THE ESTATE OF K.O. JORDAN, ET AL, Petitioners, v. HARTFORD ACCIDENT AND INDEMNITY COMPANY, Respondent.
No. 58725-6
Supreme Court of Washington
January 21, 1993
120 Wn.2d 490 | 844 P.2d 403
En Banc.
John F. Kruger (of Karr Tuttle Campbell), for respondent.
James J. Purcell on behalf of Escrow Association of Washington, amicus curiae for petitioners.
JOHNSON, J. — The petitioners seek review of a Court of Appeals decision holding that the respondent insurance company was not liable to the petitioners under the terms of a statutorily mandated fidelity bond. We hold that the insurer
Lakeside Escrow Corporation (Lakeside) conducted business at several offices in the Puget Sound area. The company was registered under
Thomas Tinsley was a shareholder, director, vice-president and employee of Lakeside. Beginning in May 1987, Tinsley embezzled money from the escrow trust account at Lakeside‘s Bellevue office and diverted the funds into the company‘s operating account to cover general operating expenses. To cover this embezzlement, Tinsley sometimes shifted money back from the operating account to the trust account. He also submitted false operating reports to the other Lakeside officers.
In December 1987, the Department of Licensing audited Lakeside‘s trust accounts and discovered Tinsley‘s thefts. As a result, the Department suspended Lakeside‘s escrow certificate and the bank froze all of Lakeside‘s trust accounts. The record reflects that Tinsley embezzled almost $180,000 from the trust accounts. Tinsley was subsequently sentenced to 17 months in prison for embezzling the trust account funds.
Jordan and the other petitioners were customers of Lakeside. Each of them had escrow funds in the Bellevue trust account, and each lost money as a result of Tinsley‘s thefts. The amounts they lost are:
| Estate of Jordan | $114,536.16 |
| Stewart and Susan John | 26,276.71 |
| Estate of Rodier | 15,371.24 |
| Pacific Group | 4,287.50 |
Lakeside filed for relief under Chapter 7 of the bankruptcy code. Lakeside‘s trustee in bankruptcy filed a claim
The Bankruptcy Court entered judgments against Lakeside in favor of the petitioners. The bankruptcy trustee then assigned Lakeside‘s claim under the bond to the petitioners. The petitioners sued on the bond in the Superior Court for King County. The Superior Court granted the petitioners’ motion for summary judgment, ruling that Hartford was liable under the bond.
Hartford appealed the superior court ruling. The Court of Appeals reversed the Superior Court, concluding that Hartford was not liable on the bond because Lakeside suffered no loss. Estate of Jordan v. Hartford Accident & Indem. Co., 62 Wn. App. 218, 813 P.2d 1279 (1991). We granted the petitioners’ request for review, and we reverse the Court of Appeals.
This case requires us to interpret a section of the Escrow Agent Registration Act.1 The Act is a comprehensive scheme that regulates the activities of escrow agents. The section at issue in this case provides:
At the time of filing an application as an escrow agent, or any renewal or reinstatement thereof, the applicant shall satisfy the director [of licensing] that it has obtained the following as evidence of financial responsibility:
(1) A fidelity bond... covering each corporate officer, partner, escrow officer, and employee. . . .
. . . .
For the purposes of this section, a “fidelity bond” shall mean a primary commercial blanket bond or its equivalent . . . . Such bond shall provide fidelity coverage for any fraudulent or dishonest acts committed by any one or more of the employees or officers as defined in the bond, acting alone or in collusion with others. Said bond shall be for the sole benefit of the escrow agent and under no circumstances whatsoever shall the bond-
ing company be liable under the bond to any other party. The bond shall . . . protect the [escrow agent] against the loss of money or other real or personal property belonging to the [escrow agent], . . . or for which the [escrow agent] is legally liable or held by the [escrow agent] in any capacity. . . .
The parties present two issues for resolution: (1) did the embezzlement from the trust accounts cause a loss to Lakeside within the meaning of
I
As a preliminary matter, we first address the issue of whether Jordan and the other petitioners2 have standing to sue under the fidelity bond. The bankruptcy trustee explicitly assigned Lakeside‘s cause of action under the bond to Jordan. Jordan then asserted a claim as assignee of Lakeside. An assignee steps into the shoes of the assignor, and has all of the rights of the assignor. Morse Electro Prods. Corp. v. Beneficial Indus. Loan Co., 90 Wn.2d 195, 198, 579 P.2d 1341 (1978). The assignee‘s cause of action is direct, not derivative. See Oklahoma Morris Plan Co. v. Security Mut. Cas. Co., 455 F.2d 1209, 1212 (8th Cir. 1972) (successor to named party succeeds to that party‘s right to sue under fidelity bond); Federal Deposit Ins. Corp. v. National Sur. Corp., 425 F. Supp. 200, 203 (E.D.N.Y. 1977) (trustee in bankruptcy has direct claim against bonding company). Because Jordan, as assignee, stands in the shoes of Lakeside and has all of Lakeside‘s rights under the bond, Jordan may assert Lakeside‘s cause of action under the bond.
