Hartford Accident & Indemnity Co. v. Flanagan

• Decision Date: 27 June 1939
• Docket Number: No. 961.,961.
• Citation: 28 F. Supp. 415
• Court: U.S. District Court — Southern District of Ohio
• Parties: HARTFORD ACCIDENT & INDEMNITY CO. v. FLANAGAN.

28 F. Supp. 415

HARTFORD ACCIDENT & INDEMNITY CO. v. FLANAGAN.

No. 961.

District Court, S. D. Ohio, W. D.

June 27, 1939.

Robert Adair Black, of Cincinnati, Ohio, and Orville M. Southard, of Dayton, Ohio, for plaintiff.

George Becker, of Dayton, Ohio, for defendant.

NEVIN, District Judge.

On August 29, 1938, plaintiff filed its petition herein praying judgment against defendant in the sum of Three Thousand Six Hundred and Five and Sixty-five one-hundredths ($3,605.65) Dollars, with interest at 6% from the 19th day of December, 1931.

On September 23, 1938, defendant filed his answer setting up four defenses. The first three are affirmative defenses, the fourth a general denial. Defendant prays to be dismissed at plaintiff's costs.

On November 21, 1938, a document entitled "Request for Admissions under Rule No. 36" was filed by plaintiff. On December 1, 1938, defendant filed an affidavit in reply thereto. There is also on file the affidavit, on behalf of plaintiff, of one Guy R. Jones, an attorney in Illinois, in which he states that "he represented the Camargo State Bank on December 11th, 1931, in the consummation and adjustment of a claim presented by the Camargo State Bank against the Hartford Accident & Indemnity Company on a certain fiduciary bond executed on behalf of Lloyd Flanagan in favor of the Camargo State Bank of Camargo, Illinois, an Illinois corporation, by Hartford Accident & Indemnity Company on January 6th, 1926" and that "to his personal knowledge on December 11th, 1931, an adjustment of the claim of said Bank against said Surety Company was consummated by the execution of a release, in writing, duly signed by the President of said Bank, who is now deceased, a true copy of which said release is hereto attached and made part hereof by reference; * * * that said release was executed according to its terms and tenor, in consideration of the sum of $3125.00, then paid by said Hartford Accident & Indemnity Company to said Camargo State Bank, and that the execution of said release was duly authorized by the Directors and Stockholders of said Bank" and that "said Bank has been liquidated and was finally dissolved by authority of and under the direction of the Banking Department of the State of Illinois, on April 18th, 1935, and that as such, said banking corporation is no longer in existence as a legal entity, and that there has not been, since April 18th, 1935, any representative, fiduciary or trustee of said corporation."

On January 3, 1939, plaintiff filed a motion for summary judgment under Rule 56, Rules of Civil Procedure, 28 U.S.C.A. following section 723c, as follows: "Comes now the plaintiff, and moves on the pleadings, exhibits, documents, request for admissions and affidavit for summary judgment in its favor on the claims set out in its petition filed herein."

On January 10, 1939, defendant filed a "Memorandum in opposition of plaintiff's motion for summary judgment". At the outset of this memorandum defendant says "By virtue of Rule 56 of Civil Procedure for the District Courts of the United States, defendant joins with plaintiff and moves on the pleadings, exhibits, documents and affidavits for summary judgment in his favor."

At the request of both parties respectively, therefore, the cause is now before the court on the pleadings and documents referred to in the respective motions for summary judgment in favor either of plaintiff or defendant.

It is agreed between the parties that it is shown by the pleadings and the other documents referred to that, on December 23, 1925, defendant was in the employ of the Camargo State Bank of Camargo, Illinois, as "Cashier, General Banking", and that on that date he made an application to the plaintiff company herein for a fiduciary bond. In his application defendant states that he had theretofore been an employee of the Camargo State Bank for about 6½ years. On January 6, 1926, plaintiff accepted the application and became surety on the bond of defendant, who became principal thereon, in the sum of $7,500, which amount was later reduced, on March 10, 1931, to the sum of $5,000.

On October 13, 1931, defendant confessed in writing to the fraudulent embezzlement and misappropriation of funds belonging to the bank in the sum of $8,007.70. Defendant was indicted, entered a plea of guilty and was sentenced to, and served, a term in a state penal institution. While denying all liability but, nevertheless, desiring to settle and adjust any claims against it, plaintiff, on December 19, 1931 (the release is dated December 11, 1931 — see copy attached to Jones affidavit), paid to the Camargo State Bank, on account of loss by reason of the fraudulent embezzlement and misappropriation of funds by the defendant, the sum of $3,125. In addition, plaintiff claims that in good faith it incurred expenses for investigation and attorneys fees on account of the fraudulent embezzlement the sum of $480.65, making the total sum of $3,605.65 for which, as indicated, it prays judgment against defendant with interest. The Camargo State Bank is no longer in existence. It has not existed as a legal entity since April 18, 1935. It has been liquidated, dissolved and has no successor.

