K. K. HALL, Circuit Judge:
C. Douglas Wilson & Co. (Wilson), a mortgage broker, sustained losses in excess of $1,250,000 as a result of the mishandling of certain HUD/FHA loans by an employee, and filed a declaratory action in district court against its three defendant insurance carriers to fix their respective liabilities. On motion for nonsuit at the close of plaintiff’s evidence, the district court dismissed [1277]*1277St. Paul Fire and Marine Insurance Company (St. Paul) as a party. At the close of all the evidence, the jury returned a verdict for plaintiff against both the Insurance Company of North America (INA) and Hartford Accident and Indemnity Company (Hartford). The district court then granted a motion for judgment n. o. v. We affirm.
To resolve the question of liability in this ease we must focus attention upon the date of March 25, 1973, the dishonesty of J. L. Barksdale, then a vice president of Wilson, and the manner in which Wilson reacted to the discovery of Barksdale’s dishonesty.
St. Paul was the fidelity bond insurer prior to March 25,1973. INA and Hartford were the insurers after that date.1 The St. Paul policy provided coverage only for losses discovered during the policy period.2 The INA and Hartford policies expressly excluded coverage for losses resulting from the dishonest acts of any employee which occurred after the employer had knowledge of the employee’s dishonesty.3 The district court ruled, as a matter of law, that St. Paul was not liable because Wilson discovered its losses after the St. Paul policy had expired, and that INA and Hartford were not liable because Wilson knew of the dishonesty of its vice-president before the effective date of their policies.
The facts may be stated briefly. Wilson is a wholly-owned subsidiary of NCNB Corporation. The genesis of this lawsuit is found in various loan practices of J. L. Barksdale, then vice-president of Wilson in charge of all multi-family construction loans insured by the Secretary of HUD through FHA. On March 16, 1973, Robert Shaw, NCNB’s credit review officer, discovered during a routine audit that Barksdale was advancing construction monies to contractors before getting prior approval from HUD, which prior approval was one condition to participation in the HUD/FHA program. Shaw confronted Barksdale, who candidly admitted this practice; he also admitted that he falsely certified the dates and amounts of advances on standard HUD forms, to make those dates and amounts conform to the actual dates and amounts approved by HUD. Barksdale justified this practice by saying that “ . . . all construction lenders in FHA projects were handling. these [pre-advances and false certifications] on this basis and . . . FHA, or HUD, was aware of this practice. . . ”
Shaw, concerned about the situation, wrote a detailed memo to Wilson officials on March 18,1973. A meeting was held the following day to discuss the situation, but no action was taken against Barksdale, al[1278]*1278though the practice of making pre-advances “came to a screeching halt.” Wilson did not notify St. Paul, who was then the insurer on a fidelity bond, of Barksdale’s actions, nor did it notify INA or Hartford, who six days later were to become the insurers. Various Wilson officials testified at trial that, at the time, they considered Barks-dale’s actions to be bad business practice and poor judgment, but did not consider them dishonest or illegal. Significantly, Wilson argued vigorously both at trial and on appeal that no losses were occasioned by Barksdale’s practice of making pre-advances.4
During the week of April 23,1973, Wilson discovered that Barksdale had failed on several occasions to secure letters of credit which Wilson was obligated to hold in lieu of cash escrows required by FHA for its approval of permanent loan insurance for completed housing projects. As in the case of the pre-advances, Wilson discovered that Barksdale had falsely certified on FHA forms that he had in fact secured these letters of credit. Wilson considered these acts, which had the effect of exposing Wilson to substantial losses, dishonest and illegal, and immediately fired Barksdale and notified St. Paul, INA and Hartford of a potential claim. Wilson eventually suffered over $1,250,000 in losses due to Barksdale’s failure to secure the letters of credit, and this action was filed in district court to determine which if any of the three insurers were liable for the losses.
The INA and Hartford Policies
Both the INA and Hartford policies provided that coverage was deemed terminated or cancelled as to any employee as soon' as the Insured had knowledge that the employee had committed fraudulent or dishonest acts. Wilson admits, “with the benefit of hindsight,” that Barksdale’s false certification to HUD of the dates and amounts of pre-advances was a dishonest act, but insists that at the time it reasonably considered this to be merely poor judgment and bad business practice. INA and Hartford argue that Barksdale’s false certification of the pre-advances was dishonesty as a matter of law, and that Wilson had knowledge of this employee dishonesty before March 25, 1973, when the INA and Hartford fidelity bonds became effective. This would mean that, as to Barksdale, coverage under the bonds never went into effect.
Wilson’s argument hinges upon the distinction it attempts to make between Barksdale’s false certification of pre-advances and his false certification concerning the letters of credit; the former; it urges, is “technical only,” while the latter poses a much higher risk of loss exposure to Wilson. The district court found, and we agree, that this is a distinction without a difference. In both instances Barksdale certified false information on a HUD or FHA form, which form stated that criminal penalties attached for such false certifications,5 for the purpose of influencing HUD or FHA actions. The smaller potential for loss exposure to Wilson does not render one violation “technical.”
