First Nat. Bank Co. of Clinton, Ill. v. Insurance Co. of North America

• Decision Date: 28 September 1979
• Docket Number: No. 78-1234,78-1234
• Citation: 606 F.2d 760
• Parties: FIRST NATIONAL BANK COMPANY OF CLINTON, ILLINOIS, a National Banking Association, Plaintiff-Appellee, v. INSURANCE COMPANY OF NORTH AMERICA, a corporation and Hartford Accident and Indemnity Company, a corporation, Defendants-Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 760

606 F.2d 760

FIRST NATIONAL BANK COMPANY OF CLINTON, ILLINOIS, a National

Banking Association, Plaintiff-Appellee, v. INSURANCE COMPANY OF NORTH AMERICA, a corporation and Hartford Accident and Indemnity Company, a

corporation, Defendants-Appellants.

No. 78-1234.

United States Court of Appeals, Seventh Circuit.

Argued Feb. 14, 1979.

Decided Sept. 28, 1979.

John P. Ewart, Mattoon, Ill., for defendants-appellants.

Andrew R. Laidlaw, Chicago, Ill., for plaintiff-appellee.

Before CUMMINGS and SPRECHER, Circuit Judges, and LEIGHTON, District Judge. ^*

LEIGHTON, District Judge.

The issue in this appeal is whether the district judge committed procedural and substantive errors when he granted partial summary judgment to plaintiff-appellee, a bank, and determined the liability of defendant-appellants, two insurance companies. The bank filed suit alleging that while bankers blanket bonds sold to it by the insurance companies were in force, losses totalling $421,116.03 were sustained from transactions effected by its president. In granting the partial summary judgment, the district judge ruled that the bonds required the insurance companies to indemnify the bank for losses caused by the president's fraudulent and dishonest conduct; and that the duty to indemnify had been established in the summary proceeding. He concluded that as to liability and damages, with exception of the amount of certain losses, there was no genuine issue of material fact between the parties. In addition, he held that the bank was entitled to recover pre-judgment interest under Illinois law, Ill.Rev.Stat.1971, ch. 74, § 2.

In our judgment, these rulings must stand. Review of a record which consists of pleadings, depositions, admissions, affidavits, memoranda, and an appendix of exhibits compels us to conclude that the district judge did not commit any error, procedural or substantive, when he granted the partial summary judgment. This opinion is extended only to give the reasons for our conclusion.

I.

After the complaint was answered, pretrial motions ruled on, and discovery completed, plaintiff-appellee First National Bank and Trust Company of Clinton, Illinois, moved for summary judgment against defendants-appellants Insurance Company of North America and Hartford Accident and Indemnity Company. ¹ The motion was supported by a 48-page memorandum whose introduction described the procedural history and subject matter of the litigation. A 280-page appendix of exhibits and documents admitted at depositions was filed. The memorandum contained footnote references to the appendix, affidavits, and depositions. The following are the facts about which it was claimed there were no material issues.

A

Between February 1, 1968 and February 23, 1971, INA and Hartford issued bankers blanket bonds to First National for premiums that were paid. The amount of monetary coverage differed; but their provisions were in all pertinent parts identical. Both protected the bank from losses through any fraudulent or dishonest act of any employee acting alone or in collusion with others, to the limit of liability stated in the bonds. The one issued by INA covered losses up to $300,000, with $200 deductible. Hartford's was an excess bank employee dishonesty blanket bond that was limited to losses of up to $1,000,000, with a $300,000 deductible.

During the time these bonds were in force, Jack C. Wells was the bank's president and actively handled commercial loans to the whole range of the bank's customers. The processing of these loans was consistent with bank practice and policy. Beginning in May 1969 with the arrival in Clinton of George Lahmeyer, Wells' loan activities became almost exclusively limited to a close circle of his friends, relatives, and business associates that consisted of eight individuals including Lahmeyer, a man Wells had known in Cripple Creek, Colorado. Between May 1969 and March 1, 1971, Wells approved a total of 72 loans to these individuals, most of them without security. These borrowers had no prior ties to the Clinton, Illinois community; and in a vast majority of the cases, the loans were refinancing of original or earlier ones which had not been paid when due. Losses to the bank from these loans totalled $211,544.85.

