time, final payments were not
within the excluded financial benefits. The court's holding
on this point thus rests upon its conclusion that the

                               54
unique, one-time nature of the payment distinguished it
from the types of employee benefits set out in the
exclusionary clause.

We cannot agree with the district court's reasoning. Put
simply, a review of the case law interpreting the purpose of
the exclusionary language and the meaning of the phrase
"earned in the normal course of employment" demonstrates
that the court's conclusion on this point is contrary to most
(if not all) of the decisions addressing this issue.
Extrapolating from the cases we have found on point, we
understand the exclusion found in subsection (b) to
eliminate coverage where the insured's theory is that the
employee's purpose in engaging in the misconduct that
caused the loss was to receive some type of financial benefit
that, generally speaking, the insured provides knowingly to
its employees as part of its compensation scheme and as a
result of the employment relationship.14

(Text continued on page 57)
_________________________________________________________________

14. See St. Paul Fire & 

(reviewing cases
finding that coverage was precluded by the exclusionary clause, and
noting that in each of them, "the employers [i.e., the insureds] knowingly
paid the disputed funds directly to the employees on the belief that the
employees were entitled to the payments as compensation for honest
work"); see also 

(affirming judgment for
insurer and noting that there was no evidence that the dishonest
employee ever received any financial benefit other than salaries or
commissions from insured, his employer, as a result of improper and
speculative trading practices); Municipal Sec., Inc. v. Insurance Co. of
N.
Am., 

, 9-10 (6th Cir. 1987) (affirming summary judgment for
insurer where only evidence was that the employee obtained additional,
unearned commissions from insured, her employer, as a result of
improper conduct); Auburn 

(same conclusion),
aff'd 

(11th Cir. 1997) (table); Hartford Accident, 638 F.
Supp. at 84 (stating that the last phrase "or other employee benefits
earned in the normal course of employment" serves the useful purpose
of distinguishing the entire list in part (b) from those financial
benefits
that, generally speaking, are "unearned" in the sense that they are not
paid by the employer to the employee as part of the compensation
scheme, but instead are obtained from payoffs, embezzlement schemes
and other forms of theft); Verex Assurance, Inc. v. Gate City Mortgage
Co., No. C-83-0506W, 

, at **1-2 (D. Utah Dec. 4, 1984)
(granting judgment to insurer because there was no evidence that
employees intended to obtain a covered financial benefit; court noted

                               55
that the proofs indicated only that the loan officers decided to make
loans to persons of questionable credit in order to collect commissions
on the loans from their employer, the insured); Mortell v. Insurance Co.
of N. Am., 

, 929 (Ill. App. Ct. 1983) (finding that
dishonest employees' only personal gain was improper commissions
received from insured); Benchmark Crafters, Inc. v. Northwestern Nat'l
Ins. Co., 

, 91 (Minn. Ct. App. 1985) (stating that
employee's four months of salary and benefits he received as an
employee of the insured before the insured's discovery of the fraud did
not provide basis for coverage); First Philson Bank, N.A. v. Hartford Fire
Ins. Co., 

, 590 (Pa. Super. Ct. 1999) (affirming summary
judgment for insurer and holding that employee's receipt of shares of
insured's stock through an employee stock option plan, along with
various salary increases and bonuses from insured, constituted receipt
of benefits "earned in the normal course of employment"), appeal denied,

(Pa. Dec. 27, 1999); Dickson v. State Farm Lloyds,

, 668 (Tex. App. 1997, no writ) (rejecting insured's
coverage claim based on loss caused by employees' manipulation of time
card system in order to obtain extra salary from insured); cf. James B.
Lansing Sound, Inc. v. National Union Fire Ins. Co., 

, 1567
(9th Cir. 1986) (holding, in a suit for recovery on an employee dishonesty
policy under which the insurer agreed to indemnify for loss of money,
securities, or "other property" the insured sustained because of employee
dishonesty, that the term "other property" did not permit the insured to
recover commissions which it paid to an employee on fraudulent sales;
court relied on language in dishonesty clause that excluded
"commissions . . . or other benefits earned in the normal course of
employment"); compare 

(finding that district
court erred in granting summary judgment to insured on issue of
employee's manifest intent to obtain a covered financial benefit; in
noting
that evidence of employee's intent was mixed, court nevertheless
observed that the proofs indicated that the employee received a $40,000
"loan" from one of the bank's borrowers, ostensibly to show the
borrower's good faith in an offer of future employment to employee); First
Bank v. Hartford Underwriters Mut. Ins. Co., 

