Mid-America Bank of Chaska v. American Cas. Co.

• Decision Date: 21 September 1990
• Docket Number: No. Civ. 3-89-308.,Civ. 3-89-308.
• Citation: 745 F. Supp. 1480
• Parties: MID-AMERICA BANK OF CHASKA, successor to Citizens State Bank of Green Isle, Plaintiff, v. AMERICAN CASUALTY COMPANY OF READING, PENNSYLVANIA, Defendant. AMERICAN CASUALTY COMPANY OF READING, PENNSYLVANIA, Third Party Plaintiff, v. Donald HERD, Daniel Brown, and Ronald Ott, Third Party Defendants.
• Court: U.S. District Court — District of Minnesota

745 F. Supp. 1480

MID-AMERICA BANK OF CHASKA, successor to Citizens State Bank of Green Isle, Plaintiff, v. AMERICAN CASUALTY COMPANY OF READING, PENNSYLVANIA, Defendant.

AMERICAN CASUALTY COMPANY OF READING, PENNSYLVANIA, Third Party Plaintiff, v. Donald HERD, Daniel Brown, and Ronald Ott, Third Party Defendants.

No. Civ. 3-89-308.

United States District Court, D. Minnesota, Third Division.

September 21, 1990.

John L. Devney and Mark J. Frenz, Briggs and Morgan, Minneapolis, Minn., for plaintiff.

Peter D. Sullivan, Hinshaw, Culbertson, Moelmann, Hoban & Fuller, Chicago, Ill., and David Donna, Lindquist & Vennum, Minneapolis, Minn., for defendant.

ORDER

DEVITT, District Judge.

INTRODUCTION

In this diversity action brought by Mid-America Bank of Chaska ("Mid-America") against American Casualty Company of Reading, Pennsylvania ("American Casualty") based upon an insurance contract, defendant moves for summary judgment. For the reasons set forth below, defendant's motion is denied.

BACKGROUND

American Casualty issued a "Banker's Blanket Bond" ("the bond") to BancServices Corporation effective May 1, 1985. Under the bond, American Casualty agreed to indemnify Mid-America¹ for various types of potential losses.

Plaintiff filed suit on the bond on May 15, 1989 to recover for losses incurred as a result of the dishonest and fraudulent conduct of three former employees: Donald Herd (bank president), Daniel Brown (vice-president), and Ronald Ott (assistant cashier). Plaintiff alleges that these three employees improperly diverted bank funds for the benefit of third parties and implemented a number of elaborate devices to cover up their crooked activities. Plaintiff claims that it lost $745,783.66 on loans made to twenty-four customers as a direct result of these activities.

Among the various schemes employed by Herd, Brown, and Ott were the following:

—Unauthorized loans were made by approving overdrafts on customer checking accounts.

—Loans were made for hidden purposes by stating false purposes for the loans in the bank records.

—Loans were made to one person for the benefit of another.

—Loans were made by permitting checks to be drawn against fabricated checking balances.

—Loans were made in the form of cashiers' checks issued by the bank without payment of funds in the bank.

—Customer collateral was released without payment of underlying debts.

—Loans were renewed or extended without collecting interest and waiving interest.

—Loans were made without interest being charged.

The three employees concealed the diversion of bank funds in a variety of ways. For example, they submitted false written reports to and orally misled the bank's Board of Directors. They also removed and destroyed certain loan performance documents and altered various bank records pertaining to customer loans.

Plaintiff bases its claim upon Insuring Agreement A of the bond which provides that defendant shall indemnify plaintiff for:

A. Loss resulting directly from dishonest or fraudulent acts of an Employee committed alone or in collusion with others.

Dishonest or fraudulent acts as used in this Insuring Agreement shall mean only dishonest or fraudulent acts committed by such Employee with the manifest intent

(a) to cause the insured to sustain such loss, and

(b) to obtain financial benefit for the Employee or for any other person or organization intended by the Employee to receive such benefit ...

Defendant bases the present motion upon various bond provisions including the following contractual limitation of actions provision found at section 5(d) which provides, in relevant part:

Legal proceedings for the recovery of any loss hereunder shall not be brought prior to the expiration of 60 days after the original proof of loss is filed with the Underwriter or after the expiration of 24 months from the discovery of such loss ...

Section 4 of the bond defines "discovery" as follows:

This bond applies to loss discovered by the insured during the Bond period. Discovery occurs when the insured becomes aware of facts which would cause a reasonable person to assume that a loss covered by the bond has been or will be incurred, even though the exact amount or details of the loss may not then be known.

Notice to the Insured of an actual or potential claim by a third party which alleges that the Insured is liable under circumstances which, if true, would create a loss under this bond constitutes such discovery.