On May 3, 1937, defendant herein filed his petition in bankruptcy in this court listing in Schedule A-3 the following:

                                                     "Schedule A-3
                                            "Creditors Whose Claims are Unsecured
                                               When and Where
                Names of Creditors                 Contracted                      Nature            Amount
                Hartford Accident &            January 6, 1926        For Surety & Fidelity
                Indemnity Company,             Camargo, Ill.          Bond Principal            $5193.45
                Hartford, Conn
                                   (Memo: Surety paid obligee $3125.00 on Dec. 11, 1931, and
                                     incurred legal expenses in the amount of $468.45, totalling
                                     $3593.45; Interest for six years approximately
                                     amounts to $1600.00)"
                

On October 4, 1937, this court granted defendant's petition for final discharge in bankruptcy.

The three affirmative defenses set up by defendant are:

1. Discharge in bankruptcy.

2. Plaintiff is not the real, necessary and indispensable party plaintiff, and

3. Illegality of the contract, that is, the application and bond.

Discharge in Bankruptcy.

1. Paragraphs 2, 3, 4 and 5 of the answer (Paragraph 1 contains certain admissions) constitute the first defense, which is that defendant has been discharged in bankruptcy from any claim of the plaintiff against him. There is no dispute as to the allegations of fact in the answer. The question is one of law, that is, whether or not, having listed the claim in his schedules, defendant has been or can be discharged therefrom under the Bankruptcy Act. Plaintiff contends defendant has not been so discharged because of Sec. 17a of the Bankruptcy Act (also Sec. 17a, Chandler Act, 1938) Title 11, § 35(a), U.S.C.A. The pertinent part of that section reads as follows:

"Sec. 17 § 35. Debts not affected by a discharge

"a. A discharge in bankruptcy shall release a bankrupt from all of his provable debts * * * except such as * * * (4) were created by his fraud, embezzlement, misappropriation or defalcation while acting as an officer or in any fiduciary capacity * * *."

Defendant submits that the ultimate purpose of plaintiff's petition is to avoid the effect of defendant's discharge in bankruptcy and that the burden of proving that such discharge was not operative is upon plaintiff; that plaintiff's petition sets forth an express contract of indemnity; that all contractual obligations are provable and dischargeable in bankruptcy except those created by embezzlement or misappropriation; that this contract of indemnity between plaintiff and defendant was not created by an act of embezzlement or misappropriation, and that this contract, therefore, is provable and dischargeable in bankruptcy. In support of his contention defendant relies on Sec. 63 of the Bankruptcy Act, 11 U.S.C.A. § 103 (subsections (a) (1, 3 and 4). The pertinent part is as follows:

"§ 103. Debts provable against

"(a) Debts of the bankrupt may be proved and allowed against his estate which are * * * (4) founded upon an open account, or upon a contract express or implied."

It is well established, however, that a debt may be such as that it is not dischargeable in bankruptcy even though it may be provable and share in distribution. Friend v. Talcott, 228 U.S. 27, 33 S.Ct. 505, 57 L.Ed. 718; Clarke v. Rogers, 228 U.S. 534, 33 S.Ct. 587, 57 L.Ed. 953.

In the Friend case (228 U.S. pages 38, 39, 33 S.Ct. page 507, 57 L.Ed. 718) the court say: "That is to say, the confusion lies in not distinguishing between creditors who are excluded from the bankrupt act and those who, although included therein, have had conferred upon them the benefit of an exception from the operation of the discharge. Even a superficial analysis of the text of the bankruptcy act will make this clear. Thus, § 63a and b 30 Stat. 562 enumerates the debts which may be proved, and which are therefore entitled to participate in the benefits of the act and are bound by its provisions, including a discharge. Section 17 30 Stat. 550 enumerates the debts not affected by a discharge; that is, those exempted from its operation. It is apparent that the exemptions do not rest upon any theory of the exclusion of the creditor from the bankrupt act, or of deprivation of right to participate in the distribution, but solely on the ground that, although such rights are enjoyed, an exemption from the effect of the discharge is superadded. The text leaves no room for any other view, since the exceptions in terms are accorded to certain classes of debts which are provable under § 63, and therefore debts which are entitled to participate in the distribution, the language being: `A discharge in bankruptcy shall release a...