Miami National Bank v. Pennsylvania Insurance Co.

• Decision Date: 14 July 1970
• Docket Number: No. 68-514-Civ-TC.,68-514-Civ-TC.
• Citation: 314 F. Supp. 858
• Parties: MIAMI NATIONAL BANK, a United States banking association, Plaintiff, v. The PENNSYLVANIA INSURANCE COMPANY, a Pennsylvania corporation, and Royal Indemnity Company, a New York corporation, Defendants.
• Court: U.S. District Court — Southern District of Florida

314 F. Supp. 858

MIAMI NATIONAL BANK, a United States banking association, Plaintiff, v. The PENNSYLVANIA INSURANCE COMPANY, a Pennsylvania corporation, and Royal Indemnity Company, a New York corporation, Defendants.

No. 68-514-Civ-TC.

United States District Court, S. D. Florida.

July 14, 1970.

Harrison & Kornbluh, and Howard R. Hirsch, Miami, Fla., for plaintiff.

Dixon, Bradford, Williams, McKay & Kimbrell, Miami, Fla., for defendants.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

CABOT, District Judge.

Final hearing in this cause was held before the Court sitting without a jury on April 27, 28, 29 and 30, and on May 4 and 5, 1970, on the amended complaint and answer and on the third party complaint and answer.

This is an action by the plaintiff, Miami National Bank (Bank), to recover damages as a result of a loss which the Bank claims it sustained as a result of the dishonest, fraudulent, or criminal act of its employee, the third party defendant, Kenneth M. Harris (Harris). The Bank claims that this loss is covered by and it is entitled to recover damages under two bankers blanket bonds issued by the defendants, The Pennsylvania Insurance Company and Royal Indemnity Company (Sureties). The Sureties have brought a third party action against Harris on a common law right of indemnification.

On consideration of the evidence and the written and oral advices of counsel, the court makes the following findings of fact and reaches the following conclusions of law:

THE PARTIES AND THE BONDS IN SUIT:

1. The plaintiff, Miami National Bank, is a national banking association having its principal place of business in Miami, Florida, where it carries on a commercial banking business.

2. The defendant, The Pennsylvania Insurance Company, is a Pennsylvania corporation having its principal place of business in New York, New York, and is licensed to do business in the State of Florida, including the furnishing for compensation of surety and indemnity bonds.

3. The defendant, Royal Indemnity Company, is a New York corporation having its principal place of business in New York, New York, and is licensed to do business in the State of Florida, including the furnishing for compensation of surety and indemnity bonds.

4. The third party defendant, Kenneth M. Harris, is a resident and citizen of Miami, Florida, and was at the relevant times employed by the Miami National Bank as Vice President in charge of the Installment Loan Department.

5. Effective the 26th day of March, 1964, The Pennsylvania Insurance Company issued its bankers blanket bond to the Bank, whereby it agreed to indemnify the Bank in an amount not exceeding $97,500.00 from losses sustained and discovered, as set forth in the bond. Effective the 26th day of March, 1964, Royal Indemnity Company issued its bankers blanket bond to the Bank, whereby it agreed to indemnify and hold harmless the Bank in an amount not exceeding $1,400,000.00 against losses sustained and discovered, as set forth in the bond. Both of these bonds are standard forms of bankers blanket bonds, contain identical provisions, and indemnify the Bank against:

Any loss through any dishonest, fraudulent or criminal act of any of the employees, committed anywhere and whether committed alone or in collusion with others, including loss of property through any such act of the employees.

Each bond further provides:

The underwriter will indemnify the insured against court costs and reasonable attorneys' fees incurred and paid by the insured in defending any suit or legal proceeding brought against the insured to enforce the insured's liability or alleged liability on account of any loss, claim, or damage which, if established against the insured, would constitute a valid and collectible loss sustained by the insured under the terms of this bond. Such indemnity shall be in addition to the amount of this bond.

Other provisions of the bonds relevant to the issues raised are:

At the earliest practicable moment after discovery of any loss hereunder the insured shall give the underwriter written notice thereof and shall also within six months after such discovery furnish to the underwriter affirmative proof of loss with full particulars.

All claims of loss asserted by the Bank arose during the period that the bonds were in effect.

