National Credit Union Administration Board v. Cumis Insurance Society, Inc.

Background

St. Francis Campus Credit Union was insured under a fidelity bond issued by CUMIS Insurance Society, Inc. The bond covered, among other things, theft by employees. St. Francis discovered that its manager, Margurite Cofell, had embezzled more than $3 million. The National Credit Union Administration Board (NCUAB) was appointed receiver of St. Francis and filed a proof of loss totaling $3,086,755.94.

CUMIS later sent the NCUAB a letter stating that it was rescinding, or canceling, the bond because Cofell had allegedly lied on the application for renewal. CUMIS included a refund of premiums. The first check was separated from the letter during mail processing and was cashed under procedures used during the receivership. A second check was also deposited. NCUAB later attempted to return the money, but CUMIS did not accept it. NCUAB then sued CUMIS seeking a declaration that the bond provided coverage.

The parties’ motions

CUMIS moved for summary judgment, which asks the court to rule without a trial when no genuine dispute over an important fact exists and the moving party is entitled to judgment under the law. CUMIS argued that the Board mutually rescinded the bond by failing to respond to the rescission letter and by cashing and retaining the premium-refund checks.

NCUAB also moved for summary judgment. It argued that Cofell’s conduct fell within the bond’s employee-dishonesty coverage and that it had met the other coverage requirements. NCUAB also argued that Cofell’s alleged misrepresentations could not be attributed to the Board and that the Board had not agreed to mutual rescission. In the alternative, NCUAB argued that the Federal Credit Union Act protected its post-liquidation conduct from being used to support a rescission claim.

Analysis

The court focused on mutual rescission because the outcome of that issue controlled both motions. Under Minnesota law, an insurance contract can be rescinded by mutual agreement. The parties’ intent is judged by their actions, and the intent must be clearly expressed through conduct that is positive, unequivocal, and inconsistent with the contract’s continued existence. Whether a party intended to rescind is generally a question for the jury.

The court acknowledged evidence supporting CUMIS’s position. Several NCUAB attorneys and senior managers knew that the rescission letter and refund check were coming, and the letter was discussed with legal advisers. NCUAB also did not respond to the letter and cashed the checks.

But the court also found evidence supporting a different interpretation. The check was processed under standard receivership procedures, and the person who actually deposited it lacked the knowledge and intent necessary to rescind the bond. The record also included references to an “attempted rescission,” testimony that an NCUAB representative did not agree with CUMIS’s decision, and NCUAB’s later lawsuit challenging the rescission. The court concluded that it could not determine as a matter of law whether NCUAB’s conduct showed an unequivocal intent to rescind. That factual issue had to be resolved by a jury.

The court separately rejected NCUAB’s argument that the Federal Credit Union Act barred the mutual-rescission theory. The statute protects the NCUAB’s exercise of its powers as receiver or liquidating agent from court action that restrains or affects those powers. The court reasoned that the NCUAB had authority to enforce coverage under the bond and also had discretion to agree to release or dispose of assets and contracts for cash. Therefore, treating the cashing of the refund checks as possible evidence of mutual rescission did not improperly restrain the NCUAB’s authority.

Disposition

The court found that factual disputes remained about rescission and that the Federal Credit Union Act did not shield the NCUAB from the mutual-rescission claim. Judge Donovan W. Frank denied NCUAB’s motion for summary judgment and denied CUMIS’s motion for summary judgment.