Wilson vigorously attempts to factually distinguish the authority cited by the district court, but we are persuaded by the reasoning in City Loan and Savings Co. v. Employers’ Liability Assurance Corp., Ltd., 249 F.Supp. 633, 656 (N.D.Ohio 1964) (citations omitted).
‘Dishonesty’, as used in a fidelity bond, is to be interpreted according to its usual and ordinary meaning. To constitute dis[1279]*1279honesty, the conduct need not amount to a crime and need only involve bad faith or a want of integrity or untrustworthiness or a disposition to lie or cheat or a faithlessness to a trust. To constitute dishonesty, there need not be an intent to profit or to cause a monetary loss to the employer.
Since we conclude that Barksdale’s false certification of pre-advances constitutes dishonesty as a matter of law and that Wilson had knowledge of it before the inception of the INA and Hartford policies, and since Wilson concedes that it did not notify INA and Hartford of Barksdale’s dishonesty, we sustain the conclusion of the district court that under the terms of their respective policies INA and Hartford cannot be held liable for Wilson’s losses. See footnote 3, supra.6
The St. Paul Policy
Wilson, INA and Hartford join in arguing that the district court erred in dismissing St.
Free access — add to your briefcase to read the full text and ask questions with AI
K. K. HALL, Circuit Judge:
C. Douglas Wilson & Co. (Wilson), a mortgage broker, sustained losses in excess of $1,250,000 as a result of the mishandling of certain HUD/FHA loans by an employee, and filed a declaratory action in district court against its three defendant insurance carriers to fix their respective liabilities. On motion for nonsuit at the close of plaintiff’s evidence, the district court dismissed [1277]*1277St. Paul Fire and Marine Insurance Company (St. Paul) as a party. At the close of all the evidence, the jury returned a verdict for plaintiff against both the Insurance Company of North America (INA) and Hartford Accident and Indemnity Company (Hartford). The district court then granted a motion for judgment n. o. v. We affirm.
To resolve the question of liability in this ease we must focus attention upon the date of March 25, 1973, the dishonesty of J. L. Barksdale, then a vice president of Wilson, and the manner in which Wilson reacted to the discovery of Barksdale’s dishonesty.
St. Paul was the fidelity bond insurer prior to March 25,1973. INA and Hartford were the insurers after that date.1 The St. Paul policy provided coverage only for losses discovered during the policy period.2 The INA and Hartford policies expressly excluded coverage for losses resulting from the dishonest acts of any employee which occurred after the employer had knowledge of the employee’s dishonesty.3 The district court ruled, as a matter of law, that St. Paul was not liable because Wilson discovered its losses after the St. Paul policy had expired, and that INA and Hartford were not liable because Wilson knew of the dishonesty of its vice-president before the effective date of their policies.
The facts may be stated briefly. Wilson is a wholly-owned subsidiary of NCNB Corporation. The genesis of this lawsuit is found in various loan practices of J. L. Barksdale, then vice-president of Wilson in charge of all multi-family construction loans insured by the Secretary of HUD through FHA. On March 16, 1973, Robert Shaw, NCNB’s credit review officer, discovered during a routine audit that Barksdale was advancing construction monies to contractors before getting prior approval from HUD, which prior approval was one condition to participation in the HUD/FHA program. Shaw confronted Barksdale, who candidly admitted this practice; he also admitted that he falsely certified the dates and amounts of advances on standard HUD forms, to make those dates and amounts conform to the actual dates and amounts approved by HUD. Barksdale justified this practice by saying that “ . . . all construction lenders in FHA projects were handling. these [pre-advances and false certifications] on this basis and . . . FHA, or HUD, was aware of this practice. . . ”
Shaw, concerned about the situation, wrote a detailed memo to Wilson officials on March 18,1973. A meeting was held the following day to discuss the situation, but no action was taken against Barksdale, al[1278]*1278though the practice of making pre-advances “came to a screeching halt.” Wilson did not notify St. Paul, who was then the insurer on a fidelity bond, of Barksdale’s actions, nor did it notify INA or Hartford, who six days later were to become the insurers. Various Wilson officials testified at trial that, at the time, they considered Barks-dale’s actions to be bad business practice and poor judgment, but did not consider them dishonest or illegal. Significantly, Wilson argued vigorously both at trial and on appeal that no losses were occasioned by Barksdale’s practice of making pre-advances.4
During the week of April 23,1973, Wilson discovered that Barksdale had failed on several occasions to secure letters of credit which Wilson was obligated to hold in lieu of cash escrows required by FHA for its approval of permanent loan insurance for completed housing projects. As in the case of the pre-advances, Wilson discovered that Barksdale had falsely certified on FHA forms that he had in fact secured these letters of credit. Wilson considered these acts, which had the effect of exposing Wilson to substantial losses, dishonest and illegal, and immediately fired Barksdale and notified St. Paul, INA and Hartford of a potential claim. Wilson eventually suffered over $1,250,000 in losses due to Barksdale’s failure to secure the letters of credit, and this action was filed in district court to determine which if any of the three insurers were liable for the losses.
