Clarendon Bank & Trust v. Fid. & Deposit Co. of Md.

• Decision Date: 22 December 1975
• Docket Number: Civ. A. No. 296-75-A.
• Citation: 406 F. Supp. 1161
• Court: U.S. District Court — Eastern District of Virginia
• Parties: CLARENDON BANK & TRUST, Plaintiff, v. FIDELITY AND DEPOSIT COMPANY OF MARYLAND, Defendant.

406 F. Supp. 1161

CLARENDON BANK & TRUST, Plaintiff, v. FIDELITY AND DEPOSIT COMPANY OF MARYLAND, Defendant.

Civ. A. No. 296-75-A.

United States District Court, E. D. Virginia, Alexandria Division.

December 22, 1975.

Frank E. Brown, Jr., Thomas G. Mays, Arlington, Va., for plaintiff.

Alexander M. Heron and John C. Hayes, Jr., Washington, D. C., Fred C. Alexander, Jr., Alexandria, Va., for defendant.

MEMORANDUM OPINION

CLARKE, District Judge.

Plaintiff, Clarendon Bank & Trust (CB&T), seeks recovery in the amount of $307,812.10 from defendant, Fidelity and Deposit Company of Maryland (F&D), alleging that a loss sustained as the result of allowing a customer to draw on deposits which were ultimately dishonored falls within the coverage of the Banker's Blanket Bond issued by F&D to CB&T. Plaintiff relies on Insuring Agreements B, loss of property through false pretenses, and D, loss through forgery, for recovery. Defendant alleges that the loss was not occasioned through a forgery, and so is not payable under Insuring Agreement (D) and that the definition of "Property" in Section 1(b) of the Bond refers only to tangible personal property, excluding this loss from coverage under Insuring Agreement (B) (Loss of property through false pretenses). Finally, F&D contends that any loss is excluded from coverage by virtue of the "check kiting" provision of Section 2(e) (Exclusions). Plaintiff claims F&D has not plead the loan exclusion portion of Section 2(e) and, therefore, that provision is not in issue.

This Court has jurisdiction by virtue of 28 U.S.C. § 1332. The parties agree that at all times pertinent to the issues herein the Bond was in full force and effect.

The stipulations of counsel and the evidence showed that on March 31, 1973, a checking account was opened at CB&T by a customer who, at the time pertinent to this case, was named Car Retailers and was a partnership consisting of Jule Williamson and F. L. Kitzmiller. Both partners dealt with the bank in making deposits, signing checks on the firm's account and in authorizing payment of drafts drawn on Car Retailers for automobiles purchased by the firm.

Car Retailers would buy used automobiles at "wholesale" and would in turn sell them to other dealers. When Car Retailers purchased automobiles at an auction, a draft would be accompanied by title certificates to the automobiles and would be presented to CB&T for payment from Car Retailers' account.

Sometime before January 1, 1974, Car Retailers worked out a system of financing or "floor planning" its purchases with Richardson's Used Cars, Inc., of Bladenboro, North Carolina. Under the system adopted to implement this plan, Richardson furnished Car Retailers with blank checks which Mr. Williamson, of Car Retailers, would fill out for a given amount, list on the check the cars being financed and would sign the name of Jerry Richardson, Richardson's President, to the check and would place his initials J. W. by the signature. Car Retailers would mail the title certificates for the automobiles involved to Richardson's bank in Bladenboro so that they could be checked against the listing on the check when it was presented for payment. For this financing service, Richardson received a fee.

CB&T thought the Richardson checks being deposited by Car Retailers to its account represented proceeds from the sale of the automobiles by Car Retailers to Richardson and was unaware that the transactions were for the purpose of financing Car Retailers' purchases.

The practice at CB&T was that Mr. Kitzmiller, partner in Car Retailers, would call on Mr. Paul Schumacher, Executive Vice President of CB&T, with a deposit made up of checks from various sources. Prominent among those checks, both as to number and amount, were those drawn on Richardson's Account at the Bladenboro, North Carolina, bank. Mr. Schumacher would add up the deposit and would be told by Mr. Kitzmiller what drafts which had been drawn by others on Car Retailers for its purchases should be paid from the funds so deposited. Mr. Schumacher would then "sight post" the deposit and would thereby commit CB&T to pay the drafts selected and would allow Mr. Kitzmiller to take the certificates of title to the automobiles which had accompanied the drafts. Thus, Mr. Schumacher was committing the bank to make payments on uncollected funds.

