Bradley Bank v. Hartford Acc. and Indem. Co.

• Decision Date: 02 February 1983
• Docket Number: No. 82-C-62.,82-C-62.
• Citation: 557 F. Supp. 243
• Parties: BRADLEY BANK, Plaintiff, v. HARTFORD ACCIDENT AND INDEMNITY COMPANY, Defendant.
• Court: U.S. District Court — Western District of Wisconsin

557 F. Supp. 243

BRADLEY BANK, Plaintiff, v. HARTFORD ACCIDENT AND INDEMNITY COMPANY, Defendant.

No. 82-C-62.

United States District Court, W.D. Wisconsin.

February 2, 1983.

Leonard F. Schmitt, Merrill, Wis., for plaintiff.

Bruce Gillman, Madison, Wis., for defendant.

MEMORANDUM AND ORDER

SHABAZ, District Judge.

Before the Court are cross motions for summary judgment in this action on a contract of insurance. For the reasons set forth in the memorandum below, plaintiff's motion is denied and defendant's motion is granted.

Jurisdiction is based on 28 U.S.C. § 1332; the parties are of diverse citizenship and the amount in controversy exceeds $10,000.

The parties have submitted a thorough stipulation of facts which the Court adopts as its own statement of undisputed facts. A summary of the facts necessary for the decision in this matter follows:

FACTS

Plaintiff is an incorporated commercial bank located at Tomahawk, Wisconsin (hereinafter, the bank). Defendant is an insurance corporation domiciled in Connecticut (hereinafter, the insurer).

At all times material to the complaint, a contract of insurance existed between the parties wherein the insurer agreed to insure the bank against a number of loss risks. The insurance agreement was entitled "Bankers Blanket Bond" which was subheaded "Standard Form No. 24, Revised in April, 1969." The bank took no part in drafting the contract, but accepted it as presented by the defendant. The contract had seven standard insuring agreements, enumerated "A" through "G." Insuring agreement "B," denominated "On premises," covered, among other things:

Loss of property (occurring with or without negligence or violence) through ... false pretenses ...

Property was defined as money and virtually anything else of monetary value.

The contract also contained a number of exclusions, some of which were attached as riders. Among these was the following:

The Underwriter shall not be liable under the attached bond for:

Loss resulting from payments made or withdrawals from any depositors account which has been credited with items of deposit which are uncollected for any reason, including forgery, unless such payments are made to, or withdrawn by, such depositor or representative of such depositor who is within the office of the insured at the time of such payment or withdrawal, or unless such loss is covered under Insuring Agreement Clause (A).

From about February 1, 1979, a checking account under the name of "Midway Chrysler-Dodge, Inc." (hereinafter, Midway), was maintained at the bank by one Donald E. Schnabel. It was the custom and policy of the bank to immediately credit the account of Midway whenever Schnabel made deposits consisting of checks. The bank also permitted Schnabel to make immediate withdrawals against such deposits.

Schnabel also maintained a checking account under the name of "Don Schnabel Chevrolet-Olds" at the Lincoln County Bank in Merrill, Wisconsin, about 22 miles from the plaintiff bank in Tomahawk.

Both of the automobile dealerships operated by Schnabel were in Tomahawk.

On July 2, 1981, Schnabel drew a check on the account of Don Schnabel Chevrolet-Olds at the Lincoln County Bank in the sum of $19,727.41 payable to Midway. This check was deposited personally or by agent on the premises of plaintiff bank into the Midway account on July 3, 1981.

A second check on the Lincoln County Bank account was drawn on July 3, 1981 for $17,114.28 payable to Midway. This check was also deposited into the Midway account on July 3, 1981 by Schnabel or an agent on the premises of plaintiff bank.

A third check on the Lincoln County Bank account was drawn on July 4, 1981 for $16,891.09 payable to Midway. This check was deposited into the Midway account on July 6, 1981 by Schnabel or an agent on the premises of plaintiff bank.

On July 9, 1981, the Lincoln County Bank returned to the Federal Reserve Bank in Minneapolis the aforementioned three checks, stamped "Returned Not Paid-Uncollected Funds — 7-9-81."

On July 1, 1981, Schnabel drew a check on the Midway account at plaintiff bank in the amount of $16,891.09 payable to Don Schnabel Chevrolet-Olds. The check was deposited in the Lincoln County Bank account on the same day.

A second check was drawn on the Midway account at plaintiff bank, and payable to Don Schnabel Chevrolet-Olds, for $14,487.50, on July 2, 1981. The check was deposited on the same day.

A third check was drawn on the Midway account at plaintiff bank, and payable to Don Schnabel Chevrolet-Olds, for $20,813.34 on July 3, 1981. The check was deposited in the Lincoln County Bank on the same day.

