MASS. MUT. LIFE INS. v. CERTAIN UNDERWRITERS, 4791-VCL (Del.Ch. 7-23-2010)

ubt that the omitted element was uncontested and supported by overwhelming evidence, such that the jury verdict would have been the same absent the error, the erroneous instruction is properly found to be harmless." Id. at 17. In rejecting automatic reversal for all errors that "infringe upon the jury's fact-finding role and affect the jury's deliberative process in ways that are, strictly speaking, not readily calculable," the Court held that the essential inquiry is whether it is "clear beyond a reasonable doubt that a rational jury would have found the defendant guilty absent the error." Id. at 18 (emphasis added).

In a strongly-worded dissent Justice Scalia, joined by Justices Souter and Ginsburg, condemned the majority's ruling:

The Court's decision today is the only instance I know of (or could conceive of) in which the remedy for a constitutional violation by a trial judge (making the determination of criminal guilt reserved to the jury) is a repetition of the same constitutional violation by the appellate court (making the determination of criminal guilt reserved to the jury).

Id. at 32 (Scalia, J. dissenting in part and dissenting in judgment). The majority was not entirely insensitive to this concern, but stated that, ultimately, "[w]e believe that where an omitted element is supported by uncontroverted evidence, this approach reaches an appropriate balance between `society's interest in punishing the guilty [and] the method by which decisions of guilt are to be made.'" Id. at 18 (quoting Connecticut v. Johnson, 460 U.S. 73, 86 (1983) (plurality opinion)). The majority went on to note that if the element in question had been contested, and competing evidence sufficient to support a contrary finding on the omitted element had been offered, then the Court could not have found the constitutional violation harmless beyond a reasonable doubt and would have reversed. Id. at 19.

Taking Sullivan and Neder together, in instances where erroneous jury instructions were provided at trial, an appellate court must first determine whether an improper jury instruction affected the entire deliberative process. If it did, then a reversal is necessary as the jury's deliberations were fundamentally flawed, and any attempted harmless error inquiry would essentially result in the appellate court itself acting in the role of jury. However, where the jury instructions were only partially erroneous, such as where the jury instructions improperly omitted one element of a charged offense, the appellate court may apply the harmless error test, and where the evidence supporting a finding on the omitted element is overwhelming and uncontroverted, so that no rational jury could have found that the state failed to prove that element, the constitutional violation may be deemed harmless.

iii. Review Provided for Fundamental Error/Plain Error

Generally Idaho's appellate courts will not consider error not preserved for appeal through an objection at trial. State v. Johnson, 126 Idaho 892, 896, 894 P.2d 125, 129 (1995). "This limitation on appellate-court authority serves to induce the timely raising of claims and objections, which gives the [trial] court the opportunity to consider and resolve them." Puckett v. U.S., 129 S.Ct. 1423, 1428 (2009). Ordinarily, the trial court is in the best position to determine the relevant facts and to adjudicate the dispute. Id. "In the case of an actual or invited procedural error, the [trial] court can often correct or avoid the mistake so that it cannot possibly affect the ultimate outcome." Id. Furthermore, requiring a contemporaneous objection prevents the litigant from sandbagging the court, i.e., "remaining silent about his objection and belatedly raising the error only if the case does not conclude in his favor." Id. However, every defendant has a Fourteenth Amendment right to due process and "[i]t is axiomatic that `[a] fair trial in a fair tribunal is a basic requirement of due process.'" Caperton v. A.T. Massey Coal Co., Inc., 129 S. Ct. 2252, 2259 (2009) (quoting In re Murchison, 349 U.S. 133, 136 (1955)). Accordingly, when an error has not been properly preserved for appeal through objection at trial, the appellate court's authority to remedy that error is strictly circumscribed to cases where the error results in the defendant being deprived of his or her Fourteenth Amendment due process right to a fair trial in a fair tribunal. See State v. Field, 144 Idaho 559, 571, 165 P.3d 273, 285 (2007).

The U.S. Supreme Court has never held that the U.S. Constitution requires state courts to provide appellate review for instances of unobjected to violations of constitutionally protected rights. Nevertheless we choose to consider the U.S. Supreme Court's application of the statutorily-derived plain error review and how it compares with Idaho's traditional fundamental error review.

The federal courts, like Idaho, follow the procedural principle that an issue raised for the first time on appeal will not be considered on appeal. However, Federal Rule of Criminal Procedure 52(b) provides federal appellate courts with limited power to correct errors even in the absence of a timely objection before the trial court. Federal Rule of Criminal Procedure 52(b) states: "A plain error that affects substantial rights may be considered even though it was not brought to the court's attention." In applying plain error review the U.S. Supreme Court has recognized the strong societal interest in finality of judgments, and the associated incentive that must be given for defendants to properly object before a trial court, as that body is best suited to deal with potential error at trial, before a verdict has been reached. See Puckett v. U.S., 129 S.Ct. 1423 (2009). However, the Court has also recognized that this public policy must be balanced with the sense of fundamental justice inherent in the concept of a fair trial. See id.

Based upon this framework the U.S. Supreme Court devised a three-prong threshold inquiry for determining when appellate courts should reverse on the grounds of unobjected to error. U.S. v. Olano, 507 U.S. 725, 732-35 (1993). First, the defendant must have had one of his rights violated, a right which he did not waive. Id. at 732-33 ("Waiver is different from forfeiture. Whereas forfeiture is the failure to make the timely assertion of a right, waiver is the `intentional relinquishment or abandonment of a known right.'" (quoting Johnson v. Zerbst, 304 U.S. 458, 464 (1938))). Second, the error must be "plain" which "is synonymous with `clear' or, equivalently, `obvious.'" Id. at 734. Third, the error must affect substantial rights, meaning (in most instances) that it must have affected the outcome of the trial court proceedings. Id. This third prong is equivalent to the analysis applied in Chapman harmless error review, with one important difference. In harmless error review the burden of persuasion is on the State to demonstrate that the constitutional violation did not affect the outcome of the case. In plain error review the burden is upon the defendant to demonstrate that the error did affect the outcome. As stated by the U.S. Supreme Court:

