931 F.2d 989 (2nd Cir. 1991), 715, Herbert Const. Co. v. Continental Ins. Co.

Docket Nº:715, Docket 90-7697.
Citation:931 F.2d 989
Party Name:HERBERT CONSTRUCTION COMPANY, Plaintiff-Appellee, Cross-Appellant, v. CONTINENTAL INSURANCE COMPANY, Defendant-Appellant, Cross-Appellee.
Case Date:April 19, 1991
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit
 
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931 F.2d 989 (2nd Cir. 1991)

HERBERT CONSTRUCTION COMPANY, Plaintiff-Appellee, Cross-Appellant,

v.

CONTINENTAL INSURANCE COMPANY, Defendant-Appellant, Cross-Appellee.

No. 715, Docket 90-7697.

United States Court of Appeals, Second Circuit

April 19, 1991

Argued Dec. 19, 1990.

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Lewis Stockman, New York City (Hart & Hume, New York City, of counsel), for defendant-appellant, cross-appellee.

Frederick Cohen, New York City (John S. Wojak, Jr., Ross & Cohen, New York City, of counsel), for plaintiff-appellee, cross-appellant.

Before MESKILL, PRATT and WALKER, Circuit Judges.

MESKILL, Circuit Judge:

The Continental Insurance Company (Continental) appeals from a judgment of the United States District Court for the Southern District of New York, Carter, J., finding Continental liable to Herbert Construction Company (Herbert) in the amount of $680,000. Judgment was entered pursuant to (1) an order of the district court granting partial summary judgment in favor of Herbert on the question of liability and denying Continental's cross-motion for summary judgment seeking dismissal of the complaint, and (2) a subsequent stipulation to damages. Continental challenges the district court's decision to grant summary judgment for Herbert, arguing that the court misapplied the law of apparent authority. Continental also contends that the district court should have granted summary judgment in its favor.

We accept Continental's first contention and reject its second. Consequently, we affirm in part, vacate in part, and remand the case to the district court for further proceedings.

BACKGROUND

In 1987, Herbert entered into an agreement with Shearson Lehman Brothers, Inc. to construct a thirty-nine story office tower at 388-390 Greenwich Street, New York, New York (Shearson building). As general contractor for the project, Herbert negotiated an agreement with Michaels Art Metals (Michaels), dated October 10, 1987, to install the windows on the Shearson building. Herbert required Michaels to furnish payment and performance surety bonds before the subcontract would be awarded.

Several months later Michaels mailed to Herbert payment and performance bonds dated March 9, 1988. The performance bond at issue was executed on a bond form bearing the logo "The Continental Insurance Companies," and designated Continental, one of fifteen members of The Continental Insurance Companies Group, as the surety on the bond. The bond contained

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the signature of Lawrence P. Dixon as attorney for Continental. The bond listed Michaels as the principal and Herbert as the obligee. The performance bond accompanied a payment bond, a Continental financial statement dated December 31, 1985, and a general power of attorney describing Dixon as Continental's "true and lawful attorney." A corporate seal appeared on the documents; Continental, however, denies that the seal was its own.

Having complied with Herbert's request to obtain the requisite bonds, Michaels was awarded the subcontract, which was signed on April 15, 1988. Problems arose soon after Michaels began work on the Shearson building. On June 20, 1988, Michaels filed a voluntary bankruptcy petition under Chapter 11 of the United States Bankruptcy Code. Michaels then informed Herbert that it probably would not be able to complete performance under the subcontract. Herbert subsequently wrote a letter to Continental, dated June 30, 1988, informing Continental that it would have to remedy any default by Michaels on its subcontract obligations. The subcontract between Herbert and Michaels was formally terminated by letter dated July 20, 1988. Herbert sent a copy of that letter to Continental, advising Continental of Herbert's intention to seek recovery under the performance bond.

At about this time, the machinations of Dixon, the executing agent on the performance bond, came to light. Unbeknownst to Herbert and apparently Michaels as well, Dixon did not have authority in March 1988 to execute the performance bond on behalf of Continental. Continental had revoked Dixon's power of attorney to execute surety bonds on behalf of Continental in October 1987, several months earlier.

