Holley Coal Co. v. Globe Indemnity Co.

• Citation: 186 F.2d 291
• Decision Date: 27 December 1950
• Docket Number: No. 6168.,6168.
• Parties: HOLLEY COAL CO. v. GLOBE INDEMNITY CO.
• Court: United States Courts of Appeals. United States Court of Appeals (4th Circuit)

186 F.2d 291 (1950)

HOLLEY COAL CO. v. GLOBE INDEMNITY CO.

No. 6168.

United States Court of Appeals Fourth Circuit.

Argued November 20, 1950.

Decided December 27, 1950.

COPYRIGHT MATERIAL OMITTED

Roy S. Samms, Jr., Charleston, W. Va., and Bernard J. Pettigrew, Jr., Charleston, W. Va., for appellant.

Robert W. Lawson, Jr., Charleston, W. Va. (Stanley C. Morris and Steptoe & Johnson, Charleston, W. Va., on the brief), for appellee.

Before PARKER, Chief Judge, and SOPER and DOBIE, Circuit Judges.

DOBIE, Circuit Judge.

This civil action was instituted in the Circuit Court of Kanawha County, West Virginia, by Holley Coal Company (hereinafter called Holley Company) for the purpose of recovery on an indemnity bond in the penalty of $10,000.00, theretofore issued by defendant Globe Indemnity Company (hereinafter called Globe), covering losses incurred during 1947 and 1948 through the alleged defalcation of Holley Company's employees. On motion of defendant Globe, this case was removed to the United States District Court for the Southern District of West Virginia. The case was submitted to a jury on certain interrogatories, and judgment was ultimately entered in favor of Globe on the jury's answers to these interrogatories. Holley Company brings this appeal.

The bond agreed to indemnify Holley Company for any loss incurred through the dishonest acts of its employees, the bond also stated that certain limitations and conditions set forth in Sections A and B thereof should be conditions precedent to recovery under the bond. Sections A and B, and the riders thereto, defined "Employees" and expressly excepted from this definition the following officers of Holley Company: A. J. Holley — President; Blanche Holley — Vice President (his wife); Margaret Martin — Secretary-Treasurer (his daughter).

The Declaration filed by Holley Company in the West Virginia state court averred that Holley Company had suffered a loss in excess of $10,000, because of the embezzlement of an employee; it did not aver that those persons expressly excepted from coverage were not, in whole or in part, responsible for the loss. Holley Company presented its case solely by introducing evidence tending to show that one Layton L. Bennett, an employee, embezzled the money.

Globe's answer, filed in the United States District Court after removal, was in essence a general denial of the averments of Holley Company's declaration, to which was added a second defense stating that the action was not brought within two months after the loss as required by the terms of the bond. This answer was not signed. Later, over the objections of Holley Company that the answer was not signed, Globe was permitted to file a first amended answer which repeated the general denial and made more specific the second defense. At the trial, however, it developed that Globe was defending on the theory that A. J. Holley and the other persons expressly excepted from coverage were responsible, either by themselves or in conjunction with "employees," for the loss. Evidence tending to prove this defense was admitted by the District Judge and interrogatories were submitted to the jury, The jury's answers to these interrogatories supported this defense and the jury was discharged. Weeks later, over the objection of Holley Company, Globe was permitted to file a second amended answer incorporating this defense, and judgment was entered by the District Court in favor of Globe.

The first question raised by this appeal, therefore, is whether the District Judge properly permitted the complicity of those persons expressly excepted from coverage to become an issue in the case. We think he did.

The bond seems to expressly provide that Holley Company must show as a condition precedent to recovery that the loss was not attributable to those persons excepted in the bond. Such a showing would thus become a part of Holley Company's case (not an affirmative defense), to be pleaded and proved by it. Federal Rules of Civil Procedure, Rule 9(c), 28 U.S.C.A.; McAllister v. City of Riesel, Tex., 5 Cir., 146 F.2d 130.

