Mid-States Insurance Co. v. American Fidelity & Cas. Co.

• Decision Date: 12 June 1956
• Docket Number: No. 14695.,14695.
• Citation: 234 F.2d 721
• Parties: MID-STATES INSURANCE COMPANY, a corporation, and The Anglo California National Bank of San Francisco, Appellants, v. AMERICAN FIDELITY AND CASUALTY COMPANY, Inc., a corporation, American Plan Corporation, a corporation, Mark Hart, Joseph Lotz, Ralph L. Smead and L. Sudekum, Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

234 F.2d 721 (1956)

MID-STATES INSURANCE COMPANY, a corporation, and The Anglo California National Bank of San Francisco, Appellants, v. AMERICAN FIDELITY AND CASUALTY COMPANY, Inc., a corporation, American Plan Corporation, a corporation, Mark Hart, Joseph Lotz, Ralph L. Smead and L. Sudekum, Appellees.

No. 14695.

United States Court of Appeals Ninth Circuit.

June 12, 1956.

Wallace, Garrison, Norton & Ray, Maynard Garrison, San Francisco, Cal., Lewis Schimberg, Chicago, Ill., for appellant, Mid-States.

Severson, McCallum & Davis, Almon B. McCallum, Nathan R. Berke, San Francisco, Cal., for appellant, Anglo Bank.

Bronson, Bronson & McKinnon, E. D. Bronson, Harold R. McKinnon, San Francisco, Cal., for appellees.

Before HEALY, POPE and FEE, Circuit Judges.

POPE, Circuit Judge.

This is an appeal from a judgment which denied relief to Mid-States Insurance Company, plaintiff in the court below, and also denied relief to Anglo-California National Bank of San Francisco, which intervened in the action and filed its complaint against the same defendants, appellees herein.¹

The facts in the case appear in the trial court's opinion which is reported in 125 F.Supp. 34, where they are outlined at greater length than will be necessary for the purposes of this opinion. As the findings disclosed, both Mid-States and the defendant American Fidelity and Casualty Company were corporations engaged in the business of writing and selling automobile insurance policies in the State of California. Mid-States is an Illinois corporation and American Fidelity is chartered in Pennsylvania. The defendant, American Plan Corporation, is a New York corporation; it was the manager of the automobile physical damage insurance business of American Fidelity.

In May, 1947, Mid-States appointed the defendant Joseph Lotz its general agent for California, and he remained an agent in that company until January 21, 1952. In November, 1950, American Fidelity also appointed Lotz as its general agent for California, and he continued in that capacity until August 22, 1951. Both of these agencies provided for an arrangement whereby the agent received his commission under what is called the "retrospective" plan. This meant that the agent was required to pay to the insurance company the full amount of the premium collected on the insurance written without deducting his commission. Although the agent had an agreed period of time after the close of each month in which to pay the month's premiums to the insurance company, yet at the end of that so-called "credit period" he had to pay the full amount of the premium to the company. At a later time, after the loss experience of the company upon the insurance written had been determined, the agent's commission would be paid to him, or he would be credited with it, the commission being dependent upon the company's loss experience.

By August 1, 1951, Lotz was indebted to Mid-States for approximately $30,000, and to American Fidelity for approximately $190,000. By August 22, 1951, this indebtedness to American Fidelity had climbed to approximately $247,500. Within the next few months and before January 1, 1952, Lotz' indebtedness to American Fidelity was completely liquidated, but within the same period his indebtedness to Mid-States increased to a sum in excess of $287,000. The issues raised by Mid-States relate to transactions by Lotz and American Fidelity during this period of a few months whereby American Fidelity succeeded in collecting in full the large amount previously owing to it, and Mid-States was left with a similarly large uncollectible claim against Lotz who was insolvent. It is alleged that in the main this was accomplished through various acts of Lotz performed with the knowledge and collaboration of American Fidelity whereby he improperly transferred to Fidelity the premiums collected by him on policies written for Mid-States, which premiums he held in trust for that company. It is also alleged that some $61,000 of this former indebtedness to American Fidelity was liquidated by procuring Mid-States to rewrite with its own policies a block of insurance previously written by American Fidelity on which the premium value was $61,000, and that this rewriting on the part of Mid-States was procured by the fraudulent representations and misstatements made to it by the officers of American Fidelity. Thus, it will be noted, Mid-States' complaint against American Fidelity is based in part upon its claim that it may follow trust funds wrongfully diverted by Lotz into the hands of American Fidelity which is charged not only with knowledge of their improper diversion but with actively procuring the diversion; and in part upon its claim of loss arising out of the alleged fraud and misrepresentation relating to the $61,000 mentioned.

