United States Fidelity & Guar. Co. v. Empire State Bank

• Citation: 448 F.2d 360
• Decision Date: 02 September 1971
• Docket Number: 20576.,No. 20579,20579
• Parties: UNITED STATES FIDELITY & GUARANTY COMPANY, Appellant, v. EMPIRE STATE BANK, Appellee. EMPIRE STATE BANK, Cross-Appellant, v. UNITED STATES FIDELITY & GUARANTY COMPANY, Cross-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (8th Circuit)

448 F.2d 360 (1971)

UNITED STATES FIDELITY & GUARANTY COMPANY, Appellant, v. EMPIRE STATE BANK, Appellee.

EMPIRE STATE BANK, Cross-Appellant, v. UNITED STATES FIDELITY & GUARANTY COMPANY, Cross-Appellee.

Nos. 20579, 20576.

United States Court of Appeals, Eighth Circuit.

September 2, 1971.

COPYRIGHT MATERIAL OMITTED

Samuel J. Molby, James F. Duncan, Kansas City, Mo., for appellant; Watson, Ess, Marshall & Enggas, Kansas City, Mo., of counsel.

Bernard L. Balkin, Judith J. Paxton, Kansas City, Mo., for appellee; Achtenberg, Sandler & Balkin, Kansas City, Mo., of counsel.

Before ALDRICH,^* LAY and BRIGHT, Circuit Judges.

BRIGHT, Circuit Judge.

In this case, Empire State Bank of Kansas City, Missouri (Empire) sought indemnity from its insurer, United States Fidelity & Guaranty Company (U.S.F. & G.), under a Bankers' Blanket Bond which protected against any loss resulting from the dishonesty of any employee, "sustained * * * at any time," and discovered during the policy period. Empire recovered in the district court on two of three claims, and U.S. F. & G. appeals from the judgment allowing that recovery. Empire cross-appeals on the one claim disallowed by the trial court. We affirm the district court judgment, except for its allowance of statutory penalties and certain prejudgment interest.

Empire claimed that the dishonesty of its former executive vice president, Ben Leimgruber, caused Empire substantial loss in two unrelated loan transactions. Count I of this action, for $25,776.19 plus interest, is based on Empire's loss on loans made to Briar Associates, a corporation, and to Eddie Robbins, its principal stockholder who co-signed promissory notes representing the indebtedness. Count II, for $96,199.28 plus interest, arises from losses sustained on loans made to Pleasure, Incorporated, and to Lyle McAllister, its principal stockholder. Under Count III, for approximately $26,000 plus interest, Empire sought recovery of expenditures for attorney's fees incurred in successfully defending a third-party action in which the plaintiff alleged damages resulting from fraudulent misrepresentations by Empire's officers, including Leimgruber. Empire also sought recovery of the Missouri statutory penalty for its insurer's vexatious refusal to pay the claims under Counts I and II and its vexatious refusal to defend or indemnify Empire for the expenses incurred in the third-party action under Count III.¹ The district court, in an unreported opinion, allowed plaintiff recovery of $23,391.94 on Count I, denied recovery on Count II, awarded recovery of $11,685 on Count III, and allowed both statutory penalties and prejudgment interest on Counts I and III. The insurer urges that we reverse or reduce the recovery on Count I and disallow any recovery of statutory penalties or prejudgment interest on Count I and Count III. Empire, in its cross-appeal, contends that it is entitled as a matter of law to recover under Count II.

We first consider the U.S.F. & G. appeal and turn to a consideration of Count I.

I. DISCOVERY OF LOSS

Empire commenced business as a newly organized bank in February 1963. In November of that year the directors hired Ben Leimgruber, a banker of considerable experience, as executive vice president to supervise banking operations. Leimgruber, during previous employment at the Union National Bank of Kansas City, had worked himself up from assistant auditor to executive vice president, third in the hierarchy of bank officers below the board chairman and president. Leimgruber had also served the United States government as an assistant national bank examiner from 1934 until 1942.

Leimgruber remained at Empire until March 1, 1965, when he resigned after shortages were discovered in the installment loan department. The shortages were attributed to dishonest and fraudulent acts committed by the manager of that department who worked under Leimgruber's supervision. There has been no suggestion of complicity by Leimgruber in these defalcations.

