First Dakota National Bank v. BancInsure, Inc.

#26921-LSW
2014 S.D. 57

IN THE SUPREME COURT
OF THE
STATE OF SOUTH DAKOTA

****
In the Matter of the CERTIFICATION OF A QUESTION OF LAW FROM THE
UNITED STATES DISTRICT COURT, DISTRICT OF SOUTH DAKOTA,
SOUTHERN DIVISION, Pursuant to the Provisions of SDCL 15-24A-1, and
Concerning Federal Action Civ. 12-4061-KES, Titled as Follows:

****
FIRST DAKOTA NATIONAL BANK, Plaintiff,

v.

BANCINSURE, INC., Defendant.

****
ORIGINAL PROCEEDING

****

SHEILA S. WOODWARD
STEVEN K. HUFF of
Johnson, Miner, Marlow,
Woodward & Huff, Prof. LLC
Yankton, South Dakota Attorneys for plaintiff.

WILLIAM P. FULLER of
Fuller & Williamson, LLP
Sioux Falls, South Dakota
and
EMERIC J. DWYER
JOSEPH A.NILAN of
Gregerson, Rosow, Johnson & Nilan, LTD
Minneapolis, Minnesota Attorneys for defendant.

****

CONSIDERED ON BRIEFS
ON MAY 27, 2014
OPINION FILED 07/30/14
#26921

WILBUR, Justice

[¶1.] In answer to a certified question from the United States District Court

for the District of South Dakota, we conclude that the Financial Institution Bond in

this case is not a surety contract.

Background

[¶2.] First Dakota National Bank purchased a Financial Institution Bond

from BancInsure, Inc. to provide coverage for liability issues that could arise in the

course of its operations. The Bond provides in pertinent part:

Legal proceedings for the recovery of any loss under this Bond
shall not be brought prior to the expiration of sixty (60) days
after the original proof of loss is filed with [BancInsure] or after
the expiration of 24 months from the discovery of such loss,
except that any action or proceeding to recover under this Bond
on account of any judgment against [First Dakota] in any suit
mentioned in General Agreement (F), or to recover attorneys’
fees paid in any such suit, shall be brought within 24 months
from the date upon which the judgment and such suit shall
become final.

[¶3.] In 2004, First Dakota loaned Terry Schulte $250,000. Loan officer

Wayne Wassink was in charge of the Schulte loan. Over the next five years, the

Schulte loan was reviewed annually and renewed, and the interest on the loan was

paid until the loan matured. Wassink always transacted business concerning the

Schulte loan exclusively through Schulte’s intermediary, Douglas Larsen.

[¶4.] In October 2009, Wassink met with Schulte because the Schulte loan

was past due. Schulte told Wassink he did not have a line of credit with First

Dakota and suggested that Larsen must have forged the note. After an

investigation, First Dakota believed certain documents used to renew the Schulte

-1-
#26921

loan had falsified signatures. 1 First Dakota notified BancInsure of the potential

forgery on October 13, 2009.

[¶5.] In July 2011, First Dakota filed a proof of loss with BancInsure

seeking coverage under the Bond for three loans, including the Schulte loan. In

November 2011, BancInsure denied coverage on two of the three claims and stated

that the information submitted regarding the Schulte Loan was insufficient to

prove coverage under the Bond. In response, First Dakota agreed the other two

loans were not covered, but maintained there was coverage for the Schulte loan

under the Bond. In March 2012, BancInsure again denied coverage for the Schulte

loan and informed First Dakota it had not brought suit within two years since the

loss was discovered.

[¶6.] In April 2012, First Dakota sued BancInsure in federal court seeking

coverage under the Bond and damages for bad-faith denial of the claim and

vexatious refusal to pay the claim. BancInsure moved for summary judgment

because the claim fell outside the two-year statute of limitations outlined in the

Bond. The following question was then certified to this Court:

SDCL 53-9-6 prohibits parties from contractually limiting the
statute of limitations except in the case of a “surety contract.” Is
the Financial Institution Bond a “surety contract”?

1. Wassink and Larsen were indicted on federal charges of fraud and other
related matters concerning the Schulte loan transaction. Larsen pleaded
guilty to the charges. Wassink maintained his innocence, but he ultimately
pleaded guilty to structuring and tax evasion on unrelated charges.

-2-
#26921

Standard of Review

[¶7.] “Technically, this Court does not sit as an appellate court in this case

as the matter came to us as a certified question from the United States District

Court for the District of South Dakota. Nevertheless, we employ the same legal

standards for this analysis that we use when reviewing appellate cases.” Unruh v.

