United States Court of Appeals,

Fifth Circuit.

No. 92-2620

Summary Calendar.

In the Matter of WORLD HOSPITALITY LIMITED, Debtor.

Rodney TOW, in place of William E. Heitkamp, Trustee, Appellant,

v.

Kenneth S. WOHL and Fidelity & Casualty Company, Appellees.

Feb. 16, 1993.

Appeal from the United States District Court for the Southern District of Texas.

Before JOLLY, DUHÉ, and BARKSDALE, Circuit Judges.

E. GRADY JOLLY, Circuit Judge:

In this case, we decide the reach of a bond that Fidelity & Casualty Co. ("Fidelity") issued to

World Hospitality, Ltd., Inc. ("World") to cover losses that result from the dishonest or fraudulent

acts of World's employees. The losses aro se while World was failing. Kenneth S. Wohl, World's

dominant shareholder, fraudulently appropriated some of World's assets before the company filed for

bankruptcy. The bankruptcy court found that Wohl controlled World, instead of World controlling

him. The bankruptcy court then held that Wohl was not one of World's employees and, t hus, t he

bond did not cover his dishonest acts. The district court affirmed. Because we agree with the

reasoning of the bankruptcy court, we affirm.

I

World provided services to several oil companies. When the oil business slumped, World's

profits went down. Then, in the mid 1980's, two of World's biggest clients went bankrupt. World

immediately became unprofitable and soon thereafter the firm filed for bankruptcy under chapter 11

of the Ban kruptcy Code. Along with his former wife, Kenneth S. Wohl owned 95% percent of

World. Wohl was an officer and director of World and its chief executive officer. Before filing for

bankruptcy, World made over fift y payments or transfers to Wohl. World also paid some of Wohl's1 Pursuant to an order entered on December 17, 1992, Rodney Tow was substituted as the

appellant. debts and gave Wohl a security interest in some of its assets.

In the summer of 1988, the bankruptcy court converted the proceeding to a liquidation under

chapter 7 of the Bankruptcy Code and appointed the appellant, William E. Heitkamp, the trustee.

Heitkamp brought this fraudulent conveyance action against Wohl and World's insurer Fideli ty &

Casualty Co. ("Fidelity") in the summer of 1990. Heitkamp argued that the transfers World made to

Wohl were fraudulent conveyances because the y were made to defraud its creditors. Heitkamp

further alleged that Fidelity was liable for the fraudulent conveyances because it had issued World a

bond that covered losses caused by the fraudulent or dishonest acts of World's employees.

The bankruptcy court agreed that the transfers were fraudule nt convey ances. The court

further found that Wohl dominated World and that World did not have the right to control him in the

performance of his duties. Thus, the court concluded that Wohl was not one of World's employees

within the meaning of that term as it is used in the bond. Consequently, the court held that Fidelity

was not liable to Heitkamp based on Wohl's actions. The district court affirmed the judgment of the

bankruptcy court. On behalf of the estate in bankruptcy, Heitkamp appeals. 1

II

The issue before us is whether Wohl was an employee of World within the meaning of the

term as it is used in the bond Fidelity issued to World. If Wo hl was an employee, then Fidelity is

liable to World's estate in bankruptcy for Wohl's fraudulent acts. This question is essentially a legal

one and, thus, we review the district court's conclusion de novo. U nited States v. Harrison, 918 F.2d

469, 473 (5th Cir.1990). Pursuant to Bankruptcy Rule 8013, however, we will not set aside a

bankruptcy court's factual findings unless they are clearly erroneous. M atter of Lenard

, 849 F.2d

974, 976 (5th Cir.1988).

The bond Fidelity issued to World only covers losses that result directly from the fraudulent

or dishonest acts of World's employees. The bond defines an employee as:

any natural person (except a director or trustee of the Insured, if a corporati on, who is not

also an officer or employee thereof in some other capacity) while in the regular service of theInsured in the ordinary course of the Insured's business during the Policy Period and whom

the Insured compensates by salary, wages or commissions and has the right to govern and

direct in the performance of such service, but does not mean any broker, factor, commission

merchant, co nsignee, contractor or other agent or representative of the same general

character. (Emphasis added).

