Phoenix Savings and Loan, Inc. v. Aetna Casualty & Sur. Co., 11011.

• Court: United States Courts of Appeals. United States Court of Appeals (4th Circuit)
• Citation: 381 F.2d 245
• Docket Number: No. 11011.,11011.
• Parties: PHOENIX SAVINGS AND LOAN, INC., Appellant, v. The AETNA CASUALTY AND SURETY COMPANY, Appellee.
• Decision Date: 06 July 1967

381 F.2d 245 (1967)

PHOENIX SAVINGS AND LOAN, INC., Appellant,
v.
The AETNA CASUALTY AND SURETY COMPANY, Appellee.

No. 11011.

United States Court of Appeals Fourth Circuit.

Argued March 10, 1967.

Decided July 6, 1967.

381 F.2d 246

Clarence W. Sharp, Baltimore, Md. (Herbert H. Rosenbaum, Baltimore, Md., on the brief), for appellant.

Elmer W. Beasley, Hartford, Conn. (William B. Kempton, Baltimore, Md., Alexander M. Heron and Preston C. King, Jr., Washington, D. C., on the brief) for appellee.

Before SOBELOFF and CRAVEN, Circuit Judges, and SIMONS, District Judge.

SIMONS, District Judge:

Appellant, Phoenix Savings and Loan Inc., successor to Phoenix Savings and Loan Association, Inc. (herein referred to interchangeably as "Phoenix") brought this action against defendant, The Aetna Casualty and Surety Company (herein referred to as "Aetna") in the Superior Court of Baltimore City, Maryland, seeking indemnity under a Savings and Loan Blanket Bond, Standard Form No. 22, revised to September 1960, for losses claimed to have been sustained by Phoenix through numerous dishonest and fraudulent acts of its officers, employees, agents and/or directors. The losses alleged to have been covered by the bond involve some fourteen detailed documented transactions occurring between December 1, 1959 and July 17, 1961 totaling in excess of $630,000.00.

Aetna removed the action to the United States District Court for the District of Maryland based upon diversity of citizenship and the jurisdictional amount involved. 28 U.S.C.A. § 1332.

Aetna answered, denying most of the allegations in the complaint and asserting a number of affirmative defenses which challenged Phoenix' right to recover under the bond upon the following

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grounds: The persons alleged to have defrauded and caused Phoenix to suffer the alleged losses were not "employees" as defined by the bond; concealment by Phoenix of the alleged fraudulent acts when it applied for and obtained the bond; termination of the bond as to those persons who were employees upon discovery of the first fraudulent act on their part as provided in the bond; failure to give notice of the alleged losses within the time required by the bond;¹ and the bond does not cover the insured's own fraud

Phoenix set forth its cause of action in a six-page Declaration to which was attached a lengthy Proof of Loss (Exhibit "C") including attached exhibits 1 through 18. In these instruments Phoenix enumerated the fraudulent and dishonest acts committed by certain of its officers, employees, agents and/or directors and certain corporations owned by them. The alleged primary wrongdoers were: Bernard Jay Coven who served at various times as Phoenix' president, director, member of the executive committee, and attorney; Saul Marshall who served from time to time as secretary, assistant secretary, treasurer, comptroller, auditor, member of the executive committee and director; and Albert Miller who was an agent, conveyancer, and mortgage representative, but who never served as an officer or director. Coven was paid for his services on a fee basis, Marshall received a salary of $150.00 per month, and Miller received commissions on the transactions he handled.

The following represents the four main areas of alleged loss to Phoenix: (1) Albert Miller frauds from his pocketing $50,000.00 in connection with his purchase of second mortgages for Phoenix, and the loss of in excess of $100,000.00 from the unauthorized and fraudulent issue of Phoenix common stock to him; (2) $102,000.00 loss from fraudulent and illegal misuse of securities pledged by North Shore Realty Corporation and the wrongful conversion of collateral securities pledged by it to Phoenix for a loan of $172,500.00, which were used for the personal benefit of Coven and Miller; (3) Loss in excess of $600,000.00 from fraudulent and dishonest diversions of the proceeds of sale of 367,000 shares of Phoenix common stock to the public; (4) Loss in excess of $62,000.00 from the fraudulent and dishonest purchase and resale of mortgages to Phoenix by Great Eastern Mortgage Corporation and Commercial Finance and Acceptance Corporation (both organized and dominated by Coven and Marshall), which resulted in the diversion of profits from Phoenix to those two closely held corporations, and in "kickbacks" or "finders fees" to Miller.

Phoenix' original association, Phoenix Savings and Loan Association, Inc., was incorporated under the laws of Maryland on December 29, 1958 and conducted actively its business in the City of Baltimore, Anne Arundel County and Baltimore County until July 17, 1961 at which time it was placed in the hands of a conservator by the Circuit Court of Baltimore City.

Under the Association's Charter as amended the corporation was managed and controlled by a Board of Directors of not less than three nor no more than thirty. The Charter also provided for the issuance of Class A common stock, with approximately 367,000 shares being issued; Class B common stock with approximately 36,000 shares being issued; and Class C common stock of which approximately 400 shares were issued. The holders of the Class A and B stock had one vote for each of the shares held, and the Class C stockholders each had one vote. The Articles of Incorporation further provided that "the common stock Class A and common stock Class B shall be identical in all respects, except that

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no act of the Corporation requiring the consent of the stockholders shall be valid unless concurred in by not less than 75% of the holders of Class B common stock."

Phoenix' records² indicate that 17,000 shares of Class A common stock and 6,000 shares of Class B common stock were issued to Bernard Jay Coven; that 6,519 shares of Class A common stock and 1,850 Class B common stock were issued to Saul Marshall; and that 55,000 shares of Class A common stock were issued to Albert Miller or corporations owned and controlled by him. Phoenix' records further show that Coven, Marshall and Miller were employees of the corporation who performed various administrative acts in the day to day operations of the corporation.³ There is some dispute between Phoenix and Aetna as to the dates within which the alleged fraudulent transactions occurred, Phoenix contending that the bulk of the losses occurred from November 1960 to July 17, 1961 (the date when the conservator was appointed), and Aetna contending that the major portions of such transactions occurred before the end of December 1960. Nevertheless, there is no factual dispute that Aetna's Discovery Fidelity Bond No. 73 F 163 effective one year from December 1960 with a limit of liability of $100,000.00 for each loss covered effectively any of the alleged losses within the liability limit of the policy unless such losses are excluded or are not covered because of some other provision of the bond itself.

After issues were joined Aetna served numerous requests for admissions as to certain factual statements, and the genuineness of numerous documents were either admitted or denied by Phoenix.

Thereafter, pursuant to motion for summary judgment by Aetna and after lengthy arguments by counsel for the parties the court below on July 6, 1966 granted summary judgment in Aetna's favor concluding that "where individuals have organized a corporation to line their

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own pockets, and where they control substantially all of the activities of the corporation, their knowledge of the fraudulent nature of each and every questioned transaction must be imputed to the corporation. Since the first of these...