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Diane Backis leaves the federal courthouse in Albany, New York in 2016
Diane Backis leaves the federal courthouse in Albany, New York, on Nov. 28, 2016. Backis admitted stealing $3 million from her employer, Cargill. (AP file photo)

Ruling backs Cargill insurance claim tied to employee theft

The 8th U.S. Circuit Court of Appeals has ruled that an insurance company must cover significant losses Wayzata-based Cargill suffered as a result of employee theft. In National Union v. Cargill, decided March 7, the court found that a commercial crime insurance policy issued will cover losses beyond money pocketed due to embezzlement.

National Union Fire Insurance Co. of Pittsburgh issued a commercial crime insurance policy to Cargill. Cargill’s insurance policy covered employee theft, which was defined as “the unlawful taking of property to the deprivation of the Insured.” That loss had to have resulted “directly from” employee theft for it to be covered under the policy.

Diane Backis worked at Cargill for several decades at a grain facility in Albany, New York, as a Merchant/Admin Leader. In that capacity, Backis negotiated sales contracts with Albany grain customers, entered sales in the accounting system, and handled the invoices for those transactions. Backis understood Cargill’s financial systems and controlled the Albany facility’s financial records.

In 2008, Backis began a fraudulent scheme to embezzle money from Cargill. She did this by misrepresenting the price she could sell the grain for Cargill in the Albany market. Backis entered false sales contracts into the accounting system, manipulating the receivable balances and customer payments to reflect the sale. Cargill shipped additional grain to the Albany facility, which stored grain purchased from the Midwest and transported to New York by railcar, under the impression that the grain would be sold at the higher price. Backis sold the grain at lower prices than what she told Cargill, however. Backis was able to escape undetected until 2016, even though Cargill had audit procedures and internal controls.

BDO Advisory was hired by Cargill to investigate the loss claim. It determined that Backis induced Cargill to send much more grain to Albany through her misrepresentations than Cargill otherwise would have. BDO supported its conclusion by citing the fact that, after the scheme was discovered, sales of grain in Albany declined 90%, and Cargill left the Albany market in 2018.

The report determined that Cargill suffered losses of $32,115,192 due to Backis’ actions. That figure included $3 million that Backis embezzled, as well as another $29 million that Cargill spent in freight costs shipping the grain to Albany. No lost profits were included.

National Union did not dispute that the $3 million that Backis moved into her personal bank account was covered by the policy. However, National Union disputed that Backis’ taking amount to a theft. It declined to cover the other $29 million Cargill sought, filing to suit obtain a declaration in its favor. Cargill moved for judgment on the pleadings, and the district court granted it.

Tim MacDonald, former partner at Arnold & Porter, litigated the case on behalf of National Union. “What Cargill purchased is a commercial crime policy that covers employee theft,” MacDonald stated. “It does not include losses that result from employee dishonesty. That’s a different type of policy. Cargill could have bought that kind of policy.”

“There was not a theft here,” MacDonald asserted. “The corn and sorghum was not stolen.” MacDonald cited a report that the corn and sorghum were sold at market prices in Albany.

The court disagreed. “It is true that Backis never physically seized the grain, but a ‘taking’ includes the ‘implicit transfer’ of control, and National Union concedes that under this definition, a physical seizure was not necessary,” the court wrote.

The court reasoned that, but for Backis’ misrepresentations of the sale price of grain, Cargill would have sent only the minimal amount of grain to Albany. This, the court concluded, amount to an unlawful taking under the insurance policy.

National Union also argued that the loss of $29 million in freight costs did not result “directly from” Backis’ actions. It claimed that when Cargill decided to ship the grain, that was an intervening step that broke the causal chain.

Aaron D. Van Oort, Partner at Faegre Drinker, argued on behalf of Cargill. “Ms. Backis had authority to sell Cargill’s grain,” maintained Van Oort. “Possession was transferred from Cargill to whoever Ms. Backis sold it to and she controlled that. There’s nobody else in the middle.”

The court agreed with Cargill, finding that the fraudulent scheme was designed to induce Cargill to make the decision to ship the grain. After all, if Backis had not represented that she could get inflated prices for the grain, Cargill never would have shipped the grain.

The 8th Circuit determined that Backis’ conduct constituted employee theft under the insurance policy. It affirmed the district court’s decision to grant Cargill’s motion for judgment on the pleadings.

“Cargill is glad that the 8th Circuit carefully reviewed the insurance policy and agreed that National Union had to honor its terms and cover Cargill’s loss,” Rikke Diersen-Morice, partner at Maslon, said in a statement.

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