     Case: 12-20527       Document: 00512365330         Page: 1     Date Filed: 09/06/2013




           IN THE UNITED STATES COURT OF APPEALS
                    FOR THE FIFTH CIRCUIT  United States Court of Appeals
                                                    Fifth Circuit

                                                                            FILED
                                                                        September 6, 2013

                                       No. 12-20527                        Lyle W. Cayce
                                                                                Clerk

BJ SERVICES S.R.L.; WESTERN ATLAS, INC., formerly known as BJ
Services Company, L.L.C.,

                                                  Plaintiffs - Appellants,
v.

GREAT AMERICAN INSURANCE COMPANY,

                                                  Defendant - Appellee.



                   Appeal from the United States District Court
                        for the Southern District of Texas
                             USDC No. 4:11-CV-2448


Before REAVLEY, ELROD, and GRAVES, Circuit Judges.
PER CURIAM:*
       BJ Services S.R.L. and Western Atlas, Inc. (collectively “BJ Services”)
brought an action against Great American Insurance Co. (“Great American”),
seeking a declaration that BJ Services’ losses resulting from the dishonest acts
of two of its employees are covered under a policy issued by Great American, as
well as damages for breach of contract. The district court denied BJ Services’
motion for partial summary judgment and granted summary judgment in favor


       *
         Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH CIR.
R. 47.5.4.
    Case: 12-20527     Document: 00512365330     Page: 2   Date Filed: 09/06/2013



                                  No. 12-20527

of Great American, holding that BJ Services’ losses were not covered because
they did not result “directly” from employee dishonesty. Because the district
court erred in concluding that it need not decide whether BJ Services owned the
assets stolen by the employees, we VACATE the judgment of the district court
and REMAND the case for further proceedings.
                               BACKGROUND
      The following facts appear to be undisputed. Great American issued a
policy to BJ Services providing coverage for losses resulting from employee
dishonesty. In the policy, Great American agrees to “pay for loss of, and loss
from damage to, Covered Property resulting directly from the Covered Cause of
Loss.” “Covered Property” consists of “‘money,’ ‘securities,’ and ‘property other
than money and securities.’” The policy further states that “[t]he property
covered under this insurance is limited to property . . . that you own or hold; or
. . . for which you are legally liable.” The “Covered Cause of Loss” is “employee
dishonesty.” The policy also contains an exclusion for “[l]oss that is an indirect
result of any act or ‘occurrence’ covered by this insurance including . . .
[p]ayment of damages of any type for which you are legally liable,” but does not
exclude “compensatory damages arising directly from a loss covered under this
insurance.”
      BJ Services seeks coverage under the Great American policy for losses
arising from three sets of dishonest transactions entered into by two employees,
Jose Limardo and Oscar Luis Parisi.         Limardo was a Vice President and
Regional Controller for Latin America and Parisi was the Finance Manager and
Treasurer; both were long-time employees. In 1979, the BJ Services board of
directors issued a resolution that, among other things, granted a power of
attorney authorizing Limardo to act jointly with Parisi to “operate in the name
and stead of the corporation” with Banco Frances to “apply for credits of all
kinds, . . . apply for or receive money as loan, certificates, bonds and other

                                        2
    Case: 12-20527         Document: 00512365330         Page: 3     Date Filed: 09/06/2013



                                        No. 12-20527

negotiable securities, open and close revolving accounts, . . . make, indorse, and
accept letters, promissory notes and other negotiable instruments, . . . and carry
out all those acts that may be necessary for the good performance of their office.”
In 1998, BJ Services granted a similar power of attorney allowing Limardo and
Parisi to represent BJ Services “before Banks and financial and credit
institutions with whom the corporation currently operates or may operate in the
future.”
      The Banco Frances transactions: In either 1992 or 1993, Parisi
requested that Ruben Saia, the Administrative Manager / Controller of BJ
Services, sign paperwork enabling Parisi to open a Banco Frances bank account
for BJ Services. Saia had signed similar applications in the past as part of his
regular duties, and he approved Parisi’s request on this occasion. Limardo and
Parisi then opened a Banco Frances account in BJ Services’ name and entered
into a loan agreement with Banco Frances in BJ Services’ name. Although
Parisi had the duty to notify BJ Services’ accounting department of the Banco
Frances account and have account statements sent to BJ Services’ corporate
address, Parisi did neither. As a result, the account was never included in any
corporate accounting by BJ Services. Proceeds from the loan agreement were
deposited into the account and subsequently withdrawn by Limardo and Parisi
and used for their own purposes. No other BJ Services official knew about the
account or the loan agreement.              Limardo and Parisi took approximately
$5,000,000 from the Banco Frances account, none of which was ever recovered
by BJ Services.1 Limardo and Parisi subsequently admitted that the loans were
taken out for Limardo’s personal use to resolve his financial problems.
      BJ Services discovered the Banco Frances account and loan agreement
when Banco Frances debited a different BJ Services account to partially repay