As noted above, the bankruptcy court found that Wohl was not one of World's employees because

World did not have the right to control him. The bankruptcy court relied on our decision in F irst Nat.

Life Ins. Co. v. Fid. & Dep. Co. of Md., 525 F.2d 966 (5th Cir.1976). In First National, several

i ndividuals purchased a controlling interest in First National and made themselves officers and

directors. After taking control of the company, t hey looted it. Later the firm sued its insurance

company in an effort to collect on a bond almost identical to the bond in this case. We found that the

individuals who controlled First National were not employees within the meaning of the bond. We

reasoned that their "status as o fficials never placed them "in the service' of First National, for they

served only themselves." Id., at 970.

Several other courts have reached the same conclusion. In C alifornia Union Ins. v. American

Diversified Sav., 948 F.2d 556, 566 (9th Cir.1 991), the Federal Savings and Loan Insurance

Corporation sued to recover on a similar bond after it took over a savings and loan that had failed.

The court held that because the former owners of the savings and loan "controlled the Insured, rather

than the Insured's controlling them, they do not meet the policy['s] definition of "employees.' " I d.

See also Kerr v. Aetna Cas. & Sur. Co., 350 F.2d 146, 154-155 (4th Cir.1965); E mployer's Admin.

Serv., Inc. v. Har tford Accident & Indem. Co., 147 Ariz. 202, 709 P.2d 559 (App.1985); T hree

Garden Village L td. Partnership v. United States Fid. & Guar. Co., 318 Md. 98, 567 A.2d 85

(App.1989).

All of these courts have recognized that there is a strong policy reason for deny i ng the

corporation coverage under the bonds in question. A corporation can only act through its officers

and directors. When one person owns a controlling interest in t he corporation and dominates the

corporation's actions, his acts are the corporation's acts. Allowing the corporation to recover for the

o wner's fraudulent or dishonest conduct would essentially allow the corporation to recover for its

o wn fraudulent or dishonest acts. The bonds, however, were clearly designed to insure t hecorporati ons against their employee's dishonest acts and not their own dishonest acts. S ee California

Union, 948 F.2d at 566.

In support of his argument that the bond covers Wohl's actions, Heitkamp cited the following

three cases: G eneral Finance Corp. v. Fidelit y & Cas. Co. of New York, 439 F.2d 981 (8th

Cir.1971); A merican Emp ire Ins. Co. of S.D. v. Fidelity & Dep. Co. of Md., 408 F.2d 72 (5th

Cir.1969); I

nsurance Company of North America v. Greenberg, 405 F.2d 330 (10th Cir.1969). All

of these cases are easily distinguishable. In G eneral Finance, the part i es added a clause to the

bonding agreement clearly indicating that the Insurer did not intend to cover losses that resulted from

the dishonest acts of the majority shareholder. Later the parties eliminated that clause from the

agreement. The court held that the parties' actions clearly indicated that they intended for the bond

to cover the dishonest acts of its majority shareholder. General Finance, 439 F.2d at 984.

Heitkamp also relied on our decision in American Empire even though that decision dealt with

an entirely different issue. In A merican Empire, the issue was whether a third party had an interest

in the bond. The court held that the plaint iff had no interest in the bond because he was not a third

party beneficiary. The court's comments about whether the bond covered the majority shareholder

were clearly dicta. A merican Empire, 408 F.2d at 77. Finally, Heitkamp relies on the Tenth Circuit's

decision in Insurance Company. In that case an insurance company contended that its bond did not

cover the dishonest acts of W. H. Hoster, a shareholder and t he co mpany's former president.

Although the court found that the bond covered Hoster's acts, the court noted that Hoster was not

a majority shareholder in the company. Insurance Company, 405 F.2d at 333.

A review of the cases has convinced us that the greater force of authority lies in the holding

that a majority shareholder who dominates his corporati on is not an employee of the corporati on

wit hin the meaning of the term as it is used in these bonds. The bankruptcy court's decision t hat

Wohl, with his former wife, owned 95% of World's common st o ck and completely dominated the

corporati on is not clearly erroneous. We therefore hold that Wohl was not one of World's employees

and, thus, the bond Fidelity issued to World does not cover Wohl's fraudulent conduct.

IIIFor the foregoing reasons, we AFFIRM the judgment of the district court.

AFFIRMED.