Travis Credit Union v. Cumis Insurance Society, Inc.

• Court: District Court, E.D. California
• Decided: June 13, 2025
• Docket: 2:24-cv-00823
• Status: Unknown

Opinion

1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 FOR THE EASTERN DISTRICT OF CALIFORNIA 10 11 TRAVIS CREDIT UNION, No. 2:24-cv-00823-DAD-SCR 12 Plaintiff, 13 v. ORDER GRANTING DEFENDANT’S MOTION FOR JUDGMENT ON THE 14 CUMIS INSURANCE SOCIETY, INC., PLEADINGS 15 Defendant. (Doc. No. 20) 16 17 18 This matter is before the court on the motion for judgment on the pleadings filed on behalf 19 of defendant CUMIS Insurance Society, Inc. on October 29, 2024. (Doc. No. 20.)1 On 20 November 25, 2024, the motion was taken under submission on the papers. (Doc. No. 23.) For 21 the reasons explained below, the court will grant defendant’s motion for judgment on the 22 pleadings. 23 BACKGROUND 24 On May 8, 2024, plaintiff Travis Credit Union filed its operative first amended complaint 25 (“FAC”) in this action. (Doc. No. 8.) In its FAC, plaintiff alleges as follows. 26

27 1 On March 15, 2024, defendant removed this action from the Solano County Superior Court where it was originally filed to this federal court pursuant to this court’s diversity jurisdiction, 28 28 U.S.C. § 1332(a)(1). (Doc. No. 1.) 1 Between January 1, 2021 and June 30, 2022, certain of plaintiff’s loan officers 2 manipulated plaintiff’s real-estate loan origination system (“LOS”) to misclassify real estate loan 3 originations for the purpose of generating commissions. (Id. at ¶ 7.) The involved loan officers 4 employed two methods in carrying out this scheme. (Id. at ¶¶ 10–11.) 5 The first method the loan officers used was to misclassify real estate loan originations by 6 changing the loan officer assignment in the LOS to reflect that an External Loan Officer had 7 either originated the loan or had generated the loan submission package, when the External Loan 8 Officer had not done so.2 (Id. at ¶ 10.) Pursuant to plaintiff’s commission plans, External Loan 9 Officers were only entitled to commissions on externally sourced loans that they actually closed 10 on, or retail referred loans if the External Loan Officer actually generated the loan submission 11 package with the borrower and submitted it to the operations team. (Id. at ¶¶ 8–9.) In many 12 instances, the LOS reassignment occurred shortly before or after the loans had actually funded, 13 and as a result, plaintiff’s LOS reflected a commission due to the External Loan Officer to whom 14 the loans were reassigned. (Id. at ¶ 10.) 15 The second method the loan officers used involved misclassifying loans to make them 16 appear to be commissionable at a higher rate. (Id. at ¶ 11.) Pursuant to plaintiff’s commission 17 plans, refinanced loans were commissionable at a lower rate than “new money.” (Id.) The 18 involved loan officers misclassified certain loans as “new money,” thereby making them appear 19 to be commissionable at the higher rate. (Id.) 20 As a result of these schemes, plaintiff suffered a total of at least $714,812.00 in losses. 21 (Id. at ¶ 12.) Upon discovery of the schemes, plaintiff hired a forensic auditor to ascertain their 22 scope and to examine its lending portfolio; that audit cost plaintiff $43,058.76. (Id. at ¶ 13.) 23 During the relevant time period, plaintiff was the insured under a fidelity bond (the 24 “Bond”) issued by defendant. (Id. at ¶ 6.) The Bond, a copy of which has been submitted to the 25 court by defendant, (Doc. No. 20-2), contains the following provisions: 26

27 2 Plaintiff alleges that as of April 2022, “External Loan Officers” were reclassified as “Senior Mortgage Loan Officers,” but plaintiff uses the title “External Loan Officers” consistently for 28 clarity. (Doc. No. 8 at ¶ 9.) 1 A. Employee Or Director Dishonesty 2 We will pay you for your loss resulting directly from dishonest acts committed by an “employee” or “director,” acting alone or in 3 collusion with others. 4 Such dishonest acts must be committed by the “employee” or “director” with the intent to: 5 a. Cause you to sustain such loss; or 6 b. Obtain an improper financial benefit for the “employee,” 7 “director,” or for any other person or entity. 8 However, if some or all of your loss resulted directly or indirectly from a “loan” or “trade,” that portion of the loss is not covered unless 9 you establish that the portion of the loss involving a “loan” or “trade” resulted directly from dishonest acts committed by the “employee” 10 or “director,” acting alone or in collusion with others, with the intent to: 11 1) Cause you to sustain such loss; and 12 2) Obtain an improper financial benefit for the 13 “employee” or “director,” or a financial benefit for any other person or entity. 14 As used in this coverage, an improper financial benefit does not 15 include any employment benefits received in the course of employment including salaries, commissions, fees, bonuses, 16 promotions, awards, profit sharing, business entertainment or pensions. 17 As used in this coverage, loss does not include any employment 18 benefits, including: salaries, commissions, fees, bonuses, promotions, awards, profit sharing, business entertainment or 19 pensions, intentionally paid by you. 20 [. . .] 21 J. Faithful Performance – Enhanced 22 We will pay you for your loss resulting directly from a named “employee’s” “failure to faithfully perform his/her trust.” 23 The Application Of Realized Earnings In Loan Losses Condition 24 does not apply to this coverage. 25 [. . .] 