Kerr v. Aetna Casualty & Surety Co.

• Decision Date: 05 August 1965
• Docket Number: 9972-9975.,No. 9942,9942
• Citation: 350 F.2d 146
• Parties: R. Emmett KERR, as Trustee in Bankruptcy for National Discount Corporation, Appellant, v. The AETNA CASUALTY AND SURETY COMPANY, Appellee. Charles W. GAMBRELL, Receiver for National Fidelity Insurance Company, Intervenor, Appellant, v. The AETNA CASUALTY AND SURETY COMPANY, Appellee. Charles W. GAMBRELL, Receiver for Cudd and Coan, Underwriters, Inc., Intervenor, Appellee in No. 9973, Appellant in No. 9974, v. The AETNA CASUALTY AND SURETY COMPANY, Appellant in No. 9973, Appellee in No. 9974. Charles W. GAMBRELL, Receiver for Title Insurance and Guaranty Company, Intervenor, Appellant, v. The AETNA CASUALTY AND SURETY COMPANY, Appellee.
• Court: U.S. Court of Appeals — Fourth Circuit

350 F.2d 146 (1965)

R. Emmett KERR, as Trustee in Bankruptcy for National Discount Corporation, Appellant, v. The AETNA CASUALTY AND SURETY COMPANY, Appellee.

Charles W. GAMBRELL, Receiver for National Fidelity Insurance Company, Intervenor, Appellant, v. The AETNA CASUALTY AND SURETY COMPANY, Appellee.

Charles W. GAMBRELL, Receiver for Cudd and Coan, Underwriters, Inc., Intervenor, Appellee in No. 9973, Appellant in No. 9974, v. The AETNA CASUALTY AND SURETY COMPANY, Appellant in No. 9973, Appellee in No. 9974.

Charles W. GAMBRELL, Receiver for Title Insurance and Guaranty Company, Intervenor, Appellant, v. The AETNA CASUALTY AND SURETY COMPANY, Appellee.

Nos. 9942, 9972-9975.

United States Court of Appeals Fourth Circuit.

Argued July 1, 1965.

Decided August 5, 1965.

COPYRIGHT MATERIAL OMITTED

Neville Holcombe, Spartanburg, S. C. (T. Sam Means, Jr., and Robert F. Chapman, Spartanburg, S. C., on brief), for R. Emmett Kerr in No. 9942.

Elmer W. Beasley, Hartford, Conn. (W. H. Arnold and Thomas A. Wofford, Greenville, S. C., on brief), for Aetna Casualty & Surety Co. in Nos. 9942, 9973 and 9974.

T. E. Walsh, Spartanburg, S. C. (Glen E. Craig, Columbia, S. C., on brief), for Charles W. Gambrell in No. 9972.

Frank A. Lyles, Spartanburg, S. C. (Glen E. Craig, Columbia, S. C., on brief), for Charles W. Gambrell in Nos. 9973 and 9974.

Robert L. Stoddard, Spartanburg, S. C. (Charles C. Moore, Spartanburg, S. C., and Glen E. Craig, Columbia, S. C., on brief), for Charles W. Gambrell in No. 9975.

Elmer W. Beasley, Hartford, Conn., and W. H. Arnold, Greenville, S. C. (Thomas A. Wofford, Greenville, S. C., on brief), for Aetna Casualty & Surety Co. in Nos. 9972 and 9975.

Before SOBELOFF and BOREMAN, Circuit Judges, and THOMSEN, District Judge.

THOMSEN, District Judge.

These appeals arise out of an action begun by the Trustee in Bankruptcy of National Discount Corporation (National Discount) against Aetna Casualty and Surety Company (Aetna) to recover under a fidelity bond issued by Aetna to National Discount and seven other corporations as the named Insured. The Insurance Commissioner, as receiver for three other corporations also named as Insured in the bond — National Fidelity Insurance Company (National Fidelity), Title Insurance and Guaranty Company (Title), and Cudd & Coan Underwriters, Inc. (Underwriters) — was allowed to file separate intervening complaints asserting his claims as receiver for the respective companies. The cases were heard by Judge Martin, without a jury. Testimony was taken in each case and much documentary evidence stipulated or admitted. The Judge filed a separate opinion in each of the four cases; in three of them he rejected all of the claims; in one, the Underwriters case, he allowed some claims and disallowed others.

No attempt will be made in this opinion to set out in detail the facts found with such meticulous care by the District Judge. No question has been raised with respect to his findings of historical facts. Although some of the inferences which he drew and conclusions which he reached are challenged in each case, we cannot say that any of his findings were clearly erroneous or that any of his conclusions were incorrect, except in the Underwriters case discussed in VI below.

Since jurisdiction is based on diversity of citizenship, 28 U.S.C.A. § 1332, the cases are controlled by South Carolina law.