, 937 (S.D.
Ohio 1998) ("Courts have found indicia of manifest intent to obtain
financial benefit outside the normal course of employment where an
employee has a financial interest in the entity who benefits from the
improper transaction."), aff'd on other grounds, 

(6th Cir.
1999) (table); Estate of K.O. Jordan v. Hartford Accident & Indem. Co.,

, 413 (Wash. 1993) (en banc) (stating that employee
obtained a financial benefit other than one"earned in the normal course
of employment" when he embezzled trust funds and used them to cover

                               56
Following this approach, courts have explained that
payments qualifying as "payoffs" or "kickbacks" fall outside
the exclusionary clause, as well as financial benefits
obtained as a result of the employee's interest in an entity
that benefits from the improper transaction, because the
payments in those instances clearly are not "salaries,
commissions, fees, bonuses, promotions, awards, profit
sharing, pensions or other employee benefits earned in the
normal course of employment." See 

($40,000 "loan" from borrower to employee); First
Bank v. Hartford Underwriters Mut. Ins. Co., 

, 937-38 (S.D. Ohio 1998), aff'd on other grounds, 

(6th Cir. 1999) (table); Estate of K.O. Jordan v.
Hartford Accident & Indem. Co., 

, 413 (Wash.
1993) (en banc). Moreover, courts have rejected the
argument that the exclusion precludes coverage only for
losses caused by an employee's desire to obtain, for
example, honestly earned commissions, finding that the
term "earned" encompasses financial benefits both
fraudulently obtained and honestly earned from the
employer. See Municipal Sec., Inc. v. Insurance Co. of N.
Am., 

, 9-10 (6th Cir. 1987); Auburn Ford, 967 F.
Supp. at 479; Mortell v. Insurance Co. of N. Am., 

, 929 (Ill. App. Ct. 1983).

Thus, contrary to the district court's construction of the
exclusion found in subsection (b), courts addressing its
scope have held that the "earned in the course of
employment" language is descriptive of the character of the
payment at issue rather than the frequency with which the
payment is received or the timing of its receipt. Indeed, this
construction makes sense in view of the fact that each of
the eight nouns preceding the last phrase "other employee
benefits . . ." share the singular characteristic that they are
all financial benefits provided knowingly by an insured, in
its capacity as an employer, to its employees as a form of
compensation and as a result of the employment
relationship.
_________________________________________________________________

operating expenses of company in which he was a shareholder, director,
officer and employee).

                               57
We also point out that the very nature of bonuses and
awards, both of which are excluded financial benefits under
subsection (b), undermines the district court's limitation of
the exclusion to only those payments received with
frequency, or at a minimum more than once. Webster's
Third New International Dictionary defines a "bonus" as
"something given or received that is over and above what is
expected." 

Similarly, Webster's Seventh New
Collegiate Dictionary defines an "award" as "something that
is conferred or bestowed: prize." 

Thus, if
presented in the employment context, bonuses and awards
are given by an employer to its employee as rewards based
on job-related performance. By their very nature, those
rewards are bestowed sparingly, perhaps only once in an
employee's career. Nevertheless, under the plain language
of the bond, a loss motivated by a desire to obtain such
benefits falls squarely within the exclusion found in
subsection (b).

Thus, we cannot agree with the district court's reasoning
that the last phrase "earned in the normal course" indicates
that the excluded benefits are limited to those forms of
compensation that are given by the employer to the
employee on a "regular basis." Rather, we hold that the
exclusion covers payments knowingly made by the insured
to the employee as a consequence of their employment
relationship and in recognition of the employee's
performance of job-related duties. Applying this standard
here, we find that the golden handcuff payments fall
squarely within the exclusion set forth in subsection (b),
whether it be because they are considered a "bonus,"
"award," or simply a financial benefit that the employees
"earned in the normal course of employment."

We point out that the closing agreements describe the
payments thereunder as "compensation" for the employees'
assistance in City Collateral sale, SA at 153, which
suggests to us that the payments were bestowed once and
only to certain employees in recognition of their job-related
performance. We also note that the fact that the closing
agreements provided for a singular, lump-sum payment
actually supports the finding that the payments qualify as
a bonus or award, given the ordinary meaning of those

                               58
terms. Moreover, these payments clearly are distinguishable
from the those financial benefits which have been held to
fall outside the category of excluded benefits, namely
payoffs or embezzled funds, as City Collateral voluntarily
signed the agreements knowing that the payments would
be made if the sale eventually occurred. Indeed, City
Federal paid the employees once the HonFed deal closed.
Compare St. Paul Fire & 

-61;
Morgan, 

(noting that bribes
would not qualify as "salary, commissions, fees or other
emoluments," which was the operative exclusionary
language).