26 Failure To Faithfully Perform His/Her Trust 27 “Failure to faithfully perform his/her trust” means acting in conscious disregard of your established and enforced share or deposit 28 policies or that portion of your established and enforced lending 1 policy which sets out the parameters which must be met in order for a “loan” to be approved. 2 “Failure to faithfully perform his/her trust” does not mean: 3 a. Negligence, mistakes or oversights; 4 b. Acts or omissions resulting from inadequate training; 5 c. Unintentional violation of laws or regulations; 6 d. Unintentional violation of your policies or procedures; 7 e. Acts or omissions known to, acquiesced in, or ratified by your 8 Board Of Directors; 9 f. Acts of an “employee” for which you could have made claim under Employee Or Director Dishonesty Coverage; or 10 g. Conscious disregard of any policies other than lending, share 11 or deposit policies, including, without limitation, personnel policies, investment policies, or collection policies or that 12 portion of any policy that relates to the collection of monies. 13 [. . .] 14 Audit And Claims Expense 15 The Audit Expense Coverage is replaced with the Audit And Claims Expense Coverage as follows: 16 1. We will pay you for: 17 a. The necessary and reasonable fees and expenses you 18 pay for a special audit of your records to establish a valid and collectible loss under Employee Or Director 19 Dishonesty Coverage, Faithful Performance Coverage or Faithful Performance – Enhanced 20 Coverage; or 21 b. Reasonable expenses incurred by you with our prior written consent that are directly related to the 22 preparation of a proof of loss in support of a claim covered under this Bond. 23 2. Such special audit under subparagraph 1.a. must be 24 performed by a recognized provider of auditing services. “Employees’” salaries and other expenses are not covered 25 without our prior consent. 26 3. We will not pay under subparagraph 1.a. above for: 27 a. A routine or periodic audit even though it may result in the establishment of a covered loss; or 28 1 b. Correcting, modernizing or otherwise preparing your books and records after you have discovered a 2 covered loss. 3 4. For fees and expenses covered under subparagraph 1.a. above, we will pay you the lesser of: 4 a. The Single Loss Limit Of Liability for Audit Expense 5 Coverage shown on the Declarations; 6 b. The special audit fees and expenses you paid; or 7 c. 100% of the covered loss under Employee Or Director Dishonesty Coverage, Faithful Performance 8 Coverage or Faithful Performance – Enhanced Coverage. 9 5. Audit And Claims Expense Coverage is in addition to 10 whatever coverage may ultimately be available under this Bond for loss that is the subject of such special audit. 11 6. Any covered fees or expenses will be paid only after 12 settlement of the covered loss under this Bond. 13 7. We shall have no liability to pay any such fees or expenses, if the amount of the covered loss does not exceed the Single 14 Loss Deductible Amount applicable to the coverage under which the loss was covered. 15 16 (Doc. No. 20-2 at 27, 31, 49, 96–97.) 17 On August 9, 2022, plaintiff filed a claim with defendant. (Id. at ¶ 15.) On August 11, 18 2022, defendant assigned a claim number and informed plaintiff that it would review the claim 19 for potential coverage, including under the “Employee or Director Dishonesty” and the “Faithful 20 Performance – Enhanced” coverage provisions of the Bond. (Id.) On November 17, 2022, 21 plaintiff submitted proof of loss to defendant. (Id. at ¶ 19.) On September 14, 2023, defendant 22 denied coverage. (Id.) 23 Based on these allegations in its FAC, plaintiff asserts the following three causes of action 24 against defendant: (1) a breach of contract claim; (2) a breach of the covenant of good faith and 25 fair dealing claim; and (3) a declaratory relief claim regarding defendant’s indemnity obligations. 26 (Id. at ¶¶ 22–36.) 27 ///// 28 ///// 1 On October 29, 2024, defendant filed the pending motion for judgment on the pleadings. 2 (Doc. No. 20.) Plaintiff filed its opposition to that motion on November 12, 2024. (Doc. No. 21.) 3 On November 22, 2024, defendant filed its reply thereto. (Doc. No. 22.) 4 LEGAL STANDARD 5 A. Motion for Judgment on the Pleadings 6 Federal Rule of Civil Procedure 12(c) provides that: “After the pleadings are closed—but 7 early enough not to delay trial—a party may move for judgment on the pleadings.” 8 A motion for judgment on the pleadings “challenges the legal sufficiency of the opposing 9 party’s pleadings[.]” Morgan v. Cnty. of Yolo, 436 F. Supp. 2d 1152, 1154–55 (E.D. Cal. 2006), 10 aff’d, 277 F. App’x 734 (9th Cir. 2008). In reviewing a motion brought under Rule 12(c), the 11 court “must accept all factual allegations in the complaint as true and construe them in the light 12 most favorable to the nonmoving party.” Fleming v. Pickard, 581 F.3d 922, 925 (9th Cir. 2009). 13 The same legal standards governing a Rule 12(b)(6) motion are applicable to a motion 14 brought under Rule 12(c). See Dworkin v. Hustler Mag., Inc., 867 F.2d 1188, 1192 (9th Cir. 15 1989). Accordingly, “judgment on the pleadings is properly granted when, taking all the 16 allegations in the non-moving party’s pleadings as true, the moving party is entitled to judgment 17 as a matter of law.” Marshall Naify Revocable Tr. v. United States, 672 F.3d 620, 623 (9th Cir. 18 2012) (quoting Fajardo v. Cnty. of Los Angeles, 179 F.3d 698, 699 (9th Cir. 1999)); see also 19 Fleming, 581 F.3d at 925 (stating that “judgment on the pleadings is properly granted when there 20 is no issue of material fact in dispute, and the moving party is entitled to judgment as a matter of 21 law”). The allegations of the complaint must be accepted as true, while any allegations made by 22 the moving party that contradict the allegations of the complaint are assumed to be false. See 23 MacDonald v. Grace Church Seattle, 457 F.3d 1079, 1081 (9th Cir. 2006). The facts are viewed 24 in the light most favorable to the non-moving party and all reasonable inferences are drawn in 25 favor of that party. See Living Designs, Inc. v. E.I. DuPont de Nemours & Co., 431 F.3d 353, 360 26 (9th Cir. 2005). 