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LINCOLN-WAY FED. SAV. BANK v. EMPLOYERS INS. OF WA

August 3, 1989

LINCOLN-WAY FEDERAL SAVINGS BANK, Plaintiff,
v.
EMPLOYERS INSURANCE OF WAUSAU, Defendant


George M. Marovich, United States District Judge.


The opinion of the court was delivered by: MAROVICH

GEORGE M. MAROVICH, UNITED STATES DISTRICT JUDGE

 Plaintiff Lincoln-Way Federal Savings Bank ("Lincoln-Way") filed a declaratory judgment action, seeking to recover on a financial institution special bond against defendant Employers Insurance of Wausau ("Employers") for losses sustained when Lincoln-Way's mortgage-backed securities were allegedly lost or stolen by an investment firm of Bevill, Bresler and Schulman, Inc. ("BBS") and its affiliate, Bevill, Bressler & Schulman Asset Management Corp. ("AMC"). Employers presently moves for partial summary judgment and Lincoln-Way brings a cross-motion to strike certain affirmative defenses. At oral argument, the parties narrowed the issues to be resolved by the court. This memorandum opinion and order addresses those issues.

 I. FACTS

 On February 6, 1985, Lincoln-Way entered into repurchase and reverse repurchase transactions with BBS. Lincoln-Way executed documents indicating a "sale" of mortgage participation certificate with a market value of $ 3,998,000.00 to BBS, and an agreement by BBS to "resell" the certificate to Lincoln-Way at the end of ninety days at the price of $ 3,770,000.00 plus an amount of interest. At the same time, Lincoln-Way entered into a repurchase transaction with BBS, whereby Lincoln-Way agreed to "buy" four mortgage-backed securities ("GNMAs") at the end of the ninety days at the same price plus interest.

 Employers issued a financial institution special bond to Lincoln-Way, effective March 1, 1985. Lincoln-Way has made claims for coverage under two provisions of the bond as a result of its losses. The first provision provides coverage for losses sustained as a result of incidents of fraud or theft that occur on the insured's premises or on the premises where the subject property is lodged. *fn1" The second provision provides for recovery of losses sustained as a result of the insured's having purchased, sold, received, or delivered any security, document or other instrument which proves lost or stolen. *fn2"

 Employers has denied Lincoln-Way's claims and has raised three defenses: (1) Lincoln-Way's claim is excluded under the "trading" loss exclusion of the bond; *fn3" (2) the loss is excluded under the "loan" exclusion of the bond; *fn4" and (3) the bond does not cover Lincoln-Way's loss because the loss was sustained on February 6, 1985, prior to the effective date of the bond.

 Lincoln-Way filed its complaint on July 29, 1987. On October 1, 1987, Employers filed a motion for summary judgment pursuant to Fed.R.Civ.P. 56. On December 7, 1987, Judge Shadur denied Employers' motion without prejudice and suggested to the parties that an issue-narrowing motion be brought under Fed.R.Civ.P. 16.

 Employers then filed a motion for partial summary judgment pursuant to Fed.R.Civ.P. 56. Lincoln-Way has filed a cross-motion under Fed.R.Civ.P. 16 to strike Employers' affirmative defenses.

 The parties presented oral arguments to this court on December 21, 1988. At that time, the attorneys for the parties indicated that the court could resolve the following issues as a matter of law:

 
1) whether the loss-sustained rider is prohibited by the Federal Home Loan Bank regulations.
 
2) whether the trading loss or loan loss exclusions run afoul of the Federal Home ...

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