Commercial Bank of Bluefield v. St. Paul Fire and Marine Ins. Co.

• Decision Date: 01 November 1985
• Docket Number: No. CC945,CC945
• Citation: 175 W.Va. 588,336 S.E.2d 552
• Court: West Virginia Supreme Court
• Parties: The COMMERCIAL BANK OF BLUEFIELD v. ST. PAUL FIRE AND MARINE INSURANCE CO.

Page 552

336 S.E.2d 552

175 W.Va. 588

The COMMERCIAL BANK OF BLUEFIELD v. ST. PAUL FIRE AND MARINE INSURANCE CO.

No. CC945.

Supreme Court of Appeals of West Virginia.

Nov. 1, 1985.

Syllabus by the Court

1. "Garnishment [in aid of execution on a judgment] is, in effect, a suit by the [judgment debtor], in the name of the [judgment creditor], against the garnishee, and he [the judgment creditor] generally occupies toward the garnishee the same position that his debtor occupied; his rights are no higher." Crane v. Standard Lumber & Mfg. Co., 77 W.Va. 617, 620, 87 S.E. 1018, 1019-20 (1916).

2. Employee fidelity insurance (sometimes called fidelity guaranty insurance) is a contract whereby one for consideration agrees to indemnify the insured against loss arising from want of integrity, fidelity or honesty of employees or other persons holding positions of trust. The insurer is liable to the insured only in the event of a loss sustained by the insured.

3. A judgment creditor may maintain a garnishment proceeding in aid of execution to reach the proceeds of a judgment debtor's employee fidelity insurance policy when the judgment debtor has sustained a loss within the meaning of that policy, even though a formal notice and proof of loss has not been furnished to the insurer and even though the amount of the loss has not been determined at the time the garnishment proceeding is brought.

4. A judgment creditor of an indemnitee may not maintain, as a third-party beneficiary, a direct action against the indemnitor when the indemnity is against loss by the indemnitee.

5. An indemnitor against loss ordinarily may not, in a garnishment-in-aid-of-execution proceeding, assert defenses against the judgment creditor which the indemnitee/judgment debtor failed to assert, such as the comparative negligence of the judgment creditor.

Harold D. Brewster, Jr., Hudgins, Coulling, Brewster, Morhous & Cameron, Bluefield, for appellant.

J.W. Barringer, R. Thomas Czarnik, Kwass, Stone, McGhee & Feuchtenberger, Bluefield, for appellee.

McHUGH, Justice:

This case is before this Court upon certified questions from the Circuit Court of Mercer County, West Virginia. It presents some questions of first impression in this jurisdiction regarding the liability of an employee fidelity insurer to a third party.

Data Services Corporation [hereinafter, "the insured"] performed payroll services for the Commercial Bank of Bluefield [hereinafter, "the bank"]. An employee of the insured, through a check kiting scheme, misappropriated the insured's checking account funds in two banks, including the bank herein. The misappropriation of funds (in the aggregate, in excess of $600,000.00) resulted in the insured's few remaining assets being attached by secured creditors and in the insured's complete cessation of business. The misappropriation also resulted in the loss, under interbank collection laws, of approximately $185,000.00 by the bank.

Within two weeks after the check kiting scheme was discovered, the bank brought an action and subsequently obtained a default judgment against the insured for the damage sustained by the bank resulting from the defalcation by the insured's employee. A writ of execution was returned unsatisfied.

After obtaining the default judgment the bank brought this proceeding against St. Paul Fire and Marine Insurance Company [hereinafter, "the insurer"], which had indemnified the insured against loss, up to $50,000.00, from employee infidelity (dishonesty or fraud). The original complaint, filed within several days after discovery of the insurance, was predicated upon a third-party-beneficiary-contract theory of recovery. The amended complaint added a garnishment-in-aid-of-execution theory of recovery. The parties engaged in pre-trial discovery.

Thereafter, the trial court, the Circuit Court of Mercer County, West Virginia, denied both the bank's motion for summary judgment and the insurer's motion to dismiss. To obtain pre-trial guidance on the rather novel theories of recovery and defenses, the trial court certified the following three questions (paraphrased by us) ¹:

(1) May a judgment creditor (here, the bank) maintain a garnishment proceeding in aid of execution to reach the proceeds of a judgment debtor's (the insured's) employee fidelity insurance policy when the judgment debtor (the insured) has sustained a loss within the meaning of that policy?

(2) May the bank as a judgment creditor of an indemnitee (the insured) maintain, as a third-party beneficiary, a direct action against an indemnitor (the insurer) when the indemnity is against loss by the indemnitee?