The history of Dixon's agency relationship with Continental dated back at least to 1980. In 1980 Dixon began soliciting applications for surety bonds and insurance on behalf of Continental through Dixon Brokerage, Inc., an independent insurance agency owned by Dixon. To facilitate Dixon's execution of Continental bonds, Continental gave Dixon a general power of attorney in 1980. In connection with this arrangement, Continental ultimately delivered to Dixon twenty-five undated and unnumbered facsimile power of attorney forms, Continental corporate seals and several original blank bond forms bearing the logo "The Continental Insurance Companies." Dixon retained this general power of attorney for Continental until the fall of 1987.

In late September 1987, Dixon submitted a bid bond for a construction project in an amount exceeding what he had advised Continental would be bid for the job. Because of this incident, Continental decided to revoke Dixon's power of attorney to execute bonds, but to leave intact his authority to solicit applications for surety bonds and insurance for execution by Continental. Continental notified Dixon by phone of its decision on October 12, 1987. On October 19, 1987, Justin Larkman, a bond manager for Continental, and Chris Terzian, a Continental underwriter, went to the office of Dixon Brokerage. There they met one of Dixon's associates, who showed them where Dixon kept his power of attorney forms and corporate seals, whereupon they retrieved the power of attorney forms, two corporate seals and some Continental financial statements. Continental concedes that it made no efforts to inform individual clients or the public at large that Dixon's authority to execute Continental bonds had been revoked. Continental also concedes that Larkman and Terzian did not retrieve the Continental blank bond forms that had been given to Dixon, perhaps because Dixon was still allowed to solicit bond and insurance business for Continental. In fact, after October 1987, Dixon sold Michaels a Continental "Catastrophe Liability Policy," to be effective from December 19, 1987 to December 19, 1988. Dixon's authority to solicit surety and insurance applications on behalf of Continental was not terminated until June 28, 1988.

In early June 1988, Continental learned that it was the surety on a bond, other than the one at issue here, that it had no record of issuing. Upon determining that the mysterious bond had been executed by Dixon after his power of attorney had been revoked, Continental contacted Dixon who

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agreed to attend a meeting with Continental representatives on June 13, 1988.

Attending the June 13 meeting were Dixon, Matthew Klimczak, assistant vice president of Continental's surety bond department, a Continental attorney, and two members of Continental's corporate security department. An account of the meeting is contained in the affidavit of Klimczak, Dixon having thereafter invoked his Fifth Amendment privilege against self-incrimination. Dixon admitted during the meeting that he issued several unauthorized bonds after Continental revoked his power of attorney in October 1987. According to Dixon, he was motivated by a desire to maintain relationships with his clients and to "get even" with Continental for having revoked his power of attorney. Dixon also admitted that he deposited the premiums for the unauthorized bonds in his brokerage account, forwarding nothing to Continental.

Dixon feigned authority to execute the bond in question by doctoring a valid power of attorney form signed earlier, before the revocation by Continental. The power of attorney was returned to Dixon by a customer whose bid had been rejected. Dixon deleted the date on the power of attorney form, made several photocopies of it and then affixed an executed copy to the unauthorized performance bond. Dixon claimed he stamped the bond with another insurance company's corporate seal.

By letter dated June 23, 1988, Continental notified all the obligees on the fraudulently executed bonds that the bonds were unauthorized. A second letter followed, dated June 30, 1988, setting forth the method by which Dixon fraudulently issued the bonds and reiterating the invalidity of the bonds. Herbert received both letters.

Faced with Michaels' bankruptcy and Continental's disavowal of the performance bond, Herbert made arrangements to complete Michaels' work on the Shearson building. The extra work cost Herbert approximately $790,000 more than the price specified in the subcontract with Michaels. On November 15, 1988, Herbert filed a complaint in the United States District Court for the Southern District of New York seeking damages from Continental for failing to meet its obligations under the performance bond. Herbert requested a jury trial. After both parties engaged in substantial discovery, Herbert moved for summary judgment on the issue of liability. Herbert asserted that the alleged termination of Dixon's general power of attorney was ineffective as a matter of law because Dixon possessed the apparent authority to bind Continental. Continental cross-moved for summary judgment dismissing the complaint claiming that apparent authority was non-existent because Continental retrieved its power of attorney and corporate seals from Dixon, Herbert did not deal directly with Dixon, and Herbert had a duty of inquiry regarding Dixon's authority to execute bonds for Continental.

The district court issued an unreported opinion dated April 10, 1990, granting Herbert's motion and denying Continental's cross-motion. The court saw no dispute as to any material facts in the case and applied the law as follows. The court held that the law of apparent authority did not require a direct...

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