General Elec. Credit Corp. v. Wolverine Ins. Co.

• Citation: 362 N.W.2d 595,420 Mich. 176
• Decision Date: 09 January 1985
• Docket Number: Docket No. 70435,No. 12,12
• Parties: GENERAL ELECTRIC CREDIT CORPORATION, a New York corporation, Plaintiff-Appellee, v. WOLVERINE INSURANCE COMPANY, a Michigan corporation, Defendant, Cross-Plaintiff-Appellant, and Number One Mobile Homes, Inc., a Michigan corporation, Defendant, and Robert E. Sivyer and Marlene J. Sivyer, Defendants, Cross-Defendants. Calendar420 Mich. 176, 362 N.W.2d 595
• Court: Supreme Court of Michigan

Page 595

362 N.W.2d 595

GENERAL ELECTRIC CREDIT CORPORATION, a New York corporation, Plaintiff-Appellee, v. WOLVERINE INSURANCE COMPANY, a Michigan corporation, Defendant, Cross-Plaintiff-Appellant, and Number One Mobile Homes, Inc., a Michigan corporation,

Defendant,

and

Robert E. Sivyer and Marlene J. Sivyer, Defendants,

Cross-Defendants.

Docket No. 70435.

Calendar No. 12.

420 Mich. 176, 362 N.W.2d 595

Supreme Court of Michigan.

Argued May 10, 1984.

Decided Dec. 28, 1984.

Released for Publication Jan. 9, 1985.

Louis P. Labbe, Birmingham, for appellee General Elec. Credit corp.

Jenkins, Nystrom, Hitchcock, & Nystrom, Jeannette A. Paskin, Southfield, for defendant and cross plaintiff/appellant.

RYAN, Justice.

This case is concerned with the meaning of the word "fraud" as used in a surety bond whose terms are prescribed by statute. Three questions are presented:

1. Whether the term "fraud" in the expression "fraud, cheating, or misrepresentation", as used in a surety bond issued pursuant to M.C.L. Sec. 257.248(7); M.S.A. Sec. 9.1948(7), ¹ means only actual fraud or also means constructive fraud;

2. Whether M.C.L. Sec. 257.248(7); M.S.A. Sec. 9.1948(7) limits the liability of a surety to a total of $10,000 where a $10,000 surety bond is issued in one year, and renewed the following year, and wrongful acts occur in each year resulting in defalcations exceeding $10,000 in each year; and

3. Whether the trial court erred in assessing prejudgment interest against the defendant surety.

I

Number One Mobile Homes, Inc. (hereafter NOMH) is a licensed mobile home dealer operated by individual defendants Robert and Marlene Sivyer. As a condition of becoming a licensed mobile home dealer, NOMH was required to meet several requirements. One of these, contained in M.C.L. Sec. 257.248(7); M.S.A. Sec. 9.1948(7), requires that a licensed mobile home dealer obtain a "properly executed bond or renewal certificate". M.C.L. Sec. 257.248(7); M.S.A. Sec. 9.1948(7) provides:

"An applicant for a new vehicle dealer or a used or secondhand vehicle dealer or broker license shall accompany the application with a properly executed bond or renewal certificate. If a renewal certificate is used, the bond shall be considered as renewed for each succeeding year in the same amount and with the same effect as an original bond. The bond shall be in the sum of $10,000.00 with good and sufficient surety to be approved by the secretary of state. The bond shall be conditioned to indemnify or reimburse a purchaser, seller, financing agency, or governmental agency for monetary loss caused through fraud, cheating, or misrepresentation in the conduct of the vehicle business, whether the fraud, cheating, or misrepresentation was made by the dealer or by an employee, agent, or salesperson of the dealer. The surety shall be required to make indemnification or reimbursement for a monetary loss only after judgment based on fraud, cheating, or misrepresentation has been entered in a court of record against the licensee. The bond shall also be conditioned to indemnify or reimburse the state for any sales tax deficiency as provided in Act No. 167 of the Public Acts of 1933, as amended, being sections 205.51 to 205.78 of the Michigan Compiled Laws, or use tax deficiency as provided in Act No. 94 of the Public Acts of 1937, as amended, being sections 205.91 to 205.111 of the Michigan Compiled Laws, for the year in which the bond was in force. The surety shall be required to make indemnification or reimbursement only after final judgment has been entered in a court of record against the licensee. A dealer or applicant who has furnished satisfactory proof that a bond similar to the bond required by this subsection is executed and in force shall be exempt from the bond provisions set forth in this subsection. The aggregate liability of the surety shall not exceed the sum of the bond. The surety on the bond may cancel the bond upon giving 30 days' notice in writing to the secretary of state and thereafter shall not be liable for a breach of condition occurring after the effective date of the cancellation." (Emphasis added.)