The bank suffered other losses as a result of Wells' conduct. For some years, it had participated in loans made by the Farmers State Bank, Carlock, Illinois. Wells had been instrumental in acquiring that bank for his brother-in-law, Jack Hamilton, and an acquaintance, Donald Starks. After he became president of First National, Wells authorized transactions which continued the bank's participation in loans with Farmers State Bank. At subsequent meetings of the board of directors, Wells was orally directed to make no further participation loans, and to assure that the extent of First National's involvement in such transactions would be substantially reduced. On October 20, 1970, these participation loans were reviewed by the board, and a resolution was passed forbidding any more loan purchases.

Despite this prohibition, Wells continued to authorize such loan participations by First National. Later, when collection of the bank's portion of the loans was sought, it was discovered that many of the loan documents were forgeries. Starks disappeared in January 1971; and the Carlock bank was closed shortly thereafter. The total loss to the bank from these transactions was $113,748.60. In addition, Wells approved exorbitant fees and unjustifiable invoices that were paid out of bank funds to Leroy Neal, an architect, and one of the persons for whom Wells had approved loans which caused losses to the bank. Wells also diverted to himself monies which belonged to the bank from credit life insurance commissions. From these two categories of transactions, he caused the bank to suffer losses of $14,193.90 and $16,222.09, respectively.

On March 1, 1971, the bank's directors concluded that Wells had violated his duties as an officer and requested his resignation; he submitted it 10 days later. An examination of bank records followed; and after an extensive investigation, INA and Hartford, as required by the bonds were notified of the losses. The two companies furnished their proof of loss forms which the bank filled out and mailed back, with supporting affidavits, on July 21 and 23, 1971. Liability was denied; this suit followed.

B

Based on these facts, and others to which the memorandum referred, the bank contended that summary judgment was an appropriate procedure for the final determination of its suit. It pointed out that the action, and the motion for summary judgment, presented only one issue: whether the actions of the bank president constituted fraudulent and dishonest conduct within the terms of the bankers blanket bonds. An extensive argument was submitted on this issue, with citations from a long line of federal court decisions.

INA and Hartford responded to the motion for summary judgment with a joint motion to strike and, anticipating that their motion would be denied, they filed a response to the summary judgment motion. The motion to strike was grounded on the bank's alleged failure to comply with Rule 56(c) of the Federal Rules of Civil Procedure. ² The companies alleged that the bank had supported its motion with documents and exhibits that did not have competent foundation and consisted of hearsay. For example, the two insurance companies contended that no competent foundation was offered for the copies of the bonds on which the bank's suit was based. They claimed that the proofs of loss on which the bank relied were without competent foundation; and that the affidavits of Wells' former secretary and the bank's executive vice president, important items offered by the bank in support of its motion for summary judgment, were unsigned.

The response to the summary judgment motion was supported by a six-page affidavit in which Wells denied many of the sworn assertions of his former secretary, and those of other affiants for the bank. His denials covered all the categories of transactions which the bank claimed had resulted in losses.

In response to the joint motion to strike, in which the insurance companies appeared to be questioning the authenticity of their bonds and the adequacy of the affidavits submitted with the proofs of loss, the bank requested the insurance companies to admit 16 facts, including sale of the bonds and signing of the affidavits. The insurance companies admitted six of the facts and denied one, unequivocally. As to those requests to admit facts pertaining to the bonds, they objected, claiming that the "facts" sought to be admitted were in actuality conclusions. As to the requests pertaining to the affidavits, they claimed insufficient knowledge as to whether the originals had been signed by the individuals involved; this fact, they said, was within the sole knowledge of the persons who signed the affidavits, or of those who were present at the signing.

The bank immediately made a motion for an order ruling that the companies had failed to answer or object to these requests in accordance with Rule 36, Federal Rules of Civil Procedure; and therefore, that the requests be taken as admitted. ³ This motion was objected to, with the parties submitting briefs. Thereafter, the bank filed a reply in the summary judgment proceeding, summarizing the facts which Wells' affidavit had left uncontradicted.

The district judge heard the parties in oral argument, and after considering the extensive record before him, he overruled the various motions of the insurance companies, rejected their numerous objections, and sustained the bank's motion that certain paragraphs in its requests for admissions be taken as having been admitted. He then granted the bank partial summary judgment, ruling that under Ill.Rev.Stat.1971, ch. 74, § 2, pre-judgment interest had to be paid by the insurance companies on...