Dixie Nat. Bank of Dade County v. Employers Commercial Union Ins. Co. of America

• Decision Date: 07 February 1985
• Docket Number: No. 65118,65118
• Citation: 463 So.2d 1147,10 Fla. L. Weekly 107
• Parties: 10 Fla. L. Weekly 107 DIXIE NATIONAL BANK OF DADE COUNTY, etc., Plaintiff, v. EMPLOYERS COMMERCIAL UNION INSURANCE COMPANY OF AMERICA, etc., Defendant-Third Party, Plaintiff-Appellant, v. Dr. Thomas F. CARNEY, etc., Third Party Defendants-Appellees.
• Court: Florida Supreme Court

Page 1147

463 So.2d 1147

10 Fla. L. Weekly 107

DIXIE NATIONAL BANK OF DADE COUNTY, etc., Plaintiff, v. EMPLOYERS COMMERCIAL UNION INSURANCE COMPANY OF AMERICA, etc., Defendant-Third Party, Plaintiff-Appellant, v. Dr. Thomas F. CARNEY, etc., Third Party Defendants-Appellees.

No. 65118.

Supreme Court of Florida.

Feb. 7, 1985.

James E. Tribble of Blackwell, Walker, Gray, Powers, Flick & Hoehl, Miami, for plaintiff-appellant.

Edward G. Rubinoff of Preddy, Kutner & Hardy, and Michael J. Cappucio of Fowler, White, Burnett, Hurley, Banick & Strickroot, Miami, for defendants-appellees.

ALDERMAN, Justice.

The United States Circuit Court of Appeals for the Eleventh Circuit has certified the following questions for this Court to address because they are questions of Florida law with no controlling precedent in the decisions of this Court. These questions are:

(1) In an action by a fidelity bond insurer against the directors of a bank and the directors' insurer for the directors' negligence in failing to prevent embezzlement losses, if the fidelity bond insurer obtains rights against the insured's directors through legal or equitable subrogation and also obtains a written assignment of claims from the bank, does Florida law require the fidelity insurer to establish superior equities as between the fidelity insurer and the directors and their insurer in order to recover?

(2) If so, does the fidelity insurer's status as a paid surety establish superior equities in favor of the insured's directors and the directors' insurer where the fidelity insurer merely asserts the directors' negligence as the basis for recovery?

Consistent with the decision of the United States District Court, Southern District of Florida, we answer these questions in the affirmative.

The facts are succinctly stated in the certificate. The Dixie National Bank of Dade County ("the Bank") commenced this litigation against the appellant, Employers Commercial Union Insurance Company of America ("Employers"), to recover on a "banker's blanket bond" policy of insurance for an embezzlement loss resulting from the defalcations of the Bank's former cashier. The Bank's insurer, Employers, denied the claim, asserting subrogation rights arising upon the payment of the Bank's claim. Employers then filed a third-party complaint against the directors of the Bank and American Home Life Insurance Company ("Home"), the directors' insurer, under a director's liability policy.

Employers and the Bank settled their dispute, and the Bank assigned Employers its right to any claims which it might have against the third-party defendants. The settlement agreement provided in part:

By the execution of this Agreement, Dixie National Bank of Dade County does hereby set over, assign, transfer and convey all of its right, title and interest in and to any claims it may have against all parties which may have caused, directly or indirectly, any of the losses set forth in the Complaint referred to above now pending in the United States District Court for the Southern District of Florida.

The third-party defendants filed a motion for judgment on the pleadings on the theory that the equitable nature of subrogation precludes a bank's liability insurer from seeking indemnity from the bank's directors for loss occasioned by the fraudulent acts of an employee of the bank. Specifically, the third-party defendants argued that Employers did not have superior equities and therefore could not be subrogated to any claims that the Bank may have against the directors and Home. They also alleged that Employers, as the Bank's fidelity insurer, could not assert, by way of a subrogation right, the directors' negligence as a basis for recouping its payment to the Bank because any such negligence was one of the risks assumed pursuant to the insurance agreement. Employers then filed a supplemental third-party complaint alleging the settlement agreement as a supplemental basis for its claim against the directors and their insurer.

