Home Federal Sav. & L. Ass'n v. Peerless Insurance Co.

• Decision Date: 08 September 1961
• Docket Number: Civ. No. 836.
• Citation: 197 F. Supp. 428
• Court: U.S. District Court — Northern District of Iowa
• Parties: HOME FEDERAL SAVINGS & LOAN ASSOCIATION, Algona, Iowa, Plaintiff, v. PEERLESS INSURANCE COMPANY, Defendant.

197 F. Supp. 428

HOME FEDERAL SAVINGS & LOAN ASSOCIATION, Algona, Iowa, Plaintiff, v. PEERLESS INSURANCE COMPANY, Defendant.

Civ. No. 836.

United States District Court N. D. Iowa, Central Division.

September 8, 1961.

H. F. Fristedt (of Shumway, Kelly & Fristedt), Algona, Iowa, and Alan Loth, Fort Dodge, Iowa, for plaintiff.

Herschel G. Langdon, of Herrick & Langdon, Des Moines, Iowa, for defendant.

GRAVEN, District Judge.

This is an action to recover from the defendant bonding company under the insuring clauses of a Savings and Loan Blanket Bond (Standard Form No. 22) issued by the defendant to the plaintiff to insure it against certain types of loss. The plaintiff is a Federal Savings and Loan Association organized and existing under the provisions of Section 1464 of Title 12 U.S.C.A. Its principal place of business is in Algona, Kossuth County, Iowa. The defendant is a corporation organized and existing under the laws of the State of New Hampshire. The amount in controversy greatly exceeds $10,000, exclusive of interest and costs.

The case was tried to the Court. The record consists of the pleadings (as limited by a written stipulation); several depositions; the defendant's answers to plaintiff's requests for admissions under Rule 36, 28 U.S.C.A.; and a detailed stipulation between the parties as to certain facts.

The scope of the present controversy, as outlined by the original pleadings, has been substantially reduced by stipulation. It has been stipulated that the Court may dismiss several of the claims in the original complaint with prejudice. Essentially, the controversy remaining to be determined revolves around five checks issued by the plaintiff totaling approximately $50,000. Four of these checks were drawn on its account at the Humboldt Trust and Savings Bank of Humboldt, Iowa, and the other check was drawn on its account at the Iowa State Bank of Algona, Iowa. The five checks were all drawn by officers and employees of the plaintiff at its Algona office and were issued by those officers and employees for the purpose of making real estate loans to the payees of the checks. Unbeknown to those in the plaintiff's Algona office, however, the named payees of four of these checks were fictitious persons and the payee of the fifth check, although an existing person, had never made application to the plaintiff for a loan and knew nothing about the transaction.

The transactions referred to were the result of a fraudulent scheme perpetrated upon the plaintiff by one Dennis Gahan, who was engaged in the insurance and real estate business in Humboldt. In connection with his real estate business, Gahan engaged in the purchase of vacant lots. He would improve them by the construction of single unit dwellings thereon, and then sell them. Many of those purchasing real estate from Gahan financed their homes through the lending facilities of the plaintiff. Gahan would assist the purchasers in making application for such loans and received a one per cent commission from the plaintiff on all such loans actually completed. In the fraudulent transactions herein involved, Gahan made false applications for loans in the names of purported purchasers of lots owned by him. The lots which were described in the loan applications were unimproved but they were falsely listed on the applications as being improved. Gahan signed the names of these purported purchasers on the loan applications and on the resulting notes and mortgages which were duly acknowledged by himself as notary. When the plaintiff sent a committee of appraisers to inspect the houses and lots described Gahan, on each occasion, showed them a lot several blocks away which did have a house on it. The checks which were issued for the supposed loan transactions were received by Gahan to be delivered to the payees. Gahan endorsed the names of the payees on the checks and then deposited them in his account at the Humboldt Trust and Savings Bank. The circumstances were substantially the same as to each of the five checks involved.

The plaintiff has asserted a claim against the defendant under its blanket bond for the loss which it sustained through Gahan's misappropriations and submitted the appropriate proof of loss required by the contract. The defendant has refused to indemnify the plaintiff and maintains that the coverage of the bond in question does not insure plaintiff against the type of fraudulent transaction which is involved in this case. Thus, the problem before the Court is primarily one of interpretation of an insurance contract. The pertinent coverage provisions of the bond are as follows:

"In consideration of an agreed premium, the Peerless Insurance Company * * * hereby undertakes and agrees to indemnify and hold harmless the plaintiff * * * from and against any losses sustained and discovered as hereinafter set forth.

