Endeco, Inc., In re
| Decision Date | 09 November 1983 |
| Docket Number | No. 82-2382,82-2382 |
| Citation | 718 F.2d 879 |
| Parties | Bankr. L. Rep. P 69,426 In re ENDECO, INC.; Cavalier Estates, Inc.; Environmental Development Corp.; Lincorp, Inc., Bankrupts. UNITED STATES of America For the Use and Benefit of James McMERTY, as Trustee under Chapter X Proceedings of the Bankruptcy Act for Endeco, Inc. and its subsidiaries, Cavalier Estates, Inc.; Environmental Development Corp., Inc.; and Lincorp, Inc., Appellees, v. FIDELITY AND CASUALTY COMPANY OF NEW YORK, Appellant. |
| Court | U.S. Court of Appeals — Eighth Circuit |
Dan Plambeck of Stefanson, Landberg & Alm, Moorhead, Minn., for appellant.
Terry L. Wiles of Lamb, Schaefer, McNair & Larson, Ltd., Fargo, N.D., for appellees.
Before HEANEY, Circuit Judge, HENLEY, Senior Circuit Judge, and BROWN, * Senior Circuit Judge.
This appeal involves a dispute over the extent of coverage that a trustee's bond provides to an estate in reorganization under Chapter X of the former Bankruptcy Act, 11 U.S.C.S. Secs. 501-676 (repealed 1978). The main question presented for review is whether, under the circumstances presented here, the trustee's bond is one continuous contract over the period of the trusteeship, so that the bonding company's total liability is limited to the face amount of the bond, or, on the other hand, the bond is a separate contract for each year for which an additional premium is paid, so as to obligate the insurer to pay, up to the face amount of the bond, for the defalcations of the trustee in each year. An additional issue involves the bonding company's rights as subrogee to the successor trustee's claim against the
defalcating trustee. The bankruptcy court, acting on facts stipulated by the parties, found that the liability of the defendant-appellant bonding company was cumulative, requiring it to pay up to the face amount of the bond for the trustee's defalcations for each year of his trusteeship. The bankruptcy court also rejected the defendant-appellant's subrogation claim. The district court affirmed the bankruptcy court's decision, and defendant-appellant appealed. We affirm the district court.
As noted above, the facts in this case were stipulated by the parties. One James H. Herzog was appointed trustee in the Chapter X reorganization proceedings involving Endeco, Inc., and its subsidiaries, Cavalier Estates, Inc., Environmental Development Corp., Inc. and Lincorp, Inc. Fidelity and Casualty Company of New York (Fidelity), defendant-appellant in this case, issued trustee fidelity bonds, payable to the United States of America, guaranteeing Herzog's performance in each of the bankruptcy proceedings. The parties agree that Herzog breached his fiduciary duties to all of the estates, and that the successor trustee is entitled to some recovery on the bonds. 1 The bond for Endeco, Inc., dated September 21, 1973, was in the amount of ten thousand dollars; the bonds for each of the others were in the amount of five thousand dollars and dated October 11, 1973. The bonds Fidelity issued were approved by order of the bankruptcy judge and the initial year's premium paid forthwith. The bonds contained no language proscribing cumulative liability with respect to future years as additional yearly premiums were to be paid. Fidelity did, however, upon the anniversary dates of the bonds in 1974, 1975, 1976 and 1977, mail to Herzog a certificate of continuation which included a statement of annual premium due, containing the following provision:
A premium in the amount set forth below will become due on the first date shown for the term indicated. This premium is paid and is accepted upon the express stipulation that the liability of the Company under the bond herein described shall not be cumulative, and that in no event shall the aggregate liability of the Company for any one or more defaults of the Principal, during any one or more years of the suretyship under the said bond, as extended by this or any other extension of the terms thereof, exceed the amount set forth in said bond or any existing certificate changing the amount of said bond.
Herzog received these continuation certificates and paid the requested premiums. Copies of the continuation certificates were filed with the bankruptcy court, but the bankruptcy judge did not approve them, and there is no evidence that he had actual knowledge of the limitation.
The issue of bonding companies' liability on renewed bonds has been an area of some disagreement among the courts. As noted by the parties and reflected by the bankruptcy court's opinion, there is little North Dakota law in this area. 2 But the case of Parish of East Baton Rouge v. Fidelity & Cas. Co. of N.Y., 373 F.Supp. 440 (M.D.La.), aff'd, 502 F.2d 783 (5th Cir.1974), sets out some generally accepted principles useful in deciding the issue. In determining the Louisiana law in this diversity case, the court set out the following guidelines:
The rule generally recognized is that a renewal of a fidelity policy or bond constitutes a separate and distinct contract, for the period of time covered by such renewal, unless it appears to be the intention of the parties, as evidenced by the provisions thereof, that such policy or bond and renewal thereof shall constitute one continuous contract. 25 C.J. 1109 Sec. 16.
and
Under the view usually taken of renewals it has been held that the insurer's liability is not limited to the amount named in the original fidelity contract, but that there is a liability for the amount fixed by such original contract for a loss occurring during its life. When, however, as may be the case, a fidelity policy or bond and the renewals thereof are intended by the parties to constitute one continuous contract, the liability of the insurer is limited to the sum named in the original bond. 25 C.J. 1110 Sec. 16.
and
The extent of liability of the company under a contract of fidelity insurance depends on the terms of the contract. While the general rule that contracts of insurance, where they are ambiguous, will be construed against the company applies, nevertheless the liability of the company cannot be extended beyond the terms of the contract. 45 C.J.S. Insurance Sec. 980.
Parish of East Baton Rouge, 373 F.Supp. at 442. See also Massachusetts Bond. & Ins. Co. v. Julius Seidel Lbr. Co., 279 F.2d 861 (8th Cir.1960), and 17 Couch on Insurance, Sec. 68:47 (2d ed. 1966).
Our task is to give effect, following the above principles, to the entire bond contract issued and renewed by Fidelity. The principal question is whether the provision of the renewal certificates which purported to limit Fidelity's liability was part of the contract.
Fidelity argues that the holding in Parish of East Baton Rouge should control our decision here. In that case a bonding company issued a bond to insure the faithful performance by the parish sheriff of his duties as tax collector. The bond, in the amount of $50,000.00, was issued in January 1961 to cover the period until January 1962. The bond remained in effect until January 1972, being renewed annually by means of a continuation certificate which contained language expressly stating that the company's liability under the bond was not cumulative but limited to the face amount of the bond. 3 During the years 1968, 1969 and 1970, a total of $180,000.00 of tax revenue was stolen by a member of the sheriff's office. The parish filed a claim for $150,000.00, arguing that there was a separate contract for $50,000.00 for each of the 3 years involved. The bonding company contended that, through the provision in the continuation certificates, its liability was limited to the face amount of the bond. The court noted that the parish, the obligee, did not contend that it was unaware of the limiting...
To continue reading
Request your trial