The district court treated the motion for judgment on the pleadings as a motion for summary judgment and entered partial summary judgment against Employers on the issue of ordinary negligence. In his order, the district judge adopted the reasoning of First National Bank of Columbus v. Hansen, 84 Wis.2d 422, 267 N.W.2d 367 (1978), and held that no right of subrogation exists in favor of a fidelity insurer against its insured's directors for ordinary negligence in the conduct of their supervisory duties. On the issue of the Bank's assignment of its claims, the court rejected Employers' attempt to improve its position, holding that notwithstanding the assignment subrogation would be enforced only in favor of a meritorious claim and after a balancing of the equities. The court concluded that because Employers, a compensated surety, cannot establish equities superior to those of the directors, a balancing of the equities precluded Employers from asserting a subrogation claim against the Bank's directors for their ordinary negligence. The court added that Employers would be entitled to subrogation upon proof of culpability by the third-party defendants in the nature of fraud or bad faith.

Thereafter, in order to narrow the remaining issues, the parties executed a pretrial stipulation. In brief summary, these stipulations recited that the embezzling employee, Robert Hansen, was employed by the Bank commencing in 1964 and was a vice president/cashier of the Bank from 1971 until his discharge in May of 1974, following discovery of his defalcations. During the period of his employment at the Bank, particularly while he was cashier, Hansen was a trusted employee and was head of its operations.

The embezzlements consisted primarily of diverting checks for payment of interest on securities from correspondent banks to checking accounts rather than recording them in interest receivable accounts and diverting interest credits received on federal funds sold to checking accounts rather than crediting them to the Bank's income account. Hansen accomplished these embezzlements by preparing general ledger tickets that channelled the income and money of the Bank to his own account.

The Bank's directors first became aware of Hansen's embezzlements during May of 1974. Prior to that time, the Bank had not been involved in any other defalcations by any other employees, and the directors were unaware of any problems involved with the handling of the Bank's funds. The parties stipulated that the directors did not personally gain or stand to gain from Hansen's embezzlements. Employers also conceded that its proof does not establish actual knowledge of the embezzlement, dishonest purpose, or furtive design. Employers contended that its evidence would establish that the directors were grossly negligent for failing properly to direct and manage the Bank's affairs.

The parties filed a joint motion for clarification in which they requested the district court to define more specifically the meaning of "bad faith" as used in the court's order granting partial summary judgment. They asked the court to determine if proof of gross negligence without personal gain by the directors would be sufficient for Employers to sustain its cause of action. In response, the court entered an order stating that, in the context of a subrogation action by a compensated surety against the directors of its insured for an embezzlement loss, the term "bad faith" implies the conscious doing of a wrong because of dishonest purpose and requires a person to act affirmatively with furtive design or ill will. In that case, it would encompass actual knowledge on the part of the directors of Hansen's embezzlement scheme and their failure to act on such knowledge.

Based on the stipulated facts, the district court concluded that there was no evidence that the directors committed bad faith or fraud; therefore, Employers did not have a subrogable cause of action against the directors or Home to recover payments to the Bank on the embezzlement claim. Accordingly, the district court entered final summary judgment against Employers, and Employers appealed to the Eleventh Circuit.

Employers emphasizes the distinction between legal (or equitable) subrogation and conventional subrogation and contends that the balancing of equities does not apply in conventional subrogation claims based on an assignment. The directors, appellees in the federal court, respond that subrogation in Florida is an equitable doctrine controlled by the relative equities of the matter and that to succeed in subrogation, a claimant must affirmatively establish superior equities in himself as against the party against whom subrogation is sought to be enforced. Subrogation in Florida, they maintain, is not an absolute right. Appellees assert that Employers cannot avoid the requirement of establishing superior equities merely by obtaining a written assignment from the Bank. This would emphasize form to the detriment of substance. They point out that the distinction between legal subrogation and conventional subrogation is significant only in determining the source of the right and not in delineating the parameters of the remedy available to the assignee party. A conventional subrogee obtains standing to assert a subrogation claim which he would otherwise lack. Conventional subrogation allows him to stand in the shoes of those who are subrogees by operation of law, and he thus must meet the same equitable requirements that courts impose on those subrogees. They state that when Employers paid Dixie National under its claim, it attained the rights the law accords a surety to claims against third persons, and Employers' position was neither improved or lessened...