Community Nat. Bank v. Fidelity & Deposit Co. of Maryland

• Decision Date: 01 November 1977
• Docket Number: No. 76-1612,76-1612
• Citation: 563 F.2d 1319
• Parties: COMMUNITY NATIONAL BANK, etc., Plaintiff, v. FIDELITY AND DEPOSIT CO. OF MARYLAND, etc., Defendant and Third-Party Plaintiff-Appellant, v. George C. PARKER et al., Third-Party Defendants, and Wayne Reeder and RWMCO Corp., Third-Party Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1319

563 F.2d 1319

COMMUNITY NATIONAL BANK, etc., Plaintiff, v. FIDELITY AND DEPOSIT CO. OF MARYLAND, etc., Defendant and Third-Party Plaintiff-Appellant, v. George C. PARKER et al., Third-Party Defendants, and Wayne Reeder and RWMCO Corp., Third-Party Defendants-Appellees.

No. 76-1612.

United States Court of Appeals, Ninth Circuit.

Nov. 1, 1977.

Rehearing Denied Nov. 28, 1977.

Cynthia H. Plevin, San Francisco, Cal., argued for appellant.

Dominick Bianco, Bakersfield, Cal., argued for appellee.

Appeal from the United States District Court for the Eastern District of California.

Before BROWNING and TRASK, Circuit Judges, and FREY ^*, District Judge.

PER CURIAM:

The district court granted summary judgment against a surety in favor of a third party on the ground that the surety had no greater right against the third party than the creditor had and the creditor was barred by a judgment in favor of the third party in a prior action by the creditor. A California decision subsequent to the lower court's ruling held that a surety has an independent and direct cause of action against a third party for injuries suffered by the surety as a result of the wrongful conduct of the third party. This decision requires reversal of the judgment below.

On May 1, 1969, Fidelity-Deposit Company of Maryland (Fidelity) issued a banker's blanket bond to Community National Bank (CNB) by which Fidelity agreed to indemnify CNB for any losses sustained as a result of the fraudulent or dishonest acts of CNB's employees, acting alone or in collusion with others. Shortly thereafter, George Parker, CNB's Chairman of the Board, RWMCO, a corporation, and Wayne Reeder, RWMCO's President, entered into a fraudulent scheme whereby CNB funds were misappropriated for the benefit of Cal State Airlines, a corporation controlled by Parker and Reeder.

CNB's loans to Cal State exceeded the legal lending limit permitted by national banking laws. To circumvent this limitation, Parker requested Reeder to execute a promissory note to CNB for $150,000 as an accommodation to CNB. Parker told Reeder the purpose of the transaction was to circumvent government banking restrictions and that the money would be turned over to Cal State. Reeder agreed to sign the note in his capacity as President of RWMCO, Inc., a corporation solely owned by Reeder, which had no assets. CNB credited the amount of the note to Cal State's account. The note was never paid.

CNB sued RWMCO and Reeder on the note in a California court. The state court entered judgment for RWMCO and Reeder on the ground that the note was made solely for the accommodation of CNB, neither RWMCO or Reeder received any benefit from it, and it was executed on the express understanding that neither RWMCO or Reeder would be liable. On appeal, CNB argued that CNB's stockholders were entitled to recover from RWMCO and Reeder as a matter of law for fraud. The appellate court rejected the argument on the ground that CNB had elected to sue on the note, and not for fraud, and by doing so had ratified the acts of the agents, including all the conditions under which the note was made.

CNB then sued Fidelity on its fidelity bond in state court. The suit was removed to the district court on the basis of diversity of citizenship. Fidelity filed a third-party complaint against Parker, RWMCO, and Reeder. CNB and Fidelity entered into a settlement agreement and the action was dismissed as between them. Fidelity moved for summary judgment against Parker, RWMCO and Reeder; Reeder and RWMCO filed a cross-motion against Fidelity. The district court granted Fidelity's motion as to Parker, and Parker did not appeal. The court denied Fidelity's motion as to Reeder and RWMCO, however, and granted their cross-motion for summary judgment against Fidelity, on the ground that Fidelity's rights against Reeder and RWMCO were based solely on subrogation and that these derivative rights had been extinguished in the prior state court action.

The subsequent decision in Commercial Standard Insurance Co. v. Bank of America, 57 Cal.App.3d 241, 129 Cal.Rptr. 91 (1976) undercuts the district court's holding. ¹ Arnold and Mary Mendoza entered into an agreement with International Development Corp. to build a duplex on the Mendozas' land. The Mendozas borrowed $57,786 from Bank of America to finance the construction. They contracted with Commercial Standard Insurance Co. to bond the project, Commercial to act as surety, the Mendozas as creditor, and International as principal. The Bank negligently disbursed excessive funds to International, which thereafter defaulted. Because of the excessive disbursements, insufficient funds remained to complete the project and pay outstanding claims. As a result, Commercial incurred liability on its surety bond to the Mendozas, and to laborers, materialmen, and subcontractors. The surety brought an independent action for negligence against the Bank as well as an action based on subrogation to the Mendozas' rights. The trial court dismissed both claims. The independent claim was dismissed on the ground that the Bank owed the surety no duty of care. The appellate court reversed.