27 ///// 28 ///// 1 B. California Contract Law 2 Under California law, the interpretation of an insurance policy is a question of law. See 3 Waller v. Truck Ins. Exch., Inc., 11 Cal. 4th 1, 18 (1995), as modified on denial of reh’g (Oct. 26, 4 1995); see also Universal Cable Prods., LLC v. Atlantic Specialty Ins. Co., 929 F.3d 1143, 1151 5 (9th Cir. 2019) (“[T]he interpretation of an insurance policy is a question of law . . . .”). A court 6 interpreting the terms of an insurance policy must give the terms their plain and ordinary 7 meaning. See Wheeler v. Am. Fam. Home Ins. Co., 632 F. Supp. 3d 1063, 1071 (N.D. Cal. 2022); 8 see also Hoban v. Nova Cas. Co., 335 F. Supp. 3d 1192, 1201–02 (E.D. Cal. 2018) (“Insurance 9 policies are construed under the typical rules of contract law, which require looking ‘first to the 10 language of the contract in order to ascertain its plain meaning or the meaning a layperson would 11 ordinarily attach to it.’”) (quoting Waller, 11 Cal. 4th at 18). “A contract term will be considered 12 ambiguous when it is capable of two or more constructions, both of which are reasonable. But 13 ‘courts will not strain to create an ambiguity where none exists.’” Westport Ins. Corp. v. N. Cal. 14 Relief, 76 F. Supp. 3d 869, 879 (N.D. Cal. 2014) (quoting Waller, 11 Cal. 4th at 18–19). Further, 15 a “contract must be interpreted as a whole.” RLI Ins. Co. v. City of Visalia, 297 F. Supp. 3d 1038, 16 1049 (E.D. Cal. 2018); see also Waller, 11 Cal. 4th at 19; Hoban, 335 F. Supp. 3d at 1202. “The 17 terms of a contract must be construed in a manner that takes into account the context of the 18 language and is consistent with the contract as a whole.” Great Minds v. Office Depot, Inc., 945 19 F.3d 1106, 1110 (9th Cir. 2019) (citations and modifications omitted). 20 ANALYSIS 21 In its pending motion, defendant argues that it is entitled to judgment on the pleadings 22 with respect to all three of plaintiff’s claims. As to plaintiff’s claims for breach of contract and 23 declaratory judgment, defendant argues that the Bond provides no coverage for the commission 24 schemes that plaintiff has alleged to be the victim of. (Doc. No. 20-1 at 9–10.) As to plaintiff’s 25 claim for breach of the implied covenant of good faith and fair dealing, defendant argues that it is 26 entitled to judgment in its favor because its claims determination was correct, or at the very least, 27 based on a reasonable interpretation of the Bond. (Id. at 15.) In opposition, plaintiff argues that 28 the commission schemes caused hundreds of thousands of dollars of loss which is covered under 1 three different Bond provisions: the “Employee or Director Dishonesty” coverage, the “Faithful 2 Performance – Enhanced” coverage, and the “Audit and Claims Expense” coverage. (Doc. No. 3 21 at 8–11.) Further, plaintiff argues that it has demonstrated defendant’s bad faith by alleging 4 that defendant “improperly delayed then denied its claim despite clear coverage under the Bond.” 5 (Id. at 11.) The court will first take up the issue of coverage under each relevant Bond provision 6 and then will discuss the effect of that analysis on each of plaintiff’s three claims asserted in this 7 action. 8 A. Coverage under the “Employee Or Director Dishonesty” Bond Provision 9 As noted, the Bond provides coverage under its Employee Or Director Dishonesty 10 Coverage for “loss resulting directly from dishonest acts committed by an employee or director.” 11 (Doc. No. 20-2 at 27.) The Bond states that “dishonest acts” must be committed “with the intent 12 to” either “cause [the insured] to sustain [] loss” or “obtain an improper financial benefit for the 13 employee, director, or for any other person or entity.” (Id.) Critically, however, the Bond 14 clarifies that “[a]s used in this coverage, loss does not include any employment benefits, 15 including: salaries, commissions, fees, bonuses, promotions, awards, profit sharing, business 16 entertainment or pensions, intentionally paid by [the insured],” and an “improper financial benefit 17 does not include any employment benefits received in the course of employment including 18 salaries, commissions, fees, bonuses, promotions, awards, profit sharing, business entertainment 19 or pensions.” (Id.) 20 Defendant argues that because plaintiff concedes in its FAC that it seeks reimbursement 21 for commission payments, “there is no coverage for [plaintiff’s] claimed losses” “[u]nder the 22 clear and unambiguous terms of the [B]ond.” (Doc. No. 20-1 at 11.) In opposition, plaintiff 23 argues that the commission payments paid pursuant to the loan officers’ schemes can still 24 constitute an “improper financial benefit” or a “loss” because “[t]he plain meaning of the 25 coverage” is “to cover any loss resulting from the dishonest acts of an employee that is not an 26 employment benefit the employer would have paid to the employee anyway.” (Doc. No. 21 at 8.) 27 In the alternative, plaintiff argues that its allegations support coverage for the loss because 28 plaintiff did not intentionally pay the commissions it paid as a result of these schemes. (Id. at 9.) 