Perkins v. Clinton State Bank, 78-1083

• Decision Date: 27 February 1979
• Docket Number: No. 78-1083,78-1083
• Parties: Ben Fred PERKINS, as Administrator with Will Annexed of the Estate of T. O. Perkins, Deceased, and Mary Perkins, Individually, Appellees, v. CLINTON STATE BANK, Appellant, v. FIDELITY AND DEPOSIT COMPANY OF MARYLAND, Appellee, G. C. Daugherty Properties, Inc., and G. C. Daugherty, Individually.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 327

593 F.2d 327

Ben Fred PERKINS, as Administrator with Will Annexed of the

Estate of T. O. Perkins, Deceased, and Mary

Perkins, Individually, Appellees, v. CLINTON STATE BANK, Appellant, v. FIDELITY AND DEPOSIT COMPANY OF MARYLAND, Appellee, G. C. Daugherty Properties, Inc., and G. C. Daugherty, Individually.

No. 78-1083.

United States Court of Appeals,

Eighth Circuit.

Submitted Sept. 12, 1978.

Decided Feb. 27, 1979.

John L. Johnson, Johnson & Lewis, Ltd., Little Rock, Ark., argued, for appellant; Fletcher C. Lewis, Little Rock, Ark., on brief.

Vincent Foster, Jr., Little Rock, Ark., argued and on brief, for appellee Perkins.

Ronald A. May, Wright, Lindsey & Jennings, Little Rock, Ark., argued and on brief, for appellee Fidelity & Deposit Co. of Maryland.

Before VAN OOSTERHOUT, ^* Senior Circuit Judge, LAY and BRIGHT, Circuit Judges.

LAY, Circuit Judge.

This is an appeal by the Clinton State Bank from a judgment for losses suffered by Mary Perkins and the estate of her deceased husband, T. O. Perkins. The trial court, the Honorable G. Thomas Eisele presiding, found that the defendant G. C. Daugherty fraudulently induced Thomas McKnight, an officer of the Bank, to release escrow documents which the Bank, as escrow agent, held as security for the protection of the Perkins in a complicated land transaction with Daugherty. The court found the Bank and Daugherty liable for damages suffered by the Perkins. The court further found the Bank's bonding agreement with Fidelity & Deposit Company of Maryland covered the loss sustained, but held that the Bank could not recover from Fidelity since it had failed to comply with the notice provision contained in the agreement.

On appeal the Bank contends the trial court erred in (1) holding the Bank had breached its fiduciary duties as escrow agent; (2) finding a causal relationship between the Bank's actions and the damages awarded; and (3) holding that the Bank failed to give timely notice of loss to Fidelity under the bonding agreement.

Facts.

In December of 1972, Mr. G. C. Daugherty, a third-party defendant in this suit, initiated efforts to purchase 800 acres of Arkansas land from Mr. and Mrs. Perkins. The trial court found that Daugherty acted with the specific intent to defraud the Perkins out of 80 per cent of the purchase price. Daugherty and G. C. Daugherty Properties, Inc., an alter ego "shell" corporation wholly owned by Daugherty, entered into an agreement to buy land from the Perkins. Under this agreement Daugherty executed a promissory note which made him personally liable for the purchase price due the Perkins. The debt was further secured by certain property owned by Daugherty in San Antonio, Texas and the 800 acre Arkansas tract. Upon the Perkins' recommendation, the Clinton State Bank was designated as the escrow agent. Pursuant to the escrow ¹ and purchase agreements, Daugherty deposited with the Bank, as security for the promissory note, a deed for three acres of the San Antonio land and a quitclaim deed from G. C. Daugherty Properties, Inc. conveying the 800 acre tract back to the Perkins.

In April 1973 Daugherty told Mrs. Perkins that he intended to sell the San Antonio property and apply the proceeds to pay off a large part of the $80,000 note. He further led Mrs. Perkins to believe that in order to complete the sale her signature on an addendum to the escrow agreement was necessary. Daugherty subsequently drafted the addendum, ² which Mrs. Perkins signed.

Thereafter Daugherty, on behalf of Daugherty Properties conveyed the San Antonio property to Tanzana, Inc., another "shell" corporation owned by Daugherty, and received a promissory note from Tanzana in the amount of $80,000 payable to Daugherty Properties in annual installments of $10,000. On the reverse side of the note Daugherty, on behalf of Daugherty Properties, assigned the note to Mrs. Perkins with recourse against Daugherty Properties. At the same time, Daugherty, now acting on behalf of Tanzana, executed a deed of trust upon the San Antonio property in favor of the Bank to secure the payment of the Tanzana note. Daugherty intentionally failed to note on the deed of trust the assignment to Mrs. Perkins.

