Opinion ID: 299022
Heading Depth: 1
Heading Rank: 1

Heading: discovery of loss

Text: 4 Empire commenced business as a newly organized bank in February 1963. In November of that year the directors hired Ben Leimgruber, a banker of considerable experience, as executive vice president to supervise banking operations. Leimgruber, during previous employment at the Union National Bank of Kansas City, had worked himself up from assistant auditor to executive vice president, third in the hierarchy of bank officers below the board chairman and president. Leimgruber had also served the United States government as an assistant national bank examiner from 1934 until 1942. 5 Leimgruber remained at Empire until March 1, 1965, when he resigned after shortages were discovered in the installment loan department. The shortages were attributed to dishonest and fraudulent acts committed by the manager of that department who worked under Leimgruber's supervision. There has been no suggestion of complicity by Leimgruber in these defalcations. 6 During the period from November 14, 1964, to November 23, 1964, Briar Associates secured loans from Empire by giving a pledge of the corporation's capital stock. The pledged stock showed a book value of approximately $36,000 representing capitalized expenditures, but the collateral actually possessed no real value as security. With the co-signature of Eddie Robbins, Empire initially loaned Briar Associates the sum of $7,500. Subsequently, the Bank made additional advances until the indebtedness of Briar Associates reached approximately $19,000 at the end of November 1964. On December 1, 1964, the Bank made one additional loan to the corporation of $27,000, securing this loan by a pledge of stock in various publicly-held companies, in the hope of improving the Bank's secured status on the entire account. The Bank advanced an additional $1,250 on December 23, 1964, secured by a mortgage on certain real property in Pawhuska, Oklahoma, in which, as it was later disclosed, the borrower held no title interest. The borrower made no payment on these loans. 7 After Leimgruber resigned in March of 1965, Empire unsuccessfully attempted to collect the Briar Associates account by contacting Eddie Robbins. During these collection efforts, Empire's president learned of the poor credit ratings of both Robbins and Briar Associates. In 1957, Union National, Leimgruber's former employer, had charged off a Robbins loan in the sum of $3,125, and in May of 1964 Union National had charged off a Briar Associates-Eddie Robbins loan in the sum of $6,100. In a conference with Robbins in April 1965, Robbins stated to Empire's president that he had himself loaned money to Leimgruber. In support of this claim, Robbins exhibited facsimilies of two $4,500 notes signed by Leimgruber. In June 1965, after Empire had repossessed an automobile owned by Robbins and held by the Bank as collateral for an installment loan, Robbins protested the Bank's treatment of him as unjustified, claiming to have paid Leimgruber approximately $2,500 as a commission for obtaining credit with Empire. 8 After July 1, 1965, Empire verified that Robbins had in fact wired approximately $2,500 to Leimgruber on December 2, 1964, the day after the Bank had granted Briar Associates the new $27,000 loan. Empire, in September 1965, arranged for an investigator to interview Leimgruber at Phoenix, Arizona, where Leimgruber had moved after leaving the Bank. In that interview, Leimgruber emphatically denied that Robbins had ever loaned him money, denied knowledge concerning Robbins's defaults at Union National, and denied the receipt of any commission or any money from Robbins in connection with any loan transaction. By way of later deposition introduced at trial, however, Leimgruber testified to the contrary. He admitted that Robbins sent him $2,500 on December 2, 1964, but said that this money was held in trust for Robbins. Leimgruber further testified that he had returned this money to Robbins in cash about two months later. Leimgruber also admitted borrowing money from Robbins, but said that this transaction had occurred long before he had accepted employment with Empire. Leimgruber admitted giving Robbins a note representing this loan in the amount of $4,500 and stated that this note had been renewed from time to time. Following default on these loans, the Bank liquidated the collateral and sustained an overall loss of $23,391.94, which loss was made the subject of Count I. 9 As to Count I, the trial court determined: (1) that the actions and conduct of Leimgruber in recommending [Briar Associates as a] new customer and in making and renewing the loans made [to Briar Associates and Eddie Robbins] were dishonest; (2) that the loss attributable to depreciation of corporate stocks held by Empire as collateral for the $27,000 loan in December 1964 constituted a recoverable loss flowing from Leimgruber's dishonesty; 2 and (3) that the dishonesty of Leimgruber was not discovered by the bank until after July 1, 1965, and [that] the loss [was] covered by [the] bond. 10 On this appeal, U.S.F. & G. does not contend that the trial court erred in finding Leimgruber's conduct to be dishonest with regard to the Briar Associates-Eddie Robbins loans. It concedes that this finding rests upon credibility determinations drawn by the district court from disputed testimony. U.S.F. & G. contends, however, that no substantial evidence supports the trial court's finding that the Bank had discovered its loss within the policy period, which commenced at noon on July 1, 1965, and continued until September 22, 1966. Irrespective of this, U.S.F. & G. also contends that the Bank possessed sufficient knowledge of Leimgruber's wrongdoing to require it to disclose its suspicions when it executed its application for bond coverage in June of 1965. 