The INA and Hartford Policies
Both the INA and Hartford policies provided that coverage was deemed terminated or cancelled as to any employee as soon' as the Insured had knowledge that the employee had committed fraudulent or dishonest acts. Wilson admits, “with the benefit of hindsight,” that Barksdale’s false certification to HUD of the dates and amounts of pre-advances was a dishonest act, but insists that at the time it reasonably considered this to be merely poor judgment and bad business practice. INA and Hartford argue that Barksdale’s false certification of the pre-advances was dishonesty as a matter of law, and that Wilson had knowledge of this employee dishonesty before March 25, 1973, when the INA and Hartford fidelity bonds became effective. This would mean that, as to Barksdale, coverage under the bonds never went into effect.
Wilson’s argument hinges upon the distinction it attempts to make between Barksdale’s false certification of pre-advances and his false certification concerning the letters of credit; the former; it urges, is “technical only,” while the latter poses a much higher risk of loss exposure to Wilson. The district court found, and we agree, that this is a distinction without a difference. In both instances Barksdale certified false information on a HUD or FHA form, which form stated that criminal penalties attached for such false certifications,5 for the purpose of influencing HUD or FHA actions. The smaller potential for loss exposure to Wilson does not render one violation “technical.”
Wilson vigorously attempts to factually distinguish the authority cited by the district court, but we are persuaded by the reasoning in City Loan and Savings Co. v. Employers’ Liability Assurance Corp., Ltd., 249 F.Supp. 633, 656 (N.D.Ohio 1964) (citations omitted).
‘Dishonesty’, as used in a fidelity bond, is to be interpreted according to its usual and ordinary meaning. To constitute dis[1279]*1279honesty, the conduct need not amount to a crime and need only involve bad faith or a want of integrity or untrustworthiness or a disposition to lie or cheat or a faithlessness to a trust. To constitute dishonesty, there need not be an intent to profit or to cause a monetary loss to the employer.
Since we conclude that Barksdale’s false certification of pre-advances constitutes dishonesty as a matter of law and that Wilson had knowledge of it before the inception of the INA and Hartford policies, and since Wilson concedes that it did not notify INA and Hartford of Barksdale’s dishonesty, we sustain the conclusion of the district court that under the terms of their respective policies INA and Hartford cannot be held liable for Wilson’s losses. See footnote 3, supra.6
The St. Paul Policy
Wilson, INA and Hartford join in arguing that the district court erred in dismissing St. Paul from the case at the close of plaintiff’s evidence. All of that evidence indicated that Wilson’s losses were occasioned solely by Barksdale’s failure to secure the letters of credit7 and that this failure was not discovered until the week of April 23,1973. The St. Paul policy provided coverage only for losses discovered during the policy period; the policy expired on March 25, 1973.
Defendants INA and Hartford were prepared to offer the testimony of J. L. Barksdale that Wilson had discovered the missing letters of credit, and thus its loss, before March 25, 1973. However, they did not file a cross-claim against St. Paul. The district court held that, even given the relaxed burden of proof in a declaratory action, it was the plaintiff’s burden — not INA’s or Hartford’s — to establish St. Paul’s liability. See 6A Moore’s Federal Practice U 57.31, at 266-71 (2d ed. 1974). Wilson presented no evidence upon which St. Paul could be held liable. INA and Hartford, who did not file a cross-claim against St. Paul and thus did not assume the role of plaintiff as against St. Paul, should not be heard to complain.
Conclusion
We find Wilson’s argument that the district court failed to consider the materiality of Wilson’s non-disclosure to the insurers to be refuted both by the language in the court’s opinion and by the evidence. The fact of an employee’s known dishonesty cannot be non-material where the insurer is underwriting a fidelity bond. Graham v. Aetna Insurance Co., 243 S.C. 108, 132 S.E.2d 273 (1963), relied upon by Wilson, is inapposite.
We agree with the district court’s analysis of the law of waiver and estoppel and with his conclusion that these defenses are unavailing where, as here, the effect would be to add to or extend policy coverage and, in any event, the defenses have no support in the evidence.
In light of our holding that neither INA nor Hartford may be held liable for Wilson’s loss because of Wilson’s non-disclosure of employee dishonesty, we need not consider the additional issue raised by Hartford [1280]*1280of whether it may not be held liable because its coverage is written on a “loss sustained” basis rather than on a “loss discovered” basis.
The unfortunate position in which Wilson finds itself was occasioned in part by sheer bad luck in timing as to the change in insurers and in part by the poor judgment of its own officers. However, mindful of Justice Holmes’ admonition, we cannot use this hard case as a vehicle to make bad law. Each issue raised in this appeal is analyzed at length in the district court’s opinion, and we affirm on the basis of that opinion.
AFFIRMED.