When the defendant has made a timely objection to an error and Rule 52(a) applies, a court of appeals normally engages in a specific analysis of the district court record — a so-called "harmless error" inquiry — to determine whether the error was prejudicial. Rule 52(b) normally requires the same kind of inquiry, with one important difference: It is the defendant rather than the Government who bears the burden of persuasion with respect to prejudice. In most cases, a court of appeals cannot correct the forfeited error unless the defendant shows that the error was prejudicial. This burden shifting is dictated by a subtle but important difference in language between the two parts of Rule 52: While Rule 52(a) precludes error correction only if the error "does not affect substantial rights," . . . Rule 52(b) authorizes no remedy unless the error does "affec[t] substantial rights."

Id. at 734-35 (citations omitted). The reason the parenthetical — (in most instances) — was inserted into the third prong above is because the U.S. Supreme Court in Olano declined to determine whether unobjected to constitutional violations rising to the level of structural defects will satisfy the "affect substantial rights" prong without a showing of actual affect on the outcome of the case. Id. at 735. See also Puckett v. U.S., 129 S.Ct. 1423, 1432 (2009). Finally, the U.S. Supreme Court in Olano held that even where the defendant has met his burden under the three-prong threshold test, an appellate court should still only reverse where the error "seriously affect[s] the fairness, integrity or public reputation of judicial proceedings." Id. at 736 (alteration in the original) (internal quotation omitted).

Although the Idaho Rules of Criminal Procedure do not contain the equivalent of Rule 52(b), Idaho Rule of Evidence 103(d) does state that nothing under the rules shall preclude an appellate court from "taking notice of plain errors affecting substantial rights." We have long held that instances of unobjected to fundamental error would be subject to review on appeal. State v. Haggard, 94 Idaho 249, 251, 486 P.2d 260, 262 (1971) ("In case of fundamental error in a criminal case the Supreme Court may consider the [error] even though no objection had been made at time of trial."). Where the federal courts employ the plain error doctrine, Idaho courts employ the fundamental error doctrine.

Idaho has limited appellate review of unobjected-to error to cases wherein the defendant has alleged the violation of a constitutionally protected right. State v. Kirkwood, 111 Idaho 623, 625-26, 726 P.2d 735, 737-38 (1986). We have stated that "where . . . the asserted error relates not to infringement upon a constitutional right, but to violation of a rule or statute . . . the `fundamental error' doctrine is not invoked." Id. at 626, 726 P.2d at 738 (quoting State v. Kelly, 106 Idaho 268, 277, 678 P.2d 60, 69 (Ct. App. 1984)). In other words, contrary to the federal plain error rule, in Idaho a trial error that does not violate one or more of the defendant's constitutionally protected rights is not subject to reversal under the fundamental error doctrine. See State v. Anderson, 144 Idaho 743, 749, 170 P.3d 886, 892 (2007).

The State of Idaho shares the same conflicting interests as the federal government when it comes to review of unobjected to error, and we find that the U.S. Supreme Court struck an appropriate balance between these competing interests in their opinion in Olano. Idaho's previous articulation of fundamental error failed to provide appellate courts with a structured inquiry likely to lend itself to equal application. Therefore, after careful and considered analysis, we hold that in cases of unobjected to fundamental error: (1) the defendant must demonstrate that one or more of the defendant's unwaived constitutional rights were violated; (2) the error must be clear or obvious, without the need for any additional information not contained in the appellate record, including information as to whether the failure to object was a tactical decision; and (3) the defendant must demonstrate that the error affected the defendant's substantial rights, meaning (in most instances) that it must have affected the outcome of the trial proceedings. If there is insufficient evidence in the appellate record to show clear error, the matter would be better handled in post-conviction proceedings. Placing the burden of demonstrating harm on the defendant will encourage the making of timely objections that could result in the error being prevented or the harm being alleviated.

In summary, where an error has occurred at trial and was not followed by a contemporaneous objection, such error shall only be reviewed where the defendant demonstrates to an appellate court that one of his unwaived constitutional rights was plainly violated. If the defendant meets this burden then an appellate court shall review the error under the harmless error test, with the defendant bearing the burden of proving there is a reasonable possibility that the error affected the outcome of the trial.

In Smith v. State, 94 Idaho 469, 475 n. 13, 491 P.2d 733, 739 n. 13 (1971), we adopted the following definition of fundamental error from the New Mexico Supreme Court:

Error that is fundamental must be such error as goes to the foundation or basis of a defendant's rights or must go to the foundation of the case or take from the defendant a right which was essential to his defense and which no court could or ought to permit him to waive. Each case will of necessity, under such a rule, stand on its own merits. Out of the facts in each case will arise the law.

Although we have applied other definitions in the past, this is the only definition that has been formally adopted by the Court. See State v. Knowlton, 123 Idaho 916, 918, 854 P.2d 259, 261 (1993) (reaffirming that the New Mexico definition of fundamental error was formally adopted by this Court in Smith). One problem with New Mexico's definition lies in the phrase "which no court could or ought to permit [the defendant] to waive." Bingham, 116 Idaho at 423, 776 P.2d at 432 (quoting State v. Garcia, 128 P.2d 459, 462 (N.M. 1942)). In Idaho, we permit a defendant to waive a right of constitutional magnitude, so long as the defendant does so knowingly, voluntarily, and intelligently. See State v. Kirkwood, 111 Idaho 623, 626, 726 P.2d 735, 738 (1986). Another problem with the New Mexico definition is that it makes fundamental error review an excessively ambiguous process, with only vague standards for appellate courts to follow. We take this opportunity to expressly disavow our definition of "fundamental error" as adopted in Smith.