NOMH procured a conforming surety bond from Wolverine Insurance Company for calendar year 1977. The bond was "renewed" for 1978 and Wolverine issued a renewal certificate. The bond contained the following language:

"Now therefore, the condition of this obligation is such that the principal and surety shall indemnify or reimburse any purchaser, seller, financing agency or governmental agency for any monetary loss only after judgment based on fraud, cheating or misrepresentation has been entered in a court record [sic ] against the licensee.

* * *

"Provided further, that the aggregate liability of the surety for all such judgments shall, in no event, exceed the sum of this bond.

"Coverage hereunder shall be effective as of 12:01 a.m. on January 1, 1977 and shall remain in effect continuously, provided, however, that the said surety may cancel the bond upon giving thirty days notice in writing to the Secretary of State and thereafter shall be relieved of liability for any breach of condition occurring after the effective date of the cancellation." (Emphasis added.)

In November 1976, NOMH entered into a floor plan financing arrangement with the plaintiff, General Electric Credit Corporation (hereafter GECC). The agreement provided that GECC would loan money to NOMH to buy mobile home units for sale at retail, but would retain a security interest in all of NOMH's inventory and equipment. When a unit of secured property was sold, NOMH was required to repay to GECC the amount owed on that item or place all money received on the sale into a trust account for the benefit of GECC until such payment was made. In late 1977 and again in early 1978, NOMH violated this agreement by selling mobile homes subject to the security agreement without either paying its indebtedness on those items or placing the money received into the trust account for GECC.

On May 29, 1979, GECC filed suit against the defendants. The essential allegations of the plaintiff's claims are pleaded in four counts, but only the third and fourth counts are relevant to our inquiry. In Count III, claiming against all of the defendants except Wolverine, GECC alleges that NOMH and the individual defendants sold four mobile homes "out of trust", by which is meant that NOMH neither paid GECC for the units sold nor placed an amount equal to the funds derived from the sale into a trust account. Specifically, GECC claims that in December 1977 NOMH and the individual defendants sold two mobile homes which were subject to the security agreement without remitting to GECC an amount equal to the indebtedness on the units or paying the money into the trust account, that they sold a mobile home in January 1978 which was subject to the security agreement without paying the indebtedness or remitting the funds received to the trust account, and that in March 1978 they sold still another mobile home which was subject to the security agreement without paying the indebtedness or remitting the funds received to the trust account. GECC claimed entitlement to a judgment against the individual defendants for damages of $26,086.01 "for fraudulent and wrongful conversion through fraud, cheating or misrepresentation". In Count IV, GECC claimed that as financing agent for NOMH, and pursuant to the terms of the surety bond issued by Wolverine, it was entitled to payment from Wolverine for damages based upon the fraud identified in Count III and prayed for entry of a judgment for $26,086.01 plus 6% interest per annum from date of the judgment together with attorney fees and costs.

The trial court granted summary judgment in favor of GECC on Counts III and IV of its complaint.

The summary judgment against NOMH and the individual defendants under Count III of the complaint is stated, in part, to be "on account of fraudulent and wrongful conversion fraud, cheating or misrepresentation; in 1977 in the sum of $15,179.97; and in 1978 in the sum of $10,906.14; for a total of $26,086.81; plus prejudgment interest from May 26, 1978 to September 26, 1980 at 6% per annum". Under Count IV, the trial court awarded summary judgment for $20,000 plus costs against Wolverine "under its statutory liability and the judgment entered in favor of plaintiff against [NOMH] and [the individual defendants]". It is clear, therefore, and indeed not controverted, that the judgment against Wolverine was based on the judgment against the individual defendants for "fraud, cheating, or misrepresentation" as provided in the statute earlier quoted.

In awarding the summary judgments, the trial court rejected the three claims or defenses that had been asserted by Wolverine:

--That "fraud", as that term is used in the statute, M.C.L. Sec. 257.248(7); M.S.A. Sec. 9.1948(7), and the surety bond, required proof of actual or intentional fraud and not merely constructive fraud;

--That the surety's total aggregate liability for the losses in both years could not exceed $10,000; and

--That prejudgment interest and costs were not taxable.

On appeal, the Court of Appeals affirmed. 120 Mich.App. 227, 327 N.W.2d 449 (1982). It found that "fraud" is a broad generic term generally encompassing both actual and constructive fraud, that a broad reading of the term "fraud" was consistent with the legislative policy behind the statute, and that fidelity bonds are generally given the construction which is favorable to the insured in cases where the policy language is susceptible to more than one interpretation. The court also concluded that the renewal of the bond in 1978 constituted a separate bond agreement which afforded $10,000 protection for 1978 in addition to, or separate from, the original $10,000 protection for 1977. The Court of Appeals did not discuss Wolverine's contention that the trial court erred in granting prejudgment interest.

W...