Opinion
32970.
DECIDED MAY 2, 1950. REHEARING DENIED JUNE 7, 1950.
Complaint on bond; from Fulton Superior Court — Judge Pharr. January 5, 1950. (Application to Supreme Court for certiorari.)
MacDougald, Troutman, Sams Schroder, Dan MacDougald Jr., for plaintiff.
Harry S. McCowen, for defendant.
Powell, Goldstein, Frazer Murphy, amicus curiae.
1. In a suit on a fidelity bond, to recover money allegedly lost through the acts of an employee covered thereunder, where the amended petition fails to allege that the loss occurred by reason of larceny, embezzlement, misappropriation, forgery, or other fraudulent or dishonest act as set out in the bond, it fails to set forth a cause of action thereunder.
2. Where the allegations of the petition, as here, affirmatively show that the loss upon which suit is brought under the terms of a fidelity bond is the result of an indebtedness by the employee to the plaintiff, rather than a loss occasioned by reason of larceny, embezzlement, or other fraudulent or dishonest act as set forth in the bond, there can be no recovery under such bond.
DECIDED MAY 2, 1950. REHEARING DENIED JUNE 7, 1950.
Hurt Quinn Incorporated, herein referred to as the plaintiff, filed suit in the Superior Court of Fulton County against the National Surety Corporation, herein referred to as the defendant, to recover the sum of $10,000, representing the full coverage under a fidelity bond issued by the defendant to the plaintiff on Whitner Company, an employee and local insurance agent of the plaintiff, and herein referred to as the local agent. The bond in question covered all the employees and local agents of the plaintiff, in designated amounts, and under its terms the defendant agreed to indemnify the plaintiff "against any direct loss of money or other personal property belonging to the Insured or for which the Insured is legally liable, caused by larceny, embezzlement, forgery, misappropriation, wrongful abstraction, or any other fraudulent or dishonest act or acts committed by any of the Insured's employees while covered under this bond."
The petition alleges in substance that the plaintiff is the general agent of various designated insurance companies; that it has authority to write master fire insurance policies to various employees or local agents; that Whitner Company was such an employee and local agent; that it wrote to this local agent a master fire insurance policy, under the terms of which the local agent had the right to write and sell insurance policies to the individuals insured; that whenever the local agent sold such a policy it became liable to the plaintiff for the full premium on such policy within four weeks after the month in which the policy was written; that Whitner Company sold a tremendous and ever-increasing volume of such policies; that under the plan set up it paid the plaintiff the full premium owing to the plaintiff on each policy it issued under the master policy by advancing its own money to do so, and thereafter it collected from the individuals insured small amounts weekly or monthly over the entire life of the policy (the aggregate amount collected being four times the cash premium price charged by the insurance companies); that the policies were issued in one, three and five year terms; that in order to do this the local agent needed to be financed so that it would be in position to pay the cash premiums to the plaintiff and later collect from the individuals insured; that an agreement was entered into to finance this plan; that under the terms of the financing agreement, the local agent each month borrowed from First National Bank sufficient funds to pay the plaintiff the total premiums owing on every policy it had issued during that month for the full life of such policy, plus an additional amount which represented the greater portion of the commissions owing by the plaintiff to the local agent for writing these policies; that upon borrowing such sum from First National Bank each month it gave the bank its note for the total amount borrowed and secured this note by assigning to the bank as collateral, title to all the premiums due by the individuals insured on such policies; that the local agent turned in both to the bank and the plaintiff a record showing just what individual policies were covered thereunder and what premiums were due.
