Oklahoma Morris Plan Co. v. Security Mutual Cas. Co.

• Decision Date: 28 December 1970
• Docket Number: No. 69 C 18(2).,69 C 18(2).
• Parties: OKLAHOMA MORRIS PLAN COMPANY, a Corporation and Liberty Loan Corporation, a Corporation, Plaintiffs, v. SECURITY MUTUAL CASUALTY COMPANY, a Corporation, Defendant.
• Court: U.S. District Court — Eastern District of Missouri

323 F. Supp. 1057

OKLAHOMA MORRIS PLAN COMPANY, a Corporation

and

Liberty Loan Corporation, a Corporation, Plaintiffs, v. SECURITY MUTUAL CASUALTY COMPANY, a Corporation, Defendant.

No. 69 C 18(2).

United States District Court, E. D. Missouri, E. D.

December 28, 1970.

R. H. McRoberts, Bryan, Cave, McPheeters & McRoberts, St. Louis, Mo., for plaintiffs.

Ralph C. Kleinschmidt, Evans & Dixon, St. Louis, Mo., for defendant.

MEMORANDUM

MEREDITH, District Judge.

This case was tried to the Court without a jury. It is a suit on a bankers blanket bond issued by Security Mutual Casualty Company to General Contract Finance Corporation and Oklahoma Morris Plan Company to cover any losses of General Contract Finance Corporation or Oklahoma Morris Plan Company through fraud or dishonesty of its employees.

Liberty Loan Corporation is a Delaware corporation, with its principal place of business in Clayton, Missouri. Oklahoma Morris Plan Company is an Oklahoma corporation that was owned by Liberty at the time of trial. The defendant, Security Mutual Casualty Company, is a citizen of Illinois, with its principal place of business in Chicago. This Court has jursdiction under 28 U.S.C. § 1332.

Security Mutual Casualty Company issued its Bankers Blanket Bond No. 11315, effective as of April 1, 1966, in which the assured was designated as:

"GENERAL CONTRACT FINANCE CORPORATION, ETAL, ST. LOUIS, MISSOURI (PER JOINT ASSURED RIDER ATTACHED) and all nominees organized by it for the purpose of handling any of its business transactions (hereinafter collectively called the Assured),. * * *"

Oklahoma Morris Plan Company, a corporation, was included as one of the named insured on April 1, 1966, and at all times thereafter relevant to this loss.

On August 7, 1967, General Contract Finance Corporation executed an Instrument of Exchange (wherein it was referred to as "General") with Liberty Loan Corporation, providing, in part:

"1. General hereby transfers, assigns, and conveys to Liberty all of General's assets, real, personal or mixed, and wheresoever located, meaning by the term `assets' all of General's properties, funds, permits, licenses, rights, interests and claims of any description whatever, tangible or intangible, absolute or contingent, known or unknown, whether created by agreement or operation of law, and whether or not included or by generally accepted accounting principles includable in balance sheets, it being particularly understood, but not by way of limitation of this definition, that the term shall embrace any rights or claims against the United States or state, county, municipal or other governments for refunds of taxes paid and to adjustments of taxable income for any year because of losses or other events occurring in another year; except, however, that the following assets are not hereby transferred, assigned and conveyed to Liberty:

"* * *

"2. Simultaneously with the execution hereof, General has delivered to Liberty the following, the receipt of which is hereby acknowledged by Liberty:

"(A) Stock certificates, duly endorsed by General to Liberty or to Liberty's nominees as aforesaid, for shares of outstanding capital stock of all those subsidiaries of General which are listed in Schedule A attached to the aforesaid Plan of Reorganization, the shares evidenced by said certificates being represented by General as constituting all of the outstanding capital stock of said subsidiaries;"

Among the assets delivered to Liberty Loan Corporation were stock certificates, endorsed by General Contract Finance Corporation to Liberty Loan Corporation, or its nominee, covering all of the shares of the outstanding capital stock of Oklahoma Morris Plan Company, which are still owned by Liberty.

On January 10, 1968, Oklahoma Morris Plan Company discovered that Orval Jack Williams, an employee, had been embezzling company funds over a number of years by setting up fictitious loans to fictitious persons; signing the names of such fictitious persons to applications, notes, and payment cards; by causing checks to be drawn payable to such fictitious persons; and by endorsing the names of such fictitious persons on such checks, and appropriating the proceeds to his own use. Notice of the loss was reported to the defendant by letter, dated January 19, 1968.

On January 23, 1968, a copy of the sworn question and answer statement made by Orval Jack Williams, detailing his fraudulent transactions, together with a list of ninety-five outstanding fictitious loans, and Williams' affidavit, was sent to defendant's underwriting managers, Scarborough and Company.