THE NATURE OF THE CLAIM:

6. The Bank seeks to recover for losses sustained as a result of acts of its employee Kenneth M. Harris that were dishonest, fraudulent, or criminal within the meaning of the provisions of the bonds. Harris, in his capacity as Vice President in charge of the Installment Loan Department of the Bank, disbursed loan proceeds to Mutual Leasing Corporation (Mutual) during the period of mid-November, 1965, through April, 1966, of an aggregate sum in excess of $1,500,000.00. The defendants contend that the Bank has failed to establish liability based on the acts of Harris and that, in any event, the Bank failed to comply with the notice provisions of the bonds, thus releasing the defendants from liability thereunder.

DISHONESTY OF THE EMPLOYEE:

7. Kenneth Harris, having seventeen years of prior banking experience, was hired by the plaintiff in November, 1964, as an Assistant Vice President. In December, 1964, he was placed in charge of the Installment Loan Department of the Bank. During 1965 the Bank was under close scrutiny of federal bank examiners and, because of its precarious financial status, at one time had been instructed to cease making loans until further notice. However, Harris was later made aware by other bank officers that the Bank was desirous of substantially increasing the loan volume of the Installment Loan Department.

8. Mutual Leasing Corporation, newly formed at about this time, was interested in obtaining financing for its operation. Mutual's principal officers were Joseph Lubin, President, and Sidney Stern, Vice President. Their plan, involving a minimum of capital outlay, was to purchase new automobiles and trucks, finance the purchase price, and then lease the vehicles to third parties.

9. In October, 1965, Harris met Lubin through the Bank's then President, Vance Foster. Harris had known Stern previously and had assisted him with financing a home improvement business. Harris learned of Mutual's financing requirements and was aware that the corporation had virtually no assets. According to Harris, it was agreed that prior to any loans being made to Mutual, Lubin and Stern would each contribute $10,000.00 to the corporation and that a Dr. Rickles (a cousin of Stern) would transfer to the corporation real property having a value of $100,000.00. Thereupon Harris, in mid-November, 1965, without ascertaining whether these contributions had been made, commenced authorizing loans to Mutual for the purchase of automobiles.

10. By December 31, 1965, Harris had approved and the Bank had advanced in excess of $250,000.00 to the account of Mutual as a result of 68 individual loan transactions. The mechanics of each transaction were substantially that Mutual would purchase a new car from a dealer and the Bank would then finance the purchase with a loan of 110% of the dealer's invoice, plus the cost of the license tag and state sales tax, subject to a limitation of $300.00 over cost. Thus, Mutual purchased the cars using little cash of its own.

11. The limit of Harris's authority from the Bank on loans to any one person or corporation without prior approval of the Bank's loan committee was $10,000.00. Harris was fully cognizant of this limitation on his loaning authority and that it applied as well to the aggregate balance of individual loans.

12. Harris did not apply for nor did he receive authority from the bank loan committee to exceed the $10,000.00 limitation in the case of Mutual, although he had asked the loan committee for such authorization in connection with other loans. This was so even though the great majority of the Installment Loan Department's loan volume was with Mutual.¹

13. Harris was also aware that, by statute,² the maximum amount which could be loaned by the Bank to any one customer was $250,000.00. Indeed, Harris had instructed certain employees in the Installment Loan Department to advise him when Mutual's loan balance had reached that sum.

14. Toward the end of December, 1965, Harris learned that Mutual's loan balance exceeded the statutory maximum. The evidence indicates that, in part at least, Mutual's balance was brought under the statutory limit through the alteration of bank records so as to insert the name of a Mutual employee or another person as "borrower" in place of Mutual.³

15. Upon learning that the statutory maximum had been reached, Harris conferred with Stern and Lubin. Harris told them that the only way the Bank could continue to make loans to Mutual was through a "direct sales" method whereby the lessees of the cars would show on bank records as the owner and borrower. Thus Mutual's name would not appear. Ultimately, the following plan was agreed upon. Harris furnished to Stern and Lubin all bank forms necessary for the completion of a loan. When a customer came to Mutual to lease a car, he would be asked to sign these forms in blank, being told that this was "required by the bank." The customer would thus sign in blank a note and chattel mortgage, a lease, and a credit application which authorized the loan proceeds to be disbursed to Mutual. When the papers were forwarded to Harris, Harris would fill in the note and mortgage for the appropriate amount and cause the proceeds of the loan to be credited to Mutual's checking account. Almost incredibly, in a period of four months, commencing in early January, 1966, approximately $1,400,000.00 was disbursed to Mutual in this manner.⁴

16. During the period these loans were being made, Harris made certain that the payment books were sent to Mutual and not to the listed borrowers. Meanwhile, Mutual continued to lease cars, at increased rates,...