"At other times, we have defined fundamental error as `[a]n error that goes to the foundation or basis of a defendant's rights,' State v. Kenner, 121 Idaho 594, 597, 826 P.2d 1306, 1309 (1992), and an `error which so profoundly distorts the trial that it produces manifest injustice and deprives the accused of his constitutional right to due process,' State v. Sheahan, 139 Idaho 267, 281, 77 P.3d 956, 970 (2003) [(internal quotations omitted)]." State v. Christiansen, 144 Idaho 463, 470, 163 P.3d 1175, 1182 (2007).

iv. Review for Claims of Prosecutorial Misconduct

We find no reason that claims of prosecutorial misconduct should be treated any differently from other trial errors.

a. Objected to Prosecutorial Misconduct

Where a defendant demonstrates that prosecutorial misconduct has occurred, and such misconduct was followed by a contemporaneous objection by defense counsel, such error shall be reviewed for harmless error in accordance with Chapman.

b. Unobjected to Prosecutorial Misconduct

Where prosecutorial misconduct was not objected to at trial, Idaho appellate courts may only order a reversal when the defendant demonstrates that the violation in question qualifies as fundamental error as outlined above. If the defendant fails to meet his burden then an appellate court may not reverse under the fundamental error doctrine. If the prosecutorial misconduct is found to constitute fundamental error under the three-prong inquiry, then an appellate court shall vacate and remand. It should be noted that it is a violation of a defendant's Fourteenth Amendment right to a fair trial for a prosecutor to attempt to have a jury reach its decision on any factor other than the law as set forth in the jury instructions and the evidence admitted during trial, including reasonable inferences that may be drawn from that evidence.

The defendant may still file a petition for post-conviction relief proceedings in order to ascertain whether defense counsel's failure to object to the alleged error constituted ineffective assistance of counsel.

v. Standard of Review Summary

In summary, where a defendant alleges that an error occurred at trial, appellate courts in Idaho will engage in the following analysis:

(1) If the alleged error was followed by a contemporaneous objection at trial, appellate courts shall employ the harmless error test articulated in Chapman. Where the defendant meets his initial burden of showing that a violation occurred, the State then has the burden of demonstrating to the appellate court beyond a reasonable doubt that the constitutional violation did not contribute to the jury's verdict. There are two exceptions to this standard:

a. Where the error in question is a constitutional violation found to constitute a structural defect, affecting the base structure of the trial to the point that a criminal trial cannot reliably serve its function as a vehicle for determination of guilt or innocence, the appellate court shall automatically vacate and remand.

b. Where the jury reached its verdict based upon erroneous instruction an appellate court shall generally vacate and remand the decision of the lower court. However, in the limited instance where the jury received proper instruction on all but one element of an offense, and "[w]here a reviewing court concludes beyond a reasonable doubt that the omitted element was uncontested and supported by overwhelming evidence, such that the jury verdict would have been the same absent the error, the erroneous instruction is properly found to be harmless." State v. Lovelace, 140 Idaho 73, 79, 90 P.3d 298, 304 (2004). If a rational jury could have found that the state failed to prove the omitted element then the appellate court shall vacate and remand.

(2) If the alleged error was not followed by a contemporaneous objection, it shall only be reviewed by an appellate court under Idaho's fundamental error doctrine. Such review includes a three-prong inquiry wherein the defendant bears the burden of persuading the appellate court that the alleged error: (1) violates one or more of the defendant's unwaived constitutional rights; (2) plainly exists; and (3) was not harmless. If the defendant persuades the appellate court that the complained of error satisfies this three-prong inquiry, then the appellate court shall vacate and remand.

We find that this analytical approach clarifies our standard of review while adhering to the historic principles underlying Idaho's harmless error and fundamental error doctrines.

2. As Applied Here

None of the claims of prosecutorial misconduct raised by Perry on appeal allege the violation a constitutional right. As stated above, "where . . . the asserted error relates not to infringement upon a constitutional right, but to violation of a rule or statute, . . . the `fundamental error' doctrine is not invoked." State v. Kirkwood, 111 Idaho 623, 626, 726 P.2d 735, 738 (1986) (quoting State v. Kelly, 106 Idaho 268, 277, 678 P.2d 60, 69 (Ct. App. 1984)). Here Perry alleges that the prosecutor committed misconduct in eliciting testimony from the foster mother, foster father, and investigating officer, all vouching for the T.P.'s credibility, and by referring to this testimony again during closing arguments.

i The prosecutor committed misconduct.

a. Prosecutorial Misconduct in Questioning Witnesses

Perry first asserts that the prosecutor committed misconduct by eliciting testimony from the foster mother, foster father, and the investigating officer, Teneyck, vouching for the girls' credibility. During direct examination, the prosecutor asked the foster mother if T.P. had ever been dishonest with her, the foster mother replied that T.P. had, but only about immaterial things. In addition, the prosecutor asked the foster father during redirect examination whether he noticed any signs of dishonesty on the girls' faces when they reported the allegations against Perry, and the foster father replied that he had not. Finally, the prosecutor asked the Teneyck on direct examination whether he believed that T.P. H.P. were being truthful about her allegations against Perry. Teneyck replied that he believed T.P. was being truthful, he did not offer his opinion as to the truthfulness of H.P. as the court sustained defense counsel's objection to this question.

