Continental Cas. Co. v. Fifth/Third Bank

• Citation: 418 F.Supp.2d 964
• Decision Date: 03 March 2006
• Docket Number: No. 3:03CV7217.,3:03CV7217.
• Parties: CONTINENTAL CASUALTY COMPANY, Plaintiff v. FIFTH/THIRD BANK, Defendant.
• Court: U.S. District Court — Northern District of Ohio

418 F.Supp.2d 964

CONTINENTAL CASUALTY COMPANY, Plaintiff v. FIFTH/THIRD BANK, Defendant.

No. 3:03CV7217.

United States District Court, N.D. Ohio, Western Division.

March 3, 2006.

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John M. Carey, Watkins, Bates & Carey, Toledo, OH, Randall Marmor, Clausen Miller, Chicago, IL, Richard M. Kerger, Kerger & Associates, Robert W. Bohmer, Watkins, Bates & Carey, Stephen D. Hartman, Kerger & Kerger, Toledo, OH, for Plaintiff Continental Casualty Company.

Laurie J. Pangle, Spengler Nathanson, Teresa L. Grigsby, Spengler Nathanson, Theodore M. Rowen, Spengler Nathanson, Toledo, OH, for Defendant Fifth Third Bank.

ORDER

CARR, Chief Judge.

This is a subrogation claim by an insurance company, which paid a loss resulting from the defalcation of an agent, Samuel Balber, of Brooks Insurance Company, a Toledo, Ohio, insurance agency. Jurisdiction exists under 28 U.S.C. § 1332(a)(1).

Balber deposited more than $500,000 worth of premium payment checks into his personal account at defendant Fifth/Third Bank (5/3). The checks should have been deposited into the company's account. Brooks had a half-million dollar insurance policy with Continental Casualty Company (Continental) for employee dishonesty and fraud. After Balber's misconduct came to light, Continental paid Brooks on the policy, and Brooks assigned its rights against 5/3 to Continental.

Continental seeks to recover from 5/3 the $500,000 it paid Brooks. Fifth/Third defends by asserting, inter alia, statutory Uniform Commercial Code (UCC) defenses that place the liability for fraudulent checks not on the depository bank but on either 1) an employer who places a dishonest employee in a position of responsibility with regards to checks; or 2) a person whose negligence substantially contributes to the making of the forgeries. UCC §§ 3-405 (O.R.C. § 1303.47) (employee dishonesty); 3-406 (O.R.C. § 1303.49) (negligence substantially contributing to the making of a forgery).

Pending are cross motions for summary judgment and a motion by Continental to strike the deposition testimony of Dennis Johnson, Chief Executive Officer of Brooks. For the following reasons, Continental's motion for summary judgment is granted in regards to ten checks with missing or illegible endorsements and 127 checks with restrictive endorsements. Otherwise, the motions are denied.

Background

Brooks is a Toledo-area insurance agency. Samuel Balber was a sales agent for Brooks. Brooks maintained its depository accounts at 5/3. Balber had an account at 5/3 in the name of "Samuel Balber Insurance."

Balber defrauded Brooks by taking 279 checks for insurance premiums, endorsing them, and depositing the funds into his 5/3 account. His misdeeds were discovered and he ultimately pleaded guilty to criminal charges of bank fraud on November 1, 2002. The U.S. District Court for the Northern District of Ohio sentenced Balber to a thirty-four month term of imprisonment. Balber was ordered to pay Brooks $698,115.52 in restitution, but has, thus far, not done so.

Balber endorsed 127 checks, totaling $215,301.19, "for deposit only." (Doc. 37 at 5). He endorsed 142 checks, totaling $320,682.96, with a "Brooks Insurance Agency" ink stamp and signed with the name of a deceased former Brooks employee, Rose Bodner.(Id.). Ten checks, totaling $17,758.68, had missing or illegible endorsements. (Id.).

This series of defalcations was not the first time Balber had taken customer payments and deposited them into his own account. In 1990, Balber's accounts included such a large number of receivables that Brooks's attorney contacted Balber about the problem. (Doc. 32 at 9). A Brooks employee eventually was assigned the task of scrutinizing Balber's accounts in the future. (Id. at 9-10).

Around the time Brooks discovered the problems with Balber's accounts in 1990, Balber informed Brooks's Chief Executive Officer, Dennis Johnson, that he (Balber) had a substance abuse problem. In 1990, Balber paid Brooks $186,729.50 to resolve a receivable for one of his clients. Balber paid this amount with a check drawn on his own bank account, rather than with a check drawn on the client's bank account. As a result of that incident, Brooks officials told Balber he could not deposit premiums into his own account.