I

For ten years or so before July, 1961, A. D. Cudd, Jr. and William D. Coan controlled a small financial empire, centered in Spartanburg, S. C., consisting of a number of insurance, finance, and related corporations in which, with one exception,¹ Cudd and Coan or companies controlled by them owned all or most of the stock. Among those corporations were: National Discount, which was engaged in the business of financing the purchase of automobiles and the purchase or improvement of other property; Title, a wholly owned subsidiary of National Discount, which insured the automobiles financed by National Discount; Wholesale Motors, Inc., which sold the automobiles repossessed by National Discount; National Fidelity, another insurance company; and Underwriters, which operated a general insurance agency, acted as an insurance company to the extent of reinsuring part of the business written by the other insurance companies controlled by Cudd and Coan, and supplied to those companies on a commission basis all services usually rendered by the home office employees of an insurance company.

Cudd and Coan served as officers and directors of all of the companies. They were the only directors of Underwriters and Title, but National Discount and National Fidelity had other directors, as well, and all of the companies had other officers.

For several years Cudd and Coan had procured for the four companies above named and a number of other controlled corporations a blanket fidelity bond covering their respective employees, which was written from time to time by different insurance companies. Effective January 1, 1960, Aetna issued such a bond naming as the Insured eight corporations, including the five described above.

The losses covered by the bond include "Fidelity — (A) Any loss through any dishonest or fraudulent act of any of the Employees, committed anywhere and whether committed alone or in collusion with others, including loss of Property through any such act of any of the Employees".

"Employee" and "Employees" were defined "to mean, respectively, one or more of the officers, clerks and other natural persons in the service of the Insured * * * during the currency of this bond and who are compensated by salary, wages or commissions, and whom the Insured has the right to govern and direct at all times in the performance of such service * * *."

Section 1(d) of the "Conditions and Limitations" eliminated coverage for acts by a director as such;² section 1(e) eliminated losses from loans unless the loan was fraudulently made.³

Section 4 of the Conditions required prompt notice after discovery of a loss.⁴

Section 12 provided for termination of the bond as a whole in certain events, and for termination as to individual employees upon discovery of any dishonest or fraudulent act on the part of such employee.⁵

The bond further provided: "Knowledge possessed or discovery made by any Insured * * * or officer thereof shall for the purposes of Section 4 and of subsection (a) of the second paragraph of Section 12 of this bond constitute knowledge or discovery by all the insured and termination of this bond as to any Employee as provided in Section 12 shall apply to all the Insured * * *."

The Aetna bond picked up any liability covered by the previous bonds, subject to customary provisions with respect to discovery, notice and the like. Some of the claims made by plaintiffs in these four cases arise out of alleged losses which occurred before the Aetna bond was issued.

II

The largest claims consist of transactions between several Insured named in the bond, including loans, contributions to capital, advances and commissions. Smaller claims involve payments to Cudd or Coan individually or credits to the account of one or the other of them on the books of one of the corporations. One claim involves a loan to a corporation which was not an Insured.

Some of the transactions were wash transactions intended to make a financial statement of one of the insured corporations look better and so mislead or deceive the Insurance Commissioner or a bank which was considering a loan, but did not deceive or despoil the insured corporations. Judge Martin correctly held that there was no loss with respect to any of those items.

In connection with all of the claims, it is important to note that the bond insured only the several corporations. Levey v. Jamison, 4 Cir., 93 F.2d 810 (1938). Losses in connection with fraud perpetrated on the corporations' creditors or on the Insurance Commissioner are not covered by the bond.

Aetna has raised substantially the same defenses in each of the four cases. They are summarized in note⁶ below.

III The National Discount Case

The Trustee for National Discount claims $635,230.12, based on transactions between that corporation and Title, directly or through a related corporation, in 1960 and 1961. Shortly before, in 1959, National Discount had suffered heavy losses, only partly covered by insurance, which had reduced its net worth to about $380,000. Its investment in Title was carried at $359,000, and National Discount had some bad accounts; so, if Title failed, National Discount would fail too. Title had reinsured National Fidelity for 75% of its underwritings, including National Fidelity's extremely large exposure on its Florida mobile trailer policies, after a prior reinsurance of $1,000,000 with Lloyds of London. In the early fall of 1960 Hurricane Donna hit Florida, causing heavy loss. The claims against National Fidelity as a result of the hurricane grew to more than $2,000,000, most of which were eventually paid. In an effort to enable Title to make good its obligations to National Fidelity and to save National Fidelity and Title, National Discount advanced additional capital to Title; later, to improve National Discount's borrowing capacity, National Discount sold Title to Home Realty Company, an inactive company controlled by Cudd and Coan, and took a note from Home, secured by all the stock of Title, for the sale price and other items. The other items included a loan for a substantial amount from National Discount to Home, which Home agreed to and did pass on as a contribution to the surplus of Title, and which Title paid over to National Fidelity. Title paid to National Fidelity $300,000 of the money which it received directly or indirectly from National Discount before it was due to National Fidelity under the reinsurance treaty. The $300,000 was paid under an agreement calling for "an adjustment of commissions", but Title eventually owed approximately...