It was the further agreement between the parties that the insurance companies and the plaintiff, their general agent and acting on their behalf, should assign to the bank for its further protection title to all return premiums on canceled policies. This assignment was made. It is then alleged that "the method adopted by petitioner, as general agent of the Sentinel Fire Insurance Company and the Agricultural Insurance Company, to carry out the obligations of these companies to account for and pay over to The First National Bank unearned premium on the canceled individual policies or entry numbers, was to have such payments made by Whitner Company from the current cash premium receipts due these companies through the conduct of the business, such payments to be deducted from the monthly remittances made to petitioner on behalf of the Sentinel Fire Insurance Company or Agricultural Insurance Company, as the case might be." Thus the bank was protected, as it had the right to receive all premiums paid in by individuals insured during the life of the policy, up to the limit of its indebtedness; and if the policy was canceled during that time it had the right to receive the refund made by the plaintiff and its insurance companies, the plaintiff having previously been paid in full by the local agent. The arrangement made by the plaintiff for paying these return premiums due by it to the bank was as follows: when the local agent made its borrowing each month for the purpose of getting money to pay the plaintiff the amount owing as the full paid-up premium on the individual policies it had issued under its master policy for that month, it was supposed, after receiving this amount, to deduct therefrom the amount owing by the plaintiff to the bank and pay back to the bank this sum, together with a list of the canceled policies represented by these refunds. Thereupon the bank released the plaintiff and its insurance companies from their assignments on such canceled policies. This amounted to a direction by the plaintiff for the local agent to pay a part of the amount due directly to it, and to pay the balance of the amount due directly to the bank, taking credit for the latter against the sums it owed the plaintiff as cash payments of the policies it issued by virtue of its master policy. The petition further alleges the following:
"9. Despite the fact that Whitner Co. was obligated to pay over to the First National Bank the unearned and return premiums on canceled policies and took credit for the same against current premiums due, they failed and neglected [emphasis ours] to pay over such sums to the First National Bank of Atlanta, although they had retained from their monthly remittances sufficient sums therefor. A subsequent audit developed that Whitner Co. had failed to pay over to the First National Bank the sum of $199,640.33 . . return premiums due on canceled policies and entry numbers. 10. As a result of the action of Whitner and Co. as hereinbefore set forth, the Sentinel Fire Insurance Co. and the Agricultural Insurance Co. have had to make good and pay over to The First National Bank the said sum of $199,640.33."
It should also be noted that all transactions between the bank and the local agent, Whitner Company, were not conducted directly, but were conducted through the Georgia Fire Insurance Service Incorporated, a corporation organized and set up by the local agent for this purpose.
To this petition the defendant filed general and special demurrers. Paragraph 2 is as follows: "That plaintiff's petition fails to specify the amount of money or enumerate or describe any other personal property belonging to plaintiff or for which plaintiff is legally liable, constituting any direct loss caused by larceny, embezzlement, forgery, misappropriation, wrongful abstraction, or any other fraudulent or dishonest act or acts committed by Whitner Co. while covered under the bond sued upon." The general demurrers to the petition were sustained and the petition dismissed, to which judgment of the trial court the plaintiff excepts.
While numerous questions are raised in the brief of the plaintiff's counsel, the first consideration must be whether the petition, as amended, sets out a cause of action under the terms of the bond upon which suit was brought. This bond agrees to indemnify the plaintiff for losses of money or other personal property only "when caused by larceny, embezzlement, forgery, misappropriation, wrongful abstraction, or any other fraudulent or dishonest act or acts committed by any of the Insured's employees while covered under this bond." It is admitted that the plaintiff or its insurance companies lost the sum $199,640.33 through the acts of its employee, Whitner Company. We do not in this opinion determine the question of whether the plaintiff has stated facts sufficient to show a personal loss rather than a loss by the insurance companies for which it acted as general agent, but assume for the purpose of argument that the plaintiff would have had a right to bring this action if the terms of the indemnity contract had otherwise been met. First, the relation of employer and employee must exist and the loss must be shown. This is admitted. Then, the loss must be due to the larceny, misappropriation or other fraudulent or dishonest act of the employee as set out in the bond. It is obvious from the allegations of the petition that the local agent was incurring an ever-increasing amount of short-term debts on the premiums it paid the plaintiff, and long-term credits on the money due it from individual policyholders. Under such circumstances, if anything occurs which interrupts the momentum of expansion on the part of the obligee, the local agent here, it commonly results in immediate financial distress. This fact bears upon the question of intent, because, without a dishonest intent on the part of the local agent to convert the