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EMPLOYERS INS. OF WAUSAU v. DOONAN

July 21, 1987

EMPLOYERS INSURANCE OF WAUSAU, A MUTUAL COMPANY, AS ASSIGNEE OF BANK OF VIOLA, PLAINTIFF,
v.
EMORY LEE DOONAN, VIRGINIA LEE DOONAN, KIRK DOONAN, VICTOR DEAN DOONAN, RODNEY E. FLORES, MARGARET FLORES, DON FLORES, ROBERT H. SELL, LAURA J. FLORES, DAN ELLIOTT, DANIEL H. SELL, KIMBERLY S. ELLIOTT, DELORES M. CARRAHER, UNIVERSAL PROVISIONS, STEVE MASON, JUDITH FISHER, W.J. GALLAGHER, GLEN MILLIKEN, JAMES SLAVISH AND JACK LAMBIN, DEFENDANTS.



The opinion of the court was delivered by: Mihm, District Judge.

ORDER

Presently before this Court is Defendants', W.J. Gallagher, Glen Milliken, James Slavish, and Jack Lambin (hereafter Gallagher, Milliken, Slavish, and Lambin) Motion for Judgment on the Pleadings, and Defendant, Judith Fisher's (hereafter Fisher) Alternate Motion for Judgment on the Pleadings concerning the issue of the right to subrogation on the basis of a claim of negligence. After reviewing the pleadings and record created at the hearing held on March 27, 1987, the Court finds that both of the identified motions should be granted.

The claims in this case arise from the banker's blanket bond issued by Employers Insurance of Wausau (hereafter Employers) to the Bank of Viola (hereafter Bank), which insured the Bank against certain losses resulting from acts of the Bank's employees and third parties. In 1982, the Bank sustained a loss as a result of the fraudulent acts of its then president, and major (80%) stockholder, Emory Lee Doonan. The Bank's loss was reimbursed by Employers pursuant to the banker's special bond.

On May 18, 1983, Employers and the Bank entered into a release and assignment agreement, which assigned to Employers all claims that the Bank may have against any and all individuals responsible for the loss incurred. Relevant to the present motions, Employers has brought claims against the Bank's directors and officers, Gallagher, Milliken, Slavish, Lambin, and Fisher, alleging that the directors' and officers' negligence, gross negligence, and reckless conduct was the proximate cause of the Bank's loss. Employers assert that it should be permitted to recover from the directors and officers the sum paid to the Bank on the Doonan loss.

The issue presented in the Gallagher, Milliken, Slavish, and Lambin Motion for Judgment on the Pleadings is identical to the issue presented in Fisher's Alternate Motion for Judgment on the Motion to Dismiss. Therefore, the two motions will be consolidated for the purpose of this Court's analysis.

The issue presented in these motions is whether an insurance company, who paid its insured under a fidelity bond for a loss resulting from fraudulent acts of an employee, may, by obtaining an assignment from the insured bank of all causes of action that the bank may have against persons responsible for the loss, maintain a cause of action for negligence against the directors of the Bank. In essence, the Motions for Judgment on the Pleadings assert that (1) the insurer's right to prevail is subject to equitable principles that govern the doctrine of subrogation; (2) the insurer cannot avoid the application of these equitable principles by obtaining a written assignment from the Bank; (3) in balancing the equities, the paid insurer's equitable position lacks superiority to that of the Defendant directors, who are charged only with negligence; (4) accordingly, as a matter of law, a subrogation action against them cannot be sustained.

The parties concede the fact that there is no case directly on point in Illinois law. Under Illinois law, both legal (equitable) and conventional subrogation are recognized. Makeel v. Hotchkiss, 190 Ill. 311, 60 West Page 1222 N.E. 524 (1901); Western United Dairy v. Continental Mortgage Company, 28 Ill. App.2d 132, 170 N.E.2d 650 (1960). Under Illinois law, both conventional and legal subrogation involves a balancing of the equities. Makeel v. Hotchkiss, 190 Ill. 311, 320 (1901). Further, subrogation can only be enforced in equity, and will not be enforced when it would work injustice to others having equal equities. Id.

In Illinois, conventional subrogation differs from legal subrogation in that the third party is a "volunteer," with no obligation to discharge the prior debt or interest in the encumbered property, except for an agreement to do so. Western United Dairy v. Continental Mortgage Company, 28 Ill. App.2d 132, 135, 170 N.E.2d 650 (1960). Conventional subrogation is based on equitable principles. Id.

