On December 8, 2009, the P.C. hired Matthew Udy as a business and financial manager. According to Dr. Greenwald, Udy's responsibilities included receiving income from all sources, making payments on accounts payable, payments to credit card accounts, and payments for other miscellaneous charges and services, and managing information technology issues at the medical office. Dr. Greenwald referred to Udy as his personal assistant and as a “financial manager of [the] medical practice.”

As evidenced by a 2012 W-2, however, the P.C. was the sole entity that employed Udy and paid for his services.

Also in 2009, Dr. Greenwald formed a real estate company, Allagash Realty, LLC. According to Dr. Greenwald, Udy was responsible for managing Allagash, which included collecting Allagash's rents and other payments, as well as paying its creditors.

On September 11, 2013, Janeene Ditmore, the P.C.'s office manager, was notified that a questionable purchase had been made with one of Dr. Greenwald's credit cards. Dr. Greenwald, along with Ms. Ditmore and Troy Clayton, the CPA for the P.C., confronted Udy about the purchase. Udy confessed to wrongfully appropriating money and was fired that day.

Due to the admitted wrongdoing, Mr. Clayton conducted an internal financial audit for the P.C. The audit consisted of an analysis of the P.C.'s financial records, Allagash's financial records, and Dr. Greenwald's personal credit card accounts.

Dr. Greenwald reported Udy to the police. Udy subsequently pleaded guilty to felony unauthorized use of an access device in violation of 18 U.S.C. § 1029 in federal court and he was ordered to pay $275,488.32 in restitution.

By letter dated October 10, 2013, Larren Covert, a lawyer for Dr. Greenwald and Greenwald Neurosurgical, notified Western that an employee had “stolen funds from the business.” Mr. Clayton sent Western a sworn proof of loss form dated January 22, 2014 that identified the “approximate loss” in the amount of $347,395.

Several days later, according to Western, its claim manager, Ginger Barnes, told Mr. Clayton that if any losses were to be reimbursed, they had to be sustained by the P.C. because the bond only covered the fraudulent or dishonest “act of an employee of the Insured. . . .” Western contended that Udy only was an employee of the P.C. and consequently only the P.C. would be insured under the bond.

Ms. Barnes subsequently explained that the bond, “covers loss due to an employee of Brent H. Greenwald dba Greenwald Neurosurgical only. The application states it is to cover the business of 'Neurosurgery.' Losses incurred involving the Allugash [sic] properties are not covered by this bond. Losses incurred to Brent Greenwald personally are also not covered. The Restitution portion of the Plea Agreement shows a loss of '$250,386.22 payable to the doctor.' There is nothing that sets out exactly what portion of the loss was caused to Greenwald Neurosurgical. . . .

“At this time, I request a break down as to what makes up the $250,386.22 payable to the doctor. It appears at least $140,095 is the loss regarding the Allugash [sic] properties. If the loss involves credit card companies . . ., please provide us with documentation showing whether those cards were personal accounts or business accounts and whether business funds were used to pay those personal charges by Mr. Udy.”

Counsel for Dr. Greenwald and the P.C. took the position that the bond covered all of Dr. Greenwald's businesses, not just the P.C.

Because Western refused to pay under the bond, Dr. Greenwald sued Western for breach of contract and unjust enrichment.

The trial court granted summary judgment in favor of the P.C., concluding that it was entitled to recover the full $100,000 under the bond.

The dispute reached the Idaho Supreme Court.

The Idaho Supreme Court's Decision

The Supreme Court of Idaho reversed.

In its decision, the court found that the trial court had correctly concluded that only the P.C. was an insured and that the P.C. was the only entity that could recover under the bond because it was the only entity to have compensated Udy.

The court then ruled that the P.C. only could recover losses it sustained that were caused by Udy while he was acting in the ordinary course of the P.C.'s business.

As the court observed, the P.C.'s articles of incorporation established it as a for-profit company with the purpose of “conduct[ing] a medical practice of neurosurgery.” Therefore, the ordinary course of the P.C.'s business included all the activities needed to operate and maintain a profitable medical practice, and whether Udy had been acting in the “ordinary course of [the P.C.'s] business” was a jury question, the court said.

In summary, the court ruled that the P.C. was the only employer of Udy and, therefore, the only entity that could recover under the policy. The court added that to the extent Udy had been acting in the ordinary course of business for the P.C., Western had an obligation to indemnify the P.C. for those losses. However, the court stated, for that contractual obligation to indemnify to arise, the P.C. had to prove that Udy's actions were within the ordinary course of the P.C.'s business. Neither Dr. Greenwald personally nor Allagash could recover under the bond for Udy's conduct, the court concluded. 

The case is Greenwald v. Western Surety Co., No. 45404 (Idaho March 15, 2019). Attorneys involved include Elam & Burke, P.A., Boise, for appellant. Joshua S. Evett argued. Swafford Law, P.C., Idaho Falls, for respondent. Larren K. Covert argued.