Fidelity & Deposit Co. of Maryland v. Smith

• Decision Date: 30 April 1984
• Docket Number: No. 82-3655,KESSLER-BODENHEIMER,82-3655
• Citation: 730 F.2d 1026
• Parties: FIDELITY & DEPOSIT CO. OF MARYLAND, Plaintiff-Appellant, v. Harold J. SMITH, Jr., Defendant-Third Party Plaintiff, Appellee-Appellant, v., et al., Third Party Defendants-Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1026

730 F.2d 1026

FIDELITY & DEPOSIT CO. OF MARYLAND, Plaintiff-Appellant, v. Harold J. SMITH, Jr., Defendant-Third Party Plaintiff, Appellee-Appellant, v. KESSLER-BODENHEIMER, et al., Third Party Defendants-Appellees.

No. 82-3655.

United States Court of Appeals Fifth Circuit.

April 30, 1984.

Rehearing Denied May 22, 1984.

Eugene R. Preaus, Virginia N. Roddy, New Orleans, La., Fidelity & Deposit Co. of Maryland.

John D. Lambert, Jr., New Orleans, La., for Smith.

James Ryan, III, Peter S. Title, New Orleans, for Kessler-Bodenheimer.

Appeals from the United States District Court for the Eastern District of Louisiana.

Before WISDOM, REAVLEY and JOHNSON, Circuit Judges.

WISDOM, Circuit Judge:

In this diversity action controlled by Louisiana law, Fidelity and Deposit Company of Maryland appeals from the grant of a summary judgment in favor of Harold Smith based on the one-year prescriptive period for offenses and quasi-offenses. Smith appeals from the denial, also for prescription, of his third-party action for defamation against his former employer, Kessler-Bodenheimer, Inc. This appeal raises two issues. The first is the prescriptive period to be applied to a cause of action brought by a fidelity insurer against an employee of the insured. The prescriptive period depends upon the classification under Louisiana law of the insurer's cause of action against the employee. Although the district court did not reach the merits of this case, we must address the merits to classify the insurer's cause of action. The second issue raised by this appeal concerns the prescriptive period applicable to a cause of action for defamation.

We vacate the summary judgment granted to Smith and remand for a determination whether Kessler-Bodenheimer could state a quasi-contractual or contractual cause of action against Smith. Because Smith's action for defamation was filed more than one year from the date that the alleged injurious words were spoken, we affirm the denial of his cause of action.

I.

Fidelity and Deposit Company of Maryland (F & D) insured Kessler-Bodenheimer, Inc. (K-B) under the terms of a Comprehensive Dishonesty, Disappearance and Destruction Policy. The policy protected K-B from loss sustained as a result of the "dishonest or fraudulent acts" of its employees. K-B filed a claim under the fidelity policy based on the allegedly dishonest actions of its employee, Harold Smith. K-B maintains that Smith caused it to suffer a monetary loss by engaging in a fraudulent financing scheme on behalf of one of its clients, Mitchell, Marsh & Marsh (MM & M). Smith maintains that his actions constituted an accepted business practice, or alternatively that MM & M's promissory note was a novation that extinguished any obligation he had to K-B. ¹

Under K-B's usual financing practice, a client purchasing insurance must pay in cash a minimum of 20 percent of the premium due on the policy. The balance, up to 80 percent, may be financed with one of two companies approved by K-B for this purpose. The finance company pays the balance to K-B and collects from the client on an installment basis. K-B guarantees the loans.

Smith handled the MM & M account for his employer. MM & M was a real estate investment company that purchased insurance coverage from K-B as it acquired new properties. To purchase this insurance, MM & M used the 80 percent financing scheme through A & R Capital Corporation, one of the approved companies. Because of equipment failure, A & R did not send payment notices to MM & M for several months. When a statement eventually was sent, the account was $16,000 in arrears. MM & M informed Smith that it could not pay this amount in a lump sum and that it would need additional time to bring its existing account up-to-date. In the interim, MM & M continued to purchase insurance coverage for its new properties. To give MM & M an opportunity to settle its existing account without having to use its available cash to purchase new insurance, Smith fictitiously increased the insurance premiums to be financed on other accounts: thus, rather than paying 20 percent of the actual premium and financing the remaining 80 percent, the falsely inflated premium allowed MM & M to finance 100 percent of the actual premium. MM & M, however, remained unable to meet its payment obligation to A & R. When A & R informed K-B of the amount due on the account, the scheme was uncovered. At K-B's request, MM & M executed a promissory note, on which it later defaulted. K-B, of course, was liable to A & R for the balance due on MM & M's account.