Davison Cnty., 2008 S.D. 9, ¶ 5, 744 N.W.2d 839, 841-42. We interpret contracts

and statutes de novo. In re Pooled Advocate Trust, 2012 S.D. 24, ¶ 20, 813 N.W.2d

130, 138; Lillibridge v. Meade Sch. Dist. No. 46-1, 2008 S.D. 17, ¶ 9, 746 N.W.2d

428, 431.

Decision

[¶8.] “In matters of statutory interpretation, this Court begins with the

plain language and structure of the statute.” State ex rel. Dep’t of Transp. v. Clark,

2011 S.D. 20, ¶ 10, 798 N.W.2d 160, 164 (citations omitted). “Words and phrases in

a statute must be given their plain meaning and effect.” Id. ¶ 5, 798 N.W.2d at 162

(citation omitted). In addition, it is fundamental “that the words of a statute must

be read in their context and with a view to their place in the overall statutory

scheme.” In re Expungement of Oliver, 2012 S.D. 9, ¶ 9, 810 N.W. 2d 350, 352

(citations omitted). “[I]t is inappropriate to select one statute on a topic and

disregard another statute which may modify or limit the effective scope of the

former statute.” Id. (citation omitted). Accordingly, we are not free to “enlarge the

scope of [a] statute by an unwarranted interpretation of its language.” In re Adams,

329 N.W.2d 882, 884 (S.D. 1983) (citation omitted).

-3-
#26921

[¶9.] In relying on SDCL 56-2-1, First Dakota argues that the Bond is not a

surety contract because BancInsure did not promise to perform any obligation of

First Dakota, but rather agreed to indemnify First Dakota for covered losses, e.g.,

employee infidelity. In response, BancInsure argues that because the Bond is

fidelity insurance, which is defined as surety insurance in SDCL 58-9-29, the Bond

is a surety contract that satisfies the exception of SDCL 53-9-6. In making its

arguments, BancInsure relies on the analysis in Resolution Trust Corp. v. Hartford

Accident & Indemnity Co., 25 F.3d 657 (8th Cir. 1994). In addition, BancInsure

argues that the necessary element of a surety contract—the surety’s responsibility

to perform the defaulting principal’s obligation to a third party—is BancInsure’s

promise to secure First Dakota from its employees’ infidelity.

[¶10.] SDCL 53-9-6 voids contract provisions, except those in surety

contracts, that limit the statute of limitations. 2 But SDCL 53-9-6 fails to define a

surety contract. Instead, we turn to SDCL 56-2-1:

Suretyship is a contract by which one[, the surety,] who at the
request of another[, the principal,] and for the purpose of
securing to [the principal] a benefit becomes responsible for the
performance by the [principal] of some act in favor of a third
person . . . .

In interpreting SDCL 56-2-1, we stated:

2. SDCL 53-9-6 reads in relevant part:

Every provision in a contract restricting a party from enforcing
his rights under it by usual legal proceedings in ordinary
tribunals, or limiting his time to do so, is void. However, . . . any
provision in a surety contract which limits the time for
enforcement is valid and enforceable if the limitation of time is
not less than two years after the cause of action has accrued.

-4-
#26921

Suretyship is a contractual relationship, which results from two
persons becoming obligated to the same creditor with one of
them bearing the ultimate liability. In other words, if the debt
is enforced against the surety, he then is entitled to be
indemnified by the one who should have paid the debt before the
surety was compelled to do so.

State of Wis. Inv. Bd. v. Hurst, 410 N.W.2d 560, 562-63 (S.D. 1987). 3 Because

suretyship is defined in statute and interpreted in our case law as a contractual

relationship, we conclude that suretyship is a surety contract as used in SDCL 53-9-

6.

[¶11.] In applying the plain language of SDCL 56-2-1 to the Bond, we

conclude that the Bond is not a surety contract. In order for the Bond to satisfy the

definition of a surety contract, BancInsure must become responsible for First

Dakota’s performance “of some act in favor of a third person.” SDCL 56-2-1

(emphasis added). The Bond does not identify “some act” that BancInsure is

responsible to perform in case of First Dakota’s default. Rather, the Bond provides

that BancInsure, “in consideration of an agreed premium and subject to the . . .

terms of this Bond, agrees to indemnify” First Dakota for, inter alia, “[l]oss

resulting directly from dishonest or fraudulent acts committed by an Employee

acting alone or in collusion with others” and “[l]oss resulting directly from . . .