1 The court will first address below whether plaintiff has alleged an “improper financial 2 benefit” before turning to whether plaintiff suffered a “loss” as required for coverage under this 3 provision of the Bond. 4 1. Improper Financial Benefit 5 As noted above, plaintiff argues that despite the Bond language stating that “an improper 6 financial benefit does not include any employment benefits received in the course of employment 7 including salaries, commissions,” etc., (Doc. No. 20-2 at 27), the commissions paid here are not 8 excluded from coverage because they would not have been paid “in the absence of the fraud,” and 9 “the process by which [the funds] were stolen—fraudulently manipulating the commission 10 processes—does not vitiate coverage” and “is irrelevant.” (Doc. No. 21 at 8.) Defendant argues 11 that this interpretation of the coverage provision language of the Bond would “render [an] entire 12 clause superfluous.” (Doc. No. 22 at 6.) 13 Both parties acknowledge that the Ninth Circuit addressed a similar question almost forty 14 years ago in its decision in James B. Lansing Sound, Inc. v. Nat’l Union Fire Ins. Co. of 15 Pittsburgh, Pa., 801 F.2d 1560 (9th Cir. 1986). In James B. Lansing Sound, Inc., two of the 16 plaintiff’s employees “perpetrated a complex fraud” on the plaintiff company which involved 17 submitting “large, fictitious purchase orders” with “lower than normal sales prices” and changed 18 payment terms, receiving commissions on those sales, and reselling the products abroad to 19 undercut authorized dealers. Id. at 1562–63. The plaintiff company submitted proof of its loss to 20 its insurers, one of whom “maintained that [the plaintiff] incurred no recoverable losses,” leading 21 to an action being brought for breach of the insurance contract. Id. at 1563. The contract at issue 22 provided coverage for “dishonest or fraudulent acts committed by such Employee with the 23 manifest intent . . . to obtain financial benefit for the Employee . . . other than salaries, 24 commissions, fees, bonuses, promotions, awards, profit sharing, pensions or other employee 25 benefits earned in the normal course of employment.” Id. at 1567. The plaintiff company argued 26 that the commissions paid pursuant to the fraud scheme were recoverable because the “fraudulent 27 sales of its equipment were not its normal course of business.” Id. The Ninth Circuit rejected 28 that argument, concluding that “under [the plaintiff’s] theory, the exclusion of commissions 1 would have no meaning or effect because fraud and dishonest acts are not usually part of a normal 2 course of business.” Id. The court also noted that the plaintiff would have incurred those 3 commission expenses “even if the merchandise had been sold at the list price” and not the lower 4 than normal rate. Id. Accordingly, the court concluded that “the commission payments [were] 5 excluded by the unambiguous terms” of the insurance policy. Id. The Eighth Circuit later 6 reviewed a similar standard dishonesty provision and agreed that this interpretation gave “the 7 entire provision [] meaning,” noting that although this means “that the policy does not cover all 8 types of employee theft, the employee dishonesty provision still provides coverage for many 9 dishonest acts of employees,” such as “forging checks, fraudulently using employer credit cards 10 . . . embezzlement . . . stealing from inventory . . . and altering purchase orders to confer a benefit 11 on the selling company.” R&J Enters. v. Gen. Cas. Co. of Wis., 627 F.3d 723, 727 (8th Cir. 12 2010). 13 Applying these holdings, the court concludes that the commission payments at issue here 14 are plainly excluded from the definition of an “improper financial benefit” under the terms of the 15 Employee Or Director Dishonesty provision, which specifically carve out “employment benefits 16 received in the course of employment including salaries, commissions,” etc. Plaintiff’s strained 17 interpretation of the contract language fails to take into account the context of the exclusion 18 within a dishonesty provision. As noted, the provision specifies that “an improper financial 19 benefit does not include any employment benefits received in the course of employment including 20 salaries, commissions . . . .” (Doc. No. 20-2 at 27.) If the court interpreted this phrase, as 21 plaintiff suggests, to only refer to “an employment benefit the employer would have paid to the 22 employee anyway,” the phrase would have little meaning in context and would carve out nothing, 23 because a financial benefit can hardly be viewed as improper if an employee is entitled to it 24 anyway. Instead, interpreting the language as plainly written, that an improper financial benefit 25 does not include any employment benefit received in the course of employment including 26 commissions, gives meaning to the entire phrase as it appears within the contract, because even if 27 an employee’s acts were dishonest and a resulting financial benefit from those acts seems 28 “improper,” coverage is excluded if the benefit was received by the employee in the specific 1 manner identified (through employment benefits). See Performance Autoplex II Ltd. v. 2 Midcontinent Cas. Co., 322 F.3d 847, 858 (5th Cir. 2003) (holding for the insurer by finding that, 3 where an employee obtained a pay increase for herself, the plain language of the policy excluded 4 coverage for unauthorized salaries obtained due to employee dishonesty because if the phrase 5 “normal course of employment” was interpreted to mean not “through employee dishonesty,” 6 “the policy language excluding salaries would become mere surplusage”); Mortell v. Ins. Co. of 7 N. Am., 120 Ill. App. 3d 1016, 1025–26 (1983) (concluding that bond language defining 8 “dishonest or fraudulent acts” as those committed with intent to cause the insured to sustain loss 9 and “to obtain financial benefit . . . other than salaries, commissions . . . or other employee 10 benefits earned in the normal course of employment” was “unambiguous and must be given effect 11 as written”). 