Wooddale, Inc. v. Fidelity and Deposit Co. of Maryland

• Citation: 378 F.2d 627
• Decision Date: 02 June 1967
• Docket Number: No. 18383.,18383.
• Parties: WOODDALE, INC., Appellant, v. FIDELITY AND DEPOSIT COMPANY OF MARYLAND, Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (8th Circuit)

378 F.2d 627 (1967)

WOODDALE, INC., Appellant, v. FIDELITY AND DEPOSIT COMPANY OF MARYLAND, Appellee.

No. 18383.

United States Court of Appeals Eighth Circuit.

May 17, 1967.

Rehearing Denied June 2, 1967.

COPYRIGHT MATERIAL OMITTED

Ronald D. Olson, of Carlsen, Greiner & Law, Minneapolis, Minn., for appellant.

Paul Ahlers, of Bannister, Carpenter, Ahlers & Cooney, Des Moines, Iowa, for appellee.

Before MATTHES, MEHAFFY and LAY, Circuit Judges.

LAY, Circuit Judge.

We are faced with an action upon a fidelity bond arising out of alleged misappropriations by the President of the appellant company.¹ Appellee denied liability claiming, among other things, that the President was not an "employee" as defined under the policy but was specifically excluded thereunder as a "contractor." Trial was held to the court alone and at the close of all the evidence the court entered judgment for the appellee bonding company.

Wendell Caldbeck was engaged in a general contracting business in the City of Des Moines since 1946, operating under the name of Caldbeck Construction Co. In 1959, Caldbeck entered into an agreement with the Watson Construction Co., a Minnesota corporation, and its President, Frederick O. Watson, that the latter would co-sign all performance bond applications with Caldbeck Construction Co. This arrangement was set up because of Caldbeck's poor financial condition. Under the contract Watson Construction Co. received three-eighths of the gross profits and Caldbeck Construction Co. received five-eighths on the bonded jobs. Caldbeck independently did the work and was in no sense aided by the Watson Company in the construction work.

In April 1961, Caldbeck, Inc. was formed. Originally Wendell Caldbeck was one of the directors of the corporation. However, at the organizational meeting he resigned as a director but continued as President. The stockholders and incorporators of Caldbeck, Inc. were Frederick O. Watson and two business associates, J. Gordon Campbell and Robert L. Maddox. Maddox was a creditor of Caldbeck operating another construction company named Allied Construction Services, Inc. As of May 5, 1961, these three men comprised the Board of Directors. Only Watson, as Secretary-Treasurer, and Caldbeck, as President, had authority to sign checks on Caldbeck, Inc. An agreement was entered into by Watson on behalf of the new corporation with Caldbeck Construction Co. whereby the corporation would bid on all work requiring performance bonds and if a job was secured it would then be subcontracted to Caldbeck Construction Co. The performance bonds were then made out in the name of Caldbeck, Inc. A profit sharing agreement, similar to that which had existed between Caldbeck and Watson, was entered into by Caldbeck Construction Co. and the corporation on all bonded jobs.

After the formation of the corporation Caldbeck, as President, would make out an invoice under the name of Caldbeck, Inc. on all bonded jobs. Upon receiving payment from the owner, pursuant to the particular building contract, this money was deposited by Caldbeck into the Caldbeck, Inc. bank account. He would then in turn invoice Caldbeck, Inc. in the name of Caldbeck Construction Co. in an amount necessary for payment of bills on that particular job. He would then issue a check from Caldbeck, Inc. to Caldbeck Construction Co. for that amount.

In September of 1962 Mr. Watson conferred with a Mr. Lang and a Mr. Lynn, agents of the bonding company, concerning a fidelity bond covering the operations of Caldbeck, Inc. Appellee claims that Watson at that time misrepresented that Caldbeck, as an employee, was being paid a commission by the corporation. Nevertheless, at that time the agents of appellee expressly told Watson to pay some sort of salary "to clarify the situation so there would be no problems." The corporate minutes on September 13, 1962, reflect that yearly salaries of $50.00 were to be paid to both Caldbeck and Miss Larson, a bookkeeper.

Some time in September 1963, and before December 3, 1963, Wendell Caldbeck, as President of appellant, wrote certain checks to Caldbeck Construction Co. from funds that were paid to Caldbeck, Inc. from a job known as "Wolkoff-Effress." This payment to Caldbeck Construction Co., pursuant to the directions of Caldbeck, Inc. and pursuant to the past practices of Caldbeck, Inc., was to be applied for the payment of labor and materials on this particular "Wolkoff-Effress" contract. The record is likewise undisputed that at the time that Caldbeck wrote these checks he knew that the funds from prior payments on that job had not been fully applied to the outstanding expenses but in fact had been used for his own personal use, as well as general expenses of Caldbeck Construction Co.