The Supreme Court of the Territory of Idaho stated over one-hundred years ago, that a question calling "for the opinion of one witness as to the truthfulness of another . . . is clearly an invasion of the province of the jury, who are the judges of the credibility of witnesses." People v. Barnes, 2 Idaho 148, 150, 9 P. 532, 533 (1886). Lay witnesses are not permitted to testify as to matters of credibility. Reynolds v. State, 126 Idaho 24, 30-31, 878 P.2d 198, 204-05 (Ct. App. 1994). Furthermore, we have held that "expert testimony which does nothing but vouch for the credibility of another witness encroaches upon the jury's vital and exclusive function to make credibility determinations, and therefore does not `assist the trier of fact' as required by Rule 702." State v. Perry, 139 Idaho 520, 525, 81 P.3d 1230, 1235 (2003) (quoting U.S. v. Charley, 189 F.3d 1251, 1267 (10th Cir. 1999)). We hold that the prosecutor committed misconduct by eliciting vouching testimony from these witnesses. However, such misconduct did not constitute the violation of any constitutional right. Therefore, such questioning does not constitute fundamental error.

b. Prosecutorial Misconduct in Closing Statement

Perry next asserts that four statements made by the prosecutor during her closing argument constituted error. First, the prosecutor said:

[The foster mother] told you that they are regular kids, no big issues, no problems as far as, you know, being excessively dishonest. They tell little untruths or they have about things that are small. But every child does that. You have to look, when you're reviewing the credibility of witness's testimony, at their credibility. If [the foster mother] had wanted you to believe that these two girls were absolute angels, she probably thinks that they are, but if she had wanted to bolster them in some way and say, well, they're — they never tell an untruth, that is what she would say. She would say, no, they're never untruthful. And that wouldn't be what we know to be true in the real world. That's not the way children are. No children are perfect. All children tell mistruths from time to time. These children tell mistruths about really incidental things, but minor things, not of any great accord. Writing on a wall, I don't think, would be considered a major lie.

Second, the prosecutor made reference to the investigating officer's testimony, stating:

[The investigating officer] told you that he has a lot of training and experience in interviewing both adults and children, what the differences are. Stress levels of girls or children are higher. He didn't detect any signs that he normally would see if he was thinking that something was — he didn't detect any signs of dishonesty in these girls either.

Third, the prosecutor said:

All three witnesses [the foster mother, the foster father, and the officer] that they told this to individually believed them. All three.

Fourth and finally, the prosecutor stated:

There hasn't been any indication here of anything from these girls but honesty. If they had wanted to tell a lie, then why not just go all the way. . . . Why not if you're going to lie.

By the time of closing argument, the prosecutor had been warned twice by the district court about the impropriety of eliciting vouching testimony from the witnesses. Nevertheless, the prosecutor went on to refer to the vouching testimony listed above. There was no excuse for this conduct and it was clearly improper. Therefore, the prosecutor's statements during closing argument constitute misconduct. However, such misconduct did not violate any of Perry's constitutional rights, and it therefore cannot constitute fundamental error. ii. Only one act of prosecutorial misconduct was objected to during trial and the trial court properly sustained the objection.

As noted above, the prosecutor committed misconduct during her questioning of the foster mother, foster father, and investigating officer, as well as during her closing statement. However, defense counsel chose to object to only one such instance of misconduct, when the prosecutor — after establishing Officer Teneyck's training and experience in detecting signs of deceptiveness in interviewees — asked Teneyck whether T.P. displayed any signs of untruthfulness during her interview. Teneyck responded that she had not. Later, the prosecutor asked the same question regarding H.P., but this time defense counsel objected before Teneyck could answer. The district court sustained counsel's objection, stating: "This just seems to be a way of trying to vouch for the witnesses' credibility and I think it's inadmissible. It's up to the jury to decide whether the witnesses are credible or not." We hold that the prosecutor's question constituted misconduct, in questioning a witness on the credibility of another witness, infringing upon the province of the jury. However defense counsel's timely objection, sustained by the trial court, kept impermissible evidence from the jury. Therefore, no error occurred and harmless error analysis is inapplicable.

D. Cumulative Error

In the alternative, Perry argues that the accumulation of errors that occurred during trial, in the aggregate, were sufficient to warrant a new trial. Perry argues that even if this Court determined that the errors listed above are not fundamental and/or are harmless; they still constitute "errors" and must be considered under the cumulative error doctrine. We disagree.

Under the doctrine of cumulative error, a series of errors, harmless in and of themselves, may in the aggregate show the absence of a fair trial. State v. Martinez, 125 Idaho 445, 453, 872 P.2d 708, 716 (1994). However, a necessary predicate to the application of the doctrine is a finding of more than one error. See State v. Hawkins, 131 Idaho 396, 407, 958 P.2d 22, 33 (Ct. App. 1998).

In State v. Higgins, 122 Idaho 590, 836 P.2d 536 (1992), this Court considered whether alleged errors not objected to during trial, that were not deemed fundamental, could be reviewed under the cumulative error doctrine. After determining that the alleged act of prosecutorial misconduct did not rise to the level of fundamental error, we refused to consider the act under our cumulative error analysis. We stated: "Because we find no error in this case that was preserved for appeal, we conclude that the cumulative error doctrine does not apply." Id. at 604, 836 P.2d at 550. This Court was also faced with a similar issue in State v. Raudebaugh, 124 Idaho 758, 864 P.2d 596 (1993). After determining that the prosecutor's acts did not rise to the level of fundamental error, we refused to address whether there was error. Id. at 769-70, 864 P.2d at 607-08. As such, we did not include the defendant's claims of prosecutorial misconduct in our cumulative error analysis.

Thus, it is well-established that alleged errors at trial, that are not followed by a contemporaneous objection, will not be considered under the cumulative error doctrine unless said errors are found to pass the threshold analysis under our fundamental error doctrine. Here, Perry has demonstrated no error. Where defense counsel raised an objection to the prosecution's question about Teneyck's opinion as to H.P.'s truthfulness the trial court properly sustained, preventing the impermissible testimony from reaching the jury. Instances of prosecutorial misconduct that were not objected to at trial failed our threshold inquiry for fundamental error and are therefore not properly considered error for purposes of cumulative error review. As such, Perry has failed to demonstrate at least two errors, a necessary predicate to the application of our cumulative error doctrine.

