Continental Sav. Ass'n v. U.S. Fidelity and Guar. Co.

• Decision Date: 17 June 1985
• Docket Number: No. 84-1382,84-1382
• Citation: 762 F.2d 1239
• Parties: CONTINENTAL SAVINGS ASSOCIATION, Plaintiff-Appellant, v. UNITED STATES FIDELITY AND GUARANTY COMPANY, Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1239

762 F.2d 1239

CONTINENTAL SAVINGS ASSOCIATION, Plaintiff-Appellant, v. UNITED STATES FIDELITY AND GUARANTY COMPANY, Defendant-Appellee.

No. 84-1382.

United States Court of Appeals Fifth Circuit.

June 17, 1985.

Lackshin & Nathan, Bernard Wm. Fischman, Lionel M. Schooler, Houston, Tex., for plaintiff-appellant.

Winstead, McGuire, Sechrest & Minick, Jeff Joyce, W. Mike Baggett, Dallas, Tex., for defendant-appellee.

Appeal from the United States District Court for the Northern District of Texas.

Before GOLDBERG, RUBIN, and HILL, Circuit Judges.

ROBERT MADDEN HILL, Circuit Judge:

Continental Savings Association (Continental) sought indemnity for attorney's fees and court costs pursuant to the terms of a fidelity bond issued to Continental by the United States Fidelity and Guaranty Company (USF&G). The fees and costs were expended by Continental in defending an action for fraud brought by Fidelity Mortgage Investors (FMI). The district court denied relief, finding that Continental did not comply with the notice provisions of the bond. We reverse.

I.

On May 13, 1974, FMI brought suit against Continental ¹ in the state courts of Texas. FMI alleged that Continental had defaulted on a loan commitment originally executed in favor of Rockwall Estates, Inc., and later assigned to FMI in September 1971. The commitment was executed in July 1971 by the then President and part owner of Continental, James McPherson. McPherson sold his interest in Continental in February 1973.

In its state court action, FMI claimed that a commitment fee of $8,500, representing 1% of the amount of the commitment, had been tendered to and accepted by Continental through McPherson, thus satisfying the condition precedent to effectiveness of the commitment. Continental, having been unable to discover any record of receipt of the fee, denied liability. Sometime between May and July 1974, Continental gave USF&G oral notice, through counsel, of the pending action. However, in December of the same year, FMI took a nonsuit in its state court action and filed a similar action in United States district court. By the middle of February 1975, USF&G had obtained copies of the pleadings in the federal court action.

The complaint filed in the federal court action alleged, among other things, that FMI had been "defrauded" by Continental through the actions of its agent, McPherson. FMI sought over $2,000,000 in actual damages and $6,000,000 in punitive damages. After protracted litigation concerning jurisdictional issues, see, e.g., Navarro Savings Association v. Lee, 446 U.S. 458, 100 S.Ct. 1779, 64 L.Ed.2d 425 (1980), and remand to the district court for trial, Continental prevailed on the merits. The jury found that the commitment fee had been diverted by McPherson and that consequently Continental had no obligation to fund the commitment. Continental then filed this action to recover attorney's fees and court costs under the fidelity bond issued by USF&G.

The district court was persuaded by USF&G's defenses which asserted that Continental failed to comply with the notice of loss provision and the notice of suit provision of the bond. We find no merit in these defenses.

II.

The first portion of the fidelity bond, entitled "Insuring Agreements," contains USF&G's agreement to indemnify Continental for various losses "sustained ... at any time but discovered during the Bond Period," including, in paragraph (A), "Fidelity" losses which are "[l]oss[es] through any dishonest or fraudulent act of any of [Continental's] Employees." The second portion of the bond, entitled "General Agreements", provides, in paragraph C, for indemnity for attorneys' fees and court costs in the following language:

C. The Underwriter will indemnify the Insured against court costs and reasonable attorneys' fees incurred and paid by the Insured in defending any suit or legal proceeding brought against the insured to enforce the insured's liability or alleged liability on account of any loss, claim or damage, which, if established against the Insured, would constitute a valid and collectible loss sustained by the Insured under the terms of this bond. In the event such loss, claim or damage is subject to a Deductible Amount or is in excess of the amount collectible under the terms of this bond, such court costs and attorneys' fees shall be prorated. Such indemnity shall be in addition to the amount of this bond. In consideration of this indemnity, Insured shall promptly give notice to the Underwriter of the institution of any such suit or legal proceeding; at the request of the Underwriter shall furnish it with copies of all pleadings and other papers therein; and at the Underwriter's election shall permit the Underwriter to conduct the defense of such suit or legal proceeding in the Insured's name, through attorneys of the Underwriter's own selection.