Armed with the escrow agreement addendum, the Tanzana deed of trust, the Tanzana promissory note which had been assigned to Mrs. Perkins, and the deed from Daugherty Properties to Tanzana, Daugherty visited the Bank in May of 1973. During this visit Daugherty convinced the Bank's assistant cashier, Mr. McKnight, who was totally inexperienced in real estate matters, ³ that the addendum authorized the release of the documents held pursuant to the original escrow agreement upon receipt of proceeds in the amount of $80,000. The Bank accepted into escrow the above-listed documents, and in return marked the original promissory note from Daugherty to the Perkins "paid" and delivered it, along with the quitclaim deed for the 800 acres and the warranty deed for the San Antonio property, to Daugherty. Thus, Daugherty relieved himself of personal liability to the Perkins by substituting Daugherty Properties and Tanzana in his stead. No payments were made to the escrow account by Daugherty, Daugherty Properties or Tanzana. ⁴

On June 18, 1974, Mrs. Perkins' attorney wrote a letter to the Clinton State Bank concerning the possibility of filing "the appropriate action against all parties who are liable in any way . . . ." On August 6, 1975, Mrs. Perkins filed a complaint against the Bank, whereupon the Bank advised its insurer, Fidelity & Deposit Company, of the complaint and stated its belief that the loss alleged therein was covered by the Fidelity & Deposit Blanket Bond Agreement.

I. Action Against the Bank.

Breach of Bank's Fiduciary Duty.

The trial court found several instances in which the Bank breached its fiduciary duty as escrow agent. First, the Bank negligently released the originally escrowed documents to Daugherty. Second, the Bank assisted Daugherty in reselling the 800 acres by certifying that Daugherty had no obligation to the Perkins on the land. The Bank failed to notify Mrs. Perkins of the sale and made no attempt to collect for the escrow account the proceeds of the sale. And finally, the Bank was negligent when it filed the deed of trust to the San Antonio property without noting the assignment of said deed to Mrs. Perkins. This omission allowed Daugherty, acting as agent for Tanzana, to later resell the San Antonio property.

The trial judge's finding that the Bank breached its duty as escrow agent is not clearly erroneous. There exists ample evidence to support this finding.

Causation.

The Bank contends that even if it was negligent, "Daugherty had accomplished all necessary steps to complete his fraud from the date the Escrow was entered into, and no subsequent act or omission by the Bank affected this result." We reject this contention, and affirm, on the basis of the trial court's opinion, the finding that the original escrow agreement did "give to the Perkins substantial security arrangements to protect the payment of the $80,000 balance due on the transaction." We likewise sustain the trial court's decision for the reasons therein given that the Bank's negligence damaged the Perkins by compromising the security provided in the original escrow agreement.

II. The Fidelity Bond.

In a third party action the Clinton State Bank sought recovery for any possible loss to Perkins under its fidelity bond with Fidelity & Deposit Company of Maryland. The insuring agreement provided protection for:

Loss of Property (Occurring with or without negligence or violence) through . . . false pretenses . . . while the Property is (or is supposed to be) lodged or deposited within any offices or premises (is an insured event) . . . .

(Emphasis added.)

The district court denied the Bank recovery on the bond because the Bank failed to give timely notice of the loss. The notice provision of the bonding agreement provides that "(a)t the earliest practicable moment after Discovery of any loss hereunder the Insured shall give the Underwriter written notice thereof . . . ." (Emphasis added.) ⁵ The trial court held that the letter sent by Mrs. Perkins' attorney to the Bank on June 18, 1974, contained sufficient information when coupled with the knowledge McKnight had, to place the Bank on notice that it had sustained an insured loss. The district court additionally found that "at a minimum this letter required the Bank to inquire further into the Perkins-Daugherty escrow arrangement, and its own transactions with Mr. Daugherty, to determine its potential liability."

We respectfully disagree and reverse the judgment denying the Bank recovery under the policy.

On June 18, Mr. Carden, Mrs. Perkins' attorney, wrote to Howard Johnson, the president of the Clinton State Bank, as follows:

I have been contacted by Mrs. Mary Perkins, widow of Mr. T. O. Perkins, of Dallas, Texas, in regards to the possible filing of legal actions against Mr. G. C. Daugherty and the G. C. Daugherty Properties, Inc., for failure to comply with a certain contract of sales involving the sale of approximately 800 acres of land in Searcy County, Arkansas. The contract and escrow agreement was entered into on February 12th, 1973. Since the Clinton State Bank serves as escrow agent, I am sure that you will be a necessary party, if it becomes eminent (sic) that there is a need for filing suit.

I would like to know what documents you still have in your escrow file at the bank. It is my understanding that you should have a warranty deed, as well as a quitclaim deed, abstract of title and promissory notes on the 800 acres of land. Further, I understand that you also have in your possession certain warranty deeds and quitclaim deeds from G. C. Daugherty and the G. C. Daugherty Properties, Inc., on a certain tract or parcel of land located in San Antonio, Bexar County, Texas.

An addendum was added to the original...