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A Better Partnership
December 02, 2015

COA finds charter school's sale of bonds without the proper authority triggered insurance policy's fraud exclusion

In Employers Mutual Casualty Company v Helicon Associates, Inc, No. 322215, the Michigan Court of Appeals held that the sale of bonds by a charter school that lacked the proper authority to issue bonds constituted an act of fraud or dishonesty that precluded coverage under an insurance contract’s fraud and dishonesty exclusion.
Wells Fargo Advantage National Tax Free Fund, Wells Fargo Advantage Municipal Bond Fund, Lord Abbett Municipal Income Fund, Inc., and Pioneer Municipal High Income Advantage (collectively, the “Funds”) purchased $7 million in bonds issued by a charter school operated by Helicon Associates, Inc. and managed by Michael Witucki.  The charter school, however, lacked authority to issue its own debt.  As a result, the school had to unwind the bond, and the Funds accepted $3.2 million in newly issued bonds in lieu of their original $7 million.  The Funds subsequently filed a federal suit against parties insured by Employers Mutual Casualty Company (“EMC”).  The federal action resulted in a consent judgment for violation of the Connecticut Uniform Securities Act (“CUSA”) and an award to the Funds of more than $4 million. 
EMC defended Helicon and Witucki in the federal action under a reservation of rights, but commenced a declaratory judgment action seeking to establish that indemnity coverage was not available for the claims asserted in the federal action.  EMC argued that four separate exclusions—return of remuneration, personal profit or advantage, guarantee on bonds, and fraud or dishonesty—under its policies applied, each of which precluded coverage.  The trial court found that three of the four exclusions applied and granted summary disposition in favor of EMC.
The Court of Appeals upheld the trial court’s decision, stating that the fraud and dishonesty exclusion applied because the consent judgment, by finding a violation of CUSA, necessarily found that Helicon and Witucki made untrue statements of omissions of material fact.  As a result, the offering and sale of bonds to the Funds without the proper authority were untrue representations that constituted acts of fraud or dishonesty within the meaning of the policy exclusion.  Because the court concluded that the fraud and dishonesty exclusion applied, it did not address the remaining exclusions.

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