United States Fidelity & Guaranty Co. v. Barber

• Decision Date: 13 April 1934
• Docket Number: No. 6478.,6478.
• Citation: 70 F.2d 220
• Parties: UNITED STATES FIDELITY & GUARANTY CO. v. BARBER.
• Court: U.S. Court of Appeals — Sixth Circuit

70 F.2d 220 (1934)

UNITED STATES FIDELITY & GUARANTY CO. v. BARBER.

No. 6478.

Circuit Court of Appeals, Sixth Circuit.

April 13, 1934.

Albert McClatchey and T. W. Payne, both of Detroit, Mich. (Payne & Payne and Albert McClatchey, all of Detroit, Mich., on the brief), for appellant.

O. L. Smith, of Detroit, Mich. (Neill E. Graham and James R. Neill, both of Detroit, Mich., on the brief), for appellee.

Before HICKS and SIMONS, Circuit Judges, and WEST, District Judge.

SIMONS, Circuit Judge.

The appeal raises questions affecting the liability of an insurer and its extent, upon a so-called fidelity schedule bond, issued to a bank to indemnify it for losses sustained through dishonest or criminal acts of employees listed in schedules forming part of the bond. The appellant is the insurer, and the appellee receiver for the insured, who as plaintiff below obtained the judgment here reviewed.

The bond was originally written in 1927. It provided that, for consideration of a premium based upon an annual rate of 30 cents per $100 of insurance, the insurer bound itself to pay such pecuniary loss as the insured would sustain through the "fraud, dishonesty, forgery, theft, embezzlement, wrongful abstraction, misapplication or misappropriation, or any other dishonest or criminal act or omission, of or by any of the employees listed in the schedule forming part of this bond, directly or in connivance with others * * * during the period commencing upon the date each employee is listed hereunder, and continuing in amounts scheduled until the termination of this insurance." The employer was to have the right without impairing the continuity of the bond, to add to the schedule the names of other employees, to increase or decrease the amount of insurance of any employee, and was required to notify the insurer of loss within ten days after its discovery. The insurance was to be terminated only by written notice of either party, or as to any employee by his retirement from the employ of the insured, or upon the discovery of a loss through him.

The first schedule attached to the bond covered the period October 1, 1927, to October 1, 1928. With this schedule, the employees covered thereby, and the amount of protection as to each, we have no concern. The second schedule covered a period beginning October 1, 1928, insured the fidelity of George J. Kolowich as president in the sum of $10,000, Frank J. Zielinski as pay teller for $40,000, and A. Goscicki as bookkeeper for $10,000. By change and acceptance notice Willard Babcock was added, with liability of $25,000, from June 11, 1929, as manager, loan department. The third schedule covered the period beginning the 1st day of October, 1929, and insured the fidelity of Kolowich, Babcock, and Goscicki in the same amounts as under the preceding schedule, but listed Babcock as cashier, and reduced the coverage for Zielinski to $25,000. This schedule contains the following proviso: "Provided this list shall be deemed a part of the original bond, and not a new obligation, nor shall it create cumulative liability."

In subsequent change and acceptance notices during the period covered by the third schedule, the name of A. Goscicki was withdrawn, and the name M. A. Gosicki was substituted, with the title of teller and book-keeper, and the name Frank J. Zielinski as pay teller was withdrawn and Frank J. Zielinski as assistant cashier was substituted. The losses claimed to have been sustained by the insured were suffered in the periods covered by the second and third schedules, as amended, and such periods will be hereinafter respectively referred to as first and second periods.

The losses for which liability upon the bond is asserted are claimed to have resulted from the several dishonest or criminal acts of Kolowich, president, Babcock, cashier, Gosicki, paying teller, and Zielinski, bookkeeper and assistant cashier. An understanding of the issues involved necessitates a somewhat detailed, though necessarily condensed, statement of the relationship of the employees named to the bank, and their activities in respect to the transactions involved.

George J. Kolowich was the president and principal stockholder in the State Bank of America, which was a Michigan corporation located in Hamtramck, Mich. With his wife, Irene G. Kolowich, he also operated a private bank in Hamtramck, known as the Merchants' & Mechanics' Bank, which carried a commercial account with the State Bank of America, and of which one John W. Kempisty was the cashier and manager. In addition to his banking activities, Kolowich was also a stockholder and director in a corporation known as Kolowich and Johns, likewise a depositor and customer of the State Bank of America. As president and director of the latter bank, Babcock, Gosicki, and Zielinski were subject to his orders; Babcock having qualified as a director by virtue of shares given to him by Kolowich. Kempisty was Kolowich's employee in the Merchants' & Mechanics' Bank.

