Farmers and Merchants State Bank of Pierz v. St. Paul Fire & Marine Ins. Co.

• Decision Date: 28 May 1976
• Docket Number: No. 46134,46134
• Citation: 242 N.W.2d 840,309 Minn. 14
• Parties: FARMERS & MERCHANTS STATE BANK OF PIERZ, Respondent, v. ST. PAUL FIRE & MARINE INSURANCE COMPANY, Appellant.
• Court: Minnesota Supreme Court

Page 840

242 N.W.2d 840

309 Minn. 14

FARMERS & MERCHANTS STATE BANK OF PIERZ, Respondent, v. ST. PAUL FIRE & MARINE INSURANCE COMPANY, Appellant.

No. 46134.

Supreme Court of Minnesota.

May 28, 1976.

[309 MINN 14] Syllabus by the Court

1. A bankers fidelity bond does not provide coverage for losses suffered by reason of fraud, dishonesty, or breach of fiduciary duty when the bank, through its board of directors, had knowledge of the acts complained of, appreciated their fraudulent nature, and condoned, acquiesced, or participated in them.

2. An insurer has no duty to defend a suit brought against its [309 MINN 15] insured when it has knowledge from facts dehors the complaint that the acts giving rise to the suit are outside the coverage of the policy.

Meagher, Geer, Markham, Anderson, Adamson, Flaskamp & Brennan and O. C. Adamson II, R. D. Blanchard and John H. Riley, Minneapolis, for appellant.

Rider, Bennett, Egan, Johnson & Arundel and Richard J. Nygaard and William J. George, Minneapolis, for respondent.

Heard before ROGOSHESKE, PETERSON, and YETKA, JJ., and considered and decided by the court en banc.

ROGOSHESKE, Justice.

This appeal raises the issue of whether the issuer of a bankers fidelity bond is obligated to indemnify the insured bank for legal expenses incurred by the bank in defense and settlement of a customers' suit for damages alleging fraudulent acts on the part of the bank and three of its officer-directors. Contrary to the trial court's determination, we hold that the stipulated facts, including the allegations of the customers' complaint and facts dehors the complaint known to the insurer, establish that the alleged fraudulent acts were perpetrated jointly by the bank and its officer-directors. Accordingly, the bank is not entitled to recover on the bond for the legal expenses so incurred. We therefore reverse and order judgment for defendant insurer.

In the spring of 1970, the Catholic parish of Pierz decided to offer its elementary school for sale at public auction. Ernest R. Benusa and Richard N. Bujalski (the customers) were interested in obtaining the school for renovation into an apartment building. On April 24, 1970, they went to the Farmers & Merchants State Bank of Pierz (the bank) and spoke to Dennis J. Feda, the cashier of the bank, about the prospects for a real estate loan to help finance the project. On May 8, 1970, they met with F. L. Spanier, assistant vice president of the bank, and also discussed the proposed loan. By this time, William T. Stoll, the bank's president and 90-percent stockholder, was also aware of the customers' plans to purchase and renovate the school property. At all times relevant, the bank's board of directors consisted of Feda, Spanier, Stoll, and Mrs. Stoll.

The church senate, a board of about 25 members, had the responsibility for deciding to whom and at what price the property would be sold. Feda, Spanier, and Stoll were all members of the senate. After the customers had made a presentation of their desire to purchase the property and renovate it to the senate on April 28, 1970, at a senate meeting at which Feda was present, the bank became interested in purchasing the property itself to construct a new bank. The customers had stated at the meeting that they would offer $3,000 for the property, and although the bank's officers knew from the senate reaction that the bank could buy the property itself for that amount, they decided to offer $10,000.

The officers realized that their decision to buy the property for the bank created a conflict of interest between the bank and the customers. They decided to inform the customers, if they ever called again at the bank, that the bank was submitting a bid itself. The customers did not contact the bank between May 8 and June 2, and they first learned of the bank's bid on the morning of June 2, about 25 minutes before the bids were to be received. At the auction the senate accepted the bank's bid of $10,000, rejecting the customers' $3,000 bid. Those were the only bids submitted.

The customers sued the bank, Feda, Spanier, and Stoll, alleging breach of a fiduciary relationship. St. Paul Fire & Marine Insurance Company had issued a bankers fidelity bond policy to the bank. ¹ St. Paul Fire & Marine declined to defend the bank when the suit was tendered to it. Consequently, the bank undertook the defense of itself and its officers, settling the action after a partial trial and incurring legal fees of $5,730.14. The bank then sued St. Paul Fire & Marine in an attempt to recover this amount. The trial court awarded the bank judgment for $5,730.14 with interest from the date that amount was paid by it.

The Minnesota law concerning an insurer's duty to defend was concisely summarized in Bituminous Cas. Corp. v. Bartlett, Minn., 240 N.W.2d 310, 312 (1976):

'We review some basic law concerning the nature of the insurer's obligation to defend its insured. The obligation to defend is contractual in nature and is generally determined by the allegations of the complaint against the insured and the indemnity coverage afforded by the policy. Republic Vanguard Ins. Co. v. Buehl, 295 Minn. 327, 332, 204 N.W.2d 426, 429 (1973). However, the complaint is not controlling when actual facts clearly establish the existence or nonexistence of an obligation to defend. Crum v. Anchor Cas. Co., 264 Minn. 378, 119 N.W.2d 703 (1963); Bobich v. Oja, 258 Minn. 287, 104 N.W.2d 19 (1960); Weis v. State Farm Mutual Auto Ins. Co., 242 Minn. 141, 64 N.W.2d 366 (1954). If any part of the cause of action against the insured arguably falls within the scope of coverage, the insurer must defend. Christian v. Royal Ins. Co., 185 Minn. 180, 240 N.W. 365 (1932). Any ambiguity as to coverage at the pretrial stage is to be resolved in favor of the insured. As we said in Crum:

"Whether an insurer is under an obligation to defend is not always free from doubt until the case is actually tried. Such doubts should be resolved in favor of the insured.' 264 Minn. 390, 119 N.W.2d 711.

'From the above authorities, it is apparent that an insurer seeking to avoid having to defend an insured carries the burden of demonstrating that all parts of the cause of action against the insured fall clearly outside the scope of coverage. If any part is arguably within the scope of coverage, the insurer should defend, reserving its right to contest coverage based on facts developed at trial on the merits. See, F. D. Chapman Const. Co. v. Glens Falls Ins. Co., 297 Minn. 406, 211 N.W.2d 871 (1973).'

Thus while the insurer must as a rule defend any suit which alleges a claim within coverage, if the insurer has knowledge from facts dehors the complaint that the acts giving rise to the suit are outside the coverage of the policy, there is no duty to defend. ²

A bankers fidelity bond is intended to protect a bank from losses sustained as a result of dishonest, fraudulent, or criminal acts on the part of its employees. ³ It is broad enough 'to cover loss by dishonest or fraudulent acts and conduct of the employe whereby the employer is rendered liable to third parties.' Citizens State Bank v. New Amsterdam Cas. Co., 177 Minn. 65, 70, 224 N.W. 451, 453 (1929). However, a bankers fidelity bond does not cover losses suffered by reason of fraud, dishonesty, or breach of fiduciary duty when a bank, through its board of directors, had knowledge of the acts complained of, appreciated their fraudulent nature, and condoned, acquiesced, or...