IV. CONCLUSION

For the reasons set forth above, we hold that the district court did not err in excluding evidence that T.P. had lied or exaggerated about the shower spraying incident involving H.P., which was offered to impeach T.P.'s allegations against Perry and to impeach the foster mother's testimony under I.R.E. 613(a), as any minimal probative value of the evidence was substantially outweighed by the danger of jury confusion and the waste of trial time. In addition, we hold that the alleged acts of prosecutorial misconduct, not followed by a contemporaneous objection were misconduct but do not rise to the level of fundamental error. We also hold that the prosecutor's question to the officer regarding H.P.'s truthfulness, which was objected to, was properly excluded by the trial judge and does not constitute error. Finally, we hold that Perry failed to demonstrate that at least two errors existed for purposes of applying cumulative error review. Therefore, we affirm Perry's judgment of conviction.

Chief Justice EISMANN and Justices J. JONES, W. JONES and HORTON, CONCUR.

st-party indemnity contract. . . ."); Kevin J. Russel, It Depends on What the Meaning of "Direct" Is: The Direct Loss Requirement Under Fidelity Policies, 47 No. 9 DRI For Def. 53, 53 (2005) ("One thing is clear: employee dishonesty coverage is not liability coverage. Rather, it is first-party indemnity coverage."); Schmookler, supra, at 115 ([Fidelity bonds] . . . are not liability policies, and do not provide blanket coverage for an insured's vicarious liability to a third party."); Gary J. Valeriano Carleton R. Burch, The Interpretation of a Direct Loss Under Liability Bonds, 33 Brief 32, 38 (2004) ("The clear trend among courts is to recognize that a fidelity bond is an indemnity policy, not a liability policy, and that these policies generally do not provide coverage for third-party losses.").

Courts following the new majority rule also rely heavily on the "resulting directly from" language, interpreting it as requiring an immediate causal connection between the dishonest or fraudulent conduct and the loss. Fidelity coverage is "meant to insure . . . against immediate harm from employee dishonesty. . . ." Lynch Props. Inc. v. Potomac Ins. Co., 962 F. Supp. 956, 964 (N.D. Tex. 1996), aff'd, 140 F.3d 622 (5th Cir. 1998). Many of the cases simply pronounce that "direct means direct." When employee fraud or dishonesty targets a third party, it is the third party that suffers the direct loss as a result of the fraud. See Kidder, Peabody, 676 N.Y.S.2d at 564. The insured's liability arises indirectly through the doctrine of vicarious liability or another tort theory. See id. Although the Massachusetts Supreme Court has not yet spoken, courts applying Massachusetts law have followed the new majority rule.

See First State Bank, 555 F.3d at 570-71 ("direct means direct"); Vons, 212 F.3d at 492-93 ("We hold that `direct' means `direct'. . . ."); Direct Mortgage, 625 F. Supp. 2d at 1175-76 ("direct means direct"). The minority approach interprets "direct loss" as incorporating the concept of proximate cause, which is a marginally broader standard that more readily encompasses some losses imposed by third-party claims. See Scirex Corp. v. Fed. Ins. Co., 313 F.3d 841, 850 (3d Cir. 2002); Jefferson Bank v. Progressive Cas. Ins. Co., 965 F.2d 1274, 1284-85 (3d Cir. 1992); First Am. State Bank v. Cont'l Ins. Co., 897 F.2d 319, 326 (8th Cir. 1990); Graybar Elec. Co., Inc. v. Fed. Ins. Co., 567 F. Supp. 2d 1116, 1127 (E.D. Mo. 2008); Frontline Processing Corp. v. Am. Econ. Ins. Co, 149 P.3d 906, 911 (Mont. 2006); Auto Lenders Acceptance Corp. v. Gentilini Ford, Inc., 854 A.2d 378, 385-86 (N.J. 2004).

See Fireman's Fund Ins. Co. v. Special Olympics Int'l, Inc., 346 F.3d 259, 263 (1st Cir. 2003) (stating that "courts typically deem third-party losses as outside the coverage of fidelity policies"); Atlas Metals Prods. Co. v. Lumbermans Mut. Cas. Co., 829 N.E.2d 257, 262 (Mass. App. Ct. 2005) ("To extend the insurance coverage as Atlas advocates would, in effect, transform this employee dishonesty fidelity policy into a general liability policy. . . ."); Commerce Bank, 2005 WL 4881101, at *4 (distinguishing a first-party fidelity bond from a third-party liability insurance policy); see also Stop Shop Cos. v. Fed. Ins. Co., 946 F. Supp. 99, 106 (D. Mass. 1996), rev'd on other grounds, 136 F.3d 71 (1st Cir. 1998) (holding under Massachusetts law that "direct loss" refers to immediate damage resulting from covered cause and that "directly" means "immediately").

The Fidelity Clause in the Primary Bond employs the same causal language as Standard Form No. 24. It should be interpreted consistently with cases interpreting Standard Form No. 24. Because Massachusetts follows the new majority rule, the "directly resulting from" language in the Fidelity Clause generally bars coverage for third-party claims seeking to impose loss on the insured because of the tortious acts of its employees and representatives.

2. Other Provisions In The Primary Bond Provide First-Party Coverage for Loss Resulting From A Third-Party Claim.

There are several provisions in the Primary Bond that on their face relate to third-party actions. The Assureds argue that these provisions demonstrate that the Primary Bond covers third-party claims, or at least render the Primary Bond ambiguous. These provisions do govern third-party actions, but only to the limited extent that the resulting loss could trigger coverage under one of the insuring clauses. The provisions do not contemplate third-party liability coverage. Their purpose is to address claims arising out of the misappropriation of a third party's property while in the insured's possession, a scenario where the Primary Bond provides first-party coverage. See Schmookler, supra, at 133-34.

The Fidelity Clause defines coverage in terms of a "loss," including "loss of Property." Two other provisions address what can be lost. The first defines the term "Property." The second defines the interest that the insured must have in the Property for it to be covered by the policy. See 1A Couch on Insurance at § 17:8 (noting requirement of insurable interest for property insurance). Both provisions contain phrases that might suggest coverage for third-party claims, but which courts have interpreted narrowly and consistent with first-party coverage. These provisions are "not intended to extend coverage to losses resulting from an insured's legal liability to a third party, but rather to extend coverage to the loss of a third party's property while in the possession and control of the insured." Schmookler, supra, at 133.