Nevertheless, given our construction of the exclusion, it
appears that it would not preclude coverage under the
theory that Ridder, Hurst and Merkle engaged in dishonest
and fraudulent acts with the manifest intent to secure
future lucrative employment opportunities, salaries and
signing bonuses from HonFed--a third party to their
employment relationship with City Collateral.15 Indeed, F&D
_________________________________________________________________

15. We point out in this regard that we have considered but rejected an
alternative construction of the language of the exclusionary clause--
namely that it would apply regardless of whether the employee obtained
the excluded financial benefits from the insured or a potential future
employer who is a third party to the insured/employee relationship. Not
surprisingly, we have been unable to find any cases addressing this
issue. We think it clear, however, that the exclusionary clause precludes
coverage only where the employee is motivated by a desire to obtain from
his or her current employer, i.e., the insured, the enumerated financial
benefits. See supra note 14. Such a construction is consistent with the
drafters' intent in limiting the types of risks that will be covered under
Insuring Agreement A. See generally Robin V. Weldy, A Survey of Recent
Changes in Financial Institutions Bonds, 12 Forum 895 (1977)
(describing dishonesty clause as covering losses resulting from a distinct
type of human failing, and excluding all other losses caused by
employees' "undesirable traits" from coverage):

         Certain types of financial benefit earned in the course of
        employment are not recognized. . . . In general, these benefits
would
        be those earned in the normal course of employment. For example,
        an incompetent employee earns a salary while concealing the nature
        and extent of his disastrous errors. Simple fear of unemployment is
        the undesirable trait here. It's not a covered peril. A head teller
in

                                59
apparently concedes that even under its construction of the
exclusionary clause, which we found persuasive, benefits
such as future employment, salaries and bonuses from
HonFed would not fall within the exclusionary clause in
subsection (b). Instead, it argues that the inference that the
employees acted with the manifest intent to obtain different
and more lucrative employment is "factually unsupportable"
because it is undisputed that HonFed did not seek their
employment with the company until November 1988. Thus,
as we understand F&D's argument, it challenges the
district court's assessment of the sufficiency of the RTC's
evidence to survive summary judgment on this theory.

We disagree with F&D's argument that no reasonable
jury could conclude, based on the evidence, that Ridder,
Hurst, and Merkle acted with the purpose of obtaining for
themselves more lucrative employment elsewhere, including
large salaries and bonuses with the prospective purchaser.
Indeed, we believe that a reasonable jury couldfind that
these employees, in engaging in their course of concealment
and misrepresentation, intended to secure employment
bonuses and future employment with City Collateral's
purchaser. As the district court noted, Hurst testified that
the officers sought to " `maximize their rewards' in
connection with the sales effort and targeted potential
purchasers who would likely employ them after the
transaction." Op. at 25. Put simply, the fact that Ridder,
Hurst and Merkle did not learn until November 1988, that
they in fact obtained what they had hoped for all along (in
terms of lucrative employment, salaries and bonuses with
the purchaser) is not logically inconsistent with the
_________________________________________________________________

       a bank is promoted to loan officer and is aware that future
       promotions and raises are dependent on increasing loan activity. To
       increase loans and receive a normal financial benefit (raise and
       promotion) the loan officer ignores standing lending instructions
and
       many loans go bad. Again, there is no covered loss in this
situation.

Indeed, it is apparent from this passage that the focus must
be on the wrongdoer's status as an employee of the insured at the time
of the dishonest conduct causing the loss. Thus, the relevant
employment relationship is that of the insured and the employee, rather
than the employee and a prospective employer.

                               60
proposition that they engaged in a course of concealment
and misrepresentation prior to that date to secure that
ultimate result.

We also point out that there is a suggestion in the record
that as of late October or early November 1988, Ridder,
Hurst and Merkle were confident that HonFed was going to
purchase City Collateral, and that they began negotiating
the terms of their future employment with the company
around the same time period. In determining the
employees' "manifest intent" to obtain future employment
and signing bonuses, the jury certainly could consider the
events that occurred subsequently to that date, in
particular the December 9, 1988, memorandum to HonFed,
and the fact that the individual defendants continued their
course of concealment through the date of the sale. These
events would be particularly probative on this issue, given
the circumstance that as of that time frame, Ridder, Hurst
and Merkle were certain to gain future employment,
substantial salaries and signing bonuses if the sale
occurred smoothly and on terms that were favorable to
HonFed. In that sense, then, Merkle, Ridder and Hurst's
chances for financial prosperity were tied to HonFed's
ultimate success, which inevitably would come at City
Federal's expense.

