First Bank of Marietta v. Hartford Underwriters

• Decision Date: 10 October 2002
• Docket Number: No. 00-4541.,No. 00-4542.,00-4541.,00-4542.
• Citation: 307 F.3d 501
• Parties: FIRST BANK OF MARIETTA, Plaintiff-Appellant/Cross-Appellee, v. HARTFORD UNDERWRITERS INSURANCE COMPANY, Defendant-Appellee/Cross-Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 501

307 F.3d 501

FIRST BANK OF MARIETTA, Plaintiff-Appellant/Cross-Appellee, v. HARTFORD UNDERWRITERS INSURANCE COMPANY, Defendant-Appellee/Cross-Appellant.

No. 00-4541.

No. 00-4542.

United States Court of Appeals, Sixth Circuit.

Argued June 21, 2002.

Decided and Filed October 10, 2002.

COPYRIGHT MATERIAL OMITTED

Mark S. Miller (argued and briefed), Columbus, OH, for Plaintiff-Appellant/Cross-Appellee.

William H. Woods (argued and briefed), John J. Petro (briefed), McNAMARA & McNAMARA, Columbus, OH, for Defendant-Appellee/Cross-Appellant.

Before: CLAY and GILMAN, Circuit Judges; HAYNES, District Judge.^*

OPINION

HAYNES, District Judge.

Plaintiff First Bank of Marietta ("First Bank") appeals the district court's award of attorney fees and sanctions under its inherent powers and the district court's denial of First Bank's motion for sanctions pursuant to Rule 11 of the Federal Rules of Civil Procedure. Defendant Hartford Underwriters Insurance Company ("Hartford") asserts a cross appeal of the district court's ruling that attorney fees and expenses are not available under Rule 11 for Hartford's failure to comply with the Rule 11's safe harbor provisions, and that attorney fees can not be awarded under Section 2323.51 of the Ohio Revised Code. For the reasons set forth below, we AFFIRM the district court's judgment because ample evidence supports the district court's exercise of its inherent authority to award attorneys fees. Further, neither Rule 11 nor the cited Ohio statute could be applied to the conduct sanctioned by the district court.

First Bank commenced this action seeking recovery under a fidelity bond purchased from Hartford for loss caused by an officer of First Bank, Jerry Biehl. Count I set forth a claim for losses incurred by First Bank as a result of two fraudulent loans issued by Biehl. Count II set forth a claim for losses incurred by First Bank as a result of Biehl's increase in the line of credit for Mascrete, Inc., to $301,500 from $140,000, without proper authorization.

The fidelity bond provided that Hartford would indemnify First Bank for losses resulting directly from certain "dishonest and fraudulent acts" committed by bank employees. First Bank filed a proof of loss with Hartford providing particulars regarding the loans to fictitious individuals that Hartford agreed to pay, but First Bank did not provide particulars regarding the Mascrete loan. After reviewing the documentation, Hartford took the position that Biehl's act of increasing the line of credit on the Mascrete loans was not covered under the indemnification policy. First Bank filed suit, seeking indemnification on the fictitious loans and on the Mascrete line of credit. The district court granted summary judgment to Hartford on Count II, and this Court affirmed the district court's judgment on appeal. The district court then awarded Hartford sanctions of attorney fees under its inherent powers, and denied First Bank's motion for Fed.R.Civ.P. Rule 11 sanctions. From these orders, these appeals arise.

I. Factual Background

A. First Bank's Financial Institution Bond

First Bank purchased a fidelity bond from Hartford, the terms of which are governed by the Bond Agreement that provides, in pertinent part, that Hartford would indemnify First Bank for:

(A) Loss resulting from dishonest or fraudulent acts committed by an Employee acting alone or in collusion with others.

Such dishonest or fraudulent acts must be committed by the Employee with the manifest intent:

(a) to cause the insured to sustain loss, and

(b) to obtain financial benefit for the Employee or another person or entity.

* * *

As used throughout the Insuring Agreement, financial benefit does not include any employee benefits earned in the normal course of employment, including: salaries, commissions, fees, bonuses, promotions, awards, profit sharing or pensions.

* * *

EXCLUSIONS

Section 2. This bond does not cover:

* * *

(h) loss caused by an Employee, except when covered under Insuring Agreement (A)....

Joint Appendix ("JA") at 18, 22 (emphasis added).

The Bond Agreement defines what constitutes "discovery" of loss and how First Bank should notify Hartford of loss.

DISCOVERY.

Section 3. This bond applies to loss discovered by the Insured during the Bond Period. Discovery occurs when the insured first becomes aware of facts which would cause a reasonable person to assume that a loss of a type covered by this bond has been or will be incurred, regardless of when the act or acts causing or contributing to such loss occurred, even though the exact amount or details of loss may not then be known.

NOTICE/PROOF — LEGAL PROCEEDINGS AGAINST UNDERWRITER

Section 5.

