M. B. A. F. B. Federal Credit Union v. Cumis Insurance Society, Inc.

681 F.2d 930, 10 Fed. R. Serv. 1048

• Court: Court of Appeals for the Fourth Circuit
• Decided: June 17, 1982
• Docket: No. 81-1285
• Status: Published

Opinions

PER CURIAM:

This is an appeal by Cumis Insurance Society, Inc., defendant below, from a judgment rendered against it in favor of. Myrtle Beach Air Force Base Federal Credit Union (Credit Union) for $242,080.75 on a bond which covered, among other things, loss to the Credit Union through the failure of one of its employees “to well and faithfully perform his duties.”

The Credit Union was created under the provisions of the Federal Credit Union Act, 12 U.S.C. §§ 1751 et seq. It is governed by a Board of Directors; however, approval of loan applications was vested in a three member Credit Committee, pursuant to 12 U.S.C. § 1761c.

Prior to June 1973, John Stowe approached Jack Montgomery, general manager of the Credit Union, about a real estate loan.¹ Montgomery apparently recommended to the Board that the loan be made. On June 13,1973, the Board met and recommended to the Credit Committee the approval of a $200,000 loan to Stowe.² On June 19, 1973, a local appraiser valued the property for which the loan was sought at $285,000. On June 27, Stowe formally filed an application for a loan. On June 29, he and Montgomery met in the latter’s office; Montgomery told one of the disbursing officers to process the loan, which she did, returning the documents and a check to Montgomery, who signed the check and disbursed it. Also on June 29, the Board, in a telephone meeting, recommended to the Credit Committee the approval of a loan of $225,000 to Stowe. On this same date Stowe purchased the mortgaged property for $72,000.

The Credit Committee did not review the loan until four days after it was made. One member approved the loan application and initialed it, but forged the initials of another member. Approval by at least two members is required.

Stowe ultimately defaulted on the loan; the Credit Union foreclosed on the mortgage, bought the property and sold it for $64,000. After a deficiency judgment against Stowe was discharged in bankruptcy, the Credit Union brought this action against Cumis on its surety bond. The jury found Cumis liable on the bond due to the negligence of Jack Montgomery, but specifically exonerated the other employees.

[I] The linchpin of Cumis’ arguments on appeal is that the trial court applied an incorrect standard in allowing the Credit Union to recover under the bond for a loss caused by the negligent acts of ah employee. It contends instead that to prove an employee’s failure “to well and faithfully perform his duties,” it is necessary to show intentional or willful misconduct.³

Insuring Clause A of the bond provided, among other things, coverage:

For direct loss of, or damage to, any property, as defined herein, caused by the fraud or dishonesty of any of the Insured’s employees, as herein defined, .. . or through the failure on the part of such employee ... to well and faithfully perform his duties.

The trial court, in interpreting the clause to insure against negligence, relied in part on Minor v. The Mechanics Bank of Alexandria, 26 U.S. (1 Pet.) 46, 7 L.Ed. 47 (1828). In Minor, the Supreme Court considered the argument that the language “well and truly execute the duties of cashier” was merely a stipulation for honesty, and not for skill, capacity, or diligence, but held to the contrary.

‘Well and truly to execute the duties of the office,’ includes not only honesty, but reasonable skill and diligence. If the duties are performed negligently and unskillfully — if they are violated, from want of capacity or want of care, they can never be said to be ‘well and truly executed.’ The operations of a bank require diligence, with fitness and capacity, as well as honesty, in its cashier; and the security for the faithful discharge of his duties would be utterly illusory if we were to narrow down its import to a guarantee against personal fraud only.

Id. at 69. It is true, as Cumis suggests, that the Supreme Court’s statement in Minor was dicta, but it is on point and this interpretation has been adopted in later cases.⁴

We agree with the district court’s holding that the quoted coverage insures against negligence. As it reasoned, Insuring Clause A covers two types of conduct — “fraud or dishonesty” and that an employee “well and faithfully perform” — if the latter clause is to have any independent significance it must mean something other than fraud or dishonesty.

