Duke v. Hoch

• Court: U.S. Court of Appeals — Fifth Circuit
• Citation: Duke v. Hoch, 468 F.2d 973 (5th Cir. 1973)
• Decision Date: 20 February 1973
• Docket Number: No. 71-2223.,71-2223.
• Parties: Anthony D. DUKE, Plaintiff-Appellant, v. Joel HOCH et al., Defendants, Home Indemnity Company, Garnishee-Appellee.
• Writing for the Court: BELL, AINSWORTH and GODBOLD, Circuit

468 F.2d 973 (1972)

Anthony D. DUKE, Plaintiff-Appellant, v. Joel HOCH et al., Defendants Home Indemnity Company, Garnishee-Appellee.

No. 71-2223.

United States Court of Appeals, Fifth Circuit.

October 5, 1972.

Rehearing Denied November 14, 1972.

Motion Denied February 20, 1973.

Marvin H. Gillman, Miami, Fla., for plaintiff-appellant.

William M. Hoeveler, Miami, Fla., for garnishee-appellee.

Before BELL, AINSWORTH and GODBOLD, Circuit Judges.

GODBOLD, Circuit Judge:

This appeal is by a judgment creditor who attempted unsuccessfully to reach by garnishment suit the proceeds of liability insurance policies insuring the judgment debtors. The judgment sought to be satisfied by garnishment had been rendered in a suit in which the insurer furnished a defense to its insureds, and in which the plaintiff claimed both damages covered by the policy and damages not covered. The key issue is this: in such a situation, in the merits trial, to what extent was counsel supplied by the insurer obligated to make available to the insured-defendant a verdict designating the respective portions of the total damages representing covered and noncovered damages, if in a subsequent suit on the policy by the judgment creditor it would be necessary that the creditor prove the amount of covered damages included in the verdict? In this case the verdict in the merits trial was a general verdict for a single sum and included covered and noncovered damages. In the garnishment suit the judgment creditor was required to prove the extent to which the verdict consisted of covered damages, and, being unable to do so, judgment was entered for the insurer. We reverse and remand.

Duke obtained a judgment for $226,266 in the United States District Court for the Southern District of Florida on a jury verdict against Joel Hoch, David Shriber, and Samuel Frey, individually and as partners d/b/a Hoch, Shriber & Frey, Certified Public Accountants, for damages incurred through their rendering of various services to him. Duke then brought the present suit in the same court on diversity grounds to garnish an accountants' professional liability policy or policies issued by The Home Indemnity Company and insuring the judgment debtors against negligence in the performance of professional services but not intentional misconduct. After answer to the writ of garnishment and traverse to the answer, the garnishment cause was tried without a jury before the same district judge who had presided at the trial of the main case. At the conclusion of the garnishor's evidence, the court rendered a verdict for Home. To avoid the necessity for a remand in the event he was reversed, the judge then heard the garnishee's evidence and disposed of issues concerning notice and extent of policy coverage by orally stating findings of fact and conclusions of law. He entered, in accordance with his original verdict, a judgment that garnishor take nothing and the cause be dismissed. Duke appeals.

The complaint in the main suit against the accountants alleged that Duke had employed them to manage his financial and business affairs, such as preparing proper records and statements and rendering business advice. It charged that during their employ defendants failed to file timely and properly prepared income tax returns, causing him to be subject to interest and penalties imposed by the IRS; failed to discover or to advise Duke of "churning" in his account with a securities firm or to compel that firm to cease unauthorized purchases and sales; and failed to maintain proper books and records reflecting plaintiff's financial state of affairs, all of which caused him damages in the range of hundreds of thousands of dollars. Additionally the complaint stated that Shriber, the partner designated by the firm to supervise Duke's affairs, had opened a checking account known as "David Shriber Trust Account" in which Shriber commingled the funds of Duke and others without maintaining adequate records or rendering any accounting and from which Shriber withdrew for his personal use $40,000 of Duke's funds, which defalcation was not discovered in any audit by the firm or reflected in financial statements prepared for Duke. This latter aspect of the complaint, referred to throughout the proceedings as the "trust account count" (more properly, "trust account claim"), is central to the parties' contentions in this appeal. Finally, Shriber was said to have caused large losses by guaranteeing in Duke's name various obligations of a corporation and investing Duke's money in that corporation.