The court wrote:

"Analysis of liability for negligence in terms of 'duty' has been criticized as a question-begging process. The assertion that liability must . . . be denied because defendant bears no 'duty' to plaintiff begs the essential question whether the plaintiff's interests are entitled to legal protection against the defendant's conduct." 57 Cal.App.3d at 249, 129 Cal.Rptr. at 95 quoting in part from Dillon v. Legg, 68 Cal.2d 728, 734, 69 Cal.Rptr. 72, 76, 441 P.2d 912, 916, and Derrick v. Ontario Community Hospital, 47 Cal.App.3d 145, 152-153, 120 Cal.Rptr. 566, 571.

The court went on "The principal policy considerations are: 'the foreseeability of harm to the plaintiff, the degree of certainty that the plaintiff suffered injury, the closeness of the connection between the defendant's conduct and the injury suffered, the moral blame attached to the defendant's conduct, the policy of preventing future harm, the extent of the burden to the defendant and consequences to the community of imposing a duty to exercise care with resulting liability for breach, and the availability, cost and prevalence of insurance for the risk involved.' " 57 Cal.App.3d at 249, 129 Cal.Rptr. at 95 quoting from Rowland v. Christian, 69 Cal.2d 108, 113, 70 Cal.Rptr. 97, 100, 443 P.2d 561, 564, 32 A.L.R.3d 496.

Applying this test, the court found that the surety, Commercial Standard, had stated a cause of action for negligence against the third party, Bank of America.

Viewing the evidence in the present case in the light most favorable to appellant, the party opposing the motion for summary judgment, we conclude that the Commercial Standard test for imposing independent tort liability upon a third party in favor of a surety has been satisfied. The foreseeability of harm to the plaintiff, the certainty of injury, and the close connection between the conduct and the injury are at least as clear in this case as in Commercial Standard. Fidelity, like the surety in Commercial Standard, incurred liability as a direct result of the third party's misconduct. Greater moral blame attaches to the conduct of RWMCO and Reeder and the policy of preventing further harm is more clearly served, because their conduct involved intentional fraud while the third party conduct in Commercial Standard was negligent only. For the same reason, it cannot be said that any improper burden is imposed on RWMCO or Reeder, or on the community, by requiring them to refrain from the conduct involved. ²

Appellee argues that California Civil Code §§ 2847 and 2848 preclude liability. Section 2847 provides:

"if a surety satisfies the principal obligation, or any part thereof, whether with or without legal proceedings, the principal is bound to reimburse what he has disbursed, including necessary costs and expenses; but the surety has no claim for reimbursement against other persons, though they may have been benefited by his act, except as prescribed by the next section."

The next section, Section 2848, provides that the surety is subrogated to the rights of the creditor.

Those provisions do not preempt the common law. In, In re Elizalde's Estate, 182 Cal. 427, 188 P. 560 (1920), a surety sought subrogation to the principal's right against a third party. The defendant argued that Section 2848 made exclusive by Section 2847 permitted only subrogation to the rights of the creditor. The court rejected this interpretation, holding Section 2848 "merely declaratory of the common law on the subject, and controlling only so far as it goes. It does not appear to us that by it the legislature intended to announce all the law on the subject." Id. at 432; 188 P. at 562.

Commercial Standard rejected the argument that Section 2847 precluded liability under the theory of implied indemnity:

"It is our conclusion, however, that the quoted statutes deal not with implied indemnity but, rather, with subrogation.

Civil Code Section 2847 was enacted in 1872. The right to implied indemnity was not recognized in California until . . . 1958. Obviously a statute enacted in 1872 was not meant to preclude application of a legal doctrine not recognized until 1958." Commercial Standard Insurance Co. v. Bank of America, supra, 57 Cal.App.3d at 247 n. 1, 129 Cal.Rptr. at 94 n. 1.

Similarly, we believe the California courts would hold Section 2847 does not bar common law expansion of third party liability to protect sureties from intentional torts. Indeed, in finding a cause of action for negligence in Commercial Standard the court thought it unnecessary to discuss Section 2847.

The doctrine of collateral estoppel does not make the prior state court judgment in favor of Reeder and RWMCO binding upon Fidelity, because the issue of Reeder and RWMCO's fraud was not actually litigated. ³ Res judicata...