Hemisphere Nat. Bank v. District of Columbia

• Decision Date: 25 February 1980
• Docket Number: No. 79-169.,79-169.
• Citation: 412 A.2d 31
• Parties: HEMISPHERE NATIONAL BANK, Appellant, v. DISTRICT OF COLUMBIA INSURANCE GUARANTY ASSOCIATION, Appellee.
• Court: D.C. Court of Appeals

Page 31

412 A.2d 31

HEMISPHERE NATIONAL BANK, Appellant, v. DISTRICT OF COLUMBIA INSURANCE GUARANTY ASSOCIATION, Appellee.

No. 79-169.

District of Columbia Court of Appeals.

Submitted November 14, 1979.

Decided February 25, 1980.

David M. Dorsen, Washington, D.C., for appellant.

J. Joseph Barse, Washington, D.C., for appellee.

Before NEWMAN, Chief Judge, and GALLAGHER and MACK, Associate Judges.

NEWMAN, Chief Judge:

This case involves the construction of the District of Columbia Insurance Guaranty Act (hereinafter "the Act"), D.C.Code 1978 Supp., §§ 35-1801 to -1817, a statute providing for the creation of the District of Columbia Insurance Guaranty Association (hereinafter DCIGA) to facilitate reimbursement of District of Columbia residents for covered insurance claims when the insurer becomes insolvent. The lower court, in interpreting the statute, held that despite a principal's default on a loan and a surety company's insolvency, appellant, Hemisphere National Bank, was not entitled to recover from the DCIGA since it withdrew with prejudice from the insurer's liquidation proceedings and thereby failed to establish a valid claim. Based on this holding, the court granted appellee's motion for summary judgment.

Appellant contends that the court erred in this ruling and in holding that it had to prevail in the insurer's insolvency proceeding prior to establishing a right to recovery under the Act. Notwithstanding the trial court's broad holding, appellee agrees with appellant that a claimant need not establish the validity of a claim in any proceeding other than one before the DCIGA itself. Appellee contends, and we agree, however, that appellant's actions in this case, whereby it took divergent positions to the prejudice of the DCIGA, thereafter barred appellant's claim against the DCIGA. In addition, as an alternative ground for affirmance, we find that appellant executed a novation of its claim against Wisconsin Surety. In Part I of this opinion we set forth the pertinent facts and lower court proceedings. In Part II, we discuss the effect of the prejudicial actions taken by appellant which now bar its claim against the DCIGA. In Part III, we analyze the facts and conclude that the action of Hemisphere National Bank in obtaining the proceeds from a deed of trust from the principal after the principal's default and the surety's insolvency, resulted in a novation thereby excusing the surety company, and accordingly the DCIGA, from any further liability.

I

Hemisphere National Bank is a national bank with its offices located in the District of Columbia. On August 16, 1974, the bank made a loan to Fancy Foods of Greenbank Ltd., a Maryland corporation, in the principal amount of $72,000. Monte F. Bourjaily, Jr., and Marietta M. Bourjaily, the sole shareholders of Fancy Foods, executed guarantees on the loan to the benefit of Hemisphere National Bank. In addition, the note of Fancy Foods was secured by a surety bend executed by the now insolvent Wisconsin Surety Corporation which was lied to do business in the District of Columbia.

The Bourjailys also signed a separate bond agreement guaranteeing the loan to the Wisconsin Surety Corporation. In order to persuade the Wisconsin Surety Corporation to execute the bond guaranteeing repayment of the loan to the Hemisphere National Bank, the Bourjailys agreed to grant the corporation a fourth deed of trust on certain real estate owned by them in Montgomery County, Maryland. After this was accomplished, the Wisconsin Surety Corporation executed a bond guaranteeing repayment of Fancy Foods' loan to the Hemisphere National Bank.

Fancy Foods made payment on the note until March 20, 1975. On that date, Fancy Foods failed to make the monthly payment on the note thus constituting a default. The note contained the normal provision permitting acceleration upon default. Since March 20, 1975, Fancy Foods has continued to be in default and that deficiency has never been cured. On April 11, 1975, the Wisconsin Surety Corporation was determined to be insolvent and was ordered to be liquidated by the Circuit Court for Dane County, Wisconsin.