(emphasis added). In addition, the agreements were subject to several exclusions and limitations, one of which provided as follows:

Loss--Notice--Proof--Legal Proceedings.

Section 4. This bond is for the use and benefit only of the insured named in the Declarations and the Underwriter shall not be liable hereunder for loss sustained by anyone other than the Insured unless the Insured, in its sole discretion and at its option, shall include such loss in the Insured's proof of loss. At the earliest practicable moment after discovery of any loss hereunder the insured shall give the Underwriter written notice thereof and shall also within six months after such discovery furnish to the Underwriter affirmative proof of loss with full particulars.

(emphasis added). A rider to the bond was appended modifying Section 4, the proof of loss provision, in the following language:

Anything in the attached bond to the contrary notwithstanding, proof of loss shall be given in accordance with sub-section (a) as hereinafter set forth ...:

(a) Filing of Claim: Within 100 days after discovery of loss under said bond by the Insured or, if a corporation, by any director thereof or by any officer thereof not in collusion with the person in default, the Insured shall furnish to the Underwriter, affirmative proof of loss with full particulars in writing, including dates and items of loss, duly sworn to.

USF&G first asserts that the potential loss, namely, FMI's claim for damages against Continental, is not a "valid and collectible loss ... under the terms of [the] bond", as required by paragraph C, since it does not fall within the "Fidelity" paragraph of the "Insuring Agreements." The district court held to the contrary, finding that FMI's claim, "if established against [Continental]," would have constituted a "valid and collectible loss." For the reasons set out below, we agree.

First, an argument similar to that made by USF&G was rejected by this Court in First National Bank of Bowie v. Fidelity & Casualty Co., 634 F.2d 1000 (5th Cir.1981). There, relying on a bond whose provisions were identical in every pertinent respect to that issued to Continental here and applying Texas law, we held that "the lawsuits at issue all asserted claims which, if established against the Bank, would have been indemnified under the fidelity clause of the Bond." Id. at 1004. The lawsuits in issue in Bowie alleged that a director and the president of the insured bank had conspired to defraud various third parties through a "check kiting scheme." Similarly, FMI's action alleged fraud perpetrated on it by the president of Continental.

Despite its inability to cite pertinent distinctions between Bowie and the case before us, either in terms of the provisions of the bonds or the thrust of the underlying lawsuits, USF&G argues that the law in Texas "should" absolve it from indemnity liability for indirect losses to the insured, that is, losses sustained in litigation brought by third parties defrauded by the insured's employee. ² However, besides being convinced and bound by the reasoning in Bowie, we cannot read the language of the bond to support USF&G's position.

While not lucidly drafted, paragraph C, at least clearly encompasses the situation at hand. Under paragraph C, the insured's liability must be "on account of any loss claim or damage" and must, if established, "constitute a valid and collectible loss under the terms of [the] bond." Clearly, Continental's liability, arising from the action in which it incurred the litigation expenses it now seeks to recover under the bond, would have been "on account of [a] ... claim", namely, a claim by FMI for $8,000,000 in damages for failure to fund the loan commitment. Continental's liability, however, must also, if established, "constitute a valid and collectible loss under the terms of [the] bond." One such collectible loss is found in Insuring Agreements, paragraph (A), "[l]oss through any dishonest or fraudulent act of the Employees." Continental's potential liability to FMI, had it obtained, would clearly have been a loss of this type and thus would have "constitute[d] a valid and collectible loss under the terms of [the] bond." Neither the terms of the bond nor the law of Texas requires that the insured suffer an actual collectible loss, only that it at least be threatened with a potential collectible loss. See National Surety Corp. v. First National Bank of Midland, 431 S.W.2d 353, 357 (Tex.1968) (no actual loss to insured is necessary). Hence, Continental may recover expenses incurred in fending off that potential liability if it complied with the notice requirement.

III.

Concerning notice, paragraph C requires only that the insured "promptly give notice to the Underwriter of the institution of" suit. There is no writing requirement and there is no requirement that pleadings be submitted to USF&G except upon request. Under Texas law, similar phrases, such as "as soon as practicable" or "immediately," require only that notice be given within a reasonable time in light of the circumstances...