12 Accordingly, the court finds that plaintiff is not entitled to coverage under the Employee 13 Or Director Dishonesty provision for the dishonest acts allegedly committed by its employees 14 with the intent to obtain an “improper financial benefit,” because under the provision’s language 15 an improper financial benefit does not include salaries, commissions, or other employment 16 benefits. 17 2. Loss 18 Plaintiff next argues that the commission payments made as a result of the fraudulent 19 scheme are recoverable under the Employee Or Director Dishonesty provision of the Bond as 20 “dishonest acts [] committed by the employee [] with the intent to cause [plaintiff] to sustain such 21 loss.” (Doc. No. 20-2 at 27.) However, as noted, the Bond provision similarly excludes from its 22 definition of “loss” “any employment benefits, including: salaries, commissions, fees, bonuses, 23 promotions, awards, profit sharing, business entertainment or pensions, intentionally paid by 24 you.” (Id.) Plaintiff’s argument that the exception for employment benefits does not apply here 25 because “the commissions at issue would not have been incurred anyway” fails for the same 26 reason discussed above. See Renasant Bank v. St. Paul Mercury Ins. Co., 882 F.3d 203, 210 (5th 27 Cir. 2018) (“We therefore agree with the district court that the Bond does not count commissions 28 as the type of financial benefit that triggers coverage. This interpretation is the most natural way 1 to read the Bond and is consistent with what other circuit courts have concluded in construing 2 such language.”); Mun. Sec., Inc. v. Ins. Co. of N. Am., 829 F.2d 7, 10 (6th Cir. 1987) (“We agree 3 with this reading of the policy language. The language explicitly excluded dishonest or 4 fraudulent acts intended to enhance the employee’s regular compensation.”); Verex Assur., Inc. v. 5 Gate City Mortg. Co., No. 83-cv-00506-DKW, 1984 WL 2918, at *2 (D. Utah Dec. 4, 1984) 6 (finding that where the “allegations show that the loan officers engaged in the scheme in order to 7 obtain commissions” and the coverage requires an “intent by the employee to procure some sort 8 of financial benefit other than salary, commissions, or similar benefits,” there is “simply” no 9 coverage). 10 However, plaintiff also argues that this exclusion does not apply because the commissions 11 at issue here were not “intentionally paid.” (Doc. No. 21 at 9–10.) In this regard, plaintiff 12 contends that the “ordinary usage of ‘intentionally paid’ would never include money stolen or 13 embezzled by fraud” and that it “had no intent to pay fraudulent commissions.” (Id. at 10.) In 14 reply, defendant argues that the plain and ordinary meaning of “intentionally” is “with an 15 awareness of what one is doing,” and plaintiff has not alleged that the payment of the 16 commissions was accidental. (Doc. No. 22 at 8.) Defendant further argues that plaintiff’s 17 interpretation of the language, “that ‘intentionally paid’ means ‘with full knowledge of the 18 dishonest conduct’” would render the exception in the Employee Or Director Dishonest Bond 19 provision meaningless, “because companies typically will not pay employment benefits known to 20 be improperly gained.” (Id. at 9.) 21 The court agrees that the phrase “intentionally paid” as used in the Bond provision at issue 22 does not require that the insured has full knowledge of any and all dishonesty. If the commission 23 payments at issue here were considered “unintentionally paid” by plaintiff due to the alleged 24 fraud, then the exception for employment benefits within the dishonesty provision would again 25 have no meaning. See James B. Lansing Sound, Inc., 801 F.2d at 1567 (interpreting the Bond 26 provision such that each phrase has meaning). Indeed, the “intentionally paid” language would 27 swallow the entire exception in the context of any employee dishonesty. See R&J Enters., 627 28 F.3d at 727 (“Under [the plaintiff’s] proposed interpretation, the limiting language would be 1 superfluous, because benefits actually earned do not result from dishonest acts. . . . In other 2 words, ‘the language excluding salaries presumes that there are acts of employee dishonesty that 3 result in increased employee benefits that the insured and insurer agreed to exclude from 4 coverage.’”) (quoting Performance Autoplex II Ltd., 322 F.3d at 858). 5 Neither party cites any case law specifically discussing how to interpret the phrase 6 “intentionally paid” in this context, and the court has been unable to identify any. Nonetheless, 7 legal scholars have addressed revisions to standard form employee dishonesty provisions 8 appearing in insurance contracts and their commentary further persuades the court that plaintiff’s 9 interpretation of the meaning of “intentionally paid” in this context is incorrect: 10 Some claimants had argued that bonuses or commissions generated by a fraudulent scheme were not excluded because they were not 11 earned. The replacement of ‘earned’ with ‘received’ makes clear that the provision is referring to whether the benefit is of a type that 12 would ordinarily be received in the course of employment rather than the nature of the benefit, e.g., earned or unearned. The 2004 