NEW MEXICO SAV. & L. ASS'N v. United States Fidelity & G. Co.

• Decision Date: 05 January 1972
• Docket Number: No. 71-1032.,71-1032.
• Citation: 454 F.2d 328
• Parties: NEW MEXICO SAVINGS & LOAN ASSOCIATION, a New Mexico Corporation, Appellant, v. UNITED STATES FIDELITY AND GUARANTY COMPANY, a Maryland Corporation, Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

454 F.2d 328 (1972)

NEW MEXICO SAVINGS & LOAN ASSOCIATION, a New Mexico Corporation, Appellant, v. UNITED STATES FIDELITY AND GUARANTY COMPANY, a Maryland Corporation, Appellee.

No. 71-1032.

United States Court of Appeals, Tenth Circuit.

January 5, 1972.

COPYRIGHT MATERIAL OMITTED

John P. Eastham, and Duane C. Gilkey, Albuquerque, N. M., for appellant.

Russell Moore, and William K. Stratvert, Albuquerque, N. M., for appellee.

Before SETH, HAMLEY,^* and HOLLOWAY, Circuit Judges.

HAMLEY, Circuit Judge.

New Mexico Savings & Loan Association (New Mexico Savings) brought this diversity action against United States Fidelity and Guaranty Company (bonding company) for recovery under the fidelity coverage of a savings and loan blanket bond. New Mexico Savings alleged that it had suffered a substantial loss through the dishonest, fraudulent or criminal acts of its employees, acting alone or in collusion with others. The bonding company denied the essential allegations of the complaint. The parties tried the case to a jury which returned a verdict for the bonding company. The district court entered judgment on the verdict and New Mexico Savings appeals. We affirm.

On June 26, 1965, the bonding company issued to New Mexico Savings a savings and loan blanket bond. It thereby agreed to indemnify New Mexico Savings for any loss sustained through any "dishonest, fraudulent or criminal act of any employee, acting alone or in collusion with others." Through a rider to the bond, which became effective September 23, 1965, the coverage was increased to three hundred thousand dollars, together with ten thousand dollars coverage for audit expense. The bond was in full force and effect at all material times.

Over a ten-month period, commencing in November, 1965, and ending on August 10, 1966, New Mexico Savings incurred a loss in an amount exceeding $363,000. This loss occurred through the overdisbursement of funds during this period to Jan Medik Contractors, Inc. (Medik). The loss on the Medik account resulted from disbursements of New Mexico Savings funds on interim construction loans to Medik over and above the aggregate of the promissory notes given by Medik and the value of the residential construction mortgages.

New Mexico Savings sought to prove that the loss was due primarily to the dishonest, fraudulent or criminal acts of Virgil Stovall, a bookkeeper and later Assistant Secretary of New Mexico Savings. If not due to the culpability of Stovall, New Mexico Savings urged, it was due to the culpability of Lilburn Homan, president of that institution, from whom Stovall received instructions.

At the close of all the evidence New Mexico Savings moved for a directed verdict in its favor. The motion was denied. After the jury returned its verdict, New Mexico Savings moved for judgment notwithstanding the verdict and, in the alternative, for a new trial on the ground that the verdict is against the weight of the evidence. These alternative motions were also denied. New Mexico Savings argues that the district court erred in denying the motions described above.

Motions for a directed verdict or for judgment notwithstanding the verdict may be granted only when the evidence is all one way or so overwhelmingly in favor of the movant that the trial court in the exercise of its sound discretion would be required to set the contrary verdict aside. Chicago, Rock Island and Pacific Ry. Co. v. Howell, 401 F.2d 752, 754 (10th Cir. 1968). Cf. Denning v. Bolin Oil Co., 422 F.2d 55, 57 (10th Cir. 1970). In applying this rule, the court must view the evidence in the light most favorable to the party opposing the motion, and that party is to be given the benefit of all inferences which the evidence fairly supports, even though contrary inferences might reasonably be drawn. Continental Ore Co. v. Union Carbide & Carbon Corp., 370 U.S. 690, 696, 82 S.Ct. 1404, 8 L.Ed.2d 777 (1962).