Accordingly, we hold that at trial, the RTC may seek to
establish coverage under the bond by proving that in
engaging in the various acts of concealment and
misrepresentation, Ridder, Hurst, and Merkle acted with
the purpose of securing for themselves lucrative
employment opportunities, salaries and bonuses with City
Collateral's eventual purchaser. However, it cannot seek to
establish coverage by arguing that these employees acted
with the intent to secure the golden handcuff payments
from City Collateral, as those payments qualify asfinancial
benefits falling within the exclusionary clause in subsection
(b).

ii. Whether a reasonable jury could conclude that the
individual defendants acted with a manifest intent to
secure a financial benefit for a third party

We noted at the outset of our discussion that subsection
(b) of the fidelity provision could be satisfied in two ways.

                               61
The second way that an insured could obtain coverage is if
the loss resulted directly from the employee's desire to
obtain a financial benefit for a third party, in this instance
HonFed. F&D contended before the district court that it
was illogical to assume that the individual defendants
began their course of conduct in May 1988 with the
manifest intent to benefit HonFed because HonFed did not
come into the picture until November 1988, long after the
individual employees allegedly began their dishonest and
fraudulent conduct. The district court agreed with F&D's
argument, holding as follows:

       In addition, no rational juror could find that the
       officers fraudulently concealed information from City
       Federal beginning in May 1988 with the manifest
       intent to benefit HonFed, a potential purchaser which
       only expressed interest in City Collateral months later.
       Although the December 9 memorandum was likely
       motivated by the desire to ensure that City Collateral
       passed to HonFed on favorable terms, the entire course
       of dishonesty and concealment perpetuated by the
       officers during the prior months cannot be attributed
       to this purpose.

Op. at 24.

The RTC does not challenge this ruling on appeal. For
our purposes, we need not address whether the district
court's analysis on this point was correct because we
already have determined that the RTC may establish
coverage under subsection (b) by proving that Ridder,
Hurst, and Merkle acted with the manifest intent to secure
future employment and bonuses with HonFed. Therefore,
we will not disturb the district court's finding on this point.

c.     Whether there is sufficient evidence from which a
       reasonable jury could conclude that the employees
       acted with the manifest intent to cause City Federal to
       sustain a loss on the Northwest account (subsection
       (a)'s requirement)

F&D asserts alternatively that there is insufficient
evidence from which a reasonable jury could conclude that
the individual defendants acted with the manifest intent to
cause City Federal to incur a loss on the Northwest

                               62
account. F&D points out that the quintessential example of
an employee who undoubtedly possesses a manifest intent
to cause the insured's loss is the embezzling employee--
"the thief"--because in that situation the employee's gain is
always at the employer's expense. It contends that the only
conclusion permitted by the evidence is that the employees
hoped to save City Federal from large losses on the
Northwest account. Accordingly, it asserts that we should
affirm the district court's order of summary judgment
because, as a matter of law, the evidence could not support
the conclusion that the employees intended to cause City
Federal's loss.

The district court found that there was a triable issue
concerning the employees' manifest intent to injure City
Federal, explaining that "the evidence supports an inference
that the employees concealed the true problematic status of
the Northwest credit line to induce City Federal to approve
extensions of the credit line and to consent to the
advancement of additional funds from April to December
1988." Op. at 22. Moreover, the court pointed out that the
evidence demonstrated that the individual defendants,
either individually or collectively, were well aware of the
nature and severity of the problems with the credit line, yet
took affirmative steps to misrepresent and conceal them
from City Federal. Relying also on the other circumstantial
evidence of intent, including the concealment of the
Movroydis admission, the alteration of the customer
history, and the advisory memorandum to HonFed on the
eve of sale, the court found that a factfinder"could
certainly conclude that the employees knew that the
significant losses were `substantially certain to follow' from
their conduct and that they acted with total disregard for
these inevitable consequences." 

the court's holding on two grounds. First,
it contends that the district court's reasoning is unsound
because "it makes no sense that the employees would
cause [City Federal] to lose millions of dollars because that
loss would assist the employees in obtaining thefinancial
benefits." Br. at 48. It contends that "creating a loss would
not have assisted the employees in receiving their bonuses
from [City Federal.]" "If anything, and by the FDIC's own

                               63
admission, the Employees could have been terminated if
they had been caught purposely creating a loss on the
Northwest loan." See 

