First Sec. Sav. v. Kansas Bankers Sur. Co.
| Decision Date | 27 July 1988 |
| Docket Number | Nos. 87-1660,87-1661 and 87-1769,s. 87-1660 |
| Citation | 849 F.2d 345 |
| Parties | FIRST SECURITY SAVINGS, Appellant, v. KANSAS BANKERS SURETY CO., Appellee, v. James L. GILLETTE, et al., Third Party Defendants. FIRST SECURITY BANK & TRUST, Appellant, v. KANSAS BANKERS SURETY CO., Appellee. |
| Court | U.S. Court of Appeals — Eighth Circuit |
James B. Cavanagh, Omaha, Neb., for appellant.
Gregory Bien, Topeka, Kan., for appellee.
Before ARNOLD, WOLLMAN and TIMBERS, * Circuit Judges.
First Security Savings ("FSS") and First Security Bank & Trust ("FSB&T") appeal from summary judgments entered March 3, 1987 and March 6, 1987, respectively, in the District of Nebraska, Warren K. Urbom, District Judge, holding that Kansas Bankers Surety Co. ("KBS"), which had issued both banks a bankers blanket bond and an excess employee dishonesty bond, had valid defenses against coverage for losses sustained by the banks as the result of a dishonest employee. The court held that FSB&T was not covered since the bonds were "discovery" bonds and the bank had "discovered" the employee's dishonesty before the bonds went into effect. FSS was not covered, the court concluded, since former employees were not covered; when the bank signed the bond application, the employee involved already had resigned.
We affirm the court's summary judgment in favor of KBS and against FSB&T. Although we disagree with the court's holding that former employees were not covered under the bonds issued to FSS, our disagreement does not affect the result. We affirm the summary judgment in favor of KBS and against FSS, based on our conclusion that the defense of discovery is equally available to KBS against FSS as against FSB&T.
We shall summarize only those facts believed necessary to an understanding of the issues raised on appeal. Of necessity, fully to address the legal issues involved, a somewhat lengthy exposition of the facts seems appropriate.
During the relevant time period, James Gillette and his wife Nancy Gillette owned 100% of the stock in Olympic Investment Company, which in turn owned 90% of the stock in FSS. John Urquhart owned the other 10% of FSS stock. The Gillettes also owned 100% of the stock of FSB&T's holding company, Beatrice State Company. The Gillettes had financed their purchases of stock from Marvin Copple and S.E. Copple (Nancy's grandfather) with loans from First National Bank of Omaha ("FNBO"). James Gillette and John Urquhart held the same offices in both FSS and FSB&T. Gillette was president and chairman of the board, and Urquhart was secretary-treasurer, of both companies. Each also was on the board of directors and both were the primary loan officers of both companies.
Under Nebraska banking law, both FSS and FSB&T were required to carry fidelity bonds on all officers and employees. Neb.Rev.Stat. Secs. 8-110, 8-403.05 (1983). To comply with this requirement, since their policies with their prior insurers were about to expire, FSS and FSB&T applied to KBS for bond coverage. On January 28, 1983, Larry Keslar, an FSB&T vice-president, executed on behalf of FSB&T the application for bond coverage from KBS. On April 11, 1983, Urquhart executed on behalf of FSS the application for bond coverage from KBS. Both applications required the applicant to list its present employees and to make a representation that:
KBS issued an excess employee dishonesty bond and a bankers blanket bond to both FSS and FSB&T. The FSB&T bonds became effective on April 20, 1983, providing up to one million dollars coverage. The FSS bonds became effective April 11, 1983, also for up to one million dollars coverage.
The bonds indemnified FSS and FSB&T for "loss resulting directly from one or more dishonest or fraudulent acts of an Employee." They were "discovery bonds"; they only covered loss discovered during the period covered by the bond. The bonds defined "discovery" as occurring "when the Insured becomes aware of facts which would cause a reasonable person to assume that a loss covered by the bond has been or will be incurred, even though the exact amount or details of loss may not then be known."