11 On the discovery issue, both parties cite Jefferson Bank & Trust Co. v. Central Surety & Insurance Corp., 408 S.W.2d 825 (Mo.1966), as enunciating the controlling principles of law. In Jefferson, the Missouri Supreme Court adopted the following language taken from Wachovia Bank & Trust Co. v. Manufacturers Casualty Insurance Co., 171 F.Supp. 369 (M.D.N.C.1959): 12 In order to constitute a 'discovery' in accordance with the terms of the policy    there must be facts known, at the time it is asserted that the discovery was made, which would lead a reasonable person to an assumption that a shortage existed. The facts must be viewed as they would have been by a reasonable person at the time discovery is asserted, and not as they later appeared in the light of subsequently acquired knowledge.    [T]he mere discovery of certain facts which later lead to other facts which reveal the existence of a shortage does not necessarily constitute a discovery. Knowledge available to the insured must rise above a mere suspicion of loss. The fact that an investigation after the termination of the policy leads to the disclosure of an actual defalcation does not raise a previous suspicion to the leval of a discovery. Inefficient business procedures, or irregularities and discrepancies in accounts, if as consistent with the integrity of employees as [with] their dishonesty, does not constitute a discovery, even though dishonest acts may later be found to exist. (emphasis and bracketed word added) [408 S.W.2d at 831, quoting 171 F. Supp. at 375-376] 13 Discovery thus imports an awareness of the significance of known facts. The Missouri Supreme Court particularly noted in Jefferson that    not only must the facts be known, but they also must be recognized for what they are   . 408 S.W.2d at 831. 14 Applying this principle in relation to a clause effecting cancellation of a fidelity bond upon an insured discovering an employee's fraud, we recently said in General Finance Corp. v. Fidelity & Casualty Co. of New York, 439 F.2d 981 (8th Cir. 1971): 15 Appellee [bonding company] claims that the [fraudulent] acts [of the employee] were done openly, notoriously and without any attempt to hide or secrete them. Each of the officers knew of the acts and some of the employees were in a like position. However [,] the court found that neither the members of the board nor any of the employees of [the insured] were aware of the true nature of the events which have given rise to the allegation by the [employer's] Trustee [in Bankruptcy]. We are of the view that this finding is correct and conclude that the bond was not cancelled through the operation of this provision. [439 F.2d at 987] 16 In determining when discovery has taken place, the trier of fact must find the pertinent underlying facts known to the insured and must further determine subjective conclusions reasonably drawn therefrom by the insured. Appellant-insurer argues, and we agree, that Empire knew prior to July 1, 1965, that Briar Associate's loans had been made with inadequate collateral, to a corporation controlled by Robbins, a person having an unsavory personal, and unsatisfactory credit, reputation. Empire also knew prior to July 1, 1965, that Robbins claimed that he had made a pay-off to Leimgruber in order to obtain loans from the Bank. It was not until after July 1, 1965, however, that the Bank succeeded in substantiating any part of Robbins's charges through verifying Leimgruber's receipt of a Western Union money order sent by Robbins. Additionally, Leimgruber did not furnish the Bank with his own version of the alleged transaction until September 1965. 17 Bank president Ralph Hipsh testified that the Bank, not wanting to do Leimgruber an injustice, sent its representative, Lem Jones, to Phoenix to get Leimgruber's account of the facts. Significantly, the report that Jones gave Hipsh disclosed the following: 18 I [Jones] asked Leimgruber if he had ever received any commission or money from Robbins in connection with any of the loan transactions involved. He stated absolutely not. When I advised Leimgruber that Robbins claimed that he had to make loans to Leimgruber in order to get the financing for Briar Associates at the bank, Leimgruber began to lose his composure. He denied emphatically that Robbins had ever loaned him money. 19