During the period from March 31, 1930, to June 18, 1930, there was what was designated as a run on the Merchants' & Mechanics' Bank, which resulted in withdrawal therefrom by its depositors of between three and four hundred thousand dollars. To meet these withdrawals, the Merchants' & Mechanics' Bank drew upon its deposit in the State Bank of America. Shortly before, but during a period of somewhat active withdrawal, Kolowich had instructed Babcock, the cashier of the State Bank of America, not to let the daily balance of the Merchants' & Mechanics' Bank fall below four or five thousand dollars, and to pay all drafts by the latter without regard to whether there were sufficient funds on deposit to cover them. Instruction to that effect was given by Babcock to Gosicki, the teller. During the period mentioned, a series of eleven drafts for a total of over $94,000, and resulting in an overdraft of $80,626.37, were presented to the State Bank of America, and were paid by Gosicki under the instructions relayed to him from Kolowich through Babcock. There being insufficient funds to honor the drafts, Gosicki placed them in his cash drawer and entered them on his daily blotter and cash book as currency. Zielinski transferred these entries into the general ledger of the bank. Upon being informed of the cashing of the eleven drafts, Kolowich set about to get a loan to cover the shortage, but, being unable to do so, notified the banking commissioner. The latter suggested security, and, of various properties submitted by Kolowich, two parcels were selected by the commissioner and the board of directors of the bank, whereupon Kolowich and his wife executed a quitclaim deed thereof to the bank to secure a promissory note for the amount of the overdraft, payable on or before one year from its date. Shortly thereafter Kolowich was adjudicated a bankrupt, and turned over all of his property to his trustee. The State Bank of America went into receivership, and its receiver filed a claim in the bankruptcy proceedings against Kolowich for $435,000. What this consisted of does not appear. The referee made an order disallowing the claim unless the receiver would within five days surrender the preference given to secure the overdraft. The receiver, deeming it more advantageous to pursue the larger claim than to retain the security, surrendered it.

In addition to the loss occasioned by the overdraft transaction was a loss sustained on a note of Irene G. Kolowich in the amount of $14,373.50, the proceeds of which went to the Merchants' & Mechanics' Bank. While the note was given by Mrs. Kolowich, it is claimed it was for the benefit of George J. Kolowich, who at the time already owed the State Bank of America an amount in excess of his borrowing limit under the statutes of Michigan. The note was originally for a much larger amount, secured by stock owned partially by George J. Kolowich in the Detroit Housing Corporation, and was reduced presumably by sale of the collateral. Another item of loss claimed to have been sustained through the acts of Kolowich and Babcock was upon a note for $20,000 executed by Kolowich in the name of Kolowich and Johns. Kolowich had no authority to make the note; it was given to the bank without the knowledge of his associates in the corporation, and Babcock was instructed by Kolowich not to let Johns know anything about it. The draft given by the bank for the note was cashed at the Merchants' & Mechanics' Bank upon indorsement of Kolowich. Still another loss was upon a note for $12,580 executed by John W. Kempisty, and later reduced by a $2,000 payment. The proceeds of this note it is claimed went into the Merchants' & Mechanics' Bank, and it is the contention of the receiver that on the Kolowich and Johns, and the Kempisty notes, just as on Mrs. Kolowich's note, the real borrower was Kolowich, and, his borrowings in each case being in excess of the amount permitted by law, the losses resulting therefrom are within the protection of the bond.

Over the objections of counsel, with exceptions duly noted, evidence was received upon all the claimed losses. They totalled over $125,000. Of this amount $10,580 resulted from the discounting of the Kempisty note in the period October 1, 1928 to 1929, covered by the second schedule, and the balance during the period October 1, 1929 to 1930, covered by the third schedule. The court, construing the bond as a cumulative or multiple security bond, instructed the jury that the maximum permissible recovery was $80,580. This was on the theory that the four employees were covered during the second period for a total of $70,000, made up of a coverage of $10,000 for Kolowich, $25,000 for Babcock, $10,000 for Gosicki, and $25,000 for Zielinski, and that there was additional coverage during the first period by reason of the cumulative or multiple character of the bond of $10,000 for Kolowich and $25,000 for Babcock; this being more than sufficient to cover the...