On September 12, 1979, K-B filed a claim for $54,013.19 on its insurance policy with F & D for the losses it sustained as a result of Smith's actions. F & D began an investigation of the claim, and advised Smith of the investigation on October 9, 1979. F & D concluded that it was obligated to pay the amount claimed by K-B. After a meeting with Smith and his attorney on December 21, 1979, F & D paid K-B. K-B assigned to F & D its right to all claims against Smith. F & D made demands upon Smith to indemnify it for the amount of the claim, but Smith refused to reimburse F & D. On December 16, 1980, F & D filed this suit against Smith. On May 26, 1981, Smith filed a third-party complaint alleging that K-B executed a false proof of loss and claim with F & D, and that such false filing constituted defamation of Smith.

The district court found that F & D was suing upon the rights of K-B and characterized F & D's cause of action as an offense or quasi-offense, which in Louisiana prescribes in one year. Because K-B became aware that Smith was engaging in allegedly dishonest acts as early as June 4, 1979, and filed a proof of loss on September 12, 1979, the suit filed by F & D on December 16, 1980, was barred by the one-year prescriptive period for tort (offense or quasi-offense) actions. ² The district court also held that Smith's third-party complaint against K-B for defamation had prescribed. The district court found that Smith's defamation claim arose when K-B executed the allegedly false proof of loss with F & D. This filing occurred on September 12, 1979, and Smith was fully aware of the allegations contained in the proof of loss by October 17, 1979. Since Smith's third-party complaint was filed more than one year after these events, the district court held that the action was barred under article 3537 of the Louisiana Civil Code. ³

II.

F & D attempts to avoid the one-year prescriptive period applicable to causes of action based on offense or quasi-offense by asserting that it has independent causes of action against Smith based on suretyship and on an extra-codal doctrine, actio de in rem verso. Causes of action based on suretyship or on actio de in rem verso prescribe in ten years. ⁴

F & D contends that it was not the fidelity insurer of K-B, but rather that it was the surety for K-B's employees. We reject this characterization of F & D's role in this litigation and hold that F & D does not have an independent cause of action against Smith based on suretyship.

Article 3035 of the Louisiana Civil Code defines suretyship as a contract in which a person binds himself for another who is already bound. Article 3039 requires that suretyship be evidenced by an express contract; strict construction of the contract is mandated. F & D has not pointed to any language in its contract with K-B that creates a suretyship between F & D and K-B's employees. It has no contract with the employees. Thus, based on the language of the civil code, F & D's suretyship argument must be rejected. See American Empire Insurance Co. v. Fidelity & Deposit Co. of Maryland, 5 Cir.1969, 408 F.2d 72, 77, holding that "[a] fidelity bond was an indemnity insurance contract [because] [t]he insurer's liability did not arise until the insured ... suffered a proven loss".

The commentators are in accord with our characterization of a fidelity insurer as an insurer, not as a surety.

"The important distinction between insurance and suretyship is that suretyship is a collateral undertaking while insurance is an original undertaking. The insurance contract requires only two parties, whereas suretyship requires three: the surety, the principal debtor, and the creditor. Usually in suretyship the person who is principally liable for the obligation is a named party.... The protection against the acts of a group of unnamed employees has been called both 'fidelity insurance' and 'fidelity suretyship' but ... the contract is more properly denominated insurance."

Slovenko, Suretyship, 39 Tul.L.Rev. 427, 434 (1967) (footnotes omitted) (emphasis added). Accord 9A J. Appleman, Insurance Law and Practice Sec. 5661 (1981); 13 Couch on Insurance 2d Secs. 46.2, 46.12 (rev. ed. 1982). Because F & D was not the surety for Smith but the insurer of K-B, it cannot rely on the ten-year prescriptive period for suretyship actions.

Nor can F & D rely on the ten-year prescriptive period applicable to actions de in rem verso. An action de in rem verso is an extra-codal action for unjust enrichment. The Louisiana Supreme Court approved the doctrine underlying the action in Minyard v. Curtis Products, Inc., 1967, 251 La. 624, 205 So.2d 422. The doctrine has five prerequisites. First, the defendant must be enriched, either by a benefit received or by a detriment avoided. Tate, The Louisiana Action for Unjustified Enrichment: A Study in Judicial Process, 51 Tul.L.Rev. 446, 447 (1977). Second, the plaintiff must be impoverished. Third, the defendant's enrichment and the plaintiff's impoverishment must be causally connected. Fourth, and most importantly, neither the enrichment nor the impoverishment may be justified. Id. at 467. Justification can be supplied by a provision of law or contract that permits either the enrichment or the impoverishment. Id. Finally, the action will be permitted only when there is no other remedy at law. The effect of a prescribed action...