Nonetheless, Hartford argued before the Court of Appeals that the bankruptcy trustee did not have the authority to assign Lakeside‘s rights under the bond to Jordan, and that Jordan therefore lacks standing to bring a cause of action
Said bond shall be for the sole benefit of the escrow agent and under no circumstances whatsoever shall the bonding company be liable under the bond to any other party.
According to Hartford, this language prohibits assignments of rights under the bond.
The Court of Appeals ruled that the trustee had the authority to assign Lakeside‘s action to Jordan, and that Jordan has standing to assert the action against Hartford. Estate of Jordan, 62 Wn. App. at 224. Hartford did not cross-appeal this holding and did not address the assignability issue in its answer to Jordan‘s petition for review. A respondent must raise in its answer any issue that it wishes this court to address.
The next question is whether Tinsley‘s embezzlement of the trust account funds resulted in a “loss” within the meaning of the statute. According to Hartford, Lakeside suffered no loss even though Tinsley embezzled almost $180,000 from the trust account. Hartford argues that because Tinsley diverted the embezzled funds into another Lakeside account, there was no diminution of Lakeside‘s total assets and therefore no loss to Lakeside.
Jordan argues that Tinsley‘s embezzlement resulted in a covered loss. We agree. The fidelity bond insured “against loss of money or other property which the Insured shall sustain.” Under the statute, that bond must protect
against the loss of money or other real or personal property . . . for which the obligee is legally liable or held by the obligee in any capacity. . . .
(Italics ours.)
Neither
[T]he rule is that the provisions of the statute pursuant to which a bond is given . . . are considered part of it. . . . Conditions repugnant to the statute will be treated as surplusage, and statutory provisions which are not expressed in the bond will be inserted therein.
When read in its entirety, the Act reflects a legislative intent to protect clients of escrow agents.
These requirements reveal that the overall purpose of the Act is to regulate escrow agents for the benefit of the public. Nonetheless, Hartford argues that the language of
The Court of Appeals, however, agreed with Hartford that Lakeside suffered no “loss” within the meaning of the bond or the statute. Estate of Jordan, 62 Wn. App. at 225. The court determined that Tinsley‘s embezzlement did not result in an actual loss to Lakeside, and therefore Hartford has no liability under its bond. To support its conclusion, the Court of Appeals relied primarily on two cases from the Fifth Circuit: Fidelity & Deposit Co. v. USAFORM Hail Pool, Inc., 463 F.2d 4 (5th Cir. 1972) and Everhart v. Drake Mgt., Inc., 627 F.2d 686 (5th Cir. 1980). See Estate of Jordan, 62 Wn. App. at 224-25. The court failed to recognize,
In White & Bollard, Inc. v. Standard Accident Ins. Co., 175 Wash. 174, 27 P.2d 123 (1933), an employee of a loan agent stole client money for her own use. The original theft occurred prior to the beginning of the bond coverage. The employee then diverted funds from various client accounts to other client accounts in order to cover up the original shortage. There was no diminution of the bank‘s assets during the term of the bond. Thus the issue in the case was whether the shifting of funds from one account to another amounted to a loss within the meaning of the bond. This court concluded that wrongfully diverting the money was a misapplication of funds that amounted to a loss. White & Bollard, 175 Wash. at 181. The court reasoned that
[t]o say that the transaction involved no pecuniary loss to the [insured], such as would entitle it to recover from [the insurer] under its bond, implies too narrow and technical a view of the contract made by the parties. Fidelity bonds, being contracts of indemnity against loss, are to be liberally construed in favor of the object sought to be obtained.
White & Bollard, 175 Wash. at 181. The court thus held that crediting the money to the wrong account was a loss within the meaning of the bond. White & Bollard, 175 Wash. at 181. See also Pacific Cy. ex rel. Hamilton v. Continental Cas. Co., 184 Wash. 521, 51 P.2d 1078 (1935) (county treasurer‘s shifting of funds to cover prior shortage was breach of duty covered by bond).
Despite the clear holding of White & Bollard, the Court of Appeals ruled Lakeside suffered no loss. That court relied on USAFORM and Everhart.