(a) At the earliest practicable moment, not to exceed 30 days, after discovery of loss, the Insured shall give the Underwriter notice thereof.

(b) Within 6 months after such discovery, the Insured shall furnish to the

Underwriter proof of loss, duly sworn to, with full particulars.

* * *

(d) Legal proceedings for the recovery of any loss hereunder shall not be brought prior to the expiration of 60 days after the original proof of loss is filed with the Underwriter or after the expiration of 24 months from the discovery of such loss.

JA at 23 (emphasis added).

B. Biehl's Fraudulent Activities

Jerry Biehl was employed by First Bank as the Executive Vice President and Chief Executive Officer during the relevant period. During his employment with the bank, Biehl made a series of fraudulent loans to fictitious individuals. During this time, Biehl's lending authority was $100,000, with amounts in excess of this sum requiring the approval of First Bank's Credit Committee. In April 1994, without obtaining approval by the Credit Committee or Patrick Tonti, Chairman of the Board and President of First Bank, Biehl increased the Mascrete line of credit to $301,500 from $140,000.

On May 25, 1994, Biehl's misconduct was reported to First Bank's Board of Directors. At this meeting were Patrick Tonti, Tom Tonti, Herman Carson, Jr., Floyd Millhone, James Giles, Alan Shind, and Jerry Biehl. The Board requested that Alan Shind undertake a special audit of Mascrete, as well as reviewing other bank records to determine if Biehl had made any other unauthorized loans. After defending the Mascrete loans, Biehl offered his resignation. On May 27, 1994, Alan Shind, under Patrick Tonti's supervision, rewrote the Mascrete line of credit and replaced the April 14, 1994 Agreement approved by Biehl with a new agreement. First Bank accepted Biehl's resignation by letter dated June 7, 1994.¹

At a board meeting on June 29, 1994, Shind informed the Board of suspected fraudulent loans made by Jerry Biehl. The first loan was to the Ohio Beta Rho Alumni Association, with a balance of $45,201.75. The second loan was to Keith Atkins, with a balance of $42,772.69. Biehl converted the funds from these fraudulent loans to his personal use. At this meeting, Alan Shind and Patrick Tonti were designated to notify Hartford of First Bank's loss as a result of Biehl's activities.

According to Patrick Tonti's July 29, 1996 affidavit, after Biehl defended his actions at the board meeting, Patrick Tonti had a private meeting with Biehl, at which time Biehl admitted he had made the Mascrete loan with the intent of causing First Bank to sustain a loss:

On May 25, 1994 ... I had a private discussion with Biehl concerning the Mascrete $301,500.00 line of credit and during that discussion Biehl acknowledged to me that he knew the loan was over the limits of the lending authority. I asked Jerry why he would do such a thing and he responded that at the time he made the loan he was angry at me and the bank for not receiving his bonuses and he wanted to get back at the bank and myself.

JA at 250-51. Although the suit was filed in May 1995, Patrick Tonti's Affidavit was not disclosed nor filed with the district court until July 31, 1996, in response to Hartford's motion for summary judgment.

At the sanctions hearing held on May 8, 2000, Tom Tonti testified that it was not "until June or July of 1994 that Mr. Patrick Tonti revealed to [me] that Mr. Biehl indicated that he had approved the Mascrete line of credit with the express purpose of harming First Bank" and that the other board members were notified individually by Patrick Tonti of Biehl's comment "sometime in 1994" and most likely at "the end of '94." J.A. at 55. At this hearing, Tom Tonti was asked whether Mr. Giles, First Bank's counsel, knew about Biehl's comments:

Q: So Mr. Giles is the only board member that you didn't talk with to confirm that your father had told them about the private Biehl conversation before the end of 1994; is that correct?

A: To the best of my recollection, you know again, I can't be exact on the date. But generally, you know, yes, we knew that Jerry Biehl had said that to my father.

Id.

C. First Bank's Claims against Hartford

On June 30, 1994, Alan Shind contacted Hartford regarding a potential claim. On July 1, 1994, Hartford faxed a Proof of Loss form and letter to Patrick Tonti's home. This letter explained the claims procedure and the form provided, in pertinent part:

In addition to the Proof of Loss, we request that you include the following:

1. Detailed narrative description of the loss.

2. Date of discovery of the loss.

3. Explanation of how the loss was recovered.

4. Copy of any accounting analysis prepared.

* * *

10. Any other documentation that will help substantiate this claim.

JA at 211 (emphasis added).

First Bank responded by letter dated July 12, 1994 asserting that First Bank had two separate claims for losses incurred as a result of Biehl's actions: (1) a claim for the two fraudulent loans to fictitious individuals; and (2) a claim for the loan to Mascrete in excess of Biehl's lending authority. First Bank provided the information requested regarding the two fraudulent loans, but did not provide any specific...