What transpired within this comparatively short period of time during which American Fidelity collected the large indebtedness from what Mid-States claims was its funds, is rather fully outlined in the trial court's opinion and in its findings. By the middle of August, 1951, Hart, President of American Fidelity, had become much concerned over the large amount owing by Lotz, much of it past due and delinquent. A large check from Lotz had been dishonored by the bank. Hart had Lotz and his office manager, Smead, go to New York to discuss these delinquencies. Lotz was strongly urged by Hart to take some steps at once in order to provide funds to pay off American Fidelity. Immediately after this meeting in New York, Lotz went to Chicago and negotiated a new and more favorable agency contract with Mid-States, giving that company assurance of increased business. At the same time Smead returned to California to speed up collections from Lotz' sub-agents. About a week after the New York meeting Hart flew to Lotz' office in Oakland for further conferences with Lotz and Smead and on August 22, 1951, defendants American Fidelity and American Plan executed the written contract with Lotz which is described in the trial court's opinion.

This writing terminated Lotz' agency for American Fidelity; it called for payment and liquidation of his total indebtedness to American Fidelity by September 15, 1951, and it made Smead the agent of American Plan with authority over the American Fidelity end of Lotz' agency. At the same time Hart gave Smead a letter of instructions which read as follows: "Under even date memorandum of agreement has been executed by Joseph Lotz which in part stipulates that you will serve as the representative of American Plan Corporation with respect to the ultimate liquidation of all monies referred to in Paragraphs 1 and 2 ($247,000.00 owing by Lotz to American Fidelity) in said agreement.

"As the representative of this corporation you have full authority to deposit to the account of The American Fidelity and Casualty Company at the Central Bank in Oakland all monies received by Lotz. * * * You are to have full and supreme authority regarding financial affairs of Joseph Lotz, subject to instructions that may be transmitted to you from time to time by The American Plan Corporation, and in the event that you are prevented from performing your responsibility in any respect it will be your duty to notify immediately The American Plan Corporation.

"In consideration of the proper performance of your duties as representative and in the event the items referred to in Paragraphs 1 and 2 of said agreement are completely liquidated by September 15, 1951, you are to receive a fee from us in the sum of $1,000.00."

Following this arrangement Lotz wrote no more business for American Fidelity but proceeded to procure a large volume of insurance for Mid-States, to issue the latter's policies, and to collect the premiums thereon.

The record shows that in large part these premiums collected on account of Mid-States' business became the funds which were used to pay off Lotz' indebtedness to American Fidelity. Thus at the time Hart was at Oakland making the arrangement previously described, Hart, Lotz and Smead discussed a contemplated plan whereby Lotz would take over and rewrite a large volume of automobile insurance previously written by a concern known as Public Service Insurance Company. This arrangement was carried out as planned and this block of insurance policies was rewritten by Lotz in Mid-States. This involved the cancellation by Public Service of policies representing gross premiums of $150,000. The policies were rewritten in Mid-States for their unexpired terms. The portion of the premiums representing these unexpired terms were paid by checks of Public Service and made payable to Mid-States. These premiums, thus owing to Mid-States, aggregating some $96,000, were deposited by Lotz in his own trustee account, and approximately $90,000 thereof were paid to American Fidelity. Hart knew that the checks had been made payable directly to Mid-States, and he knew that the $90,000 came from this source.

Because of the view which the trial court took of this and other transactions by which Lotz, following termination of his agency for American Fidelity continued to write policies in the name of Mid-States, collecting the premiums and diverting those to the liquidation of his indebtedness to American Fidelity, the trial court made no findings as to either the specific or the aggregate amounts of the transactions thus handled. But it is plain from the record that these totaled large sums.

When Lotz' agency for American Fidelity terminated on August 22, 1951, there was a substantial amount of uncollected premiums arising out of business previously written for American Fidelity. It is not entirely clear whether that amount was $75,000 or $140,000, but in any event it was far less than the $247,000 which Lotz owed to American Fidelity, and since the latter sum was liquidated, it appears from the record that the liquidation in large part came from sources similar to these Public...