      1
          The amount of loss is not at issue in this appeal and appears to be uncertain.

                                               3
    Case: 12-20527     Document: 00512365330     Page: 4   Date Filed: 09/06/2013



                                  No. 12-20527

the loan. BJ Services then sued Banco Frances for repayment of these debited
funds and a declaration that the loan taken out in its name by Limardo and
Parisi was invalid. In that case, Banco Frances maintained that Limardo and
Parisi acted with actual and apparent authority to enter the loan transactions
on behalf of BJ Services. In June 2011, BJ Services agreed to settle the case
with a payment of $3,374,908.
      The Drayton transaction: In September 2001, Limardo and Parisi
signed a promissory note on behalf of BJ Services in return for a loan of $152,000
from Drayton, S.A. Limardo and Parisi failed to report the loan to the BJ
Services accounting department, and instead used it for their own purposes. BJ
Services never recovered the money. Drayton initiated a foreclosure action in
Argentina against BJ Services to recover on the promissory note, and BJ
Services sued for a declaration that the note was unenforceable. Consistent with
Drayton’s allegations, the Argentine trial court found the note enforceable
because Limardo’s and Parisi’s power of attorney granted them actual authority
to borrow on behalf of BJ Services. This ruling was affirmed on appeal.
      The BGN transaction: In September 2001, Limardo and Parisi entered
into a bond transaction with Banco General de Negocios, S.A. (“BGN”) on behalf
of BJ Services. Although the details are not exactly clear, it appears that BGN
loaned Argentine bonds worth approximately 1,380,968.78 Argentine pesos to
BJ Services. Rather than deliver the bonds to BJ Services, Limardo and Parisi
used the bonds for their own purposes; BJ Services has never recovered the
bonds. BGN initiated a foreclosure action in Argentina based on BJ Services’
failure to deliver bonds as required under the loan agreement. BGN argued that
Limardo and Parisi acted with actual and apparent authority when they entered
into the bond transaction on behalf of BJ Services, and the Argentine trial court
ruled in favor of BGN.



                                        4
    Case: 12-20527     Document: 00512365330      Page: 5    Date Filed: 09/06/2013



                                   No. 12-20527

      In March 2011, BJ Services submitted a proof of loss, seeking coverage for
its losses arising from the above transactions. In the proof of loss, BJ Services
stated that it “has been held legally liable for loss, or understands, on advice of
legal counsel, that it will ultimately be held legally liable for such loss.” BJ
Services further stated that it was attempting to reach a settlement in the Banco
Frances matter. In the proof of loss, and at all other times prior to filing the
present suit, BJ Services denied that Limardo and Parisi were authorized to
enter into any of the above transactions. Great American denied the claim,
stating that “all the money taken in the various schemes belonged to third
parties, and not to BJ and would be an indirect loss should BJ lose any of the
pending law suits in Argentina.”
                          PROCEDURAL HISTORY
      After Great American denied BJ Services’ claim, BJ Services sued Great
American in Texas state court. BJ Services sought a declaratory judgment that
the policy covered losses arising from the actions of Limardo and Parisi, as well
as damages for breach of contract. Great American removed the case to federal
court and moved for summary judgment. Great American argued that because
“any loss that BJ Services suffered arose out of its liability to the entities whose
funds were taken” rather than loss of its own funds, the loss was indirect and
therefore not covered. Alternately, Great American argued that the type of
property stolen was not covered. BJ Services filed a cross-motion for partial
summary judgment on the same issues presented in Great American’s motion
for summary judgment. BJ Services argued that it owned the funds at the time
they were stolen by Limardo and Parisi, and that its losses were therefore
directly caused by the theft rather than by liability to third parties.
      The district court granted summary judgment in favor of Great American
and denied BJ Services’ motion. The district court explained:



