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Jacobs v. Fidelity & Deposit Co.

: March 16, 1953.


Author: Duffy

Before DUFFY, FINNEGAN and LINDLEY, Circuit Judges.

DUFFY, Circuit Judge.

Plaintiff brought this action on a fidelity bond issued by defendant, to recover losses allegedly sustained by it through fraudulent and dishonest acts of one of its employees. The case was tried to a jury which rendered a verdict for the defendant, upon which the district court entered the judgment from which this appeal is taken.

Plaintiff is engaged in the business of making first mortgage loans on real estate, including construction loans on buildings in the process of construction and loans to veterans which are guaranteed by the Veterans Administration (hereinafter referred to as VA). Advance Mortgage Company (hereinafter referred to as Advance) is a wholly owned subsidiary of plaintiff. Advance makes first mortgage loans insured by Federal Housing Administration (hereinafter referred to as FHA) and was organized for that purpose, as plaintiff at that time was a sole proprietorship and only a corporation could be an approved mortgagee on loans to be guaranteed under the National Housing Act, 12 U.S.C.A. ยง 1736 et seq., as amended, 50 U.S.C.Appendix, ยง 1882 et seq. Each company handled the interim financing from the making of the loan to the completion of the building, at which time the note and mortgage would be sold to an investor.

The fidelity bond issued by defendant to plaintiff is known as a "brokers' blanket bond" insuring among other things against "any loss through any dishonest, fraudulent or criminal act of any of the employees, including loss of property through any such act of any of the employees, whether acting alone or in collusion with others and wherever any such act may be committed." Defendant agreed to hold plaintiff and Advance harmless in an amount not to exceed $100,000.

It was alleged in the complaint that between August 1, 1947, and December 15, 1948, at a time when the fidelity bond was in full force and effect, one Erik T. Smith was employed by plaintiff and Advance as manager of their construction loan departments, and that while so employed he committed certain dishonest acts as a result of which plaintiff and Advance suffered losses in excess of $100,000. For 22 or 23 years before 1946, Smith had been engaged in various activities in the construction business. Immediately prior to his employment by plaintiff, he had been employed by the Walter Butler Company of St. Paul, Minnesota, which company was engaged in heavy industry construction. On Labor Day, 1946, Irvin Jacobs, president of plaintiff and of Advance, interviewed Smith in Chicago with reference to a job opening with his companies. Smith told Jacobs he had experience as a large project job estimator and had awarded contracts for the Butler Company and had been in actual charge of numerous large projects in the field. When asked by Jacobs whether he had experience in construction payouts Smith told him that when contracts which he had awarded reached the point at which the contractor was entitled to or desired to have money paid to him, such payments passed over his desk for approval. Smith had no previous experience in small home construction.

Smith commenced work for plaintiff and Advance on September 30, 1946, for an agreed salary of $9,000 per year as manager of the construction loan department of each company. Although Smith testified that detailed instructions as to his duties were not given to him by Jacobs at the time he was employed or on the day he started his work, he admitted that Jacobs told him that he was to make inspections to ascertain whether the work had been done before any payouts were made by him.

When Smith was first employed, his predecessor, Bjorklund, had left.He was informed as to the nature of his job by two employees who had been temporarily assigned to the construction loan office after bjorklund had departed. At first his only assistant was a stenographer. In April, 1948, Mr. Hodson, an estimator, was assigned to Smith's department. Construction work in which his employers were interested was scattered over an area extending from South Bend, Indiana, to Racine, Wisconsin. Smith testified that the office opened at 8:15 A.M. and that he worked practically every day until 7:00 or 8:00 P.M.; that he also worked Saturdays and made some inspections on Sundays. He had no means of private transportation until he purchased an automobile of his own in August, 1948, and up until that time he had to use public transportation, or occasionally rented an automobile, in order to inspect the jobs.

In 1948, plaintiff made arrangements with Westowns Construction Company, a subdivider, to consider the making of first mortgage loans on new homes to be constructed by it for purchasers of property in Flowerfield Acres, a subdivision near Lombard, Illinois. The lots in Flowerfield were to be sold only to veterans and all mortgage loans were to be guaranteed by VA in accordance with its regulations. Advance made similar arrangements with Community Developers, Inc., for loans to purchasers of property in Lakewood Heights, a subdivision near Mundelein, Illinois. All loans to be made in Lakewood were to be insured by the FHA. Smith had nothing to do with the original arrangements between plaintiff and Westowns or between Advance and Community.

Plaintiff does not claim that Smith personally profited by his actions which caused plaintiff's loss. Plaintiff urges that Smith's failure to carry out instructions given to him, and his failure to follow established practices of plaintiff and Advance showed a reckless disregard for the interests of his employer which, plaintiff says, amounts to dishonesty under the meaning of that term in the fidelity bond. Plaintiff says that Smith was guilty of acts of commission and omission which evinced a want of integrity and an intentional breach of trust. Plaintiff claims that by reason of such dishonest acts of Smith, its loss totaled $41,404.23 on loans made on property in Flowerfield, and that the loss of Advance amounted to $84,728.55 on loans made on property in Lakewood, a total of $126,132.78.

There was considerable dispute as to just what Smith's exact duties and obligations were. Jacobs testified that he told Smith he would be responsible for payouts; that he must protect the interests of the companies; that it was his duty to check plans and specifications to be sure construction could be completed for the amount stated by the loan applicant; that he would have to be sure FHA and VA regulations were met; that he was not to open a loan until there were ample funds in the loan account to insure completion; that he would have to watch out about utilities and he would have to approve the contractor in the first instance; that he would have to approve a sworn construction statement if the general contractor did not do all the work, and in cases of doubt he would have to check sub-contractors; that he would have to be sure critical materials were supplied; that he was not to make any payouts unless he knew work had been done and materials furnished and unless he had a proper order and a proper waiver; that he had to provide an adequate "buffer"; that he had to be sure a survey was in conformity with the plans and specifications; and that it was the practice of plaintiff and Advance not to make payouts until a house was under roof and not unless plaintiff and Advance were sure there was enough money in the loan to insure completion.

When Jacobs was asked to relate any specific instructions given to Smith as to how he was to perform his job, he testified that he told Smith it was the latter's duty to check plans and specifications on construction loans to verify costs; that Smith should be sure there was always enough money left in the loan to complete the building; that plaintiff must always have a buffer to provide for contingencies; that Smith must be sure public utilities and street improvements were installed; that he must be sure to inspect the progress of the work as it was done, and to make no payouts excepting for work done; and that he must check the commitments from FHA and VA so that all special conditions would be met.

Smith denied receiving most of the instructions which Jacobs testified he had given.Smith claimed there were no fixed procedures as to payouts and waivers, and that as he went along in his employment he worked out his own procedures. He further testified that he or others in his department made inspections of homes on which loans had been made; also that he did not to his knowledge make a payment to either Westowns or Community without having what he thought were proper documents.

Plaintiff and Advance did not suffer any loss except on loans made on properties in Flowerfield and Lakewood Subdivisions. There apparently is no complaint as to Smith's conduct of his department for a period of almost a year after he was employed and ...

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