Appellant New Mexico Savings recognizes the heavy burden it carries under the rules noted above, but insists that in this case a directed verdict in its favor or a judgment notwithstanding the verdict should have been granted. The savings and loan institution calls our attention to extensive evidence which it believes requires that result. The tendency of this evidence is to show that Stovall assured the board of directors of New Mexico Savings that the advancements to Medik were well secured; that Stovall violated New Mexico statutes which prohibit stock building and loan associations from advancing any loans which are not "amply secured"; and that Stovall disregarded the unwritten policy of New Mexico Savings that loans would only be committed and advanced to an amount equalling seventy-five percent of the sale price of the house under construction as per contract, or seventy-five percent of the FHA appraisal.

The evidence relied upon by New Mexico Savings also tended to show that Stovall paid Medik's bills from New Mexico Savings funds in advance of Medik money coming in on assigned receivables; that Stovall participated in a number of undisclosed personal dealings with Medik which created a conflict of interest; that Stovall recorded the Medik transactions in two accounts in such a way as to conceal the developing over-disbursements; that Stovall, through improper coding, striking over correct work done by his subordinates, and by making other assertedly false entries, caused substantial receipts, unrelated to the Medik account, to be credited against that account; that Stovall knowingly allowed the over-disbursed condition to develop beyond correction before he notified his superiors of the problem; that Stovall neglected to collect interest on Medik loans amounting to at least twenty-four thousand dollars; and that Stovall was seen to destroy a number of paid Medik drafts.

This evidence, considered alone, presents a persuasive case for New Mexico Savings. However, viewed in the light of other evidence relied upon by the bonding company, quite a different picture is presented. This evidence tends to show that Stovall was hired by New Mexico Savings in January, 1965, to head its accounting department, despite the fact that he had no previous experience working for a lending or financing institution.¹ After Stovall began working for New Mexico Savings, he soon realized that he "didn't know what was going on." He thought he could learn the work, but, according to his testimony, it did not take him long to discover that "there was a lot more to learn than he thought there was." New Mexico Savings, at that time, was closing loans aggregating two million dollars every month and was servicing mortgages totaling from seventy-five to eighty million dollars and there was evidence to indicate that Stovall was overworked.

In 1963 there had been a serious dispute within New Mexico Savings' board of directors about whether or not the association should go on with construction financing. Several members of the board of directors thought that construction lending was a "risky business." Homan, president of New Mexico Savings, led the group that believed the association should engage in such financing, and his view prevailed. This activity continued to grow, with Homan making all of the business decisions. Stovall worked under Homan's supervision, and this was particularly true with respect to the Medik account. By the summer of 1965, New Mexico Savings was financing between fifteen and twenty homes for Medik at any one time and, at Homan's direction, Stovall handled the accounting on these loans.

In the fall of 1965 Medik got behind with its creditors and Jan Medik, the head of that company, came to Stovall stating that he needed around sixty thousand dollars to cover some back debts.² Stovall referred Jan Medik to Homan. An arrangement was then made whereby the association agreed to pay Medik's back bills and, in turn, would receive all of the receipts on the houses directly from the title companies when the houses were sold. As a condition of this agreement, Homan required Jan Medik to assign the stock of Medik to New Mexico Savings as a guarantee.

Before this agreement, construction financing for Medik had been handled, generally, through Account No. 1541, entitled "Construction Financing." Connected with this account were individual cards, segregated by address, and listing all disbursements and advancements for each house. Under the new arrangement, however, Medik's back bills could not be identified by house or address, and a separate account was therefore set up for Medik to take care of back bills. This was Account No. 2007, entitled "Builders' Trust Account." This was made a credit account.

It was originally the intention of the association that the back bills of Medik were to be picked up from the equities which Medik represented it had in various properties. However, problems with this procedure were encountered almost immediately. Some of the bills which the association was paying directly were on houses concerning which Medik's account had already been closed. Stovall testified that Homan stated almost from the start that the association could advance up to one hundred percent on these properties since all of the proceeds were coming to the association from the title companies. Stovall got the impression that he was to advance money from the association's general account, in anticipation that Medik monies would be coming in. The evidence reveals several instances wherein Homan specifically authorized Stovall to make such disbursements.

Throughout his testimony, Jan Medik emphasized that for a decision of any consequence on his company's account he would have to go directly to Homan. Testimony favorable to the bonding company tends to show that Stovall seriously attempted to keep track of the Medik account by various lists that showed what Medik owed on the 2007 and 1541 accounts. But he could not ascertain from those records how much security the...