Between 1980 and 1983, James Gillette handled a number of transactions, now known to be dishonest, whereby a total of more than $1,000,000 was removed from FSS and FSB&T under the guise of "loans" to "straw men", but in actuality they were on behalf of Newton Copple, Nancy's uncle (the "Copple loans"). Copple already had borrowed up to the legal lending limit from both institutions. These transactions illegally enabled him to obtain more money from them. Gillette was the only FSS and FSB&T representative involved in these illegal transactions. The loans were not paid back. The instant dispute stems from the losses from the Copple loans that FSS and FSB&T claim are covered by the KBS bonds.
On January 6, 1984, FSS and FSB&T submitted notices of potential claims to KBS. On March 6, they submitted notices of proof of loss in excess of $2,000,000. KBS denied coverage, cancelled the bonds, and issued temporary coverage for sixty days to the institutions, but only for losses arising out of actions which actually occurred during the sixty day period.
Subsequently, FSS and FSB&T separately commenced the instant actions in a Nebraska state court on January 15, 1985. The case was removed to the United States District Court for the District of Nebraska upon KBS's motions filed February 19, 1985. The actions were consolidated for trial. After the parties completed lengthy discovery, KBS moved for summary judgment against both FSS and FSB&T. The district court granted both of KBS's motions. In a judgment entered March 3, 1987, the court granted summary judgment to KBS against FSS based on the court's conclusion that Gillette, a former employee not specifically listed in the bond, was not covered by the bond. In a judgment entered March 6, 1987, the court granted summary judgment to KBS against FSB&T, based on the court's finding that FSB&T had "discovered" Gillette's dishonesty before the effective date of the bond.
From these two judgments, the instant appeals were taken.
As disclosed during discovery, the illegality of the Copple loan transactions was uncovered as a result of lengthy investigations by state and federal authorities. A summary of these investigations follows.
In late 1981 and early 1982, a number of violations other than the Copple loans initially were uncovered by the Nebraska Department of Banking & Finance ("NDB&F") and the Federal Deposit Insurance Corporation ("FDIC"). These violations included insufficiently documented loans and Gillette's sale to FSB&T at above market value of a bond he owned. The board was notified of these problems. An FDIC examiner sent a Report of Apparent Criminal Irregularity to the United States Attorney's Office concerning the bond.
The FDIC again examined FSB&T in November 1982. The examiner found further violations. He sent four more Reports of Apparent Criminal Irregularity to the United States Attorney's Office. These reports criticized irregularities in loan procedures and specifically criticized irregularities in the Copple loan transactions. Among the irregularities cited were: that Copple had enticed others to sign or he had forged signatures on loan documents; that FSB&T had allowed the signing of loan documentation to occur outside of the bank without a loan officer present; and that FSB&T had failed to require complete credit documentation prior to advancing proceeds from loans. The examiner concluded that Gillette either had handled or directed the handling of all of these transactions. The FBI also began to examine both FSB&T and FSS but did not disclose the specifics of its investigation.
On January 20, 1983 the FDIC called a special meeting of the FSB&T board. Directors Gillette, Urquhart and Reed, as well as FSB & T counsel Charles Pallesen and representatives of FDIC and NDB&F attended the meeting. NDB&F circulated a memorandum from an FDIC assistant regional director to the regional director describing the discussion at the meeting:
"The purpose of the meeting was to advise the bank directors and their counsel of ... (b) the intention of the Regional Office to recommend that the Corporation commence action under Section 8(a) of the FDI Act to remove ... Gillette as an officer and director of the bank; ... and (d) the intention of the Regional Office to advise the U.S. Attorney General's office of an apparent violation of the Federal Criminal Statutes (18 U.S.C. 4) by one of the bank officer-directors."
Although the Copple loan transactions were discussed at the meeting to the extent that they exceeded the legal lending limit, the FDIC did not state specifically that the criminal violation related to these transactions. Gillette, however, was named specifically as the violator. Subsequently, Gillette resigned as president of FSB&T and FSS and surrendered his Nebraska State executive officer's license.
In late 1982, FNBO, which had financed the Gillettes' purchase of stock in FSB&T's and FSS's holding companies, became concerned with the Gillettes' line of credit, which was secured by their stock in FSS and FSB&T as collateral. As of March, 1983, the loans exceeded $2,500,000. FNBO also became concerned about the financial health of FSB&T and FSS, particularly the money involved in the Copple loans. On April 8, 1983, FNBO entered into an agreement with James and Nancy Gillette, personally and as representatives of ...
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