On April 8, 1985, BBS filed for protection under Chapter 11 of the United States Bankruptcy Code. At that time, BBS advised Lincoln-Way that both its mortgage participation certificate and the GNMAs for which it had been "exchanged" were "gone." Lincoln-Way claims its loss was due to fraud on the part of BBS.
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.
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.
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;
(2) the loss is excluded under the "loan" exclusion of the bond;
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.