revision 13 takes the belt-and-suspenders approach of also excluding any employee benefits intentionally paid by the Insured from the 14 definition of loss. 15 Jeffrey S. Price, Michael J. Sams, Employee Dishonesty and Employee Theft: Similar but Not the 16 Same, 28 Fidelity L.J. 43, 56 (2022) (emphasis in original). This analysis suggests that standard 17 employee dishonesty provisions have been revised to clarify that their intent is to exclude from 18 coverage employment benefits categorically, and that the addition of the “intentionally paid” 19 language was meant to emphasize that benefits paid out are excluded from coverage regardless of 20 whether they were honestly earned or not. On the other hand, the only authority plaintiff cites to 21 in support of its position that commissions can never be “intentionally paid” in the context of 22 fraud is California Civil Jury Instruction 1320, which defines “intent” as an element of an assault 23 or battery or other intentional torts—a context which has little applicability here. (Doc. No. 21 at 24 10) (citing Jud. Council of Cal. Civ. Jury Instructions (2023), No. 1320). 25 The court finds plaintiff’s argument on this point to be unpersuasive and concludes that, 26 under the plain language of the Bond provision, plaintiff has not suffered a recoverable “loss” by 27 way of its payment of the commissions. Because plaintiff’s allegations do not support coverage 28 for a “loss” or an “improper financial benefit,” plaintiff cannot recover under the Employee Or 1 Director Dishonesty provision of the Bond. 2 B. Coverage under the “Faithful Performance – Enhanced” Bond Provision 3 As mentioned, the Bond also contains a “Faithful Performance – Enhanced” provision, 4 which states that the insurer will pay for the insured’s “loss resulting directly from a named 5 employee’s failure to faithfully perform his/her trust.” (Doc. No. 20-2 at 31.) The “definitions” 6 section of the Bond defines the “failure to faithfully perform his/her trust” as “acting in conscious 7 disregard of your established and enforced share or deposit policies or that portion of your 8 established and enforced lending policy which sets out the parameters which must be met in order 9 for a ‘loan’ to be approved.” (Id. at 49.) This definition also specifically clarifies that “[f]ailure 10 to faithfully perform his/her trust does not mean . . . [c]onscious disregard of any policies other 11 than lending, share or deposit policies.” (Id.) 12 In the pending motion for judgment on the pleadings, defendant observes that the “faithful 13 performance coverage provides indemnity for losses associated with defaulted loans if the lending 14 officer intentionally violated the credit union’s underwriting standards when approving the loan.” 15 (Doc. No. 20-1 at 13.) Defendant argues that while plaintiff alleges that its “lending officers 16 devised a scheme to sidestep the commission plan,” the FAC contains no allegations implicating 17 lending policy or the standards for loan approval. (Id.) It argues that “[t]he very nature of the 18 claim forecloses the possibility of faithful performance coverage” because plaintiff “alleges its 19 loan officers manipulated the manner in which loans were classified internally,” but not “that the 20 loans themselves should not have been approved.” (Id. at 14.) In opposition, plaintiff offers only 21 the following: 22 Travis had in place established lending policies with the parameters for the approval of real estate loans. By misclassifying the 23 originations of real estate loans for purposes of generating improper and fraudulent commissions, and by styling loans as new money 24 when they were not, Travis’s loan officers acted in conscious disregard of these established lending policies. Accordingly, 25 coverage pursuant to the “Faithful Performance – Enhanced” coverage exists. 26 27 (Doc. No. 21 at 11.) 28 ///// 1 The court has reviewed plaintiff’s FAC and finds that it contains no allegations regarding 2 any share, deposit, or lending policies that would support coverage for any loss suffered pursuant 3 to the Faithful Performance – Enhanced Bond provision. Plaintiff’s FAC contains allegations 4 regarding its employees’ misclassification of loans, and it alleges that “[t]he Faithful Performance 5 – Enhanced Coverage provides that CUMIS will pay for loss resulting directly from an 6 employee’s failure to faithfully perform his or her trust” and that “despite the clear and 7 unambiguous language of the . . . Faithful Performance – Enhanced Coverage, CUMIS denied 8 coverage . . . .” (Doc. No. 8 at ¶¶ 10, 11, 17, 19.) However, these allegations are insufficient to 9 allege that plaintiff’s employees “failed to faithfully perform [their] trust,” which requires acting 10 in conscious disregard of specific policies as defined in the Bond. Further, the court is 11 unpersuaded by plaintiff’s argument in opposition that it “had in place established lending 12 policies with the parameters for the approval of real estate loans” and that its loan officers acted 13 in conscious disregard of those lending policies when they misclassified the originations of real 14 estate loans. (Doc. No. 21 at 11.) Plaintiff provides no detail as to the lending policies that its 15 employees purportedly violated and does not even attempt to connect the dots between its 16 employees’ alleged actions, which involved misclassifying loans “shortly before or after” the 17 loans funded, (Doc. No. 8 at ¶ 10), and the internal process for approval of those loans. 