3. See also 1 Steven Plitt et al., Couch on Insurance § 1:14 (3d ed. 2014)
(“Suretyship is a contractual relation resulting from an agreement whereby
one person, the surety, engages to be answerable for the debt, default, or
miscarriage of another, the principal.”); 74 Am. Jur. 2d Suretyship § 1 (2014)
(“A suretyship is a three-party relationship where the surety undertakes to
perform to an obligee if the principal fails to do so. . . . In suretyship, the risk
of loss remains with the principal while the surety merely lends its credit so
as to guarantee payment or performance in the event that the principal
defaults.”).

-5-
#26921

delivering any funds” on the basis of forgery. Because the Bond is missing the

language that satisfies the critical element of a surety contract—BancInsure

becoming responsible for First Dakota’s performance “of some act in favor of a third

person”—it is not a surety contract. See SDCL 56-2-1.

[¶12.] BancInsure argues that the principal (the party that is primarily

obligated to perform some act) is not First Dakota, but rather First Dakota’s

employees. In doing so, it states “the Bond obligates BancInsure to pay [First

Dakota] in certain enumerated circumstances where [First Dakota’s] employees or

certain other third-parties do not carry out their obligations to [First Dakota].” As a

result, “BancInsure guarantees to [First Dakota] the fidelity of the actions of [First

Dakota] employees and other third parties.” We disagree. First, in order to have a

surety contract under SDCL 56-2-1, the principal must request surety protection.

No evidence exists showing First Dakota’s employees have made such a request.

Indeed, the Bond is a contract between First Dakota and BancInsure. Second, the

Bond does not articulate a guarantee that First Dakota’s employees will act

honestly, but rather protects First Dakota by indemnifying it from employee

dishonesty. 4

4. Compare SDCL 58-1-2(8) (providing that insurance is “a contract whereby
one undertakes to indemnify another or to pay or provide a specified or
determinable amount or benefit upon determinable contingencies”), and
SDCL 56-3-1 (“Indemnity is a contract by which one engages to save another
from a legal consequence of the conduct of one of the parties, or of some other
person.”), and Bryan A. Garner, Garner’s Dictionary of Legal Usage, 445 (3d
ed. 2011) (“To indemnify may mean either (1) to secure against future losses;
or (2) to pay for losses already sustained.”), with SDCL 56-2-1 (“Suretyship is
a contract by which one who at the request of another and for the purpose of
securing to him a benefit becomes responsible for the performance by the
(continued . . .)
-6-
#26921

[¶13.] BancInsure also urges this Court to conclude the Bond is a surety

contract on the basis of SDCL 58-9-29 and the analysis of Resolution Trust. SDCL

58-9-29 states: “‘Surety insurance’ includes fidelity insurance, insurance to

guarantee the fidelity of persons holding positions of public or private trust.”

BancInsure argues a four-step analysis: First, the Bond is fidelity insurance

because it protects First Dakota from employee dishonesty; second, SDCL 58-9-29

plainly states that fidelity insurance is surety insurance; third, the Bond is a

contract; and fourth, as a result, the Bond is a surety insurance contract, the

equivalent of a surety contract as stated in SDCL 53-9-6. BancInsure relies on

Resolution Trust, an eighth circuit case holding that fidelity insurance is a surety

contract. 5 We decline to adopt Resolution Trust’s analysis. See Fraternal Order of

Eagles No. 2421 of Vermillion v. Hasse, 2000 S.D. 139, ¶ 11, 618 N.W.2d 735, 738

(citing S.D. Const. art. V, § 2) (additional citations omitted) (providing that the

United States Eighth Circuit Court of Appeals “is not binding on issues of South

Dakota state law”).

________________________
(. . . continued)
latter of some act in favor of a third person . . . .”), and Garner, supra at 870
(providing that a surety, in law, is “one who undertakes some specific
responsibility on behalf of another”).

5. Resolution Trust reversed the ruling of the United States District Court for
the District of South Dakota, which held the fidelity insurance at issue in
Resolution Trust was not a surety contract under SDCL 53-9-6. 25 F.3d at
659; see also First Fed. Bank, F.S.B. v. Hartford Accident & Indem. Co., 762
F. Supp. 1352, 1354 (D.S.D. 1991) (holding that a fidelity bond was not a
surety contract). After Resolution Trust, South Dakota’s district court tolled
the contractual two-year statute of limitations. F.D.I.C. v. Hartford Accident
& Indem. Co., 97 F.3d 1148, 1149 (8th Cir. 1996). The eighth circuit again
reversed and remanded. Id. at 1152.

