Thrift Federal Sav. & Loan Ass'n of Cleveland v. Overton, 89-1545

Decision Date05 December 1990
Docket NumberNo. 89-1545,89-1545
Citation563 N.E.2d 289,56 Ohio St.3d 48
CourtOhio Supreme Court

This appeal involves, due to the misappropriation of funds, an aborted real estate transaction. The subject of this transaction was real estate located in Sheffield Lake, Ohio (hereinafter "Sheffield Lake property").

The parties to this appeal agree that on May 22, 1979, Fidelity & Deposit Company of Maryland ("Fidelity"), appellant, issued to Republic Escrow Services, Inc. ("Republic Escrow") a "Comprehensive Dishonesty, Disappearance and Destruction Policy." The terms of the policy were effective May 22, 1979 through May 22, 1985 and obligated Fidelity to pay Republic Escrow for losses occasioned by the fraudulent or dishonest acts of Republic Escrow employees.

On December 16, 1983, Thrift Federal Savings & Loan Association of Cleveland ("Thrift") initiated an action to foreclose on the Sheffield Lake property. Thrift, as mortgagee, alleged that Overton, as mortgagor, failed to abide by the terms of a mortgage note which was secured by a deed to the Sheffield Lake property executed in favor of Thrift. In its complaint, Thrift requested that the Sheffield Lake property be sold; it also sought a determination of lien priorities with respect to the property. Overton failed to answer Thrift's complaint and, thereafter, a default judgment was entered in favor of Thrift and against Overton.

Apparently, the Home Savings & Loan Company ("Home Savings"), appellee, was permitted to intervene as a defendant in the aforementioned litigation between Thrift and Overton. Home Savings filed an answer to Thrift's complaint, as well as a third-party complaint naming as third-party defendants, inter alia, Robert Kline, Republic Escrow, Fidelity, and Frances and David Ferguson.

In its third-party complaint, Home Savings alleged that Overton conveyed the Sheffield Lake property to Frances J. Ferguson and that Frances and David W. Ferguson executed a promissory note in favor of Home Savings which was secured by a mortgage deed to the Sheffield Lake property. Further, Home Savings alleged that pursuant to an agreement between it and the Fergusons, Home Savings transferred funds to Republic Escrow which, by and through Robert Kline, had entered into an escrow agreement with the Fergusons and Overton. Pursuant to the terms of the escrow agreement, Republic Escrow was to forward the funds to Thrift for purposes of discharging Thrift's mortgage on the Sheffield Lake property. Home Savings alleged that Republic Escrow and/or Kline failed to perform under the escrow agreement and that Republic Escrow and/or Kline are "bonded" by Fidelity. Home Savings sought recovery of its loss from Kline, Republic Escrow and Fidelity. Further, Home Savings sought recovery against the Fergusons on the promissory note executed by them.

Kline and Republic Escrow failed to answer the third-party complaint and, thereafter, a default judgment was entered in favor of Home Savings and against Kline and Republic Escrow.

The Fergusons answered the third-party complaint and also cross-claimed against, inter alia, Kline, Republic Escrow and Fidelity. In their answer and cross-claim, the Fergusons alleged that they had an agreement to purchase the Sheffield Lake property from Overton and that, in conjunction with this real estate transaction, Kline and/or Republic Escrow acted falsely and fraudulently to the Fergusons' detriment. The Fergusons also admitted that Kline and Republic Escrow are "bonded" by Fidelity.

Fidelity responded to both Home Savings' third-party complaint and the Fergusons' cross-claim, alleging that Home Savings and the Fergusons lacked standing to assert a claim against Fidelity on the policy Fidelity issued to Republic Escrow.

Thereafter, Fidelity moved for summary judgment with respect to the claims against it by Home Savings and the Fergusons. The trial court found that Republic Escrow did not suffer a "loss" as a result of the default judgment rendered in favor of Home Savings and against Republic Escrow within the meaning of the policy issued to Republic Escrow by Fidelity. Therefore, the trial court found that Home Savings' third-party complaint and the Fergusons' cross-claim against Fidelity failed to state a cognizable claim for relief and, accordingly, Fidelity's motion for summary judgment was granted.

Subsequently, the trial court apparently conducted a bench trial concerning Home Savings' third-party complaint against the Fergusons. The trial court found that Home Savings transferred loan funds directly to Republic Escrow, which was owned and operated by Robert Kline. Further, the trial court also found that Kline embezzled the funds and, thereafter, had been found guilty on two counts of theft. The trial court held that no consideration had passed from Home Savings to the Fergusons to obligate the Fergusons on the promissory note they executed in favor of Home Savings.

Home Savings appealed. The court of appeals affirmed the judgment of the trial court concerning the lack of the Fergusons' liability to Home Savings. However, the court of appeals reversed the judgment of the trial court which had granted summary judgment to Fidelity. The court of appeals found that by virtue of the default judgment rendered in favor of Home Savings and against Republic Escrow, Home Savings was "equitably subrogated" to the rights of Republic Escrow on the policy issued by Fidelity to Republic Escrow. The court of appeals also found that the policy provided coverage for the loss. Pursuant to App.R. 12(B), the court of appeals entered judgment in favor of Home Savings and against Fidelity.

The cause is now before this court pursuant to the allowance of a motion to certify the record.

Schwartz, Kelm, Warren & Rubenstein, Richard A. Frye and Joanne F. Weber, Columbus, Freeman & Freeman and Harold J. Freeman, Norwalk, for appellee.

Arter & Hadden, Irene Keyse-Walker, Kris H. Treu and James H. Grove, Cleveland, for appellant.

DOUGLAS, Justice.

The issue before this court is whether Home Savings, a judgment creditor of Republic Escrow, can recover against Fidelity on the "Comprehensive Dishonesty, Disappearance and Destruction Policy" issued to Republic Escrow by Fidelity covering losses due to the fraudulent or dishonest acts of Republic Escrow's employees. We determine that the policy at issue does not cover Republic Escrow for any loss it might have sustained in the case at bar and, accordingly, we find that Home Savings has no right to recover under the policy.

The policy issued to Republic Escrow by Fidelity provides, in relevant part, that:

" * * * [Fidelity] in consideration of the payment of the premium, and subject to the Declarations made a part hereof, the General Agreements, Conditions and Limitations and other terms of this Policy, agrees with the Insured, in accordance with such of the Insuring Agreements hereof as are specifically designated by the insertion of an amount of insurance in the Table of Limits of Liability, to pay the Insured for:

" * * *

"I. Loss of Money, Securities and other property which the insured shall sustain, to an amount not exceeding in the aggregate the amount stated in the Table of Limits of Liability applicable to this insuring Agreement I, resulting directly from one or more fraudulent or dishonest acts committed by an Employee, acting 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 benefits, other than salaries, commissions, fees, bonuses, promotions, awards, profit sharing, pensions or other employee benefits earned in the normal course of employment." (Emphasis added.)

The policy defines an "employee" as follows:

" 'Employee' means any natural person (except a director or trustee of the Insured, if a corporation, who is not also an officer or employee thereof in some other capacity) while in the regular service of the Insured in the ordinary course of the Insured's business during the Policy Period and whom the Insured compensates by...

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