A bank that found itself hit with a $98.5 million default judgment after the summons for a lawsuit lay unread for months on a departed employee’s desk will not be able to collect insurance coverage for the cost of having the judgment tossed out, the 4th U.S. Circuit Court of Appeals has ruled.
A unanimous panel held April 14 that the company’s “screw-ups” were no excuse for failing to give their insurer timely notice that the lawsuit had been filed against them.
Amiel Cueto, a disbarred lawyer and felon, filed a pro se action in Illinois against Maryland-based American Bank Holdings and other defendants, alleging that they fraudulently failed to fund his $8 million sale of real property, causing the deal to collapse. The complaint was served on CT Corp., American Bank’s agent for receiving service of process in Maryland in June 2008.
American Bank claims it had nothing to do with the transaction and argues that the suit was frivolous, if not fraudulent. Unfortunately, CT followed the bank’s standing instructions to transmit the papers to the bank’s CFO, who had left the company. When the bank failed to respond to Cueto’s suit, Cueto obtained the $98.5 million default judgment. When Cueto began efforts to collect the judgment in 2009, the bank belatedly realized it had a major problem on its hands and contacted its insurer, St. Paul Mercury Insurance Co.
American Bank was eventually able to get the judgment dismissed, at a cost of roughly $1.8 million in legal bills. St. Paul Mercury denied coverage for the loss, citing the lack of timely notice of the complaint from American Bank. American Bank sued to recover its damages, but a federal district court judge agreed with St. Paul Mercury, holding that American Bank had provided late notice of Cueto’s suit and breached its duty to timely defend against it, resulting in prejudice to St. Paul Mercury.
On appeal, the 4th Circuit affirmed the ruling, finding that American Bank as a corporation had “actual notice” of the lawsuit as soon as process was served on CT, its designated agent, regardless of when the company’s employees realized what was up. The appeals court noted that CT had followed American Bank’s established procedures, so the lack of awareness on the company’s part offered evidence only of flaws in the company’s protocol rather than a lack of legal notice.
“As the district court found, ‘through a variety of corporate screw-ups, significant suit papers that should have gotten immediate attention didn’t,’” Judge Paul Niemeyer wrote for the court. “But internal ‘corporate screw-ups’ provide no basis to excuse American Bank’s failure to give St. Paul Insurance timely notice of the Cueto suit after being validly served with process.”
The appeals court said that the eight-month delay in notifying St. Paul Mercury could not possibly be construed as notice “as soon as practicable,” and found that St. Paul Mercury had suffered actual prejudice as a result of the delay. The late notice precluded St. Paul Mercury from exercising some of its contractual rights, such as the right to participate in American Bank’s legal defense. The panel also rejected several other defenses American Bank had raised.
Tom Judge of Loss, Judge & Ward in Washington, D.C. represented St. Paul Mercury, and Al Mezzanotte of Whiteford, Taylor & Preston in Baltimore represented American Bank on appeal. Neither attorney returned phone calls seeking comment.
The 26-page decision is St. Paul Mercury Ins. Co. v. American Bank Holdings Inc. (Lawyers Weekly No. 001-071-16). An opinion digest is available online at nclawyersweekly.com.
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