East Attucks Com. Hous. v. Old Repub. Sur.

• Decision Date: 24 June 2003
• Docket Number: No. WD 61142.,WD 61142.
• Citation: 114 S.W.3d 311
• Parties: EAST ATTUCKS COMMUNITY HOUSING, INC., as Assignee of Omega Realty Company, Inc., Appellant, v. OLD REPUBLIC SURETY COMPANY and Reliance Insurance Company, Respondents.
• Court: Missouri Court of Appeals

114 S.W.3d 311

EAST ATTUCKS COMMUNITY HOUSING, INC., as Assignee of Omega Realty Company, Inc., Appellant, v. OLD REPUBLIC SURETY COMPANY and Reliance Insurance Company, Respondents.

No. WD 61142.

Missouri Court of Appeals, Western District.

June 24, 2003.

Motion for Rehearing and/or Transfer to Supreme Court Denied July 29, 2003.

Application for Transfer Denied September 30, 2003.

Don A. Peterson, Kansas City, MO, for Appellant.

Bernard L. Balkin, Kansas City, MO, for Respondents.

Before EDWIN H. SMITH, P.J., and BRECKENRIDGE and SMART, JJ.

EDWIN H. SMITH, Presiding Judge.

East Attucks Community Housing, Inc. (EACH), appeals the summary judgment of the Circuit Court of Jackson County for the respondents, Old Republic Surety Company (Old Republic) and Reliance Insurance Company (Reliance), on EACH's claims, as a beneficiary and an assignee, for recovery under the fidelity bond policies issued by the respondents to Omega Realty Management Company, Inc. (Omega). The bond policies were purchased to indemnify the insured, Omega, against theft, forgeries, and other defalcations committed by its employees in its management of a not-for-profit low-income housing project owned by EACH. EACH was seeking recovery under the policies for thefts by Tucson Redd, the president of Omega, and Robert Wilp, the comptroller.

EACH raises five points on appeal. In Point I, it claims that the trial court erred in granting summary judgment to the respondents on EACH's claim for recovery under the fidelity bond policies for the thefts from Omega allegedly committed by Redd on the basis that he was not a covered employee because the facts alleged in the respondents' motion, even if true, did not entitle them to judgment as a matter of law on that basis. As to EACH's remaining four points, it claims in each that the trial court erred in denying its motion for summary judgment on its claim as to Redd's alleged thefts.

We reverse and remand.

Facts

EACH, a not-for-profit corporation organized and existing under the laws of the State of Missouri, owned a Housing and Urban Development (HUD) subsidized housing project known as Sycamore Groves, which was located in Kansas City, Missouri. On September 1, 1994, EACH entered into a management agreement with Omega, a property management company organized under the laws of the State of Missouri and specializing in HUD housing, to operate Sycamore Groves. The term of the agreement was for three years, to expire on August 31, 1997. The agreement was later extended through February 28, 1998.

Pursuant to the management agreement, Omega was to, inter alia, post "a fidelity bond in the principal sum of Eighty Thousand Dollars ($80,000.00), which is at least equal to the potential gross income for two months and is conditioned to protect the Owner [EACH] and the Mortgagee against misappropriation of Project funds by the Agent [Omega] and its employees." In satisfaction of its bond obligation under the management agreement, Omega purchased from Old Republic, a corporation organized under the laws of the State of Wisconsin and authorized to do business in the State of Missouri, a crime policy, Policy No. RCB445146, which was to be effective as of September 1, 1993. That policy provided employee dishonesty coverage for Omega in an amount up to $225,000. Omega later purchased from Reliance, a corporation organized under the laws of the Commonwealth of Pennsylvania and authorized to do business in the State of Missouri, a crime policy, Policy No. B2646708, which was effective January 18, 1996. It also provided employee dishonesty coverage, but only for $25,000, with a deductible of $1,000.

The Reliance bond was to cover the deductible of the Old Republic bond.

Except for the declarations pages, setting out the dates and amounts of the coverages and deductibles, the provisions of the Old Republic and Reliance policies were identical in form and content, with Omega being the only named insured in both policies. As to coverage, each policy provided that the insurer would "pay for loss of, and loss from damage to, Covered Property resulting directly from the Covered Cause of Loss," with "covered property" being defined as "`[m]oney', `securities', and `property other than money and securities,'" and "covered cause of loss" being defined as "`[e]mployee dishonesty.'" An "employee" was defined in the policies as: "[a]ny natural person: (1) While in your service (and for 30 days after termination of service); and (2) Whom you compensate directly by salary, wages or commissions; and (3) Whom you have the right to direct and control while performing services for you."