In Everhart, the Fifth Circuit stated in dicta that moving funds from one corporate account to another is a “shifting of liabilities” and not a loss covered under a fidelity bond. 627 F.2d at 691. The court based that dicta on its earlier holding in USAFORM. The court in USAFORM relied primarily upon Continental Cas. Co. v. First Nat‘l Bank of Temple, 116 F.2d 885 (5th Cir.), cert. denied, 313 U.S. 575, 85 L. Ed. 1533, 61 S. Ct. 1087 (1941).5 Our Court of Appeals opinion
The facts in Continental Casualty are similar to those in White & Bollard. Employees of a bank diverted funds from client accounts and the bank suffered an actual loss. As in White & Bollard, that loss occurred prior to the effective date of the bond. Thus the issue before the court was the same as in White & Bollard: whether the employees’ subsequent shifting of funds from one account to another for the purpose of covering the earlier shortages amounted to a loss within the meaning of the bond. The court held there was no loss because the bank‘s assets were not diminished. Continental Casualty, 116 F.2d at 887. The court cited no authority to support that proposition.
This court‘s holding in White & Bollard directly conflicts with the Fifth Circuit‘s holding in Continental Casualty. White & Bollard thus undermines the persuasive value of later Fifth Circuit cases that rely upon Continental Casualty. Therefore our Court of Appeals’ reliance on those cases was misplaced.6 The reasoning of White & Bollard is as sound today as it was in 1933, and we find that reasoning controlling. Tinsley‘s misappropriation of trust funds resulted in a loss within the meaning of the bond.
We emphasize that our holding is based on the special trust relationship that exists between an escrow company
III
The next issue is whether Tinsley‘s embezzlement of the trust funds is a “fraudulent or dishonest” act within the meaning of the statute. We hold that it is.
We look to standard English language dictionaries for the meaning of undefined terms in insurance policies. Boeing v. Aetna Cas. & Sur. Co., 113 Wn.2d 869, 877, 784 P.2d 507, 87 A.L.R.4th 405 (1990). A fraudulent act is synonymous with a deceitful act. See Webster‘s Third New International Dictionary 904 (1986). An act is dishonest if it involves a breach of trust or honesty. See Webster‘s Third New International Dictionary 650 (1986).
Tinsley embezzled money from Lakeside‘s trust accounts. In an effort to avoid detection, he occasionally
The court‘s reasoning in Hanson PLC v. National Union Fire Ins. Co., 58 Wn. App. 561, 794 P.2d 66 (1990) supports this conclusion. The fidelity bond at issue in Hanson PLC contained language virtually identical to the language in Lakeside‘s bond. The court in Hanson PLC determined that a fraudulent or dishonest act is any act “showing a want of integrity or a breach of trust, or an abstraction of funds, together with deceit and concealment.” 58 Wn. App. at 570. Tinsley‘s acts fit that definition. His embezzlement showed a want of integrity and a breach of client trust. He acted deceitfully and attempted to conceal his embezzlement. Therefore Tinsley‘s acts were fraudulent and dishonest.
Under a plain reading of the statute, the bond covers Tinsley‘s acts. The statute mandates that the bond provide coverage against the loss of money caused by ”any fraudulent or dishonest acts committed by any one or more of the employees or officers . . . .” (Italics ours.)
Hartford nonetheless argues that the bond does not cover Tinsley‘s acts. Hartford focuses on the following passage from the statute:
[The] bond shall provide fidelity coverage for any fraudulent or dishonest acts committed by any one or more of the employees or officers as defined in the bond, acting alone or in collusion with others.
(Italics ours.)
Second, Hartford‘s argument would require us to interpret the bond as limiting the statute‘s coverage requirements. Hartford bases its contention that Tinsley‘s acts are not covered on the following language from the bond:
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 benefit, [other than normal employee benefits].
Clerk‘s Papers, at 10. Hartford maintains that the above passage defines “fraudulent or dishonest acts” in a way that does not cover Tinsley‘s embezzlement of the trust funds.
This passage does not, however, define what constitutes a “dishonest or fraudulent” act. Instead, the passage purports to limit the type of fraudulent or dishonest acts the bond covers. The bond attempts to limit coverage to only those fraudulent or dishonest acts that were committed with the specific intent listed in the bond. The statute, however, requires that the bond cover ”any fraudulent or dishonest acts” that result in a loss. (Italics ours.)
If we accepted Hartford‘s argument, we would be allowing the insurer to provide less coverage than mandated by statute. This we cannot do. We must interpret the bond to cover all of the circumstances covered by the statute. See Tollefson, 7 Wn.2d at 552-53. Accordingly, the bond
Even if we were to accept Hartford‘s argument that the language of the bond can limit the statutorily mandated coverage, we would still be required to find that the bond covers Tinsley‘s acts. Hartford interprets the bond as covering actions committed by Tinsley with the “manifest intent” to cause Lakeside to sustain a loss and to obtain a financial benefit for Tinsley.
