This opinion will be unpublished and

may not be cited except as provided by

Minn. Stat. § 480A.08, subd. 3 (1998).






KMC Management Corporation,





Certain Underwriters at Lloyd’s London,



Filed November 28, 2000


Harten, Judge


Hennepin County District Court

File No. 9913992


John M. Sheran, Robert P. Thavis, Steven P. Zabel, Leonard Street & Deinard, P.A., 150 South Fifth Street, Suite 2300, Minneapolis, MN 55402 (for appellant)


James F. Roegge, Amy J. Woodworth, Richard L. Pemberton, Jr., Meagher & Geer P.L.L.P., 4200 Multifoods Tower, 33 South Sixth Street, Minneapolis, MN 55402-3788 (for respondent)


            Considered and decided by Klaphake, Presiding Judge, Harten, Judge, and Anderson, Judge.

U N P U B L I S H E D   O P I N I O N


Appellant, a mortgage banker, made payments to a mortgage loan originator company instead of to the banks that were entitled to the payments. Instead of transmitting the payments to the banks, an officer of the mortgage loan originator company diverted them. The banks sued appellant; the case was settled.  Appellant then brought this action against respondent, its insurer, to recover the cost of settlement.  Respondent was granted summary judgment after the district court concluded that there was no coverage under the policy.  Because we see no error of law that conclusion, we affirm.


            Appellant KMC Management Corporation is a mortgage banker.  During the period relevant to this action, appellant was insured by respondent Certain Underwriters of Lloyd’s, London, (Lloyd’s), under a Mortgage Bankers Bond.

The bond coverage provided in relevant part Insuring Clause 3, Transit:

(a)       Loss of Property * * * by reason of and directly caused by such Property * * * being lost, damaged, destroyed, stolen, mislaid, misplaced, misappropriated, or made away with, or having mysteriously disappeared, while in transit anywhere in the custody of any person or persons acting as messenger * * *.


During the period of the bond, appellant settled a lawsuit brought by Main Line Bank and Harris Savings Bank (the banks), which provided warehouse lines of credit for the mortgage loans appellant purchased and had a 100% participatory interest in the loans they financed.  The banks, through bailee letters, had asked appellant to transmit payment for the loans directly to them.  But Consumer First Mortgage (CFM), the mortgage loan originator company that sold appellant the mortgage loans and had legal title to them, directed appellant to wire payment for the loans to CFM.  Appellant followed CFM’s directive.

Mark Feinberg, CFM’s officer, diverted over $5 million paid by appellant that should have been forwarded to the banks.[1]  The banks then sued appellant and obtained a settlement of $2.3 million.  Appellant brought this action against respondent to recover the settlement, arguing that the funds it had wired to CFM were property in transit and that CFM was acting as a messenger.  The district court granted respondent summary judgment after holding that the funds were not property in transit in the custody of CFM acting as a messenger.



“Insurance coverage issues are questions of law for the court.”  State Farm Ins. Cos. v. Seefeld, 481 N.W.2d 62, 64 (Minn. 1992) (citation omitted).  Appellant challenges only the district court’s determination that the funds misappropriated by CFM were not appellant’s “property * * * lost * * * in transit anywhere in the custody of any person or persons acting as messenger.”[2]

Appellant argues that the passage of funds from itself to the banks was a single transaction, interrupted by CFM’s misappropriation, so the misappropriated funds were appellant’s property, in transit, in custody of CFM.  But neither logic nor the facts support this argument.  Appellant wired funds to CFM in exchange for mortgage loans.  Appellant received the mortgage loans; CFM received the funds.  At that point, the funds became CFM’s property; appellant had received full value for them.  Therefore, at the time of the misapproporiation, the funds were not appellant’s.

The bond defines neither “in transit” nor “messenger.”  But, as the district court noted, the facts do not support a finding that the funds were “in transit,” because they had reached the destination to which appellant transmitted them.  Nor do the facts support a finding that CFM was a messenger, or was acting as a messenger, for appellant, because appellant did not entrust specific funds to CFM for transmission to a specific destination.  As the district court observed,

In hindsight, perhaps  [appellant] should have paid the money directly to [the banks] as requested by the bailee letters. However, the fact that [appellant] did not, but relied on CFM to allocate the money appropriately does not transform CFM into a “messenger.”


Moreover, CFM retained the funds for a period of time and used them to satisfy other prior obligations.  CFM was not appellant’s messenger; it did not have custody of appellant’s funds.

            Appellant relies on four cases to argue that the bond provides coverage.  None is precedential for this court, and all are readily distinguishable.  Underwood v. Globe Indem. Co., 156 N.E. 632, 633-34 (N.Y. 1927), cited for the proposition that under the terms of an “in transit” provision, delivery is not completed until the property reaches a person with a legal right to it, concerned an employee who was tricked into delivering bonds to a thief in exchange for an unsigned certified check. Hanson v. National Sur. Co., 177 N.E. 425, 427 (N.Y. 1931) and Fuller v. Home Indem. Co., 60 N.E.2d 1, 3-4 (Mass. 1945) both cited to argue that transit is not terminated by a larcenous delivery, concerned misappropriations that occurred at the moment of delivery.  United Bank of Pueblo v. Hartford Accident & Indem. Co., 529 F.2d 490, 495 (10th Cir. 1976) cited to argue that a messenger can be one of many temporary custodians of property in transit, concerned a bank employee who was assaulted and robbed as he carried the bank’s property to the bank from the bus station where it had been delivered to him.  None of these fact situations is comparable to the loss incurred through settlement of a lawsuit brought by those to whom the insured should have transmitted payments.

            Appellant presents no convincing support for its argument that the funds misappropriated after appellant wired them to CFM were, at the time of their misappropriation, property in transit in custody of a person or persons acting as messenger.  Appellant’s banker’s bond does not cover appellant’s settlement with the banks.


[1] Feinberg has been convicted of bank fraud. 

[2] Because we, like the district court, conclude that there was no coverage under the bond, we do not address the applicability of the bond’s exclusion of coverage for losses arising from the acts of a mortgage originator.  The district court also noted that there was no coverage because the loss did not occur on the insured’s premises.  Because appellant does not challenge this point on appeal, we do not address it.