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RESOLUTION TRUST CORP. v. AETNA CAS. & SUR. CO.

August 19, 1993

RESOLUTION TRUST CORPORATION, as Conservator for GREATAMERICAN FEDERAL SAVINGS AND LOAN ASSOCIATION, Plaintiff,
v.
AETNA CASUALTY & SURETY COMPANY OF ILLINOIS, Defendant.


MAROVICH


The opinion of the court was delivered by: GEORGE M. MAROVICH

Resolution Trust Corporation ("RTC"), as conservator for GreatAmerican Federal Savings and Loan Association ("GreatAmerican"), filed suit against Aetna Casualty & Surety Company of Illinois ("Aetna") after Aetna denied coverage for claimed losses sustained by GreatAmerican. RTC argues that the losses are covered by two alternative insuring agreements contained in the standard savings and loan bond agreement in effect at the time GreatAmerican suffered its losses. Both RTC and Aetna have moved for summary judgment. In addition, RTC has filed a motion to strike the affidavit of Aetna's expert, Dr. Marcia Stigum. In response, Aetna has moved to strike the affidavit of RTC's expert, Dr. Robert E. Whaley. For the following reasons, RTC's motion for summary judgment is denied and Aetna's motion for summary judgment is granted. Further, both RTC and Aetna's motions to strike the expert affidavits are denied.

 BACKGROUND

 The undisputed facts stipulated to by RTC and Aetna are as follows. In 1985 GreatAmerican was a federal mutual savings and loan institution with its principal office located in Oak Park, Illinois. Defendant Aetna is an insurance company organized and existing under the laws of Illinois. On or about November 9, 1983, Aetna issued its Savings and Loan Blanket Bond No. 08 F 11292 BCI (a Standard Form No. 22) (the "Bond") to GreatAmerican. *fn1" The Bond was in effect beginning January 15, 1984 and continuing until after June 30, 1985. The Bond had a limit of liability of $ 3,000,000 and a deductible of $ 25,000.

 Under the Bond, Aetna agreed to indemnify GreatAmerican up to the limits of liability, subject to the declarations, general agreements, conditions and limitations and other terms thereof for losses covered by the Bond's Insuring Agreements. Under the relevant portions of Insuring Agreement B, Aetna agreed to indemnify GreatAmerican for:

 
(B)(1) Loss of Property resulting directly from
 
(a) robbery, burglary, misplacement, mysterious unexplainable disappearance and damage thereto or destruction thereof while the Property is lodged or deposited within offices or premises located anywhere, or
 
(b) theft, false pretenses, common law or statutory larceny committed by a person
 
(i) present in an office or, on the premises of, the Insured, or
 
(ii) present on the premises in which the Property is lodged or deposited . . . .

 Coverage under Insuring Agreement B is subject to a number of exclusions. Section 2(e) of the Bond excludes coverage for:

 
loss resulting directly or indirectly from complete or partial non-payment of, or default upon, any loan or transaction in the nature of a loan or extension of credit, whether involving the Insured as a lender or as a borrower, including the purchase, discounting or other acquisition of false or genuine accounts, invoices, notes, agreements or Evidences of Debt, whether such loan or transaction was procured in good faith or through trick, artifice, fraud or false pretenses, except when covered under Insuring Agreements (A), (D) or (E).

 Section 2(i) of the Bond excludes coverage for:

 
loss resulting directly or indirectly from trading, with or without the knowledge of the Insured, whether or not represented by any indebtedness or balance shown to be due the Insured or any customer's account, actual or fictitious, and notwithstanding any act or omission on the part of any Employee in connection with any account relating to such trading, indebtedness, or balance, except when covered under Insuring Agreements (D) or (E).

 The exclusions in section 2(e) and 2(i) apply to claims under Insuring Agreement (B); they do not apply to claims under Insuring Agreement (E).

 Under the relevant portions of Insuring Agreement E, Aetna agreed to indemnify GreatAmerican for:

 
(E) Loss resulting directly from the Insured having, in good faith, for its own account or for the account of others,
 
(1) acquired, sold or delivered, or given value, extended credit or assumed liability, on the faith of, or otherwise acted upon, any original
 
(a) Security,
 
. . .
 
which
 
(iii) is lost or stolen;
 
. . .
 
Actual physical possession of the items listed in (a) through (g) above by the Insured, its correspondent institution or other authorized representative, is a condition precedent to the Insured's having relied on the faith of, or otherwise acted upon, such items.

 GreatAmerican began trading with Bevill, Bresler & Schulman, Inc. ("BBS") in 1981 and continued to trade with BBS until BBS filed for bankruptcy in 1985. In 1982, GreatAmerican began transacting repurchase ("repo") and reverse repurchase ("reverse repo") agreements through BBS. *fn2" The typical repo is a two-part transaction. *fn3" The first part consists of the agreement to transfer a specified security by one party to another party in exchange for a fixed price. The second part consists of the contemporaneous agreement by the seller to return or "repurchase" the security on a specified future date at the original price plus an agreed upon rate of return.

 The typical reverse repo consists of the same two-part transaction viewed from the perspective of the other side of the transaction. (For purposes of this opinion, the terms "repo" and "reverse repo" will be used to describe transactions from the perspective of the dealers, AMC or BBS. Thus, in a repo transaction, AMC or BBS "repoed out" or transferred a security to a repo participant, the buyer, and simultaneously agreed to repurchase the security on a future date. Conversely, in a reverse repo transaction, AMC or BBS, as buyer, "reversed in" or purchased a security from a reverse repo participant, who agreed to repurchase the security on a future date.)

 Once a repo or reverse repo transaction is entered into, the parties generally have three choices regarding custody of the underlying security: a repo transaction may be (a) a possessory, delivery repo transaction; (b) a non-possessory repo transaction; or (c) a tripartite repo. In a delivery repo transaction, the dealer actually transfers the security to the repo participant at the outset of the transaction. Certificated securities are physically delivered in exchange for cash. In a non-possessory repo transaction, the dealer retains possession of the securities in an account with its clearing agent. In a ...


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