                                         5
    Case: 12-20527     Document: 00512365330      Page: 6   Date Filed: 09/06/2013



                                  No. 12-20527

            In this case, the losses to BJ Services occurred when the
      company was required to satisfy its contractual obligations to the
      financial institutions. Until that point, the losses were suffered only
      by the financial institutions whose funds were misappropriated.
      There was no “actual depletion” of BJ Services’s bank funds because
      the Banco Frances account was not included in BJ Services’s books
      and records as an asset of the company. The Drayton funds and the
      BGN bonds were never deposited into any account in BJ Services’s
      name. Additionally, the amount of the loss would be the amount BJ
      Services pays to satisfy those contractual obligations, indicating
      further that the losses to BJ Services resulted directly from the
      contractual obligations caused by Limardo and Parisi’s misconduct,
      not directly from the employees’ misappropriation of the funds they
      obtained from the banks.
            Although the contractual obligations were the result of
      Limardo and Parisi’s misconduct, the employee misconduct itself did
      not “directly” cause the loss for purposes of the Policy.
The district court also stated that it “need not decide whether the
misappropriated funds were ‘Covered Property’ because its ruling that the loss
did not result directly from the employees’ misconduct is dispositive.” BJ
Services filed a motion for reconsideration, which the district court denied. In
the order denying reconsideration, the district court stated that “[t]he Court was
not required to decide who owned or held the funds because the ruling on
whether the loss was direct or indirect was dispositive.” BJ Services now
appeals.
                                 DISCUSSION
      A district court’s grant of summary judgment is reviewed de novo. Prison
Legal News v. Livingston, 683 F.3d 201, 211 (5th Cir. 2012) (citations omitted).
Summary judgment is appropriate when, viewing the evidence in the light most
favorable to the nonmoving party, there is no genuine dispute as to any material
fact and the moving party is entitled to judgment as a matter of law. Id.
(citations omitted). We assume, as the parties have assumed, that Texas
substantive law governs this dispute.

                                        6
    Case: 12-20527     Document: 00512365330      Page: 7   Date Filed: 09/06/2013



                                  No. 12-20527
      The policy makes clear that only a loss resulting directly from employee
dishonesty is covered. Only an “actual depletion of [an insured’s] funds resulting
from the employee’s act” constitutes a “direct” loss under an employee dishonesty
policy.   9A John Alan Appleman & Jean Appleman, INSURANCE LAW                AND

PRACTICE § 5722, at 475 (Supp. 2010). On the other hand, “when an insured
incurs liability to a third party—whether in contract or tort—as a result of
employee misconduct, financial loss resulting from that liability is not ‘directly’
caused by the employee misconduct and therefore is not covered by fidelity bonds
containing direct-loss language.” Universal Mortgage Corp. v. Wurttembergische
Versicherung AG, 651 F.3d 762, 763 (7th Cir. 2011); see also Vons Cos., Inc. v.
Fed. Ins. Co., 212 F.3d 489, 492 (9th Cir. 2000) (“Under the insuring clauses,
Vons is covered only for direct losses to Vons caused by its employee’s
dishonesty, not for vicarious liability for losses suffered by others arising from
its employee’s tortious conduct.”).
      The district court found it unnecessary to decide whether BJ Services
owned the assets stolen by its employees at the time they were stolen. The
district court apparently concluded that even if BJ Services technically owned
the assets, their theft caused no “actual depletion” of BJ Services’ wealth
because the assets were not included in BJ Services’ accounting books or (with
respect to the BGN and Drayton transactions) deposited into an account in BJ
Services’ name. Similarly, Great American argues that even if BJ Services
owned the assets, it suffered a “theoretical or bookkeeping loss” rather than an
actual “out-of-pocket” loss because it never exercised any control over the funds.
      We are unaware of any authority holding that funds owned by a company
are not “actually depleted” upon being stolen if the company does not exercise
a certain degree of control over the funds or include the funds in its accounting
books. Furthermore, the cases cited by Great American dealing with “theoretical
or bookkeeping loss” are inapposite. These cases establish that “direct loss” does