"The Losses Covered By This Bond Are As Follows:

"Fidelity

"1. Any loss through any dishonest, fraudulent or criminal act of any officer or employee of the insured * * *.

"Forgery Or Alteration

"2. Any loss through forgery or alteration of, on, or in any instrument.

* * * * * *

"Fraud

"5. Any loss of property through any other form of fraud or dishonesty by any person or persons, whether Employees or not. * * *"

The insuring clauses of the bond are expressly made subject to certain enumerated conditions and limitations. The only pertinent exclusionary provision of the bond is as follows:

"Section 1. This Bond Does Not Cover:

* * * * * *

"(c) Any loss the result of the complete or partial non-payment of or default upon any loan made by or obtained from the Insured, whether procured in good faith or through trick, artifice, fraud or dishonesty, except when covered by Insuring Clause 1 or 2."

It seems clear that the broad "fraud" coverage in paragraph five of the bond is subject to the exclusionary provision 1(c) and does not cover losses sustained as the result of default or nonpayment of any loan made by the plaintiff whether procured by trick, fraud or otherwise. The fidelity clause and the forgery or alteration clause, however, are not subject to the exclusion referred to. Plaintiff originally urged that the "loan" exclusion was not applicable and that, therefore, the loss in question falls within the broad coverage of the fraud clause. By written stipulation of the parties, however, this issue was withdrawn from the Court's consideration and plaintiff places no further reliance on clause five. Nor does the plaintiff place any reliance on the fidelity clause. The case was submitted to the Court for determination solely on the basis of whether the loss in question was sustained through "forgery" within the meaning of clause two of the bond. The stipulation specifically states that "if the Court shall find and determine, as to any of said five checks, that no endorsement thereon was `forged' within the meaning of the bond, it shall dismiss plaintiff's claim on such check."

Both parties concede that Iowa law is applicable to the interpretation of the bond which was delivered in Iowa and was to be performed in Iowa. See, e. g., State Bank of Poplar Bluff v. Maryland Casualty Co., 8 Cir., 1961, 289 F.2d 544, 546-547. This concession does not significantly narrow the scope of the Court's search for the controlling principles of law. The written provisions of the bond itself contain no definition of the term "forgery." The Iowa Supreme Court has not been faced with the problem of defining the term "forgery" as used in an insurance contract. That Court has, of course, had to pass occasionally upon just what type of conduct amounts to a "forgery" within the Iowa criminal statute relating to forgery. Forgery was a common law crime. Rockland-Atlas National Bank v. Massachusetts Bonding & Ins. Co., 1959, 338 Mass. 730, 734, 157 N.E.2d 239, 242. It had an established meaning under that law. Bank of Detroit v. Standard Acc. Ins. Co., 1928, 245 Mich. 14, 222 N.W. 134, 137. The term also has a general and popular meaning. Dexter Horton Nat. Bank v. United States Fidelity & Guaranty Co., 1928, 149 Wash. 343, 270 P. 799, 801. The term has a technical meaning under criminal statutes defining it. Pasadena Investment Co. v. Peerless Casualty Co., 132 Cal.App.2d 328, 282 P.2d 124, 52 A.L.R. 2d 203.

In 9 Appleman, Insurance Law and Practice 536-37 (1943), the author states:

"Forgery has been judicially defined as the making or altering, with intent to defraud, of any writing or printing so as to cause the alteration or execution to purport to be the valid act of a person, which is not. Some courts have held that the criminal statutes are controlling in regard to the definition of the term `forgery' as used in fidelity policies. But elsewhere it has been stated that the ordinary and generally accepted meaning of such term should be employed rather than the technical legal definition."

In an excellent article by Professor E. Allen Farnsworth, Insurance Against Check Forgery, 60 Columbia Law Review 284, 294-96 (1960), the author points out that forgery is not defined in either the Negotiable Instruments Law or the Uniform Commercial Code, and in regard to the construction of forgery bonds he concludes:

"* * * Courts, in construing forgery bonds, have almost without exception looked not to these statutes the Negotiable Instruments Law or Uniform Commercial Code but to the crime of forgery for a definition. This may be a natural choice; forgery bonds are often written in conjunction with policies insuring against such crimes as `robbery,' `burglary,' `embezzlement,' and `larceny,' for the `dominant purpose of such * * * indemnity bonds is not to protect against loss but to protect against criminal loss.' Citing Manufacturers & Traders Trust Co. v. Meyer Malt & Grain Corp. (Sup.Ct.1928), 132 Misc. 138, 140, 229 N.Y.Supp. 615, 618."

As to what constitutes the crime of forgery as it pertains to forgery bonds, the author states:

"While there is

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