Lumbermens Mut. Cas. Co. v. State, Dept. of Revenue and Finance
Citation | 564 N.W.2d 431 |
Decision Date | 18 June 1997 |
Docket Number | No. 96-163,96-163 |
Parties | LUMBERMENS MUTUAL CASUALTY COMPANY, Appellant, v. STATE of Iowa, DEPARTMENT OF REVENUE AND FINANCE, Appellee. |
Court | United States State Supreme Court of Iowa |
Fred L. Morris and Joseph M. Barron of Peddicord, Wharton, Thune & Spencer, P.C., Des Moines, for appellant.
Thomas J. Miller, Attorney General, Harry M. Griger, Special Assistant Attorney General and Lucille M. Hardy, Assistant Attorney General, for appellee.
Considered by HARRIS, P.J., and LAVORATO, NEUMAN, SNELL, and ANDREASEN, JJ.
Plaintiff Lumbermens Mutual Casualty Company appeals summary judgment for the Iowa Department of Revenue and Finance, claiming insurance proceeds paid out on an embezzlement claim should be reimbursed from taxes collected on the stolen funds. The district court reasoned the insurer's subrogation rights under the parties' contract extended only to insured risks, not tax assessments. Finding no error in the court's analysis, we affirm.
The facts are undisputed. From 1989 to 1992, revenue department employee Lisa Leslie embezzled $692,468. She was aided in the scheme by her husband, James, and two neighbors, Michael and Tina Gardner. The department carried coverage for loss due to public employee dishonesty under a fidelity bond with Lumbermens. So the insurer paid the department $592,468--the amount of the theft less a $100,000 deductible.
The department, meanwhile, wasted no time shifting from crime victim to tax collector. Because embezzled funds are treated as income for taxation purposes, see James v. United States, 366 U.S. 213, 218, 81 S.Ct. 1052, 1054-55, 6 L.Ed.2d 246, 252 (1961), the department issued estimated "jeopardy assessments" to the Leslies and Gardners pursuant to its taxing authority. See Iowa Code § 422.30 (1993) (). These tax assessments obligated the Leslies in the sum of $177,538.81, and the Gardners in the sum of $140,085.62.
When the Leslies and Gardners failed to pay the taxes, the department filed liens, issued distress warrants to the sheriff for seizure of property, and obtained administrative search warrants to seize the embezzlers' personal and business assets. See Iowa Code §§ 422.26 ( ), 421.9(3) (administrative search warrant). Successful in its efforts, the department collected individual income taxes of approximately $113,000 from the Leslies and approximately $32,000 from the Gardners. Nothing remained for Lumbermens to attach, nor has the State recovered restitution ordered as part of the embezzlers' criminal sentences.
Lumbermens then brought this declaratory judgment action to establish its claimed right to reimbursement under the parties' insurance contract. Its petition sought recovery, either in accordance with the terms of the policy or on equitable principles, "for any amounts realized by the [department] through the sale of property seized" from the Leslies and Gardners. By way of defense, the department asserted that Lumbermens at no time indemnified it for tax losses stemming from the embezzlement, nor did the department's jeopardy assessments represent the recovery of embezzled funds.
Following discovery, the case reached the district court on cross motions for summary judgment. In ruling for the department, the court concluded that Lumbermens' policy gave the insurer no right of subrogation against funds collected for delinquent taxes. Nor, the court ruled, could the insurer prevail on a theory of unjust enrichment. This appeal by Lumbermens followed.
Lumbermens seeks reversal on three alternative grounds. First, it contends the court erroneously rejected Lumbermens' claim to an equitable lien (with priority over the department's interests) against the taxes collected from the embezzlers. Second, Lumbermens insists that its liability under the fidelity bond should be computed by subtracting the recovered money from the amount embezzled to arrive at the "direct loss." Finally, it maintains that the department's collection efforts breached the insurance contract and constituted an unlawful confiscation of property without due process in violation of the Fourteenth Amendment to the United States Constitution.
Summary judgment is appropriate when no genuine issue of material fact exists and the moving party is entitled to judgment as a matter of law. Iowa R.Civ.P. 237(c). The parties point to no disputed facts, so resolution by way of summary judgment was proper here. See Central Nat'l Ins. Co. v. Insurance Co. of N. Am., 522 N.W.2d 39, 41-42 (Iowa 1994). Our review is limited to the correction of errors at law. Iowa R.App.P. 4. To the extent constitutional issues are implicated, we consider the totality of the circumstances under a de novo review standard. Soo Line R.R. v. Iowa Dep't of Transp., 521 N.W.2d 685, 688 (Iowa 1994).
Underlying this appeal is the department's sweeping tax collection authority. It acted on this authority to seize all the embezzlers' attachable assets thereby depleting funds immediately available for reimbursement to the insurer. That Lumbermens would be entitled to reimbursement on any restitution made on the embezzled funds is not at issue. The question is whether money collected by the department for delinquent taxes is subject to Lumbermens' subrogation claim. The short answer is "no."
A. Equitable Lien Theory. Lumbermens' claim to an equitable lien rests on its theory that the department has been unjustly enriched by collecting twice on one insured loss--first, by recovering the proceeds payable under the policy, and, second, by seizing assets to satisfy delinquent taxes assessed on the embezzled funds. See Tubbs v. United Cent. Bank, 451 N.W.2d 177, 185 (Iowa 1990) ( ). It correctly states that one of the purposes of subrogation is "to prevent unjust enrichment of one party at the expense of another." Ludwig v. Farm Bureau Mut. Ins. Co., 393 N.W.2d 143, 146 (Iowa 1986).
The parties' insurance contract contains the following subrogation clause:
Transfer of Your Rights of Recovery Against Others To Us: You must transfer to us all your rights of recovery against any person or organization for any loss you sustained and for which we have paid or settled. You must also do everything necessary to secure those rights and do nothing after the loss to impair them.
In keeping with this provision, Lumbermens seeks to place itself "in the shoes" of the department. See Bales v. Warren County, 478 N.W.2d 398, 400 (Iowa 1991) ( ). The district court recognized, however, that the department "is both the employer that suffered the embezzlement and the body charged with collecting income taxes on the embezzled money." In other words, the department wears a second pair of shoes. It suffered two losses: a direct loss of embezzled funds, and a loss of tax revenue on income generated by the embezzlement. See James, 366 U.S. at 218, 81 S.Ct. at 1055, 6 L.Ed.2d at 252 ().
The fundamental flaw in Lumbermens' equitable lien theory is its failure to appreciate the distinction between these two losses. Lumbermens furnished coverage for the embezzlement loss, not the tax loss. The parties' contract limits Lumbermens to reimbursement for "any loss [the department] sustained and for which [Lumbermens] paid or settled." (Emphasis added.) Because neither loss sustained by the department has been fully compensated, there has been no unjust enrichment. Nor can Lumbermens prevail on its claim the department "profited from the embezzlement." The assignment of...
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