The definition of "Property" states:

"Property", wherever used in this bond, shall be deemed to mean money, currency, coin, bank notes, Federal Reserve notes, postage and revenue stamps, U.S. Savings Stamps, bullion, precious metals of all kinds and in any form and articles made therefrom, jewellery [sic], watches, necklaces, bracelets, gems, precious and semi-precious stones, bonds, securities, evidences of debts, debentures, scrip, certificates, receipts, warrants, rights, transfers, coupons, drafts, bills of exchange, acceptances, notes, checks, withdrawal orders, money orders, travelers' letters of credit, bills of lading, abstracts of title, insurance policies, deeds, mortgages upon real estate and/or upon chattels and upon interest therein, and assignments of such policies, mortgages and instruments, and other valuable papers and documents, and all other instruments similar to or in the nature of the foregoing, in which the Assured has an interest or which are held by the Assured for any purpose or in any capacity and whether so held gratuitously or not and whether or not the Assured is liable therefor, and chattels which are not hereinbefore enumerated and for which the Assured is legally liable.

Primary Bond at 23 (the "Property Definition") (emphasis added).

The Property Definition identifies two broad types of property. The first type, exemplified by a long list of items notable for their portability and high degree of moneyness, qualifies as "Property" (i) if "the Assured has an interest" in it or (ii) if the Assured held it "for any purpose or in any capacity and whether so held gratuitously or not and whether or not the Assured is liable therefore." Id. The second type — "chattels which are not hereinbefore enumerated" — qualifies as "Property" if the Assured is "legally liable" for it. Id.

The interest provision, entitled "Ownership" states:

This bond shall apply to loss of Property (1) owned by the Assured, (2) held by the Assured in any capacity, or (3) for which the Assured is legally liable. This bond is for the sole use and benefit of the Assured named in the Declarations.

However, coverage provided under the Insuring Agreements of this bond shall be deemed to include amounts which the Assured is legally liable to pay a third party as a direct result of loss otherwise meeting the conditions and limitations of this bond.

Primary Bond at 41-42 (the "Ownership Provision"). The first two sentences of the Ownership Provision track language that appeared in Standard Form No. 24 prior to the 2004 revision. Financial Institution Bonds, supra, at 988. The third sentence does not appear in the standard form, and the Complaint alleges that it was specifically bargained for by the Assureds. See id. at 983-88.

Compare Financial Institution Bonds, supra, at 988 (Section 10, Ownership, in 1986 version) and id. at 1001 (Section 10, Ownership, in 1980 version) with id. at 973 (Section 12, Covered Property, in 2004 version). The 2004 revisions eliminated the phrase "legally liable" from the Financial Institution Bond. The new interest provision states: "This bond shall apply to loss of Property (1) owned by the Insured, (2) held by the Insured in any capacity, or (3) owned and held by somebody else under circumstances which make the Insured responsible for the Property prior to the occurrence of the loss." Id. at 973.

Both the Property Definition and the Ownership Provision employ the phrase "legally liable." The Property Definition uses it twice. Money and money-like instruments not owned by the Assured qualify as Property if held "for any purpose or in any capacity . . . and whether or not the Assured is liable therefor." Primary Bond at 23. Other chattels qualify as Property only if "the Assured is legally liable." The Ownership Provision speaks in similar terms by extending coverage to Property not owned by the Assured if it is "held by the Assured in any capacity" or "for which the Assured is legally liable." Id. at 41.

To a reader unversed in first-party insurance law, or to an insured looking for a textual hook for third-party coverage, the phrase "legally liable" might be thought to encompass liability imposed in a third-party action. But when used in an interest provision like the Ownership Provision, the terms "liable" and "legally liable" come laden with the accumulated interpretations of decades of precedent. Courts during the nineteenth and early twentieth centuries regularly considered claims by bailees who held goods and took out insurance on property "for which the insured is liable." See 11 Couch on Insurance at § 154:34. When a loss occurred, insurers relied on this language to deny coverage unless the insured had been judicially determined to be responsible for the loss, i.e., "legally liable." Courts rejected the insurers' interpretation, holding that the terms did not refer to any fixed legal liability to respond in damages, but rather were used in a generic sense to denote responsibility for the property.

