Insured Did Not Own Earnings Allegedly Stolen from Limited Partnership, Dooming Coverage Bid

The U.S. Court of Appeals for the Eighth Circuit has ruled that 3M Company was not entitled to insurance coverage for fraud losses it allegedly had suffered in a limited partnership.

The Case

3M invested assets from its employee benefit plan in WG Trading Company LP, in a transaction that it structured as a limited partnership interest in WG Trading. Thereafter, it learned that officers of WG Trading had fraudulently diverted hundreds of millions of dollars from WG Trading and a related company, WG Trading Investors, LP.

3M recovered its capital contribution but contended that the returns on its investments had been lost due to the fraud. It sought to recover the loss of its alleged earnings from its insurers, which denied the claim.

3M sued. The U.S. District Court for the District of Minnesota granted summary judgment in favor of the insurers. It found that 3M had not owned the property it alleged had been lost as required by the insurance policy, holding that its limited partnership interest in WG Trading had not conferred ownership over the allegedly lost earnings because “[u]p until the point at which earnings were distributed to the partners, the earnings of WG Trading were owned by WG Trading, and not by 3M or any of the other limited partners.”

3M appealed to the Eighth Circuit.

The Eighth Circuit’s Decision

The circuit court affirmed.

In its decision, the circuit court rejected 3M’s argument that its limited partnership interest in WG Trading satisfied its insurance policy’s “ownership” requirement. The circuit court reasoned that up until the time earnings were distributed to the partners, they were property of WG Trading – not property of 3M. The Eighth Circuit said that it was “fundamental” that property acquired with partnership funds was partnership property, and that individual partners did not own partnership assets until the winding up of the partnership.

The circuit court concluded, therefore, that 3M did not own the allegedly stolen earnings and that, as a consequence, it could not seek coverage for their loss under its insurance policy.

The case is 3M Co. v. National Union Fire Ins. Co. of Pittsburgh, PA, No. 15-3495 (8th Cir. May 31, 2017).