sums represented by the refunds on canceled policies to its own use in fraud of the plaintiff, no act has been alleged under which a recovery on this bond is possible. See in this regard Coconut Grove Exchange Bank v. Columbia Casualty Co., 154 Fed. 2d, 542. There must be a conversion to the use of the employee with an intent to injure or defraud. Louis Pizitz dry Goods Co. v. Fidelity Deposit Co. of Maryland, 223 Ala. 385 ( 136 So. 800). And, while the words "dishonest act" are broad enough to cover many defalcations for which indictment and conviction might not be had, and while a presumption of dishonesty or conversion may arise from all the facts alleged; nevertheless, in the present instance, the petition shows that when the plaintiff and its insurance companies first learned of the deficit in June, 1943, they did not consider that any fraud or criminal intent was involved on the part of the local agent. On the other hand, they left the local agent in charge of the business, and, while curtailing the writing of certain types of insurance, entered into a trustee agreement under which operations were continued by Whitner and Company until the latter part of 1947. "The companies represented by Whitner believed that a closer supervision of the management would likely produce results if the agency was given a chance to work itself out." The fact that in June, 1943 "no one realized the seriousness of the situation, which did not develop until the first part of December, 1943," indicates that from December, 1943, when the plaintiff first realized the entire situation, through most of 1947, it continued to treat the deficit as a result of poor management, and perhaps over-expansion or bad business judgment, on the part of the local agent, but was of the opinion that by lending its aid through the trustee agreement it could put Whitner Company back on a sound business footing. This does not indicate any apperception on the part of anyone concerned that fraud or dishonesty existed at that time, nor are any facts alleged to have been discovered subsequently to cause a different opinion. On the contrary, the only allegation in the petition connected with this deficit is that Whitner Company "failed and neglected" to pay the sums indicated over to the First National Bank, although they retained sufficient sums therefor. In Massachusetts Bonding c. Co. v. Raskin, 43 Ga. App. 582 ( 159 S.E. 778), a petition for recovery of sums withheld by an employee under a somewhat similar bond was held to be insufficient where the plaintiff alleged only that the employee "failed and refused" to pay over the sum sued for. The court there stated that the offenses mentioned in the bond involve moral turpitude, that dishonesty carries with it the idea of a wilful wrong, and that the pleader studiously avoided averring any wilful wrongful conduct on the part of the employee. The petition in the instant case likewise avoids any allegation which might rebut the presumption raised by the subsequent course of conduct between the parties alleged therein that the failure of the employee to pay over the sums due by the plaintiff's insurance companies to the bank is equally consonant with mere negligence, and inability to pay due to other causes, as it is with fraud and dishonesty.
2. While the terms of the master policy are not set out in the petition, the course of dealing between the local agent and the plaintiff is fully described. The local agent assumed a personal liability for the payment of premiums on the policies it issued under this master policy. It paid for them, not with funds collected from individuals insured, but with its own funds, which it borrowed from the bank on its own credit. Had it been unable to collect from individuals insured, it had the right to cancel the policies, but this would not effect its personal liability to the plaintiff until the time of such cancellation. The funds in question, then, are not funds entrusted to the local agent by individuals insured for the use of the plaintiff, but rather funds representing a debt owing directly from the local agent to the plaintiff under the terms of the master policy. The plaintiff recognized this and stated in a letter to the defendant that it intended "to trustee that portion of their indebtedness which is in arrears and it is expected that within a reasonable time the past due indebtedness will be paid off." (Emphasis ours.) The fact that the plaintiff directed its employee to pay a part of the money owed directly to it, and to pay the balance directly to the bank to cancel out an indebtedness on the part of the plaintiff to the bank, does not change the character of the transaction, the money still being a debt owing by the employee to the plaintiff rather than money entrusted by the plaintiff to the employee for a particular purpose. A mere indebtedness of the local agent to the plaintiff is not a defalcation which authorizes recovery under the terms of the bond, and "a mere debtor does not embezzle the money of his creditor by failing to pay the debt when due." Milwaukee Theatre Co. v. Fidelity Co., 92 Wis. 412 ( 66 N.W. 360); 16 A.L.R. 1500. The proof of a balance due to the employer from the employee is not sufficient for a recovery under a fidelity bond indemnifying the obligee against loss by the larceny or embezzlement of the employee. Williams v. United States Fidelity c. Co., 105 Md. 490 ( 66 A. 495). The allegations in the instant case, consequently, amount to no more than the non-payment of an indebtedness owing by the employee to the plaintiff, which the plaintiff had directed be paid to a third party rather than directly to itself, and are insufficient to set up a defalcation under the terms of the bond.
The trial judge did not err in sustaining the demurrers to the petition as amended and in dismissing the same.
Judgment affirmed. MacIntyre, P. J., and Gardner, J., concur.