A fourth check was drawn on the Midway account at plaintiff bank, and payable to Don Schnabel Chevrolet-Olds, for $22,170.44, on July 4, 1981. The check was deposited in the Lincoln County Bank on the same day in its night depository. The check was credited on July 6, 1981.

The total of uncollected funds checks deposited in the plaintiff bank by Schnabel from the Lincoln County Bank account of Don Schnabel Chevrolet-Olds was $53,732.78. Plaintiff bank claims it was damaged in the amount of $45,270.72, the difference apparently representing the positive balance in the Midway account immediately before the account was debited for the uncollected funds deposits, in August, 1981. After applying the $1,000 deductible to its loss, plaintiff bank claimed $44,270.72.

The insurer refused to pay the loss, claiming that the exclusion quoted above covers the facts as outlined.

Schnabel was not physically present on the premises of plaintiff bank when he drew the four checks on the Midway account payable to Don Schnabel Chevrolet-Olds.

Plaintiff bank has obtained partial satisfaction of its losses from Schnabel during the course of this litigation. Payments made by Schnabel to plaintiff bank in this regard have been subjected to interest charges and attorney fees prior to being credited against overdrafts on the Midway account.¹

MEMORANDUM

The decision in this matter is preliminarily subject to a number of general principles: First, state substantive law applies to diversity actions and the law of the forum state governs. Erie Railroad Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938); Kalmich v. Bruno, 553 F.2d 549 (7th Cir.1977) cert. den., 434 U.S. 940, 98 S.Ct. 432, 54 L.Ed.2d 300, on remand, 450 F.Supp. 227 (N.D.Ill.1978). Second, in Wisconsin, contracts of insurance are governed by the same legal principles as other contracts. Garriguenc v. Love, 67 Wis.2d 130, 226 N.W.2d 414 (1975). Third, when the language of a contract is plain and unambiguous, there is no need to consider or apply rules of construction. Amidzich v. Charter Oak Fire Ins. Co., 44 Wis.2d 45, 170 N.W.2d 813 (1969). William B. Tanner Co., Inc. v. Sparta-Tomah Broadcasting Co., 543 F.Supp. 593 (W.D.Wis.1982).

In Racine County National Bank v. Aetna Casualty & Surety Co., 56 Wis.2d 830, 203 N.W.2d 145, 149 (1973), the Supreme Court of Wisconsin stated unequivocally that, absent ambiguity, there is no reason to apply the doctrine of strict construction of insurance contracts against the insurer. This case is particularly pertinent here because the contract at issue in that case was the Bankers Blanket Bond, although the question there concerned a different exclusion.

There is little doubt here, and the Court does not understand defendant insurer to argue otherwise,² that insuring clause (B) covers the loss suffered by the bank through the machinations of Schnabel. The loss was of money by false pretenses, and the cases cited by the bank show the weight of authority behind that position. See particularly: National Bank of Commerce in New Orleans v. Fidelity and Casualty Co., 312 F.Supp. 71 (E.D.La.1970). The Court does not find this case, nor the cases cited therein, to be outdated for purposes of showing coverage under Clause (B). Nor is the issue irrelevant, as defendant insurer submits, because if the bank's claim is not covered by one of the insuring agreements, there is no need to resort to, or interpret or construe, an exclusion.

Schnabel's actions here constitute what is commonly referred to as "check kiting." As plaintiff characterizes the transactions, Schnabel wrote checks on his Midway account payable to his account at the Lincoln County Bank, and almost simultaneously (for purposes of the banking business) wrote checks from his Lincoln County Bank account to his account at plaintiff bank in order to induce, under false pretenses, the plaintiff bank to honor his checks. Plaintiff bank did so and suffered a loss. "Check kiting" has been defined as "a transfer of funds between two or more banks to obtain unauthorized credit from the bank during the time it takes the checks to clear." State v. Woodington, 31 Wis.2d 151, 142 N.W.2d 810 (1966).³

In that check-kiting constitutes loss of property through false pretenses, Nat'l Bank of Commerce, supra, the question is whether the exclusion for uncollected funds losses denies plaintiff bank coverage for the loss here. The Court concludes that the exclusion applies to the facts here clearly and unambiguously.

The Court does not believe that plaintiff bank is contending that the following language is, in any way, ambiguous:

The underwriter shall not be liable under the attached bond for:

Loss resulting from payments made or withdrawals from any depositor's account which has been credited with items of deposit which are uncollected for any reason, including forgery, ...

The loss occurred because Schnabel's Midway account at plaintiff bank had been credited with items of deposit that were uncollected because there were insufficient funds in Schnabel's Lincoln County Bank account to cover the items of deposit. The loss, finally, resulted from payments or withdrawals made by plaintiff bank from Schnabel's account (whether the payments were checks to third parties, or withdrawals made through checks written to Schnabel's ...