                                        7
    Case: 12-20527      Document: 00512365330     Page: 8   Date Filed: 09/06/2013



                                   No. 12-20527
not include a loss of “potential income,” Citizens Bank & Trust Co. v. St. Paul
Mercury Ins. Co., No. CV305-167, 2007 WL 4973847, at *5 (S.D. Ga. Sep. 14,
2007), loss of “something [a plaintiff] never actually owned but may have
thought [it] owned,” Horowitz v. Am. Int’l Group, Inc., No. 09-CV-7312, 2010 WL
3825737, at *7 (S.D.N.Y. Sep. 30, 2010), or employee actions causing a company
to incur liability to third parties. Universal Mortgage, 651 F.3d at 762-63. While
we agree that such losses are speculative or theoretical, they are easily
distinguished from a situation involving theft of assets that a company actually
owns.
        Accordingly, we disagree with the reasoning of the district court and Great
American and instead frame the analysis as follows: Limardo and Parisi entered
into transactions with three lenders in BJ Services’ name and received assets
from the lenders. If Limardo and Parisi received the assets on behalf of BJ
Services, then BJ Services received the assets. And if BJ Services received the
assets, then Limardo and Parisi took the assets from BJ Services when they
later misappropriated the assets. Finally, if the assets were taken from BJ
Services, this was plainly an “actual depletion” of BJ Services’ wealth.
        The dispositive question, then, is whether Limardo and Parisi received the
assets from the lenders on behalf of BJ Services. BJ Services argues that it
received the proceeds of the transactions through its employees because they
were granted express authorization to enter into financial transactions in BJ
Services’ name. Great American appears to concede that if Limardo and Parisi
had actual authority to enter into the transactions with the three lenders on
behalf of BJ Services, BJ Services would have received or taken possession of the
assets through its employees. However, Great American argues that Limardo
and Parisi had at most apparent authority, and that “the distinction between
apparent and actual authority . . . is dispositive of the issue in this appeal.”



                                         8
     Case: 12-20527       Document: 00512365330         Page: 9    Date Filed: 09/06/2013



                                      No. 12-20527
More specifically, Great American argues that “BJ Services never exercised any
control or possession over the proceeds because the loans were not authorized.”
       First, we agree with Great American that Limardo and Parisi lacked
actual authority to enter into the transactions at issue in this case. Although BJ
Services’ board of directors did grant Limardo and Parisi extensive powers to act
on behalf of the company, the authorization suggests that Limardo and Parisi
were allowed to use these powers only to the extent “necessary for the good
performance of their office.” More importantly, the undisputed evidence shows
that from the beginning, Limardo and Parisi intended to enter into the
transactions to benefit themselves rather than their employer. Because Limardo
and Parisi knew that BJ Services would not want them to enter into the
transactions, they lacked actual authority to enter into the transactions on
behalf of BJ Services. See Restatement (Third) of Agency § 2.01 (2006) (“An
agent acts with actual authority when, at the time of taking action that has legal
consequences for the principal, the agent reasonably believes, in accordance with
the principal’s manifestations to the agent, that the principal wishes the agent
so to act.”);2 Remenchik v. Whittington, 757 S.W.2d 836, 839 (Tex. App.—Houston
[14th Dist.] 1988, no writ) (“It is long-standing law in Texas that where an agent
binds himself to a course of conduct antagonistic to the interests of his principal,
such breach of duty, ipso facto, terminates the agency unless condoned by the
principal with full knowledge of the facts.”).
       On the other hand, the distinction between actual and apparent authority
does not have the significance suggested by Great American because an
apparent agent, acting with only apparent authority, can receive property on


       2
       The Reporter’s Notes to § 2.01 state that there is no intended substantive difference
between this definition of “actual authority” and the definition in the Second Restatement of
Agency Law, and that “[t]he definition has been expanded to encompass points made in the
commentary to Restatement Second, including the focus of actual authority on the agent’s
understanding at the time the agent acts.”

