Twin City Fed. Sav. & Loan Ass'n v. Transamerica Ins. Co.

• Decision Date: 25 July 1969
• Docket Number: No. 19301.,19301.
• Citation: 413 F.2d 494
• Parties: TWIN CITY FEDERAL SAVINGS & LOAN ASSOCIATION, Appellant, v. TRANSAMERICA INSURANCE COMPANY, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

413 F.2d 494 (1969)

TWIN CITY FEDERAL SAVINGS & LOAN ASSOCIATION, Appellant, v. TRANSAMERICA INSURANCE COMPANY, Appellee.

No. 19301.

United States Court of Appeals Eighth Circuit.

July 25, 1969.

Bernard L. Balkin, of Achtenberg, Sandler & Balkin, Kansas City, Mo., for appellant.

Robert J. Mann, of McKenzie, Williams, Merrick, Beamer & Stubbs, Kansas City, Mo., for appellee, Donald G. Stubbs, Kansas City, Mo., on the brief.

Before MATTHES, MEHAFFY and LAY, Circuit Judges.

LAY, Circuit Judge.

Twin City Federal Savings & Loan Association (hereinafter Twin City) brought action under a blanket fidelity bond against Transamerica Insurance Company for certain losses arising out of monies advanced by Twin City to the Investment Corp. of Missouri during the years of 1960 and 1961. The funds were used by Woodridge Corp., as well as others, for the construction of homes in and about the Kansas City area. Losses arose when Investment Corp. became defunct and it was discovered that prior lien interests existed superior to those assigned to Twin City. Twin City brought action under its bond and moved for a summary judgment against Transamerica. Coverage under the bond was denied by Transamerica, who likewise moved for summary judgment on the basis that the losses by Twin City arose out of "loans" specifically excluded under the bond. The issue was submitted to the trial court upon a stipulation of facts. The trial court, Honorable John W. Oliver, granted judgment in favor of the bonding company, finding that the money transactions were "loans" specifically excluded under the bond. Twin City appeals. We affirm.

On appeal it is basically alleged: (1) the exclusionary clause of the bond in reference to "loans" is ambiguous and under Missouri law the terms of the policy are to be strictly construed, most strongly against the insurer; (2) that there is either no evidence at all or at least insufficient evidence in the record to sustain a finding that there was a "loan" by Twin City; conversely, that the overwhelming evidence demonstrates that there was in fact a "sale" of credit rather than a "loan."

The facts may be briefly summarized. Twin City is a federally chartered savings and loan association organized and existing under 12 U.S.C. § 1461 et seq. In late 1960 it entered into negotiations with one Charles Hayes, vice president of Investment Corp., to extend "a line of credit" to certain construction companies for the erection of private homes. Investment Corp. was in the real estate mortgage brokerage business. According to the evidence its primary role was to set up a line of credit with different financing institutions, such as Twin City, in which money would be lent to various builders in order to finance construction of private homes. The primary builder was Woodridge Corp., which in 1960 was also owned by the sole stockholder of Investment Corp., Donald F. Roberts.

Money was obtained by Investment Corp. using two different methods. In one instance, Investment would give the lending institution their own promissory note secured by assignment of the individual notes of the construction builder which were made payable to Investment Corp. The second method was used in dealing with federally chartered building and loan companies, such as Twin City. Under this method, the monies were advanced by having Investment Corp. make a direct assignment to Twin City of the builder's notes under a blanket agreement, whereby Twin City "purchased" the notes of the builders outright.

In each instance the construction company would pay off the notes direct to the lending agency. The reason for handling the transfer of funds by assignment and purchase-discount (1 percent retained by Twin City) rather than by direct loan to Investment Corp. was to circumvent certain federal regulations which restricted building and loan associations to a 90 percent loan of the collateralized builder's notes in their lending operations. See 12 C.F.R. § 545.6-17. By use of assignment and purchase the building and loan association was able to advance up to 99 percent of the value of the builder's loans.

Twin City and Investment Corp. negotiated the terms of their agreement by the exchange of several drafts. The original drafts related to a direct collateralized loan, but because of the necessity of compliance with the federal regulations, a different mechanical procedure was evolved denoting an actual "purchase" rather than a loan. However, the various terms set forth in the overall final agreement¹ manifest the purpose that all transactions were simply to extend financing by Twin City indirectly to the various building contractors.² as construction loans.

As mentioned, it was subsequently discovered that there existed prior liens on the properties in question and substantial losses were incurred by Twin City.