Officials of Hemisphere National Bank met concerning the loan of Fancy Foods and reached an agreement with the Bourjailys on June 10, 1975, whereby the Bourjailys granted to the bank a fifth deed of trust on the same real estate which was subject to the fourth deed of trust in favor of Wisconsin Surety. The bank's deed of trust was obtained on July 1, 1975 and foreclosure occurred in the fall of 1975. The bank acquired a surplus in excess of $30,000 from the foreclosure sale, after payment of notes secured by the first three deeds of trust. During the course of the foreclosure proceedings in Montgomery County, Maryland, the president of Hemisphere National Bank executed an affidavit which was filed with the court below. That affidavit refers to the loan made by the bank, the guarantee bond executed by the Wisconsin Surety Corporation, and the negotiations with the Bourjailys which resulted in their executing a deed of trust to the bank and states that the deed of trust was "to replace the surety bond provided by Wisconsin Surety Corporation and to induce Hemisphere National Bank to forbear from bringing suit on the note which was already in default."

On or about November 21, 1975, Hemisphere National Bank filed its proof of claim in the Circuit Court for Dane County against the Wisconsin Surety Corporation in the latter's liquidation proceedings. Based on the actions of the bank in obtaining the fifth deed of trust on the Montgomery County land, and $30,000 from its foreclosure, the liquidator for the Wisconsin Surety Corporation recommended that the bank not recover. Specifically, the liquidator contended that the bank, by obtaining the deed of trust, had elected under Wisconsin law to pursue its claim against the principal and thereby had waived its right against the surety corporation.

The bank noted an appeal from the liquidator's recommendation, but the appeal was never heard. Before the matter was ready for hearing, the Hemisphere National Bank withdrew its claim with prejudice. The Wisconsin court thereupon entered an order that the claim was irrevocably withdrawn.

Hemisphere National Bank filed a complaint in the Superior Court of the District of Columbia seeking recovery under the Act from the DCIGA for the loss it incurred as the result of Fancy Foods' defaulted loan and the insolvency of the Wisconsin Surety Corporation. On July 27, 1976, the bank filed a motion for summary judgment which was denied on October 28, 1976. On December 10, 1976, the DCIGA moved for summary judgment, which motion was also denied on May 3, 1977. The case was assigned to Judge Hannon for trial. Appearing before Judge Hannon, the DCIGA made an oral motion to stay the instant case on the grounds that the liquidation proceedings involving the Wisconsin Surety Corporation in which the bank had filed a motion were in progress, and should be concluded prior to the commencement of this suit. On August 5, 1977, the trial court granted the stay.

After the bank caused its claim in the liquidation proceedings to be dismissed with prejudice, the DCIGA filed a motion to dismiss the bank's complaint. By an order dated January 11, 1979, the trial court, treating the DCIGA's motion to dismiss as a motion for summary judgment, granted DCIGA's motion and denied the bank's motion for summary judgment as well as its pending motion to compel discovery. The court explained its decision stating:

Hemisphere National Bank has an obligation to pursue its claim against the Wisconsin Surety Corporation in the State of Wisconsin insolvency proceeding to recover its pro rata share of the insolvent Surety Corporation's assets and thereby establish the unrecovered amount of the loan made to the borrower and thereafter to present its proof of claim for a sum certain to the District of Columbia Insurance Guaranty Association. By withdrawing its claim with prejudice from the liquidation proceedings in Wisconsin, Hemisphere National Bank has prevented the liquidator not only from determining the sum certain due and owing Hemisphere National Bank from the insolvent Surety's assets, but also, and more fundamentally from determining whether Hemisphere did in fact have a valid claim against the insolvent Wisconsin Surety Corporation.

This appeal followed.

II

The purpose of the Act "is to provide a mechanism for the payment of covered claims under certain insurance policies to avoid excessive delay in payment and to avoid financial loss to claimants or policy-holders because of the insolvency of an insurer . . ." D.C.Code 1978 Supp., § 35-1801. The definitional provision of the Act, § 35-1803, establishes several of the prerequisites which must be met in order for a party to be entitled to relief. Section 35-1803(6) defines the term "person" to include individuals, corporations, and associations. It is undisputed that Hemisphere National Bank is an unincorporated national bank association and, accordingly, a "person" within the meaning of the Act. Section 35-1803(3) of the Act defines "insolvent insurer" as an insurer "authorized to transact insurance in the District of Columbia, either at the time the policy was issued or when the insured event occurred, . . ." who has been determined to be insolvent. The Wisconsin Surety Corporation falls within this definition. Third, the term "covered claim" is defined in § 35-1803(2) of the Act as "an unpaid claim . . . which arises out of and is within the coverage . . . of an insurance policy . . . if such insurer becomes an insolvent . . . and . . . the claimant or insured is a resident of the District of Columbia . . . 19 It is uncontested that Wisconsin Surety acted as a guarantor on a loan between Fancy Foods and Hemisphere National Bank.

Based on the aforementioned statutory definitions, appellant contends that the only...