Second, F&D argues that the district court ignored the
undisputed evidence in the case demonstrating that the
individual defendants extended the Northwest credit line
beyond its initial maturity date in an attempt to minimize
the losses that City Federal would incur. Moreover, F&D
points out that the evidence also shows that over the
course of the summer of 1988, the credit line showed some
improvement, thus demonstrating that the employees acted
solely with the best interests of City Federal in mind. In
addressing the alleged acts of concealment, F&D contends
that they do not undercut the other evidence of the
employees' good intentions, as the RTC has failed to show
how the employees intended to harm City Federal by hiding
these problems. See 

We have made a complete study of the record of this case
to determine whether there is sufficient evidence from
which a jury could conclude that Ridder, Hurst, and Merkle
acted with the purpose or desire of causing City Federal to
sustain a loss on the Northwest account. While we do not
set forth at this point all of the evidence the RTC presented
on this issue and explain our analysis of it, we are in
complete agreement with the district court's ultimate
conclusion that the circumstances present a genuine issue
of material fact concerning their manifest intent to cause
City Federal to sustain the Northwest loss. Given the
unique facts of this case, there are many possible
conclusions that could be drawn concerning the employees'
purpose. For example, there is evidence tending to show
that Ridder, Hurst and Merkle acted with the desire of
benefitting themselves, and consequently also desired to
cause City Federal's loss, inasmuch as City Federal's loss
would inure to their benefit. Clearly, HonFed's last minute
decision to exclude the Northwest account from the
purchase was beneficial to them because it ensured that
their new employer would not be saddled with the loss with
which they arguably were involved on some level. On the
other hand, the jury could conclude that the loss was the
unfortunate result of a series of poor business decisions, or

                                64
that in seeking to obtain future employment and associated
benefits with HonFed, Ridder, Hurst and Merkle only
intended to benefit themselves and that the injury to City
Federal was an unintended consequence. Moreover, we
cannot discount the possibility that at some point, their
motivation and desires changed. In any event, the evidence
pertaining to the employees' intent is mixed, and coverage
therefore is a disputed issue of fact that should be left for
the jury. See 

.

Inasmuch as we have held that a jury may consider
evidence tending to establish an employee's reckless
behavior, as well as circumstantial proof of the substantial
likelihood of a loss, and infer from those circumstances an
intent to cause a loss, we believe that the facts of this case
are such that a reasonable jury could draw the conclusion
that the employees intended for City Federal to be saddled
with the Northwest loan loss. Indeed, as we have explained,
we simply cannot state with certainty what the employees
intended in engaging in the acts that they did. Accordingly,
we agree with the district court's ultimate conclusion that
summary judgment on this issue was inappropriate.

We have considered in this regard F&D's argument that
the district court ignored the circumstantial evidence
supporting the conclusion that the employees' actions were
not undertaken with the manifest intent to cause City
Federal's loss on the Northwest account. To be sure, F&D
is correct that a reasonable jury could conclude, based on
certain evidence in the record, that the employees only
hoped to save City Federal from incurring a substantial loss
in connection with the overflow of shipped and warehoused
loans. Nevertheless, there is other evidence in the record,
namely the various acts of concealment, which supports
the opposite conclusion. Put simply, a jury would be
required to consider all of the evidence in reaching its
ultimate finding regarding the employees' subjective intent
in engaging in the conduct that they did, and we will not
pretermit the jury's ability to do so.

Similarly, we have considered F&D's alternative
argument, namely that "it makes no sense that the
employees would cause [City Federal] to lose millions of
dollars because that loss would assist the employees in

                               65
obtaining the financial benefits." Br. at 48. It claims that
logically, if the individual defendants purposely created a
loss on the Northwest account, it would not have benefitted
them at all personally because it would be likely that City
Federal would have fired them if it discovered that they
purposely did so. In that event, Ridder, Hurst, and Merkle
would not have been able to obtain lucrative employment
with HonFed or collect on their closing agreements with
City Collateral. See 

does not persuade us that no reasonable
jury could find that these employees acted with the
manifest intent to cause City Federal to sustain a loss.
First, we note that this argument, in essence, asks us to
view the facts in the light most favorable to F&D, and draw
subjective conclusions in its favor, a task that we cannot
perform at this juncture. We believe, however, that F&D's
contention is best left for the jury's consideration. We also
point out that this argument is premised on F&D's
assumption that the RTC's theory is that the individual
defendants purposely "created" a loss on the Northwest
account. But it seems clear to us that the RTC does not
claim that individual defendants "created a loss" in the
sense that they assisted Movroydis in his kiting scheme.
Rather, the RTC's position is that the employees"caused"
the loss to City Federal because their acts of concealment
and various misrepresentations led HonFed to exclude the
loan from the sale, which in turn resulted in City Federal
being put in the unfavorable position of having to deal with
a delinquent account that was certain to result in a
significant loan loss. Inasmuch as subsection (a) of the
fidelity provision requires only that the employees acted
with the manifest intent "to cause" the insured to sustain
the loss that it did, the RTC's theory of coverage falls
squarely within its relatively narrow parameters.