On January 30, 1968, defendant gave notice of cancellation of its Bankers Blanket Bond No. 11315 to be effective on March 3, 1968.

Thereafter, on February 7, 1968, detailed information disclosing all the details of the loss was sent to the defendant's underwriting managers.

Formal sworn proof of loss was filed with Security on May 3, 1968.

Thereafter, defendant returned to plaintiffs the unearned premium on the bond for the period commencing as of March 2, 1968, to the expiration date, but retained the full pro rata premium on the bond for the period up to and including March 2, 1968.

On March 25, 1968, counsel for defendant came to St. Louis, reviewed the details of the loss with plaintiffs' auditor, and stated that he was satisfied as to the loss claimed and the compilation of evidence submitted to him.

This suit was filed on January 17, 1969. The net loss claimed by plaintiffs amounts to $75,868.67. The amount of the loss is not in question. The only question is which deductible applies.

The first issue in the case is whether the bond continued to cover Oklahoma Morris Plan Company after title to the stock of Oklahoma Morris Plan Company was transferred from General Contract Finance to Liberty Loan on August 7, 1967.

Fidelity bonds indemnifying employers against dishonest acts of their employees are to be construed broadly. In this context, doubt as to subject matter covered by a fidelity bond should be resolved, where reasonably possible, in the insured's favor. Providence Washington Ins. Co. v. Stanley, 403 F.2d 844 (5th Cir. 1968), rehearing denied 406 F.2d 735 (1969); American Ins. Co. v. First National Bank in St. Louis, 409 F.2d 1387 (8th Cir. 1969); Hansen & Rowland v. Fidelity & Deposit Co. of Maryland, 72 F.2d 151 (9th Cir. 1934).

In Couch on Insurance 2d, 24.17 (1960), the following statement is found:

"In the case of property insurance the insured must have had an insurable interest when the insurance contract was entered into * * * and when the loss is sustained. And since the right to indemnify accrues as of the time of the loss, the fact the insured thereafter parts with his interest or assigns the policy, does not defeat recovery."

After reviewing the evidence in the case and applying the above principles, it is the opinion of this Court that the bond continued to cover Oklahoma Morris Plan Company as a named insured after title to the stock of Oklahoma Morris Plan Company was transferred from General Contract Finance to Liberty Loan. The bond protected both General and Oklahoma Morris Plan jointly and severally. Thus, both companies were insured against this type of loss. Since the Oklahoma Morris Plan Company was a named insured under the policy, it has a right to recover under the provisions of the policy.

And, as pointed out in 9 Appleman, Insurance Law and Practice 5303:

"* * * a stockholder in a private corporation has an insurable interest in the corporate property, to the extent of * * * actual loss * * *."

General Finance had such an interest, which was assigned to Liberty Loan in the transfer agreement. Therefore, Liberty may sue on the bond.

The language of the bond describes the companies covered and requires no construction. It covers "General Contract Finance Corporation, et al., St. Louis, Missouri (per joint assured rider attached) and all nominees organized by it for the purpose of handling any of its business transactions (hereinafter collectively called the assured), * *"

The Joint Assured Rider attached provides, in part:

"1. From and after the time this rider becomes effective the Assured under the attached Bond are:

PER SCHEDULE `A' ATTACHED"

Schedule "A" as amended provides, in part, as follows:

"IT IS UNDERSTOOD and agreed that Schedule `A' of the attached Bond is amended as follows:

SCHEDULE `A'

General Contract Finance Corporation and only the following Associated, Subsidiary or Affiliated Companies:

Oklahoma Morris Plan Company —Oklahoma"

Followed by a long list of other named companies, all of whom, collectively, are referred to in the bond as the "Assured".

While Oklahoma Morris Plan Company and the other named companies are designated as being "Associated, Subsidiary or Affiliated Companies", the bond contains no provision requiring that the several companies must continue to be associated with, subsidiaries of, or affiliated with General Contract in order to remain covered under the bond. If the defendant had desired to be automatically relieved from liability in the event General Contract should dispose of its stock in any of the named assureds, it should have written such a provision into the bond.

Defendant also makes the contention that it had no notice of the acquisition of Oklahoma Morris Plan by Liberty. This Court finds that the defendant was advised and had knowledge in advance of the impending acquisition in August of 1967. On December 1, 1967, defendant was specifically advised of the acquisition of General Contract's assets, including all the various subsidiary corporations, by a letter from plaintiff's insurance agent. In the letter defendant was requested to change the endorsements on the bond. No action upon this request was taken. Thus, after having full knowledge of the acquisition and the details thereof, Security retained the full premium for the entire period up to March 2, 1968. This...