11 Couch on Insurance at § 154:34 ("the term `liable,' as used in the policy, was not intended to describe a particular fixed legal liability which would require a showing that the insured was responsible by contract or in tort for the fire loss, but, instead, referred to his liability or `responsibility' as a bailee"); 43 Am. Jur. 2d Insurance § 197 ("Policy provisions covering property contained in specified places and `for which the insured is liable' insure against loss of the property, and do not indemnify the insured against his or her legal responsibility in tort or by contract to the owners of the property. . . ."); see, e.g., Paktank Louisiana, Inc. v. Marsh McLennan, Inc., 688 F. Supp. 1087, 1090-91 (E.D. La. 1988) ("the phrase `the property of others for which the Insured may be liable' is an unambiguous phrase providing property damage coverage for the property of others where [the insured] has a present and existing general responsibility by virtue of a bailment"); Folger Coffee Co. v. Great Am. Ins. Co., 333 F. Supp. 1272, 1274 (W.D. Mo. 1971) ("the courts have almost uniformly held that if, from the contract construed in its entirety, the fair interpretation and construction of the insurance contract is that it was intended primarily to cover the property held by the insured, then `liable,' as used within the policy, does not refer to any fixed legal liability of the insured to respond in damages, but should be construed more broadly to mean `responsible'"); Penn v. Commercial Union Fire Ins. Co., 101 So.2d 535, 537 (Miss. 1958) (interpreting "liable" in interest clause to mean "responsible" and cover loss of customers' property due to fire without regard to whether the insured was liable in tort to its customers for the fire that caused the loss). Some courts required a prior judicial determination of liability as an additional requirement for coverage. See, e.g., Millers' Mut. Fire Ins. Ass'n v. Warroad Potato Growers Ass'n, 94 F.2d 741, 742 (8th Cir. 1938); Orient Ins. Co. v. Skellet Co., 28 F.2d 968, 969 (8th Cir. 1928); Washburn-Crosby Co. v. Home Ins. Co., 85 N.E. 592, 592 (Mass. 1908). The underlying insurable interest nevertheless rested on "legal liability" in the sense of responsibility for the property prior to the lawsuit. See Winters v. State Farm Fire Cas. Co., 73 F.3d 224, 227 (9th Cir. 1995) (holding that language like "liable" or "legally liable" "affords coverage only to the extent of the value of the bailed property, and does not cover liability to third parties in tort or contract"); Globe Rutgers Fire Ins. Co. v. United States, 202 F.2d 696, 697 (5th Cir. 1953) ("the phrase `provided the insured is legally liable therefor,' when considered in connection with these policy provisions providing insurance on property, should be considered to refer to the present and existing liability of the custodian generally and not restricted to liability which was the consequence alone of a fire"); see generally D.E. Bucker, Fire Policy on Contents or the Like as Covering Property of Insured's Customers or Bailors, 67 A.L.R.2d 1241 (1959 Supp. 2010) (discussing different interpretations of provisions referring to insured's "liability" or "legal liability").

Courts have followed these precedents when interpreting fidelity bonds. The leading case is Lynch. There, a bookkeeper employed by Lynch Properties, Inc., enjoyed access to the personal bank account of Martha Lynch, the mother of the company's president. 140 F.3d at 625. By oral agreement, Lynch Properties managed Ms. Lynch's property and investments, kept track of her personal bank account, and paid her personal bills. Id. The bookkeeper misappropriated Ms. Lynch's funds. When Lynch Properties discovered the theft, it reimbursed Ms. Lynch and made a claim under its fidelity policy, which covered property "[f]or which you are legally liable." Id. at 626. Lynch Properties argued that because its employee stole funds from Mr. Lynch, it was vicariously liable for the theft and "legally liable" for the funds. Id. at 629.

The Lynch court rejected this argument, distinguishing between liability for the property (in the sense of responsibility) before the theft and liability in tort for damages as a result of the theft:

[Lynch Properties] does not argue . . . that it was legally liable for the funds prior to their theft. Instead, it argues only that once [the bookkeeper] misappropriated the funds, it became liable to Mrs. Lynch to replace those funds and that Potomac must indemnify it for that reimbursement because [the bookkeeper] stole the funds in the course of her duties at Lynch Properties. While Lynch Properties thereby argues how it may be vicariously liable for [the bookkeeper's] acts, this argument fails to show how it was "legally liable" for the stolen property itself, that is, for the funds in Mrs. Lynch's account. Acceptance of Lynch Properties' argument would mean that Potomac's policy would cover any loss where an employee takes a customer's property in the course of their employment responsibilities, regardless of whether the employer had any interest in the property itself. Furthermore, it would transform this policy, which insures property loss for which Lynch Properties is legally liable, into a policy insuring any vicarious liability arising from an employee's dishonesty. This argument is foreclosed by the plain language of the "Interest Covered" provision, which requires that the employer have some interest in the misappropriated property, whether that be because the employer owns, holds, or is legally liable for the property.

Id. at 629 (footnote omitted); accord Vons, 212 F.3d at 491.

The Massachusetts Supreme Court has not spoken on this issue either; however, courts applying Massachusetts law have followed Lynch. See Atlas Metals, 829 N.E.2d at 259 n. 4, 262; see also Fireman's Fund Ins. Co. v. Special Olympics Int'l, Inc., 249 F. Supp. 2d 19, 28 (D. Mass. 2003) (applying Massachusetts law; noting that parties had not relied on the "legally liable" language in fidelity bond but expressing view that Lynch interpreted language correctly), aff'd on other grounds, 346 F.3d 259 (1st Cir. 2003). The phrase "legally liable" in the Property Definition and the Ownership Provision therefore cannot be read to extend coverage to losses resulting from the imposition of tort liability through a third-party action. The phrase instead extends coverage to property which, prior to its misappropriation, was the legal responsibility of the Assureds. See Schmooker, supra, at 135 ("the ownership provision . . . covers loss of property as to which, prior to its misappropriation, the insured had possession and legal responsibility"); Valeriano Burch, supra, at 36 ("For the insured to be legally liable for the property, its legal liability must attach before the acts complained of had occurred or independent of those acts").

This leaves the third sentence of the Ownership Provision, which states: "However, coverage provided under the Insuring Agreements of this bond shall be deemed to include amounts which the Assured is legally liable to pay a third party as a result of loss otherwise meeting the conditions and limitations of this bond." Primary Bond at 42. Unlike the first two sentences of the Ownership Provision, which track the form language of the pre-2004 versions of Standard Form No. 24, the third sentence cannot be found in the standard forms. But the sentence does not appear crafted out of whole cloth. It rather sets forth in the affirmative the scope of coverage described in the negative by Section I(l) of the Primary Bond. This exclusion states: " THIS BOND DOES NOT COVER: . . . (l) All damages of any type for which the Assured is legally liable, except direct compensatory damages arising from a loss covered under this bond." Primary Bond at 35 (the "Indirect Loss Exclusion").

As noted, the Indirect Loss Exclusion was one of three exclusions added to Standard Form No. 24 in 1980 to limit coverage to direct compensatory damages. See Duke, supra, at 15; Clore, supra, at 86-87. The three exclusions sought to eliminate any potential exposure to consequential damages, statutory damages (including doubling and trebling), punitive damages, or penalties. Clore, supra, at 86-89. Compensatory damages are "defined as `such damages as will compensate the injured party for the injury sustained, and nothing more; such as will simply make good or replace the loss caused by the loss or injury.'" Id. at 90 (quoting Black's Law Dictionary 467 (4th ed. 1968)).