In sum, we are convinced that the evidence is not so one-
sided so as to compel the conclusion that, as a matter of
law, Ridder, Hurst and Merkle did not intend to benefit
themselves and cause City Federal to sustain a loss.
Consequently, we will not disturb the district court's
conclusion that summary judgment on this issue was
inappropriate.

                               66
2.     Whether there is a genuine issue of material fact as to
       whether the Northwest loss is a loss "resulting directly"
       from the employees' dishonest or fraudulent acts

As its final argument, F&D contends that the district
court erred in concluding that a reasonable jury could find
that the employees' misconduct caused the Northwest loan
loss. The district court construed the causation language--
"resulting directly from"--as meaning that the bond covers
losses that would not have occurred "but for" the dishonest
conduct. See Op. at 23 (citing 

[sic]).
The court found that the evidence was sufficient to survive
F&D's summary judgment motion on this point because it
suggested that the extensions of credit and the additional
loans made after the original maturity date "at the very
least enhanced the losses" City Federal suffered. 

concluded that "while the deterioratingfinancial
condition of Northwest and Movroydis's kiting scheme
certainly contributed to the losses, a fact-finder could
reasonably conclude that the concealment by the officers of
the problematic status of the credit line in order to induce
the approval of future loans and extensions directly
resulted in a covered loss." 

not contend that the district court's "but for"
standard was incorrect, but instead maintains that the RTC
has not produced any evidence from which a reasonable
jury could conclude that the employees' misconduct was
the cause in fact of the loss, given the reality that it was
likely that City Federal would have sustained the same or
similar loss absent the fraudulent and dishonest actions.
F&D asserts that, under general principles of tort law, an
actor's conduct cannot be said to be a cause in fact of the
resulting damage if the evidence shows that the injury
would have resulted anyway even in the absence of the
conduct at issue. In support of applying this rule to bar
coverage in this case, F&D relies on tort cases discussing
the concept that a plaintiff asserting a fraud claim must
demonstrate that the fraudulent conduct caused an injury,
and it analogizes to cases which held that there is no tort
without an injury. See 

(citing Midwest Commerce
Banking Co. v. Elkhart City Ctr., 

, 524-25 (7th
Cir. 1993); Stromberger v. 3M Co., 

, 976-77

                               67
(7th Cir. 1993); Citibank, N.A. v. K-H Corp., 

,
1496 (2d Cir. 1992); Schroth v. Coal Operators Cas. Co., 

, 68 (N.J. Super. Ct. App. Div. 1950)).

From this premise, F&D argues that the RTC failed to
meet its evidentiary burden at summary judgment because
it did not introduce any evidence tending to show that,
absent the individual defendants' pattern of concealment
and misrepresentation, City Federal would have avoided the
loss on the Northwest account. Br. at 55-63. F&D points to
the fact that the RTC's expert could not quantify with a
reasonable degree of certainty what funds were available to
pay off the advances outstanding on the Northwest loan at
any particular time. F&D's argument thus is premised on
its belief that the district court's factual cause or "but for"
analysis was flawed in that no reasonable jury could
conclude that the employees' dishonest or fraudulent
conduct played any part in the loan loss that forms the
basis of the RTC's indemnification claim.

Our analysis of this issue must begin by determining the
appropriate causation standard, given the plain language of
the bond. That finding will permit us to consider whether
the evidence in record is sufficient to establish that there is
a jury issue on causation.

As to the first issue, we do not share F&D's view that the
phrase "losses resulting directly from" requires only an
inquiry into the factual cause of the loss. Indeed, it appears
that in assuming that the language "resulting directly from"
requires only a "but for" or "cause-in-fact" standard of
causation, F&D has not considered our opinion in Jefferson
Bank v. Progressive Casualty Insurance Co., 

(3d Cir. 1992), which addressed the appropriate
construction of the identical phrase under Pennsylvania
law. There we construed the "resulting directly from"
causation language in Insuring Agreement E--the forgery
provision--and concluded that that phrase meant"losses
proximately caused by." See 

In reaching our
conclusion, we specifically noted the insured's argument
that the bond's language indicated that the causation
standard was "broader" than proximate cause, and that the
standard was a more lenient one, requiring only that the
forgery be the "cause-in-fact" or the "but-for" cause of the

                               68
loss. See 

& n.10. Our analysis rejected the
insured's broader construction, as we found that the
conventional proximate cause standard was the correct
formulation. We also rejected the insurer's argument that
the language of the bond required the plaintiff to prove not
only proximate cause, but also some additional closeness in
space and time between the loss and the cause of the loss.
See 

& n.11.