Finally, Section 12 of the bond provides for termination of coverage as to any employee "as soon as any Insured, or any director or officer not in collusion with such person, shall learn of any dishonest or fraudulent act committed by such person ..."

According to defendant, it is indisputable that regulatory and internal examinations as well as certain counterclaims by debtors alerted plaintiff to the clandestine nature of its employees' activities more than two years prior to this lawsuit. Hence, defendant contends that summary judgment in its favor is appropriate. In the alternative, defendant contends that it is entitled to partial summary judgment because certain types of losses claimed by the bank are not covered by the bond.

DISCUSSION

The Court is familiar with the standards for deciding motions on summary judgment. Summary judgment is an extreme remedy and only appropriate where there exists no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ. Pro. 56(c); Loudermill v. Dow Chemical Co., 863 F.2d 566, 571 (8th Cir.1988). Here, to survive defendant's motion, plaintiff need only present evidence from which a jury might return a verdict in its favor. Anderson v. Liberty Lobby, 477 U.S. 242, 254-55, 106 S.Ct. 2505, 2513-14, 91 L.Ed.2d 202 (1986). "The evidence of the non-movant is to be believed, and all justifiable inferences are to be drawn in his favor." Id., 477 U.S. at 255, 106 S.Ct. at 2513.

The first issue presented is whether it is beyond dispute that plaintiff discovered the dishonest or fraudulent character of its employees' acts more than two years prior to filing this suit. As noted earlier, the bond provides the definition of discovery to be applied here. However, case law somewhat guides the Court in construing the bond provision. "The well established rule is that the insured under a blanket employee's fidelity bond is not bound to give notice until he has acquired knowledge of some specific fraudulent or dishonest act." First Security Savings v. Kansas Bankers Surety Co., 849 F.2d 345, 349 (8th Cir.1988); citing Perkins v. Clinton State Bank, 593 F.2d 327, 334 (8th Cir.1979) (citations omitted). Mere suspicion on the part of the insured party that an insured loss may have occurred is insufficient to trigger the notice requirement. Perkins, 593 F.2d at 334; Prior Lake State Bank v. National Surety Corporation, 248 Minn. 383, 80 N.W.2d 612, 616 (1957).² Finally, contractual provisions which limit the time within which an action may ordinarily be brought "... are not especially favored and are construed strictly against the party invoking them." Prior Lake State Bank, 80 N.W.2d at 616; Financial Timing Publications, Inc. v. Compugraphic Corporation, 893 F.2d 936, 946 (8th Cir.1990).

Defendant asserts that plaintiff was aware of the dishonest and fraudulent character of its employees' acts more than two years prior to commencing this action. Defendant supports its position by citing various portions of the record which plainly reveal that plaintiff was aware, more than two years prior to filing suit, of various acts on the part of Herd, Brown, and Ott which were not entirely in line with accepted banking practice. Plaintiff responds by admitting that it knew of the employees' irregular practices but denies that it knew these deeds were fraudulent or dishonest in nature. Rather, plaintiff avers that, until the completion of a special independent investigation on July 29, 1987, it attributed these practices to negligence or bad business judgment.

The Court has thoroughly examined the record and concludes that summary judgment against the plaintiff is not appropriate on this ground. Defendant points to various regulatory investigations which disclosed many of the acts of Herd, Brown, and Ott which the bank now characterizes as fraudulent. However, in each investigation, the bank received a high overall performance rating.³ Defendant also relies upon the depositions of several former bank employees who testified to having knowledge of the improper acts. Typical is the testimony of David W. Harrop, a Bancservices vice-president from January 1987 until August of 1989:

A. That I suspected Don Herd of fraud at that point, it's easy to say yes three years after the fact; but I guess I honestly can't answer that. I don't know if that's when we thought, "Boy, there's fraud there." Again, the purpose of the audit was to try to determine that.

Q. Well, I understand that the evidence hadn't been gathered ... All the details of whatever fraud there was wasn't known at that time. What I'm trying to find out is did you begin to assume in April of 1987 that a fraud might have occurred at the bank?

A. Did we assume that a fraud might have occurred?

Q. Yes.

A. Yes.

Q. And you began to assume that in April of 1987?

A. Right.

Viewed in the light most favorable to the plaintiff, this testimony reveals that deponent Harrop no more than suspected the possibility of fraud or dishonesty in April of 1987. As noted earlier, such suspicions are insufficient to establish that plaintiff discovered the fraud.

Defendant also contends that fraud and forgery claims filed by two of the bank's debtors, Eugene and Randy Griebel, caused plaintiff to discover a loss within the meaning of the bond in 1985 and 1986. Here, defendant specifically relies upon the second paragraph of bond section 4, containing the bond's definition of discovery. See supra, p. 1482. The precise import of ...