After Brooks learned around 1990 about Balber's substance abuse problem and high receivables, Balber ceased being a shareholder and officer with the agency.

Brooks's knowledge of prior misdeeds by Balber, 5/3. argues, shows Brooks negligently failed to take preventative measures to stop Balber from misappropriating funds again. Continental, on the other hand, argues that 5/3 exaggerates the significance of Balber's substance abuse problem and the severity of the earlier account irregularities.

This is a conversion claim, but both sides accuse each other of conduct that constitutes negligence or bad faith. Continental maintains that 5/3 grossly failed to follow reasonable banking practices by allowing Balber to deposit checks made out to Brooks into Balber's own account. Fifth/ Third, on the contrary, insists Brooks negligently failed to monitor both Balber and its own accounts, thereby substantially contributing to the fraud.

The dispositive issue is which party should bear the loss from Balber's improprieties.

Discussion

Summary judgment is appropriate "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). In viewing the evidence, I must draw all reasonable inferences in the light most favorable to the nonmoving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); Best v. Cyrus, 310 F.3d 932, 934 (6th Cir.2002); Nat'l Satellite Sports, Inc. v. Eliadis, Inc., 253 F.3d 900, 907 (6th Cir.2001). Summary judgment is warranted "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Bell v. Marinko, 367 F.3d 588, 591 (6th Cir.2004) (citing Shah v. Deaconess Hosp., 355 F.3d 496, 498 (6th Cir.2004)).

I. Admissibility of Johnson Deposition

Fifth/Third seeks to support its motion for summary judgment with statements made by Dennis Johnson, Brooks's Chief Executive Officer. Johnson was deposed in a lawsuit which resulted from Balber's earlier defalcation, Max Auto v. CNA Ins., Case No. C1-02-2856 (Lucas County Common Pleas Court). In that case, Max Auto (one of the customers whose premium money Balber stole) sued Brooks. Fifth/Third argues that Johnson's deposition shows that Brooks negligently failed to monitor Balber and customer accounts, which became delinquent when Balber pilfered the insurance payments.

In an affidavit filed in this case, Johnson explicitly references his prior deposition testimony. The Johnson deposition was attached to the affidavit as an exhibit. Rule 56 authorizes the use of affidavits. Fed.R.Civ.P. 56(c). In a summary judgment proceeding, a court may consider a document that is attached to and authenticated by an affidavit given by a competent witness. Fed.R.Civ.P. 56(c); 11-56 Moore's Federal Practice—Civil § 56.14.

Continental argues the Johnson deposition is inadmissible because it violates Rule 32(a)(4) of the Federal Rules of Civil Procedure. Continental claims that deposition testimony from another case can be used only if the other action involved the same subject matter and the same parties. Only under such circumstances, according to Continental, does an adversary have adequate motive to cross-examine the deponent, and thus test the credibility and reliability of his testimony.

Continental misses the point. Johnson's affidavit in this case referenced the earlier deposition testimony, which even was included as an attachment. The affidavit therefore incorporated the deposition testimony. 11-56 Moore's Federal Practice— Civil § 56.14 ("A deposition, even if not admissible as a deposition, may under certain circumstances be admitted as an affidavit to the extent that it fulfills the requirements of an affidavit [ .]"). Thus, I view the deposition testimony as part of the affidavit and deem it admissible in deciding the cross motions for summary judgment.

In any event, the admissibility or inadmissibility of Johnson's deposition does not affect the outcome of any of the issues raised by the cross motions for summary judgment. The deposition only contains information about Brooks that is already ascertainable from the record. Even without Johnson's deposition, evidence shows it took Brooks years to notice that Balber misappropriated several hundred checks totaling more than half a million dollars in customer insurance payments.

II. Defenses to Subrogation

Fifth/Third raises several, independent defenses to Continental's ability to subrogate Brooks's claim. None has merit.

A. Voluntary Payment Doctrine

Fifth/Third seeks to invoke the "voluntary payment doctrine" defense to subrogation by arguing that the law did not require Continental to pay Brooks on the employee dishonesty insurance policy. Thus, 5/3 argues, Continental is foreclosed from seeking to recover from 5/3 because: 1) Continental paid Brooks even though the insurance policy did not require payment, and 2) Continental should have resisted and legally challenged Brooks's demand for payment.

1. Balber Was an "Employee" Under the Policy

Fifth/Third first argues that Continental should not have paid Brooks because the policy covered "employee misappropriations" and Balber was an independent contractor, not an employee.

Continental insured Books under a policy that included commercial crime coverage. (Doc. 37 at 9; Ex. H)...