A person acts with manifest intent when he or she desires to achieve the particular consequences of the act or knows that the consequences are substantially certain to follow from the act. Hanson PLC, 58 Wn. App. at 571-72 (interpreting identical language in a fidelity bond); Bradley v. American Smelting & Ref. Co., 104 Wn.2d 677, 682, 709 P.2d 782 (1985). The actor does not have to desire the particular consequences in order for the court to find intent. Bradley, 104 Wn.2d at 682.
Bradley, 104 Wn.2d at 682 (quoting Restatement (Second) of Torts § 8A, comment b, at 15 (1965)). Thus Tinsley acted with manifest intent within the meaning of the bond because he knew that his embezzlement of funds from the trust account was substantially certain to result in a loss to Lakeside in its capacity as trustee, and in a benefit to himself.
Tinsley‘s conviction for embezzlement further indicates that he acted with intent to cause a loss.8 His conviction for embezzlement necessarily includes a determination beyond a reasonable doubt that Tinsley acted to deprive the rightful owner of the money. His occasional replacement of stolen trust funds does not change this analysis. The fact that he replaced some of the embezzled funds merely evidences a desire to not have his thefts discovered; it does not show that he lacked the intent to cause a loss. Cf. State v. Nicely, 171 Wash. 439, 446, 18 P.2d 503 (1933) (intent to return stolen funds is no defense to the crime of embezzlement); G. Bogert, Trusts and Trustees § 543, at 56 (2d rev. ed. Supp. 1992) (a trustee who engages in self-dealing breaches his or her duty of loyalty even where there is no loss to the trust); 90 C.J.S. Trusts § 270b, at 349 (1955) (mingling of trust funds with trustee‘s private funds breaches duty of loyalty even though trustee eventually replaces the funds and trust suffers no loss).
Tinsley‘s embezzlement resulted in a loss to Lakeside in its capacity as trustee. It is difficult to imagine how Tinsley could have embezzled the money without knowing that his actions were substantially certain to lead to a loss to Lakeside. Therefore he acted with manifest intent within the
Hartford also argues that Tinsley did not embezzle the trust funds for the purpose of obtaining a financial benefit for himself. The bond purports to cover only “dishonest or fraudulent acts committed by [an] Employee with the manifest intent . . . to obtain financial benefit for the Employee . . . other than salaries, commissions, fees, bonuses, promotions, awards, profit sharing, pensions or other employee benefits earned in the normal course of employment.” Clerk‘s Papers, at 10. Hartford argues that Tinsley did not embezzle the funds with a manifest intent to obtain a financial benefit other than “employee benefits earned in the normal course of employment.”
Tinsley embezzled money from the trust account in order to cover the general operating expenses of Lakeside. Among those expenses were several Lakeside debts for which Tinsley was personally liable. See Declaration of Joann Rutan; Clerk‘s Papers, at 46-47. Thus the record supports the inference that Tinsley‘s theft helped him to pay Lakeside debts for which he would otherwise be personally liable. Furthermore, his embezzlement helped keep Lakeside afloat, and benefited Tinsley in his role as a shareholder of that company.9 Tinsley‘s theft of the trust funds therefore provided him a financial benefit other than his normal employee benefits. The bond covers the loss resulting from that embezzlement.
IV
Jordan requests an award of attorney fees on appeal pursuant to our recent ruling in Olympic S.S. Co. v. Centennial Ins. Co., 117 Wn.2d 37, 811 P.2d 673 (1991). In Olympic Steamship we held that
an award of fees is required in any legal action where the insurer compels the insured to assume the burden of legal action, to obtain the full benefit of his insurance contract. . . .
117 Wn.2d at 53. Hartford argues that Olympic Steamship only allows awarding attorney fees to an insured and not to the insured‘s assignee. However, Hartford cites no authority for this proposition. We hold that Jordan is entitled to reasonable attorney fees in an amount to be determined by the Supreme Court commissioner pursuant to
CONCLUSION
Tinsley‘s embezzlement of the trust account funds was a fraudulent act within the meaning of the bond and the statute. That embezzlement resulted in a loss to Lakeside. Hartford is liable for that loss. We reverse the Court of Appeals and reinstate the superior court judgments.
DORE, C.J., and UTTER, BRACHTENBACH, DOLLIVER, SMITH, and GUY, JJ., concur.