All went well with this scheme until the automobile business began to slow up and Richardson advised Car Retailers that it would no longer "floor plan" or finance Car Retailers' acquisitions. Richardson advised Car Retailers that it would accept checks drawn on its account pursuant to the finance scheme through December 31, 1973, and it in fact did so.

Despite the cancellation of his authority, Jule Williamson continued to draw checks on Richardson's account after January 1, 1974, signing Jerry Richardson's name with the added initials "J. W." These checks continued to be a part of Car Retailers' deposits taken to Mr. Schumacher at CB&T by Kitzmiller and Mr. Schumacher continued to accept them and commit the bank to payments of drafts with these uncollected items.

For some unexplained reason, Richardson's bank in Bladenboro failed to notify CB&T that the checks in question were not being honored until around the middle of January by which time $347,163.00 in unpaid Richardson checks had been sight posted to Car Retailers' account and had been committed by CB&T to be paid out. Unfortunately, when the Bladenboro bank refused to accept the checks, it sent most of the titles to the automobiles that it had received in support thereof back to Car Retailers rather than to CB&T. Car Retailers did not turn the titles or the proceeds from the sale of the automobiles they represented over to CB&T.

CB&T salvaged some of its loss by securing the titles to some of the automobiles in question and selling the automobiles. Its net loss was $307,812.10 for which it makes claim against the defendant.

From these facts, the Court must determine if Car Retailers or Jule Williamson was guilty of Forgery as contemplated in the policy or, if not, was "property" taken from CB&T by False Pretenses as contemplated in the policy. The Court must also determine if CB&T's claim is barred by Exclusion 2(e) of the bond as being a "check kiting" scheme.

Initially, plaintiff argues that any ambiguous provisions of insurance policies must be construed against the insurer as a matter of law. This issue has particular significance because of the disputed interpretations of certain clauses in the bond at issue in this case. Defendant contends that the theoretical underpinning of the maxim of interpretation of insurance policy against the insurer is not applicable here. The bond involved in the instant matter is a standard form utilized in the banking industry. The bond was the result of "four years of study and collaboration between the American Bankers Association and the Surety Association of America." In light of the fact that industry representatives jointly drafted the bond, the defendant concludes that the policy should not be interpreted against either party. Accordingly, in defendant's view, the intent of the parties controls when ambiguities arise.

Both parties have failed to discuss decisions addressing the significance that should be attached to the ABA's participation in approving the standard form bond. Ironically, both parties have cited these cases for other propositions in their briefs but they neglect to do so for this point. At least three courts have considered the question. In National Bank of Commerce in New Orleans v. Fidelity & Casualty Company of New York, 312 F.Supp. 71 (E.D.La.1970), affirmed, 437 F.2d 96 (5th Cir. 1971), Judge Rubin decided that because the bond resulted from the joint efforts of the two professional organizations, the bond should not be applied hostilely against the insurer. An Alabama District Court disagrees. That Court recognized that the bond was the efforts of the two organizations but concluded that "this record is absent any evidence that this plaintiff or any association acting for it negotiated the language of the bankers' blanket bond here in question." Shoals National Bank of Florence v. Home Indemnity Company, 384 F.Supp. 49 (N.D.Ala.1974). This Court finds the Seventh Circuit's rationale most compelling in First National Bank of Decatur v. Insurance Company of North America, 424 F.2d 312 (7th Cir.), cert. denied, 398 U.S. 939, 90 S.Ct. 1844, 26 L.Ed.2d 272 (1970). Under the Circuit Court's analysis, the defendant would have to prove that CB&T participated in drafting the bond. The record is barren of such evidence. Additionally, the revised bond in April, 1969, issued to CB&T merely states that changes occurred "in collaboration with" the ABA. Although the plaintiff was a member of the ABA, the defendant has failed to establish the depth of the plaintiff's participation in drafting the revisions.

Therefore, concurring with the Seventh Circuit's decision, the Court will follow the general rule, in case of ambiguity the terms of an insurance policy should be interpreted against the insurer.

The first issue confronting the Court is whether the signature of Jerry Richardson by Jule Williamson constitutes forgery within the bond provisions, which provide merely that the bank shall be indemnified and held harmless from loss through forgery of any checks. The parties agree that Mr. Williamson signed Mr. Richardson's name with authority from March, 1973 to December, 1973 (Stipulation # 5). Williamson was provided with printed forms of checks bearing the name of Richardson's corporate entity. (Stipulation # 5)

These check forms were used to deposit funds into the CB&T account of Car Retailers, the partnership account of Jule Williamson and F. L. Kitzmiller. (Stipulation # 3) All the checks in dispute concern deposits made in January, 1974. These checks were signed Richardson's Used Cars, Inc., by Jerry...