When an insured holds or is legally responsible for a third party's property at the time of loss, a fidelity bond covers the property to the extent of the loss. As noted, "the mere misappropriation of such property, without a corresponding claim and finding of liability against the insured for that loss, is not compensable under the bond." Schmookler, supra, at 140-41. A loss only exists if the third party is successful on its claim. But in succeeding, the third party may obtain a judgment awarding more than the value of the misappropriated property at the time of the loss. Depending on the nature of the claim and the insured's culpability, the third party might be awarded statutory damages, penalties, or punitive damages. Even an award of compensatory damages can include additional, non-covered components.

Compensatory damages have long been divided into two categories: those which are direct, also referred to as general damages; and those which are indirect and consequential, traditionally referred to as special damages. Direct damages are those which follow immediately from the breach or occurrence. Consequential damages are those which are reasonably foreseeable, but which do not result directly from the act of a party; rather from the consequences of the act.

Clore, supra, at 90-91 (footnotes omitted).

The Indirect Loss Exclusion and the third sentence of the Ownership Provision limit coverage under the Primary Bond to the direct, compensatory damages recovered by the third party. The provisions "exclude from coverage not only punitive, but also all indirect and consequential damages for which the insured may be liable under a judgment." Id. at 91; accord Wildau, supra, at 117-18 (summarizing and adopting Clore's view); see Commerce Bank, 2005 WL 4881101, at *4 n. 3 (analogizing the requirement of direct loss under a fidelity bond to the distinction between direct and consequential damages in a breach of contract action).

The Assureds contend that they bargained specifically for the third sentence of the Ownership Provision, that it was intended to cover third-party actions, and that it must have additional meaning because it does not appear in Standard Form No. 24. The plain language of the provision does not plausibly support these arguments, particularly given the close textual relationship between the third sentence and the Indirect Loss Exclusion. The third sentence instead reads as belt-and-suspenders language. Through this addition, the drafters sought to eliminate any implication that the second sentence of the Ownership Provision ("This bond is for the sole use and benefit of the Assured named in the Declarations.") might eliminate coverage for a loss that otherwise would be covered by the first sentence ("This bond shall apply to loss of Property . . . (3) for which the Assured is legally liable."). Primary Bond at 41-42.

The Primary Bond's use of the phrase "legally liable" does not create generalized coverage for losses resulting from the imposition of tort liability in third-party actions. It instead reaffirms that the Primary Bond contemplates coverage for losses resulting from a narrow category of third-party claims, principally those in which the insured held or was legally liable for a third party's property at the time of the loss.

3. The Need For Further Proceedings

As noted, the parties have not addressed the Underlying Actions in the claim-specific manner necessary to determine whether coverage exists. This decision should provide guidance as to how I will approach that analysis. The Assureds and the Bond Underwriters shall confer and determine how to present any claims where they cannot agree about coverage. If rulings are necessary, the issues should be presented in an efficient and targeted way, such as by grouping similar causes of action into categories or by seeking rulings on representative claims. In connection with briefing on any disputed claims, the Bond Underwriters collectively will be limited to a single brief or set of briefs. If particular Bond Underwriters believe that their bonds do not follow form to the Primary Bond and present a unique defense to coverage, then they may request leave to file a separate brief limited to their specific issue.

F. The Complaint States A Claim For Court Costs And Attorneys' Fees.

The Complaint seeks to recover court costs and attorneys' fees incurred in the Underlying Actions. The relevant language of the Primary Bond, which is not designated with a separate section or subsection reference, states:

COURT COSTS AND ATTORNEYS' FEES (Applicable to all Insuring Clauses now or hereafter forming part of this bond)

The Underwriters will indemnify the Assured against court costs and reasonable attorney's fees incurred and paid by the Assured in defending any suit or legal proceeding brought against the Assured to enforce the Assured's liability or alleged liability on account of any loss, claim or damage which, if established against the Assured, would constitute a valid and collectible loss sustained by the Assured under the terms of this bond. Such indemnity shall be in addition to the amount of this bond.

Primary Bond at 33 (the "Defense Costs Provision"). This provision has been interpreted consistently as requiring the insurer to indemnify the insured for reasonable costs of defense in connection with a suit that, if successful, would result in relief that would qualify as a loss under the Primary Bond. Because I cannot yet resolve the claims for coverage as to any of the Underlying Actions, I also cannot dismiss the claims under the Defense Costs Provision.

E.g., First Am. State Bank, 897 F.2d at 326 (holding that a settlement with third parties was a covered loss under fidelity bond and that it constituted a "legal proceeding" triggering recovery of reasonable attorneys' fees); Nat'l Sur. Corp. v. Rauscher, Pierce Co., 369 F.2d 572, 574, 579 (5th Cir. 1967) (affirming award of court costs and reasonable attorneys' fees incurred in defending suits arising out of fraudulent acts of an employee which were covered under fidelity bond); Nat'l Sur. Corp. v. First Nat'l Bank, 431 S.W.2d 353, 355 (Tex. 1968) ("liability for court costs and attorneys' fees is by the plain and unambiguous language of the bond very clearly limited to situations in which they are incurred in suits or legal proceedings in which liability or alleged liability of the insured, if established, would constitute a valid and collectible loss under other loss provisions of the bond"); Hull, supra, at 639 (interpreting identically worded provision; "the surety . . . specifically indemnifies the insured for attorneys' fees and court costs spent in defending claims causing losses covered by the Bond"); see Bailey, supra, at 354-56 (noting that provision obligates surety for attorneys' fees and costs in third-party action in addition to amount of coverage under the bond).

III. CONCLUSION

The Bond Underwriters' motions to dismiss are denied. IT IS SO ORDERED.