Our research reveals that the New Jersey Supreme Court
has not addressed the meaning of the phrase "losses
resulting directly from" as it is used throughout the various
Insuring Agreements contained in the Standard Form No.
22 bond at issue in this case, and in particular has not
construed the meaning of that language as it is used in the
fidelity provision. Nevertheless, our review of several New
Jersey cases interpreting and applying similar causation
language in other types of insurance agreements indicates
to us that the New Jersey Supreme Court would follow our
opinion in Jefferson Bank and apply the proximate
causation standard to the "resulting directly from" language
found in the fidelity provision of this bond. See, e.g., Cruz-
Mendez v. ISU/Ins. Servs., 

, 525 (N.J. 1999)
(stating that statute, in using the terms "caused" and "by
reason of," contemplates proof of proximate causation)
(citing Westchester Fire Ins. Co. v. Continental Ins. Cos., 

, 669 (N.J. Super. Ct. App. Div. 1973), aff'd, 

(N.J. 1974) (per curiam), which observed that
phrases "caused by" and "resulting from" in insurance
contracts convey idea of proximate cause); Search EDP, Inc.
v. American Home Assurance Co., 

, 289-90
(N.J. Super. Ct. App. Div. 1993) (applying proximate cause
standard where errors and omissions policy covered
damages "resulting from" wrongful act where wrongful act
"arises out of" conduct of insured's business) (citing
Franklin Pack'g Co. v. California Union Ins. Co., 

(N.J. Super. Ct. App. Div. 1979)); Stone v. Royal Ins.
Co., 

, 719-20 (N.J. Super. Ct. App. Div. 1986)
(interpreting language describing coverages and exclusions
under homeowner's insurance policy where policy covered
"direct loss . . . caused by," inter alia, accidental discharge
or overflow of water, and excluded losses "directly or
indirectly from" water damage; court applied proximate

                               69
cause standard to determine if water damage was covered
by policy, and determined that last event contributing to
the damage--the ruptured hose on the sump pump--was a
covered risk); see generally Karadontes v. Continental Ins.
Co., 

, 697 n.1 (Bergen County Dist. Ct. 1976)
(noting that "direct loss" as used in fire insurance policies
has been construed to have essentially the same meaning
as proximate cause); Stephen M. Brent, Annotation, What
Constitutes "Direct Loss" Under Windstorm Insurance
Coverage, 

(1975) (noting that courts have
equated "direct result" with "proximate cause of loss"); 7
Couch 3d, supra S 101:53 ("The term `direct loss' is
generally held to be the equivalent of both `proximate
cause,' and `direct cause.' ") (citations omitted).

Indeed, our result in Jefferson Bank was predicated upon
our review of Pennsylvania case law addressing the
meaning of a similar causation standard utilized in a
different type of insurance contract, see Jefferson 

, and our construction of the language
"losses resulting directly from" comports with other
jurisdictions addressing this issue in the fidelity insurance
context. See, e.g., Mid-America Bank v. American Cas. Co.,

, 1485 (D. Minn. 1990) (utilizing
proximate cause principles in addressing defendant's
argument that the losses caused by the renewal of loans
are not losses "directly resulting from" the employee's
dishonest or fraudulent acts); Hanson 

(stating that trial court did not err in instructing jury that
"result directly" language in fidelity bond may be defined as
proximate cause). But see Fidelity & Deposit 

("Lustig requires that the FDIC show that a loan would
not have been made `but for' the fraudulent conduct of the
employee."); 

("A loss is directly
caused by the dishonest or fraudulent act within the
meaning of the bond where the bank can demonstrate that
it would not have made the loan in the absence of fraud.");
see generally William T. Bogaert, Andrew F. Caplan,
Computing the Amount of Compensable Loss under the
Financial Institution Bond, 33 Tort & Ins. L.J. 807, 813-14
& nn.29 & 33 (Spring 1998) (criticizing approach
in Jefferson Bank as adopting causation standard that was
too lenient given the plain language of bond which required

                               70
that the connection between the loss and the conduct be
"direct," and noting still that the Court of Appeals for the
Fifth Circuit's approach in Lustig "departed even further
from the contractual language by allowing recovery based
upon mere `but for' or factual causation in apparent
disregard of the direct loss requirement and the proximity
of the covered conduct and the loss").