-7-
#26921

[¶14.] We conclude the kinds of insurance included in surety insurance, as

outlined in SDCL 58-9-29 through SDCL 58-9-32, are not equivalent to surety

contracts as stated in SDCL 53-9-6 and defined in SDCL 56-2-1. SDCL 58-9-29

through SDCL 58-9-32 neither contain nor define the words surety contract, but

rather outline what kinds of insurance are included in surety insurance. SDCL 56-

2-1 (defining suretyship) became law in 1939; SDCL 58-9-29 through SDCL 58-9-32

became law in 1966 (outlining kinds of surety insurance); and SDCL 53-9-6’s

exception for surety contracts became law in 1988. This timeframe demonstrates

the Legislature knew, when writing what kinds of insurance were included in

surety insurance, the definition of a suretyship, but declined to use that language.

It further demonstrates that when the Legislature was making the exception to

SDCL 53-9-6, it operated under the knowledge of both surety insurance in SDCL

58-9-29 through SDCL 58-9-32 and suretyship in SDCL 56-2-1, but included only

the words surety contract in making the exception.

[¶15.] In addition, when outlining what kinds of insurance are included in

surety insurance, the Legislature made a clear distinction between surety insurance

and contracts of suretyship. SDCL 58-9-31 reads:

“Surety insurance” includes insurance guaranteeing the
performance of contracts, other than insurance policies, and
guaranteeing and executing bonds, undertakings, and contracts
of suretyship.

SDCL 58-9-31 plainly states that surety insurance includes “insurance . . .

guaranteeing and executing . . . contracts of suretyship.” SDCL 58-9-31 does not

say that surety insurance is a contract of suretyship, but rather insurance on a

contract of suretyship. Therefore, we conclude that SDCL 58-9-29 through SDCL

-8-
#26921

58-9-32 were “intended to provide a general definition of surety insurance for

purposes of the insurance code of South Dakota” and were not intended to define a

surety contract. See Resolution Trust, 25 F.3d at 660 (Arnold, J., concurring in

result). Indeed, Resolution Trust did not address SDCL 56-2-1, South Dakota’s

definition of suretyship.

[¶16.] Furthermore, the surety contract exception found in SDCL 53-9-6 was

passed in the legislative session immediately following Sheehan v. Morris

Irrigation, 410 N.W.2d 569 (S.D. 1987). The relationship present in Sheehan

explains what type of relationship constitutes a surety contract. In Sheehan, the

landowner (Sheehan) contracted with Morris Irrigation to build a massive irrigation

system. Id. at 570. “To assure completion of the project,” Morris Irrigation secured

a performance bond from United Pacific, the surety on the bond. Id. The

performance bond contractually limited the statute of limitations to two years. Id.

Sheehan filed suit against Morris Irrigation and United Pacific because the

irrigation system did not operate properly, but did so five years after Sheehan’s

cause of action accrued. Id. At the time of Sheehan, no exception for surety

contracts existed in SDCL 53-9-6. As a result, this Court held the bond’s two-year

contractual limit of the statute of limitations was void, allowing suit against the

surety. Id. at 571. Justice Sabers dissented urging the Legislature to create an

exception for construction bonds. Id. (Sabers, J., dissenting). 6 Moreover, on the

6. The dissent argued:

If the majority opinion is sustained, and not altered by the
[L]egislature, it will not only heap havoc upon the construction
(continued . . .)
-9-
#26921

same day that Sheehan was published, Hurst was also published, which interpreted

suretyship as defined in SDCL 56-2-1. 410 N.W.2d at 562-63 (“Suretyship is a

contractual relationship, which results from two persons becoming obligated to the

same creditor with one of them bearing the ultimate liability.”).

[¶17.] In 1988, in the first legislative session after Sheehan and Hurst were

decided, the Legislature created the exception in SDCL 53-9-6 that allowed surety

contracts to contractually limit the statute of limitations to two years. This

immediate action exhibits the Legislature’s intent to allow parties to contractually

limit the statute of limitations in surety situations similar to the relationship found

in Sheehan. See AEG Processing Ctr. No. 58, Inc. v. S.D. Dep’t of Revenue &

Regulation, 2013 S.D. 75, ¶ 12, 838 N.W.2d 843, 848 (citation omitted) (“We

presume the Legislature acts with knowledge of our judicial decisions.”). Therefore,

we conclude that a surety contract as stated in SDCL 53-9-6 does not equate to all

kinds of surety insurance as outlined in SDCL 58-9-29 through SDCL 58-9-32, but

rather equates to the type of relationship presented in Sheehan and defined in

SDCL 56-2-1.

[¶18.] We conclude that the Bond in this case is not a surety contract.

[¶19.] GILBERTSON, Chief Justice, and KONENKAMP, ZINTER and

SEVERSON, Justices, concur.

________________________
(. . . continued)
bonding industry but make the cost of construction (payment
and performance) bonds in South Dakota prohibitive to
customers, farmers, businessmen, and other owners.

Id. (Sabers, J., dissenting).

-10-