Subsequently, Caldbeck was discharged as President of the corporation. Caldbeck, Inc., as general contractor, recognizing its obligation took over the work on contracts which it had previously subcontracted to the defunct construction company.

Appellant filed suit under the bond for losses to the corporation in excess of $15,000.00.²

The trial judge entered his judgment on the ground that Caldbeck was not an "employee" of the appellant under the bond, that he was an "independent contractor" or "at most * * * a subcontractor."

The critical language of the bond appears in Section 3 of the contract defining "employee."

"Section 3. As used in this Bond, `Employee\' means any natural person (except a director or trustee of the Insured, if a corporation, who is not also an officer or employee thereof in some other capacity) while in the regular service of the Insured in the ordinary course of the Insured\'s business during the Bond Period and whom the Insured compensates by salary, wages or commissions and has the right to govern and direct in the performance of such service, but does not mean any broker, factor, commission, merchant, consignee, contractor or other agent or representative of the same general character."

We would agree with the trial court that the language of the above clause is not ambiguous. An "employee" is simply defined thereunder as, (1) any natural person; (2) while in the regular service of the insured; (3) in the ordinary course of the insured's business; (4) compensated by salary, wages or commissions; (5) whom the insured has the right to govern and direct in the performance of such service; (6) who is not acting as a contractor.

Where the language of a policy of insurance is clear and unambiguous, courts should give effect to the contractual language in harmony with plain meaning. Indemnity Insurance Co. of North America v. Pioneer Valley Savings Bank, 8 Cir., 343 F.2d 634.

Appellee relies on the general proposition that upon findings of fact, this court is bound by such determination unless clearly erroneous. However, where the facts are undisputed and the evidence is reasonably susceptible of but a single inference, the question whether the relationship of employer or independent contractor exists, is one of law for the court. Sullivan v. General Elect. Co., 6 Cir., 226 F.2d 290; Hassebroch v. Weaver Construction Co., 246 Iowa 622, 67 N.W.2d 549, 552. See also Anderson v. Elliott, 244 Iowa 670, 673, 57 N.W. 2d 792, 794. Cf. Minneapolis St. P. & S. S. M. R. Co. v. Metal-Matic, Inc., 8 Cir., 323 F.2d 903, at 912. Furthermore, it is within the competence of appellate courts as an issue of law to review the interpretation given a written contract. Standard Title Ins. Co. v. United Pac. Ins. Co., 8 Cir., 364 F.2d 287.

THE CORPORATE "SHELL"

Appellee contends the corporation was a facade whose true personality was concealed and misrepresented by Watson. Caldbeck, Inc. maintained its office at the same place of business as Caldbeck Construction Co. Appellee maintains it had no payroll, estimators or workmen, owned no office furniture, paid no rent, and did not maintain a telephone listing. But fraud was not pleaded or suggested as a defense in appellee's pleadings below.³ See Miller v. Lawlor, 245 Iowa 1144, 66 N.W.2d 267, 275, 48 A.L.R.2d 1058; Post v. Grand Lodge A.O.U.W., 211 Iowa 786, 232 N.W. 140, 142; Peacock & Peacock, Inc. v. Stuyvesant Ins. Co., 8 Cir., 332 F.2d 499, 505. Nor do we find appellee's attack on the corporate "shell" or "dummy" as a persuasive inducement to concluding that Caldbeck was not an employee of Caldbeck, Inc.

The bond application disclosed, or at least would put any reasonable person on notice, that Caldbeck, Inc. was formed for a limited purpose. There were no laborers or workmen listed and only the President and Secretary-Treasurer were indicated as employees. Lang stated he also knew that all or most contracts obtained by the corporation would be sublet to Caldbeck as an individual and that Caldbeck, Inc. would either pay the materialmen or pay Caldbeck who then in turn would pay the various costs of the job. The agents of appellee company were not strangers to the operation of Caldbeck, Inc. They had written performance bonds on construction jobs for over a year prior to its application for a fidelity bond. Appropriate here is the Iowa Supreme Court's holding in Sherman v. Harbin, 125 Iowa 174, 100 N.W. 629, wherein the headnote summarizes:

"The obligee in a fidelity bond is not bound to aid the surety in determining the propriety of entering into the contract, nor to warn him of the risk, when all the facts are as accessible to the surety as to the obligee."

See also Employers Liab. Assur. Corp., etc. v. Wasson, 8 Cir., 75 F.2d 749 at 753.

A corporation is a fiction of "legal imagination" and is entitled to be treated as a legal entity under ordinary circumstances.⁴ Where a person is "simply dealing with his own property through a corporate agency as absolutely as he might deal with it as an individual," the fiction is sometimes disregarded. Haynes v. Kenosha St. Ry. Co., 139 Wis. 227, 119 N.W. 568, at 571. Equity will not allow the corporate structure to...