During the period from November 14, 1964, to November 23, 1964, Briar Associates secured loans from Empire by giving a pledge of the corporation's capital stock. The pledged stock showed a book value of approximately $36,000 representing capitalized expenditures, but the collateral actually possessed no real value as security. With the co-signature of Eddie Robbins, Empire initially loaned Briar Associates the sum of $7,500. Subsequently, the Bank made additional advances until the indebtedness of Briar Associates reached approximately $19,000 at the end of November 1964. On December 1, 1964, the Bank made one additional loan to the corporation of $27,000, securing this loan by a pledge of stock in various publicly-held companies, in the hope of improving the Bank's secured status on the entire account. The Bank advanced an additional $1,250 on December 23, 1964, secured by a mortgage on certain real property in Pawhuska, Oklahoma, in which, as it was later disclosed, the borrower held no title interest. The borrower made no payment on these loans.

After Leimgruber resigned in March of 1965, Empire unsuccessfully attempted to collect the Briar Associates account by contacting Eddie Robbins. During these collection efforts, Empire's president learned of the poor credit ratings of both Robbins and Briar Associates. In 1957, Union National, Leimgruber's former employer, had charged off a Robbins loan in the sum of $3,125, and in May of 1964 Union National had charged off a Briar Associates-Eddie Robbins loan in the sum of $6,100. In a conference with Robbins in April 1965, Robbins stated to Empire's president that he had himself loaned money to Leimgruber. In support of this claim, Robbins exhibited facsimilies of two $4,500 notes signed by Leimgruber. In June 1965, after Empire had repossessed an automobile owned by Robbins and held by the Bank as collateral for an installment loan, Robbins protested the Bank's treatment of him as unjustified, claiming to have paid Leimgruber approximately $2,500 as a commission for obtaining credit with Empire.

After July 1, 1965, Empire verified that Robbins had in fact wired approximately $2,500 to Leimgruber on December 2, 1964, the day after the Bank had granted Briar Associates the new $27,000 loan. Empire, in September 1965, arranged for an investigator to interview Leimgruber at Phoenix, Arizona, where Leimgruber had moved after leaving the Bank. In that interview, Leimgruber emphatically denied that Robbins had ever loaned him money, denied knowledge concerning Robbins's defaults at Union National, and denied the receipt of any commission or any money from Robbins in connection with any loan transaction. By way of later deposition introduced at trial, however, Leimgruber testified to the contrary. He admitted that Robbins sent him $2,500 on December 2, 1964, but said that this money was held in trust for Robbins. Leimgruber further testified that he had returned this money to Robbins in cash about two months later. Leimgruber also admitted borrowing money from Robbins, but said that this transaction had occurred long before he had accepted employment with Empire. Leimgruber admitted giving Robbins a note representing this loan in the amount of $4,500 and stated that this note had been renewed from time to time. Following default on these loans, the Bank liquidated the collateral and sustained an overall loss of $23,391.94, which loss was made the subject of Count I.

As to Count I, the trial court determined: (1) that the actions and conduct of Leimgruber in "recommending Briar Associates as a new customer and in making and renewing the loans made to Briar Associates and Eddie Robbins were dishonest"; (2) that the loss attributable to depreciation of corporate stocks held by Empire as collateral for the $27,000 loan in December 1964 constituted a recoverable loss flowing from Leimgruber's dishonesty;² and (3) that "the dishonesty of Leimgruber was not discovered by the bank until after July 1, 1965, and that the loss was covered by the bond."

On this appeal, U.S.F. & G. does not contend that the trial court erred in finding Leimgruber's conduct to be dishonest with regard to the Briar Associates-Eddie Robbins loans. It concedes that this finding rests upon credibility determinations drawn by the district court from disputed testimony. U.S.F. & G. contends, however, that no substantial evidence supports the trial court's finding that the Bank had discovered its loss within the policy period, which commenced at noon on July 1, 1965, and continued until September 22, 1966. Irrespective of this, U.S.F. & G. also contends that the Bank possessed sufficient knowledge of Leimgruber's wrongdoing to require it to disclose its suspicions when it executed its application for bond coverage in June of 1965.

On the discovery issue, both parties cite Jefferson Bank & Trust Co. v. Central Surety & Insurance Corp., 408 S.W.2d 825 (Mo.1966), as enunciating the controlling principles of law. In Jefferson, the Missouri Supreme Court adopted the following language taken from Wachovia Bank & Trust Co. v. Manufacturers Casualty Insurance Co., 171 F.Supp. 369 (M.D.N.C.1959):

"In order to constitute a `discovery\' in accordance with the terms of the policy * * * there must be facts known, at the time it is asserted that the discovery was made, which would lead a reasonable person to an assumption that a shortage existed. The facts must be viewed as they would have been by a reasonable person at the time discovery is asserted, and not as they later appeared in the light of subsequently acquired knowledge. * * * The mere discovery of certain facts which later lead to other facts which reveal the existence of a shortage does not necessarily constitute a discovery. Knowledge available to the insured must rise above a mere suspicion of loss. The fact that an investigation after the termination of the policy leads to the disclosure of an actual

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