(3) May an indemnitor (the insurer) in either a garnishment-in-aid-of-execution proceeding or a third-party-beneficiary proceeding assert defenses against the judgment creditor (here, the bank) which the indemnitee/judgment debtor (the insured) failed to assert (primarily because the latter was defunct at the time of the underlying action)?

The trial court answered each of these questions in the affirmative. We agree that the first question should be answered affirmatively but conclude that the other two questions should be answered in the negative.

I. Garnishment

The employee fidelity insurance policy in this case indemnified the insured against loss due to employee dishonesty, not against liability to third parties. Coverage for the latter was expressly excluded (by the "legal fees exclusion"). In this case the insurer's liability to the insured accrued under the terms of the policy when (1) the employee of the insured committed a covered dishonest or fraudulent act to obtain a financial benefit and (2) the insured thereby sustained a loss of money, securities or other property. The action by the bank against the insured resulting in a default judgment against the latter established the first condition, the dishonest or fraudulent act. ² The bank asserts in this case against the insurer that the second condition, the fact and the amount of the loss by the insured, will be established by evidence, thereby mooting the insured's lack of filing of a notice and proof of loss with the insurer as required by the policy. In addition, the fact of the insured's loss appears to be uncontroverted. Instead, the insurer defends essentially upon the basis that the amount of the loss has not been ascertained by the filing of a proof of loss, a condition precedent to recovery.

W.Va.Code, 38-5-10 [1931] ³ provides for garnishment in aid of execution, also called a suggestion proceeding. "Garnishment is an ancillary statutory proceeding which has long been resorted to in aid of the collection of judgments. Its purpose is to divert to the judgment creditor a payment due the judgment debtor by a third person." Emmons-Hawkins Hardware Co. v. Sizemore, 106 W.Va. 259, 260, 145 S.E. 438, 439 (1928). If it appears from the answer of the garnishee that he is indebted or liable to the judgment debtor, or has personal property belonging to the judgment debtor, the court will order him to pay the debt or deliver the property to a receiver for distribution to the judgment creditor. W.Va.Code, 38-5-15 and -19 [1931]. If the garnishee fails to answer, or if the judgment creditor alleges that the garnishee has failed to disclose fully his debts due to the judgment debtor, the court or jury impanelled will "hear proof," "inquire" and make a determination as to the "questions at issue," that is, as to the existence and the amount of any debts due to the judgment debtor by the garnishee. W.Va.Code, 38-5-17 and -18 [1931]. See syl. pt. 9, Lutz v. Williams, 79 W.Va. 609, 91 S.E. 460 (1917); syl. pt. 2, Lanham v. Lanham, 30 W.Va. 222, 4 S.E. 273 (1887).

The word 'garnishment' is derived from the Norman French word 'garnir,' meaning to warn. [citation omitted] Thus, a summons of garnishment under our statutes is a warning to the garnishee not to pay the money or deliver the property of the judgment debtor in his hands, upon penalty that if he does he may subject himself to personal judgment.

Lynch v. Johnson, 196 Va. 516, 520, 84 S.E.2d 419, 421 (1954). "Garnishment [in aid of execution on a judgment] is, in effect, a suit by the [judgment debtor], in the name of the [judgment creditor], against the garnishee, and he [the judgment creditor] generally occupies toward the garnishee the same position that his debtor occupied; his rights are no higher." Crane v. Standard Lumber & Mfg. Co., 77 W.Va. 617, 620, 87 S.E. 1018, 1019-20 (1916). Thus, a judgment creditor in a garnishment proceeding is subrogated to the rights of the judgment debtor against the garnishee.

We now consider whether the proceeds of an employee fidelity insurance policy may be subject to garnishment.

Employee fidelity insurance (sometimes called fidelity guaranty insurance) is a contract whereby one for consideration agrees to indemnify the insured against loss arising from want of integrity, fidelity or honesty of employees or other persons holding positions of trust. The insurer is liable to the insured only in the event of a loss sustained by the insured. See 13 M. Rhodes, Couch Cyclopedia of Insurance Law 2d §§ 46:2, 46:219 (rev. 1982); 9A J. Appleman and J. Appleman, Insurance Law And Practice § 5661 (rev. 1981). Employee fidelity insurance "is direct [indemnity-against-loss] insurance procured by [the insured] in favor of himself, as contrasted with bonds running to the benefit of members of the public harmed by the misconduct of the covered individual, which bonds are third-party beneficiary contracts." Ronnau v. Caravan International Corp., 205 Kan. 154, 159, 468 P.2d 118, 122 (1970). See also 13 M. Rhodes, Couch Cyclopedia of Insurance Law 2d § 46:1 at 10 (rev. 1982). That the insured may be liable to a third party for a loss of money resulting from employee dishonesty does not transform a policy covering the insured against a direct loss into one indemnifying against liability. 175 East 74th...