Twin City had a fidelity bond with defendant company which protected it from: "Any loss of Property through any other form of fraud or dishonesty by any person or persons, whether Employees or not." Excluded, however, from the above insuring clause is: "Any loss the result of the complete or partial nonpayment of or default upon any loan made by or obtained from the Insured, whether procured in good faith or through trick, artifice, fraud or dishonesty, except when covered by Insuring Clause 1 or 2."

Twin City urges that the word "loan" is ambiguous and should be construed favorably to the insured so as not to exclude the losses involved. In this regard, Twin City contends that this Circuit has conflicting decisions in Community Fed. Sav. & Loan Ass'n v. General Cas. Co. of America, 274 F.2d 620 (8 Cir.1960) (loan clause not ambiguous) and in Indemnity Ins. Co. v. Pioneer Valley Sav. Bank., 343 F.2d 634 (8 Cir. 1965) (loan clause ambiguous). Although the word "loan" might be defined in different ways, we do not agree that it lends ambiguity to the clause itself nor does this fact necessarily aid the insured here.

The rule for construction of an insurance policy is well established. Mr. Justice Sutherland stated in Bergholm v. Peoria Life Ins. Co., 284 U.S. 489, 492, 52 S.Ct. 230, 231, 76 L.Ed. 416 (1932):

"It is true that where the terms of a policy are of doubtful meaning, that construction most favorable to the insured will be adopted. * * * This canon of construction is both reasonable and just, since the words of the policy are chosen by the insurance company; but it furnishes no warrant for avoiding hard consequences by importing into a contract an ambiguity which otherwise would not exist, or, under the guise of construction, by forcing from plain words unusual and unnatural meanings."

See also Hartford Acc. & Indem. Co. v. Federal Deposit Ins. Corp., 204 F.2d 933, 937 (8 Cir. 1953), where Judge Sanborn reviewed a similar exclusion clause under Missouri law for this court by quoting additional language from Bergholm, supra, saying:

"`Contracts of insurance, like other contracts, must be construed according to the terms which the parties have used, to be taken and understood, in the absence of ambiguity, in their plain, ordinary, and popular sense.\' Bergholm v. Peoria Life Ins. Co., 284 U.S. 489, 492, 52 S.Ct. 230, 231, 76 L. Ed. 416; State ex rel. Prudential Ins. Co. of America v. Shain, 344 Mo. 623, 627, 127 S.W.2d 675, 677.

"It is not conceivable to us that any disinterested banker, insurance underwriter, or lawyer would construe the word `loan\', as used in the exclusion clause of this indemnity bond, to cover the obligation imposed by law to reimburse a bank for money or credit obtained through the use of worthless checks."

In the instant case, the end result does not turn upon any alleged ambiguity of the insurance policy itself. The sole question here is whether, under the facts involved and Missouri law, Twin City incurred a loss by making "loans." Both parties agree that Missouri law governs the transaction.

In Missouri the definition of a "loan" is established in early usury cases. The Missouri Supreme Court in Quinn v. Van Raalte, 276 Mo. 71, 205 S.W. 59, 67 (1918), adopts the definition of the New Jersey court in Freeman v. Brittin, 17 N.J.L. 191, where it was said:

"It is not necessary in order to constitute a loan, that there should be in very terms an application to borrow or an agreement to lend. Every advancement of money for the accommodation of another, to be repaid to the person making the advance by the person receiving it, or by any person for him, or by or out of his funds, is literally and legally a loan of money." (Emphasis ours.)

See also Bank of Slater v. Union Station Bank, 283 Mo. 308, 222 S.W. 993, 996 (1920), where the court said:

"To lend is to allow the custody and use of a certain thing, on condition of the return of the thing loaned, or, in the case of money, and perhaps other things, of its equivalent in kind. Webster\'s Dictionary; Century Dictionary; Anderson\'s Dictionary; Black\'s Dictionary; Words and Phrases, First Series, Vol. 5, p. 4196; Griffen v. Train, 40 Misc.Rep. 290, 81 N. Y.Supp. 977, loc. cit. 981."

Plaintiff urges that the terms of the contract between Twin City and Investment Corp. establish conclusively that the monies advanced were not loans but in fact purchases of credit and that therefore the exclusion is not applicable. However, we think it clear that the very language of the overall agreement as well as the completion bond attached, which speak in terms of "credit extension," "loan" and "borrowers," defeat this argument. And notwithstanding the mechanics of a "purchase" described in the contract itself, the overall agreement set forth, as well as the undisputed testimony, demonstrates that Investment was simply arranging extended credit for the building contractors. The Missouri court in General Motors Acceptance Corp. v. Weinrich, 218 Mo.App. 68, 262 S.W. 425, 428 (1924), has observed:

"A loan may be cloaked in the outward form and appearance of a purchase, in

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