Thus, as a matter of logic, we see no reason why the New
Jersey Supreme Court would adopt a different
interpretation of the language, given the fact that the
phrases in the two Insuring Agreements are identical, and
our reasoning in Jefferson Bank supports an application of
the proximate causation standard in this context.
Accordingly, we hold, in accordance with our reasoning in
Jefferson Bank, that the phrase "losses resulting directly
from" requires, for purposes of indemnification, that the
losses be "proximately caused by" the fraudulent or
dishonest acts of the employee which form the basis for the
insured's coverage claim.

As previously mentioned, the district court, following
Lustig, held that there was evidence suggesting that the
dishonest and fraudulent acts were the cause in fact of the
Northwest loan loss. The court stated that there was
evidence suggesting that the extensions and additional
loans, at the very least, "enhanced" the losses City Federal
suffered. Op. at 23. Thus, it appears from the language it
used that the district court applied a less-demanding
standard of causation than that which we have adopted
today. See Jefferson 

n.10.

Nevertheless, we do not believe that the district court's
error in this regard necessitates reversal of the district
court's conclusion that there were genuine issues of
material fact concerning the question of causation
presented on the facts of this case. Indeed, we agree with
the district court's ultimate finding that a jury must
determine the cause of the Northwest loss that City Federal
sustained, and in particular, whether those specific
dishonest and fraudulent acts upon which the RTC bases
its claim of indemnification proximately caused the loss.
Under New Jersey tort law, which we find instructive on the
proximate cause analysis required under the bond, see

                               71
Jefferson 

, "a proximate cause need
not be the sole cause of harm. It suffices if it is a
substantial contributing factor to the harm suffered." Perez
v. Wyeth Labs. Inc., 

, 1261 (N.J. 1999); see
also Jefferson 

(stating that under
Pennsylvania law, a cause is proximate if it is merely a
substantial cause of the harm) (citations and quotation
marks omitted). Based on the record before us, we cannot
find, as a matter of law, that a jury could not conclude that
the employees' actions were a substantial factor in bringing
about the Northwest loan loss that eventually resulted.
Allowing the jury to decide the issue of proximate cause is
consistent with New Jersey's approach to resolving
causation issues. See 

(citing Martin
v. Bengue, Inc., 

(N.J. 1957)).

We further point out that in reaching our conclusion on
the causation issue, we are unpersuaded by F&D's
suggestion that as the non-movant at summary judgment
proceedings, the RTC had to produce evidence
demonstrating that the Northwest loan loss would have
been avoided if the employees' misconduct had not
occurred. Importantly, F&D's position in this regard is
premised on cases which are not on point factually and fail
to address the relevant legal concept here--that of
proximate causation. Indeed, it appears from its brief that
F&D's argument conflates the tort concepts of proximate
causation and lack of compensable injury. See Br. at 56-59
(citing 

; 

; 

; W. Page Keeton et al.,
Prosser and Keeton on the Law of Torts S 41, at 265 (5th ed.
1984)). Given this analytical flaw, F&D has not persuaded
us that the facts pertaining to the issue of proximate
causation are so one-sided so as to require judgment as a
matter of law in its favor. See Jefferson Bank , 965 F.2d at
1285 (finding genuine issue of material fact concerning
whether forged signature proximately caused loss where the
evidence suggested that the bank would have refused to
enter the transaction had not an individual purporting to
be a notary signed the instrument); accord 

-68 (finding that relevant question pertaining to
causation issue was whether "the loan committee relied on
[the employee's] misrepresentations in making at least some

                               72
of the disputed loans," and determined that there were
material disputed issues of fact on that point; court stated
that the bond "does not require the bank to rule out all
reasons the loan was not repaid before it can obtain
coverage"). Accordingly, we will affirm the district court's
ruling on the causation issue, as we see no basis for
concluding, as a matter of law, that the dishonest and
fraudulent actions did not cause the Northwest loss.

V. CONCLUSION

As the foregoing discussion demonstrates, we have
determined that the district court erred in determining that
no reasonable jury could conclude that City Federal
"discovered" the covered loss prior to the expiration of the
bond period. Moreover, for the reasons stated, we cannot
affirm on the alternative ground that, as a matter of law,
the loss City Federal sustained was not covered by the
plain language of the bond's fidelity provision. Accordingly,
we will reverse the district court's order entered January
29, 1998, and remand the matter to the district court for
further proceedings consistent with this opinion.

A True Copy:
Teste:

       Clerk of the United States Court of Appeals
       for the Third Circuit

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