18 Accordingly, the court finds that plaintiff’s allegations do not support its recovery under the 19 Faithful Performance – Enhanced coverage of the Bond. 20 C. Coverage under the “Audit And Claims Expense” Bond Provision 21 In its FAC, plaintiff alleges that it spent $43,058.76 on an audit upon discovery of its 22 employees’ fraudulent acts. (Doc. No. 8 at ¶ 13.) Plaintiff alleges that this loss “falls squarely 23 within” the Bond’s “Audit and Claims Expense coverage, which provides that CUMIS will pay 24 the necessary and reasonable fees and expenses Plaintiff has paid for a special audit of its records 25 to establish a valid and collectible loss.” (Id. at ¶¶ 18, 20.) In its motion, defendant argues that 26 these “fees are not covered until and unless Travis establishes a covered claim,” and “[b]ecause 27 there is no coverage for Travis’s claim under the employee dishonesty or faithful performance 28 coverages, there is also no coverage for audit expenses.” (Doc. No. 20-1 at 14–15.) Plaintiff 1 responds by arguing that because it “has established ‘a valid and collectible loss’ pursuant to the 2 ‘Employee or Director Dishonesty’ and the ‘Faithful Performance – Enhanced’ coverages,” 3 “there is also coverage for audit expenses.” (Doc. No. 21 at 11.) 4 Because the court has determined that plaintiff’s allegations do not support coverage 5 under either of the previously discussed provisions, the allegations of plaintiff’s FAC also do not 6 support coverage of plaintiff’s $43,058.76 in audit expenses incurred under the Audit And Claims 7 Expense provision. Therefore, the court concludes that plaintiff is not entitled to coverage under 8 any of the Bond provisions under which it seeks coverage. 9 D. Judgment on the Pleadings 10 As noted at the outset, in its pending motion defendant requests that the court enter 11 judgment on the pleadings in its favor as to all causes of action asserted in plaintiff’s FAC. (Doc. 12 No. 20-1 at 16.) The court finds that, pursuant to the analysis set forth above, judgment on the 13 pleadings is appropriate as to each of plaintiff’s three claims for: breach of contract, breach of the 14 covenant of good faith and fair dealing, and declaratory relief. 15 1. Breach of Contract 16 To bring a claim for breach of contract, a plaintiff must show: (1) the existence of a 17 contract; (2) plaintiff’s performance or excuse for nonperformance; (3) defendant’s breach; and 18 (4) the resulting damages to the plaintiff. Oasis W. Realty, LLC v. Goldman, 51 Cal. 4th 811, 821 19 (2011). Defendant is entitled to judgment on the pleadings because plaintiff’s allegations cannot 20 satisfy the third element—breach. Because the court has found that plaintiff is not entitled to 21 coverage for the alleged actions of its employees under the Bond provisions identified, plaintiff 22 has failed to demonstrate that defendant breached any terms of the Bond when it denied plaintiff’s 23 claim for coverage. Accordingly, the court will grant defendant’s motion as to plaintiff’s breach 24 of contract claim. See Body Xchange Sports Club, LLC v. Zurich Am. Ins. Co., 648 F. Supp. 3d 25 1205, 1220–21 (E.D. Cal. 2022) (granting the defendant’s motion for judgment on the pleadings 26 as to the plaintiff’s breach of contract claim where the plaintiff did “not have a valid claim to 27 benefits under the insurance policy”). 28 ///// 1 2. Breach of the Covenant of Good Faith and Fair Dealing 2 California has a well-established cause of action sounding in tort, rather than contract, 3 against an insurer who breaches the implied covenant of good faith and fair dealing with its 4 insured, when it “unreasonably and in bad faith withholds payment of the claim of its insured.” 5 Foley v. Interactive Data Corp., 47 Cal. 3d 654, 683–85 (1988) (en banc) (quoting Gruenberg v. 6 Aetna Ins. Co., 9 Cal. 3d 566, 575 (1973)). “While an insurance company has no obligation 7 under the implied covenant of good faith and fair dealing to pay every claim its insured makes, 8 the insurer cannot deny the claim ‘without fully investigating the grounds for its denial.’” Wilson 9 v. 21st Century Ins. Co., 42 Cal. 4th 713, 720–21 (2007) (quoting Frommoethelydo v. Fire Ins. 10 Exch., 42 Cal. 3d 208, 215 (1986)). The ultimate question in considering a bad faith claim is 11 “whether the refusal to pay policy benefits was unreasonable.” Ospal v. United Servs. Auto. 12 Ass’n, 2 Cal. App. 4th 1197, 1205 (1991); Chateau Chamberay Homeowners Ass’n v. Associated 13 Int’l Ins. Co., 90 Cal. App. 4th 335, 347 (2001) (“[B]efore an insurer can be found to have acted 14 tortiously (i.e., in bad faith), for its delay or denial in the payment of policy benefits, it must be 15 shown that the insurer acted unreasonably or without proper cause.”). 16 Here, because the court has found that defendant properly denied plaintiff’s insurance 17 coverage claim, it also concludes that plaintiff’s FAC fails to state a claim for bad faith. See 18 Waller, 11 Cal. 4th at 36 (“It is clear that if there is no potential for coverage . . . there can be no 19 action for breach of the implied covenant of good faith and fair dealing because the covenant is 20 based on the contractual relationship between the insured and the insurer.”). Accordingly, 21 defendant’s motion for judgment on the pleadings as to plaintiff’s claim for breach of the implied 22 covenant of good faith and fair dealing will also be granted. See Islands Rests., LP v. Affiliated 23 FM Ins. Co., 532 F. Supp. 3d 948, 955 (S.D. Cal. 2021) (“Here, because Plaintiffs are not ‘due’ 24 any benefits under the Policy’s general business interruption provision, they fail to state a claim 25 for bad faith. . . . Accordingly, the Court grants Defendant’s motion for judgment on the 26 pleadings as to Plaintiffs’ claim for breach of the implied covenant of good faith and fair 27 dealing.”). 