In the present case, Employers assert that their interests lie in both legal and equitable subrogation. It asserts that its legal subrogation rights arise out of the banker's special bond, and the fact that it reimbursed the Bank for its loss. Further, it asserts that its conventional subrogation rights arise from the assignment received from the Bank.

The Court finds Plaintiff's conventional subrogation claim to be somewhat disingenuous. As set forth in Western Dairy, under Illinois law a claim of conventional subrogation is founded on the fact that the third party so satisfies the debt as a "volunteer." Western United Dairy v. Continental Mortgage Company, 28 Ill. App.2d 132, 170 N.E.2d 650 (1960). In the present case, Employers certainly did not volunteer, in the true sense of the word, to reimburse the Bank. It received consideration for its acts, in the form of an insurance premium. Thus, the Court concludes that the interest that Employers possess are those that stem from their right to legal subrogation. What Employers seem to have is nothing more than a right to legal subrogation confirmed in writing. The Court finds that the Bank's assignment of claims adds no dimension to Employers' interest, nor does it give Employers a superior equitable position. Therefore, for Employers to succeed on their claim, it must show that the equities when balanced, tip in its favor. Makeel v. Hotchkiss, 190 Ill. 311, 60 N.E. 524 (1901).

In Illinois, legal subrogation is viewed consistently with how the concept seems to be viewed in other states, such as Florida and Wisconsin. National Casualty Company v. Caswel and Company, 317 Ill. App. 66, 45 N.E.2d 698 (1942). In light of the fact that Illinois' position regarding the nature of legal subrogation is consistent with that of the Florida and Wisconsin courts, this Court expressly adopts, in this case, the analysis followed in First National Bank of Columbus v. Hansen, 84 Wis.2d 422, 267 N.W.2d 367 (1978), and Dixie Bank of Dade County v. Employers Commercial Union Insurance Company of America, 463 So.2d 1147 (Fla. 1985).

Generally, there are three situations in which a fidelity insurer has been held to be subrogated to an insured's claims against third persons and employees. First, upon payment of a loss caused by the wrongful acts of a bonded employee, a fidelity insurer becomes subrogated to any right of action the employer may have against the defaulting employee. First National Bank of Columbus v. Hansen, 84 Wis.2d 422, 267 N.W.2d 367 (1978). See generally, 16 Couch on Insurance 2d, § 61, 202 (1966); 35 Am.Jur.2d, Fidelity Bonds and Insurance, § 101 (1967). Second, a fidelity insurer is subrogated to the insured's claim against third persons, who have not acted in good faith with due care, or who are chargeable with notice of the wrongful acts of the bonded employee. Annot. 95 ALR 269 (1935); 35 Am.Jur.2d, supra. Third, even though Illinois has not spoken to the following contention, some courts have held that a fidelity insurer is also subrogated to claims against third persons whose ordinary negligence contributed to the loss, particularly when the third person has benefitted from the transaction. See, e.g., Unity Telephone Company v. Design Service Company, Inc., 160 Me. 188, 201 A.2d 177 (1964); Barclay Kitchen, Inc. v. California Bank, 208 Cal.App.2d 347, 25 Cal.Rptr. 383 (1962); Jones v. United States Fidelity and Guarantee Company, 165 Va. 349, 182 S.E. 560 (1935).

In First National Bank of Columbus v. Hansen, 84 Wis.2d 422, 267 N.W.2d 367 (1978), the plaintiff, First National Bank of Columbus, filed suit against the defendants, Capitol Indemnity Corporation and Fidelity and Deposit Company of Maryland, bonding companies, to recover on two fidelity bank bonds issued to insure the bank against losses resulting from the fraudulent and dishonest acts of its employees. First National Bank of Columbus v. Hansen, 84 Wis.2d 422, 267 N.W.2d 367, 369 (1978). When the bank suffered losses in excess of $906,290.31, as a result of the dishonest and fraudulent acts of the bank's executive vice president, David Hansen, the bonding companies denied liability on the bond. 267 N.W.2d at 369. A third party complaint was filed by the bonding companies against the officers and directors of the bank, in their individual capacity. Id. The third party complaint alleged that the losses sustained by the bank were proximately caused by the ordinary negligence of these officers and directors. Id. The bonding companies alleged a right of subrogation to the bank's claim against its officers and directors for negligence, which permitted the defalcations of Hansen to occur. Id. at 370.

In Hansen, the court held that the balancing of the equities will not permit the fidelity insurer to be subrogated to the insured's claim of negligence against its own officers and directors. 267 N.W.2d at 371. The rationale for this rule is that the insurer "accepts not only the risk that some third party may cause the casualty, but also . . . that its own insured may negligently cause a loss." ...


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