The defense of Hoch and Frey, individually and as members of the partnership, was undertaken by an attorney retained for them by Home, and by various members of a firm which Hoch and Frey retained as their personal counsel. Shortly after appearing in the case, counsel supplied by Home orally notified defendants' separate counsel that the insurer was defending under a reservation of rights, including the right to deny coverage. The notice was later confirmed in writing, but no written agreement was signed by or on behalf of the defendants. The record does not reflect any objection by the partners' personal attorneys.

At the trial of the main case, the District Judge directed a verdict for Duke on the trust account claim. He charged the jury on the remaining claims and instructed it to include the amount of damages, if any, resulting from the trust account liability in whatever total it might find for the plaintiff. No one requested a general verdict with answers to interrogatories, which would have served to segregate damages and to pinpoint the extent of liability for each of the claims. The jury returned an unapportioned verdict in favor of Duke for $226,266, and judgment was entered accordingly. The garnishment proceeding ensued.

I. Availability to the insureds of an allocated verdict

At the garnishment proceeding, the District Judge first considered whether the unallocated verdict represented in part liability for noncovered acts. Obviously, the troublesome problem of separating out of the unallocated verdict the precise damages for which Home was responsible would be reached only if it was first established that a portion of the verdict represented liability for noncovered acts.

In its defense of the garnishment suit the burden was upon Home to establish that the judgment entered against its insureds and sought to be collected included damages for noncovered acts. See Jewelers Mut. Ins. Co. v. Balogh, 272 F.2d 889 (5th Cir. 1959); Weinstock v. Prudential Ins. Co., 247 So.2d 503 (Fla.Ct.App.1971); Phoenix Ins. Co. v. Branch, 234 So.2d 396 (Fla. Ct.App.1970). The trial court concluded that Home discharged that burden, and we see no error in that finding. The policies obligated Home to pay damages caused by an insured in the performance of his professional services through neglect, error, or omission, or through dishonesty, misrepresentation or fraud, unless "committed by or at the direction of the insured, any officer or partner of the insured with affirmative dishonesty or actual intent to deceive or defraud." Home established at the garnishment proceeding that the acts made the basis of the trust account claim—namely Shriber's misappropriation of Duke's funds —were either not his "professional services" or were committed "with affirmative dishonesty or actual intent to deceive or defraud."

In the garnishment suit the trial judge took judicial notice of the record and judgment in the liability action. Also, Hoch, one of the partners in the accounting firm, was called as a witness by Duke and described the services performed by the firm for clients in the ordinary course of practice. These included tax advice, management counseling, and financial and business advice; receiving and paying bills; acting as trustee or executor; and receiving copies of brokerage confirmations of purchases and sales of securities and using the information in preparing clients' tax returns, analyzing their financial situation, and formulating financial advice. Hoch stated that the firm performed all the mentioned services for Duke during the years in issue in the liability suit. On cross-examination Hoch admitted that it was not part of "his practice," that is, his own practice and that of his partners and their employees, to make investments for clients, to lend clients' money, to borrow clients' money for personal use, or to render advice to clients as to the advisability of their buying particular stocks or bonds.

For expert evidence on the policy terms Duke relied on Dr. Richard Kip, a professor of insurance at Florida State University, and Allan Pither, a surplus lines agent who had been in the insurance business since 1939. Dr. Kip testified that "his practice," or "professional services," included whatever the particular insured did in the course of his specific business, regardless of whether he did it once or a hundred times and irrespective of whether the service is one normally performed within the area of accounting, so long as it is reasonable for an accountant to do. On cross-examination Dr. Kip opined that borrowing money from one client and lending it to another or using it for the accountant's own purposes was not within the realm of accountancy.

Pither also stressed the importance of "his" in the definition of "professional services" and said that "his practice" included a service performed just once by the insured. On cross-examination he testified that with respect to the policy in question, which was intended to cover an accountant, "unauthorized borrowing of money by the insured which had not been paid back at the time of the claim would not be a covered situation." The District Judge concluded that "his practice" was a broad term encompassing services in some way related to accountancy and in fact performed by the insured, but that it did not include "lending of clients' money without approval,...