Cumis next contends there was not sufficient evidence of negligence by Montgomery. We disagree. He recommended the loan to the Board without any evidence of the value of the real estate, he failed to check out the collateral, there was some evidence that he knew what Stowe actually paid for the property, and he directed another employee to process the loan as required, knowing that it had not been approved by, or even submitted to, the Credit Committee and he disbursed it to Stowe.

Stowe did not appear at trial, but the Credit Union offered his deposition in an attempt to prove that Montgomery had actual knowledge that the property was purchased for only $72,000 — thus conclusively showing Montgomery’s negligence. Cumis contends that Stowe’s deposition testimony was inadmissible under Fed.R.Evid. 602 because Stowe had no personal knowledge of whether Montgomery knew of the purchase price. The point is not well taken. It is true that Stowe did not state definitively that he personally discussed the purchase price with Montgomery — only that it was possible — and that much of his testimony in this respect was to the effect that he thought his attorney had told Montgomery. Rule 602, however, does not require that the witness’ knowledge be positive or rise to the level of absolute certainty. Evidence is inadmissible under this rule only if in the proper exercise of the trial court’s discretion it finds that the witness could not have actually perceived or observed that which he testifies to. 2 J. Wigmore, Evidence § 658 (J. Chadbourn Rev. 1979); 3 J. Weinstein & M. Berger, Weinstein’s Evidence, ¶ 602[02] (1981). Although the question of admissibility was certainly close, we cannot say that the trial court abused its discretion in ruling that appellant’s objection went to credibility, not to admissibility, and in admitting the evidence for the jury to determine the weight to be given to Stowe’s admittedly equivocal testimony.

We have examined the other assignments of error and find them to be without merit. The judgment of the district court, 507 F.Supp. 794, is, therefore, affirmed.

AFFIRMED.

1 . Stowe and Jack Montgomery had known each other for some time prior to the making of this loan. They had coffee and lunch together, were golfing partners, and Montgomery was a guest on Stowe’s fishing boat. In 1971, Montgomery had purchased a year-old Lincoln Continental automobile from Stowe, assuming a loan of approximately $3,800. After Montgomery left the Credit Union, he shared office space with Stowe and acquired a real estate license under his sponsorship. Fifteen months prior to the loan in question, Montgomery turned over for collection four delinquent accounts of Stowe; he subsequently cured the defaults.

2 . The Credit Committee apparently never received this recommendation.

3 . The trial court instructed the jury:

Now, the words to well and faithfully perform his or her duties as applies to each of the employee Defendants in this case means that each of these employees must perform his or her duties with reasonable skill and diligence, that is, they must not be negligent or fail to use due care in performing their duties.

Now, negligence means the failure to act as an ordinary and reasonable person would act under similar circumstances. Negligence, really you determine whether they well and faithfully performed their duties by determining whether they exhibited reasonable skill and diligence; and that really means were they negligent or were they not negligent.

Now, the issues before you basically are were any of the three named employees ... negligent, because that’s what failure to well and faithfully perform their duties really means. The bond says well and faithfully perform his or her duties and I have told you that that means negligence.

4 . King Edward Employees Federal Credit Union v. Travelers Indemnity Co., 206 F.2d 726 (5th Cir. 1953); Morley v. McGuire, 219 Ark. 206, 242 S.W.2d 112 (1951); Frink v. Southern Express Co., 82 Ga. 33, 8 S.E. 862 (1889); Cas-tetter v. Barnard, 98 Ind.App. 210, 183 N.E. 681 (1932); American Bank v. Adams, 29 Mass. (12 Pick.) 303 (1832); Fiala v. Ainsworth, 63 Neb. 1, 88 N.W. 135 (1901); Concord v. Peerless Ins. Co., 110 N.H. 497, 272 A.2d 588 (1970); Hoboken v. Evans, 31 N.J.L. 342 (1865); Ellison v. Hunsinger, 237 N.C. 619, 75 S.E.2d 884 (1953).