At all relevant times, Redd was the sole shareholder, president and managing officer, and a director of Omega. Redd's wife, Ramona, served as the secretary and as a director. As reflected by Omega's annual reports filed with the Missouri Secretary of State from 1995 through 1998, also serving as directors were Herman Johnson and William Threatt. Johnson and Threatt both sent letters resigning from the board effective February 4, 1997, and March 20, 1997, respectively. However, Johnson's letter was sent to an incorrect address.

Robert Wilp served as the comptroller of Omega from 1992 to 1995 and from March 1997 through the middle of 1998. Prior to returning to Omega in 1997, Wilp advised Redd that he was charged sometime in 1996 with a felony for stealing money while he was employed at Papa John's.

In 1996 and 1997, Redd stole a total of $55,526.50 from the tenant security deposit account Omega maintained for EACH. In that regard, three checks, Nos. 1449, 1201, and 9742, were written by Redd on the account, one on September 6, 1996, for $40,000, one on November 4, 1997, for $7,000, and one on December 4, 1997, for $8,526.50. Redd used the money he took to cover up his embezzlement from the employee 940 income withholding tax funds that Omega had withheld from employee wages. These trust funds and the tax obligations for which they were created to pay were those of both Omega and Redd. Wilp was aware of the thefts by Redd and assisted him in trying to cover them up.

Wilp was also stealing from EACH's accounts. From September 1997 through December 1997, he forged checks totaling $13,940. The money was being used to fund his drug habit. As a result of their thefts, both Redd and Wilp were indicted for, pled guilty to, and were convicted of mail fraud, conspiracy to commit mail fraud and money laundering in the United States District Court, Western District of Missouri.

On August 31, 1998, Omega assigned to EACH its claims against the Old Republic policy for the thefts of Redd and Wilp. On January 6, 1999, EACH, as Omega's assignee, filed a proof of loss with Old Republic. In a letter of January 20, 1999, to counsel for EACH, acknowledging the receipt of EACH's proof of loss as to the thefts, counsel for Old Republic, Bernard L. Balkin of the law firm, Sandler, Balkin, Hellman, Weinstein & Witten, P.C., requested EACH to produce Redd for examination concerning the loss claim. On February 1, 1999, counsel for Old Republic wrote to the attorney representing Redd in his criminal proceeding, requesting that Redd execute a waiver, waiving any conflict of interest that Balkin's law firm may have had in representing Old Republic against Omega as a result of a member of the firm having previously represented Omega and Redd in an unrelated matter. The waiver was ultimately signed on May 18, 2000, after suit had been filed by EACH against the respondents.

On February 4, 1999, counsel for EACH wrote counsel for Old Republic advising that she was unable to locate Redd to set a date for his examination. In response, counsel for Old Republic wrote to counsel for EACH acknowledging the receipt of her letter of February 4 and advising:

I will await further information from you concerning the available times and places for Mr. Redd's examination.

As I explained to you in our earlier correspondence and conversations, we cannot proceed with an adequate investigation of this claim without such an examination. Although we are willing to wait a reasonable time for you to locate Mr. Redd and arrange for his appearance, we wish to again caution you that our action should not be in any way construed to be a waiver of any of the terms, stipulations or contingencies of the concerned bond, nor any agreement to extend the time provisions for filing the proof of loss or for waiving of the notice provisions in the concerned bond.

In a March 9, 1999, letter from counsel for Old Republic to counsel for EACH, EACH was advised that it had until April 1, 1999, to produce Redd or counsel for Old Republic would recommend to his client that "it close its file on this matter by reason of a failure of proof on the part of its insured" and reiterated his stance that the extension to produce Redd should not be taken as a waiver of the policy provisions concerning proof of loss.

On November 12, 1999, Omega assigned to EACH its claims against the Reliance policy for Redd and Wilp's thefts. EACH then filed a proof of loss with Reliance on May 6, 1999. Counsel for Reliance, which was the same as counsel for Old Republic, acknowledged receipt of the proof of loss claim in a letter of May 18, 1999.

In a letter dated June 7, 1999, Reliance advised counsel for EACH that its claim was being denied for failure to produce Redd for examination. In a letter dated June 10, Old Republic did the same.

On April 17, 2000, EACH filed separate lawsuits against the respondents in the Circuit Court of Jackson County seeking, as Omega's assignee, to recover under the Old Republic and Reliance policies for the thefts by Redd and Wilp. In addition to seeking recovery of its claimed losses resulting from the thefts, EACH also sought damages for vexatious refusal to pay. On February 21, 2000, the two cases were ordered consolidated for trial.

On August 20, 2001, the respondents filed a joint...