                                             9
    Case: 12-20527     Document: 00512365330       Page: 10    Date Filed: 09/06/2013



                                   No. 12-20527
behalf of the principal. If Limardo and Parisi had apparent authority to enter
into the transactions on behalf of BJ Services, they created binding contracts
between BJ Services and the lenders. See Restatement (Third) of Agency § 6.01
(“When an agent acting with actual or apparent authority makes a contract on
behalf of a disclosed principal . . . the principal and the third party are parties
to the contract.”).   Furthermore, if they acted with apparent authority in
accepting the benefit of the contracts (i.e. the money and bonds) on behalf of BJ
Services, the lenders satisfied their contractual liability to BJ Services. See
Restatement (Third) of Agency § 6.07 (“A third party’s payment to or settlement
of accounts with an agent discharges the third party’s liability to the principal
if the agent acts with actual or apparent authority in accepting the payment or
settlement.”).   The only reasonable conclusion is that, assuming apparent
authority existed, BJ Services received the money and bonds when they were
accepted by Limardo and Parisi. If BJ Services did not receive the assets, it is
difficult to understand how the lenders could have performed their end of the
contract.
      Our analysis, based on agency principles, is consistent with Texas
precedent. In American Indemnity Co. v. Mexia Independent School District, 47
S.W.2d 682, 684 (Tex. App.—Waco 1932, writ dism’d), a tax collector for the
school district collected taxes allegedly due to the district and misappropriated
them. The court held that, regardless of whether the taxes were legally collected
in the first place, the tax collector “was the agent of the district in collecting the
taxes, and whatever came into his hands as such became the property of the his
principal.” Id. This suggests that even if an agent is acting without actual
authority and against the interest of his principal, property accepted by him still
becomes the property of the principal.
      Great American argues that BJ Services never received the assets because
Limardo and Parisi “stole” the funds from the lenders, and “thieves cannot

                                         10
    Case: 12-20527    Document: 00512365330      Page: 11   Date Filed: 09/06/2013



                                  No. 12-20527
obtain or convey title to stolen property.” See, e.g., H.E.B., L.L.C. v. Ardinger,
369 S.W.3d 496, 508 (Tex. App.—Fort Worth 2012, no pet.) (“[O]ne who
purchases stolen property from a thief, no matter how innocently, acquires no
title in the property; title remains in the owner.”). Despite the characterization
of Limardo’s and Parisi’s actions as “theft” from the lenders, Limardo and Parisi
did not obtain the assets in such a way as to prevent them from obtaining title
to the assets. Based on the available facts, it appears that the lenders freely
gave the assets to Limardo and Parisi to satisfy the lenders’ contractual
obligations to BJ Services. Of course, Limardo and Parisi falsely represented to
the lenders that they were authorized to enter into the transactions on behalf of
BJ Services. But this amounts, at most, to fraudulent inducement and does not
prevent title from passing to BJ Services. See Akers v. Scofield, 167 F.2d 718,
720 (5th Cir. 1948) (“[A] transaction induced by fraudulent representations is not
void but voidable, and, in the absence of an election to rescind, title that passed
in such a transaction will continue in the recipient.”); Harris v. Archer, 134
S.W.3d 411, 427 (Tex. App.—Amarillo 2004, pet. denied) (“A contract procured
by fraud is merely voidable, unless it is shown to be void for some additional
reason.”).
                                CONCLUSION
      In conclusion, we hold that if Limardo and Parisi acted with apparent
authority in receiving the assets from the lenders, BJ Services received the
assets, and the subsequent misappropriation of the funds caused a direct loss to
BJ Services. However, it is not obvious from the evidence in the record whether
the issue of the existence of apparent authority may be decided on summary
judgment. The district court did not discuss the issue, and we decline to consider
it in the first instance on appeal. Accordingly, we VACATE the judgment of the
district court and REMAND for further proceedings consistent with this opinion.



                                        11
    Case: 12-20527        Document: 00512365330          Page: 12      Date Filed: 09/06/2013



                                        No. 12-20527
We express no opinion on the ultimate issue of coverage or on any of Great
American’s other defenses to coverage.3




       3
          In particular, we note the discrepancy between BJ Services’ present characterization
of its loss and its earlier characterization of the loss. BJ Services now characterizes its loss
as assets stolen directly from it by its employees, which would be covered. However, in the
initial proof of loss, BJ Services clearly stated that it was seeking coverage for current and
potential contractual liability to third parties, which would not be covered. Because neither
party addresses whether BJ Services is bound to its initial characterization of the loss or cites
any relevant authority, we do not consider the issue. Nothing in our opinion should be
interpreted as an implicit holding that BJ Services is not bound by its initial characterization
of the loss.

                                               12