Be that as it may, Rules 15(b) and 15(c) of the Federal Rules of Civil Procedure state:

"(b) Amendments to Conform to the Evidence. When issues not raised by the pleadings are tried by express or implied consent of the parties, they shall be treated in all respects as if they had been raised in the pleadings. Such amendment of the pleadings as may be necessary to cause them to conform to the evidence and to raise these issues may be made upon motion of any party at any time, even after judgment; but failure so to amend does not affect the result of the trial of these issues. If evidence is objected to at the trial on the ground that it is not within the issues made by the pleadings, the court may allow the pleadings to be amended and shall do so freely when the presentation of the merits of the action will be subserved thereby and the objecting party fails to satisfy the court that the admission of such evidence would prejudice him in maintaining his action or defense upon the merits. The court may grant a continuance to enable the objecting party to meet such evidence.

"(c) Relation Back of Amendments. Whenever the claim or defense asserted in the amended pleading arose out of the conduct, transaction, or occurrence set forth or attempted to be set forth in the original pleading, the amendment relates back to the date of the original pleading."

We think that this issue was tried with the implied consent of Holley Company. Prior to this case, two other legal proceedings had issued from the alleged embezzlement of the funds in question. One, a criminal action against Layton Bennett, resulted in his acquittal. Another, a suit by Layton Bennett against A. J. Holley for malicious prosecution and other alleged wrongs growing from the criminal proceeding, resulted in a mistrial. These cases involved almost identically the facts and testimony presented in the instant case. Globe's defense was thus well known to Holley Company when this case was tried below. Counsel for Globe had referred to this defense in his opening statement and this reference was commented upon by Holley Company's counsel. Much of the evidence tending to establish this defense was not objected to, and such objections as were made were based on the grounds of prejudice to Holley Company or on general irrelevancy, not on the ground that the evidence was irrelevant to the issues raised by the pleadings. Also, Holley Company expressly stated in the court below that it had no exceptions to the interrogatories submitted to the jury, some of which presented this issue. And no exceptions were taken to that part of the charge to the jury which dealt with this issue. We do not say that failure to take timely exception in these matters will necessarily shield error but we do think that this failure indicates Holley Company's consent that this issue be tried.

The Federal Rules of Civil Procedure indicate a policy to disregard technicalities and form and to determine the rights of litigants on the merits. To that end these rules are to be liberally construed. Mitchell v. White Consolidated, 7 Cir., 177 F.2d 500; Ray v. Morris, 7 Cir., 170 F.2d 498; Fakouri v. Cadais, 5 Cir., 147 F.2d 667, certiorari denied 326 U.S. 742, 66 S.Ct. 54, 90 L.Ed. 443. Amendments are to be liberally allowed where no prejudice results. United States v. Koike, 9 Cir., 164 F.2d 155; Blair v. United States, 8 Cir., 147 F.2d 840; Tahir Erk v. Glenn L. Martin Co., 4 Cir., 116 F.2d 865. And the trial court has wide discretion in the allowance of amendments. Sheridan Wyoming Coal Co. v. Krug, 84 U.S.App. D.C. 172, 172 F. 2d 282, reversed on other grounds, Chapman v. Sheridan-Wyoming Coal Corp., 338 U.S. 621, 70 S.Ct. 392; Schuckman v. Rubenstein, 6 Cir., 164 F.2d 952, certiorari denied 333 U.S. 875, 68 S.Ct. 905, 92 L.Ed. 1151.

Holley Company was prejudiced neither by the trial of the issue of the complicity of those persons excepted from coverage, nor by the second amended answer covering this issue. Holley Company was in no way surprised, it impliedly consented to the trial of this issue, and the allowance of the second amended answer could not have affected the jury's answers to the interrogatories, since it followed the jury's discharge. By Rule 15(c), this amendment related back to the date of the original answer and supported all evidence admissible to establish A. J. Holley's connection with the loss.

Holley Company argues further, that even if this defense were properly litigated, the evidence was irrelevant to the issue. A. J. Holley was virtual sole owner of the Holley Company, a corporation. It has already been said that Globe's defense was the participation of A. J. Holley in the defalcation, that he was, in short, stealing his own money. It was implicit in Globe's theory and evidence that this was done to evade federal income taxes. Thus, we think that the Federal Income Tax Lien, even though it was not filed until December, 1949, roughly two years after the funds disappeared, was properly admitted to show that A. J. Holley had tax troubles and a motive for acquiring the funds of the Holley Company in a tax-free manner. This lien covered a...