28 ///// 1 3. Declaratory Relief 2 In its FAC, plaintiff seeks declaratory relief recognizing defendant’s “obligation to 3 indemnify [p]laintiff for losses suffered as a result of the fraud perpetrated by its employees.” 4 (Doc. No. 8 at ¶ 34.) Again, because the court has concluded that defendant has no obligation to 5 indemnify plaintiff for the alleged fraud, defendant is also entitled to judgment in its favor as to 6 plaintiff’s declaratory relief claim. See Crown Intermediate Holdco Inc. v. Allianz Glob. Risks 7 US Ins. Co., No. 2:22-cv-01248-SB-AFM, 2022 WL 2301880, at *6 (C.D. Cal. June 17, 2022) 8 (“Because Regal has not plausibly alleged any physical loss or damage . . . the policy provisions 9 it invokes do not provide coverage for its losses as a matter of law. Regal’s claims for breach of 10 contract and declaratory judgment therefore fail, and Defendants are entitled to judgment on the 11 pleadings.”), aff’d, No. 22-55661, 2024 WL 5040044 (9th Cir. Dec. 9, 2024); Wallis v. 12 Centennial Ins. Co., 927 F. Supp. 2d 909, 918 (E.D. Cal. 2013) (finding that because the plaintiffs 13 had not pled cognizable claims for breach of contract and bad faith, “their request for declaratory 14 relief against [the defendant] also falls”); see also Sacramento Downtown Arena LLC v. Factory 15 Mut. Ins. Co., 637 F. Supp. 3d 865, 872 (E.D. Cal. 2022) (noting that the defendant’s “arguments 16 about the plaintiffs’ claims for declaratory relief . . . are derivative of [its] arguments about the 17 contract claim”). 18 E. Leave to Amend 19 “Although Rule 12(c) does not mention amendments, courts have discretion to grant a 20 Rule 12(c) motion with leave to amend.” Satvati v. Allstate Northbrook Indem. Co., 634 F. Supp. 21 3d 792, 800 (C.D. Cal. 2022) (citation omitted). “The court should give leave [to amend] freely 22 when justice so requires.” Fed. R. Civ. P. 15(a)(2). In the Ninth Circuit, “Rule 15’s policy of 23 favoring amendments to pleadings should be applied with extreme liberality.” United States v. 24 Webb, 655 F.2d 977, 979 (9th Cir. 1981). Generally, denial of leave to amend is proper only if it 25 is clear that “the complaint could not be saved by any amendment.” Intri-Plex Techs. v. Crest 26 Grp., 499 F.3d 1048, 1056 (9th Cir. 2007) (citation omitted); see also Ascon Props., Inc. v. Mobil 27 Oil Co., 866 F.2d 1149, 1160 (9th Cir. 1989) (“Leave need not be granted where the amendment 28 of the complaint . . . constitutes an exercise in futility . . . .”). 1 In its opposition to the pending motion, plaintiff requests that the court deny defendant’s 2 motion for judgment on the pleadings, or alternatively, it “requests leave to amend its [FAC].” 3 (Doc. No. 21 at 13.) While not dispositive, plaintiff offers no suggestion as to any new 4 allegations it would, or could in good faith, include or other amendments it would make if granted 5 leave to file a second amended complaint. Cf. Brooks v. Tapestry, Inc., No. 2:21-cv-00156-DAD- 6 JDP, 2022 WL 21872531, at *2 (E.D. Cal. Oct. 31, 2022) (granting the defendant’s motion for 7 judgment on the pleadings with leave to amend where the plaintiff “proffer[ed] [] allegations that 8 would appear to address the pleading deficiency underlying [the] defendant’s motion”). 9 In the court’s view, it is apparent that plaintiff’s FAC cannot be cured by amendment 10 because the factual nature of the allegations at issue here, namely that plaintiff’s employees 11 misclassified loans shortly before or after the loans funded for the purpose of generating higher 12 commissions, is not compatible with coverage under the Bond provisions identified. The relevant 13 legal authority supports the court’s conclusion as to the lack of coverage under the Bond, and 14 plaintiff has not cited to, nor has the court independently found, any authority supporting 15 plaintiff’s position or suggesting that amendment could cure the defects discussed herein. 16 Accordingly, the court finds that granting plaintiff leave to file a second amended complaint 17 under these circumstances would be futile. See Satvati, 634 F. Supp. 3d at 800 (granting the 18 defendant’s motion for judgment on the pleadings without leave to amend, finding that “[b]ecause 19 the defective breach of contract claim cannot be cured through amendment, leave to amend would 20 be futile”); Body Xchange Sports Club, 648 F. Supp. 3d at 1221 (granting the defendant’s motion 21 for judgment on the pleadings without leave to amend where the plaintiff did not “explain how 22 amendment could save their claims” and the “cause of [the plaintiff’s] loss . . . fall[s] squarely 23 within [a policy exclusion]”); Diaz v. Trans Union LLC, No. 1:18-cv-01341-DAD-EPG, 2019 24 WL 2389937, at *4 (E.D. Cal. June 6, 2019) (finding that “the complaint cannot be saved by 25 amendment and granting leave to amend would therefore be futile” where the “clear weight of the 26 authority on the dispositive issue is contrary to [the] plaintiff’s position”). 27 ///// 28 ///// 1 CONCLUSION 2 For the reasons set forth above: 3 1. Defendant’s motion for judgment on the pleadings (Doc. No. 20) is GRANTED as 4 to all claims asserted against it, without leave to amend; 5 2. The Clerk of the Court is directed to enter judgment in favor of defendant CUMIS 6 Insurance Society, Inc.; and 7 3. The Clerk of the Court is directed to CLOSE this case. 8 IT IS SO ORDERED. ” | Dated: _ June 13, 2025 Dae A. 2, eyel 10 DALE A. DROZD UNITED STATES DISTRICT JUDGE

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