ANDERSEN, J. (concurring in part, dissenting in part) — By awarding attorney fees in the absence of any contractual, statutory or recognized equitable ground for the award, the majority opinion perpetuates an error begun in the recent opinion of Olympic S.S. Co. v. Centennial Ins. Co., 117 Wn.2d 37, 52-53, 811 P.2d 673 (1991).
In my view, the holding in Olympic Steamship was an unwarranted rejection of the American rule on attorney fee awards — a rule this court has followed since its earliest days,10 and a rule which has generally been the law in the United States for more than 200 years.11
Until this court‘s decision in Olympic Steamship, the law in this state on attorney fees was consistent and clear; a recognized basis had to exist before such fees could be awarded.12
“The most careful and detailed early analysis of the American rule in the State of Washington is found in [State ex rel.] Macri v. Bremerton, 8 Wn.2d 93, 111 P.2d 612 (1941).” Talmadge, The Award of Attorneys’ Fees in Civil Litigation in Washington, 16 Gonz. L. Rev. 57, 60 n.13 (1980) (hereinafter referred to as Talmadge). In Macri this court held:
In absence of contract, statute, or recognized ground of equity, a court has no power to award an attorney‘s fee as part of the costs of litigation.
(Italics mine.) Macri, 8 Wn.2d at 113-14.
The equitable grounds upon which an award of fees may be based are (1) bad faith conduct of the losing party; (2) preservation of a common fund; (3) protection of constitutional principles, and (4) private Attorney General actions.13
This court‘s failure to adhere to its own pronouncements of law violates longstanding principles of stare decisis and “create[s] a feeling of general uncertainty as to the reliance which may be placed upon all decisional law.”14 In Crown Controls, Inc. v. Smiley, 110 Wn.2d 695, 704-05, 756 P.2d
When a certain legal principle has already been established in a jurisdiction, there is much to be said for its continued existence. The continuity of legal principles allows citizens to choose courses of action with a reasonable expectation of what the future legal consequences will be, even if those consequences might not arise for a considerable period of time. These interests, together with a desire to provide a society of laws and not of men, form the basis for the theory of stare decisis. . . .
. . . . The doctrine requires a clear showing that an established rule is incorrect and harmful before it is abandoned.
(Italics mine.)15
In Olympic Steamship there was no showing that the rule on attorney‘s fees was incorrect or harmful. There was no reason, compelling or otherwise, to depart from the rule. In fact, the issue was not even properly before this court. The briefs filed by the parties in Olympic Steamship did not even request the relief so broadly granted. After determining that a valid contractual basis existed for the award of attorney fees, the author of the majority opinion in Olympic Steamship, sua sponte — and by way of obiter dictum — proclaimed the following new rule:
[A]n award of fees is required in any legal action where the insurer compels the insured to assume the burden of legal action, to obtain the full benefit of his insurance contract . . . .
(Italics mine.) Olympic Steamship, 117 Wn.2d at 53.
The only clear authority cited by Olympic Steamship is a 1986 West Virginia case, Hayseeds, Inc. v. State Farm Fire & Cas., 352 S.E.2d 73 (W. Va. 1986). In rejecting both Hayseeds and Olympic Steamship, the Maryland Court of Appeals held that requiring attorney‘s fees to be paid by
insurers, who breach their contracts by failure to pay covered benefits . . . would probably mark the elimination of the American rule as to contract actions against insurers generally and
leave in doubt the efficacy of the American rule as to other types of contracts.
Collier v. MD-Individual Practice Ass‘n, 327 Md. 1, 17, 607 A.2d 537 (1992).16
While there are exceptions to the American rule,17 none was applicable in Olympic Steamship and none is applicable here. There simply was no reasonable basis for Olympic Steamship to create a new exception to the American rule on attorney fees in this state. The Olympic Steamship decision violated our own rules on stare decisis and plays havoc with fundamental principles of our judicial system.
The rule of Olympic Steamship, which the majority applies here, was nothing short of legislating. We should leave any change in the basis for attorney fee awards in insurance cases to those whose job it is to legislate. See Alyeska Pipeline Serv. Co. v. Wilderness Soc‘y, 421 U.S. 240, 249, 44 L. Ed. 2d 141, 95 S. Ct. 1612 (1975); Talmadge, 16 Gonz. L. Rev. at 74-75 (arguing that the American rule should be changed, but recognizing only legislative methods for accomplishing that change).
In the present case, unlike Olympic Steamship, there is no contractual basis for granting an award of attorney fees. I would thus deny fees and overrule Olympic Steamship.
DURHAM, J., concurs with ANDERSEN, J.
Reconsideration denied February 26, 1993.