Argued November 27, 1972. —
Decided January 15, 1973.
APPEAL from a judgment of the circuit court for Racine county: HOWARD J. DuROCHER, Circuit Judge. Affirmed.
For the appellant there were briefs by Schoone, McManus Hanson, S.C., attorneys, and Robert J. Grady of counsel, all of Racine, and oral argument by Adrian P. Schoone.
For the respondent there was a brief by Borgelt, Powell, Peterson Frauen, attorneys, and Thomas N. Klug and Thomas H. Knoll of counsel, all of Milwaukee, and oral argument by Mr. Klug.
This is an action by the plaintiff, Racine County National Bank, to recover a loss from the defendant, The Aetna Casualty Surety Company, upon a "Bankers Blanket Bond." The loss occurred by virtue of the transactions and dealings of the plaintiff-bank with a customer, Donald A. Studey.
The plaintiff-appellant, Racine County National Bank, is a national banking association which has a main office Franksville and a branch office in Sturtevant, Wisconsin. In September of 1966, Donald A. Studey and his wife became customers of the branch office and obtained the first of several loans made to them. In the succeeding period of about two years, Studey either renewed or enlarged his borrowings from the bank. The first loan was for $5,000 and was due on March 14, 1967. On March 11, 1967, it was paid off by renewing it as a part of a larger loan of $8,000. The $8,000 note was due on June 9, 1967. On June 2, 1967, Studey reduced the $8,000 loan by $500 and renewed it until August 31, 1967. On September 1, 1967, he enlarged and renewed the loan to $8,500 and that matured on February 28, 1968. On July 29, 1968, a $60,000 loan was made and part of it paid the $8,500 loan. Also, $3,000 of it was put into Studey's personal reserve account in case a personal check was overdrafted. $46,000 was given to Studey in the form of a cashier's check.
The record indicates that even though Mrs. Studey was party to some of the hereinafter mentioned loans she was never really an active participant. Mr. Studey will hereinafter be referred to as "Studey" only.
The $60,000 loan was to be secured by 1,000 shares of Woods corporate stock, 500 shares of Franchard corporate stock, 600 shares of Aries corporate stock and 400 shares of Stange corporate stock. The transaction was handled by a former manager, Mr. Donald Jonte [Jante] of the branch office.
In addition to the above collateral security, Studey made some gross misrepresentations, if not false, in his financial statement as to the ownership and true value of other assets ( i.e., real estate and stock) in order to help him secure a good credit rating with the bank.
In November of 1968, Mr. Gordon O. Chapman became vice-president of the branch office and replaced Jonte as the manager. After becoming familiar with the details of Studey's loan transactions, Chapman, on behalf of the bank, lent Studey another $2,500.
In January of 1969, the bank examined all securities held as collateral for its loans. Chapman discovered that only the Franchard and Woods stock had been delivered to the bank but not the Aries or Stange stock. Chapman notified Studey and the latter stated he would have his broker send the Aries and Stange stock. On January 20, 1969, only 500 shares of Aries and 200 shares of Stange stock were received. Chapman notified Studey again that all of the stock pledged as security was still not received; the collateral security was still short 100 shares of Aries and 200 shares of Stange stock. On January 28, 1969, Studey came to the branch office and told Chapman that he wanted to sell all of the stock held as security and would replace it with long-term investments. Chapman then released to Studey all of the securities the bank held on Studey's promise to replace them with these long-term investments. Under this arrangement the bank was without any collateral security on the $60,000 loan until Studey's broker delivered the new securities, which normally took six to eight weeks. Chapman testified that allowing Studey to take possession of these securities was a matter of business judgment and that the bank did not want to lose what it thought to be a good customer.
The securities were not delivered, and on February 28, 1969, the bank notified Studey that either he immediately send this new collateral or repay the loan. On March 12, 1969, the bank sent Studey a certified letter which declared the note due immediately. The letter came back unclaimed and the bank's subsequent attempts to notify Studey were of no avail. Sometime during this period the bank learned that Studey never owned these newly pledged securities — a fact later admitted by Studey himself. A claim was then made against defendant-respondent, The Aetna Casualty Surety Company, under the Bankers Blanket Bond issued by it to the bank. Respondent denied the claim and stated that the loss was not covered by the bond because of an exclusion clause. This action then ensued. The bank claimed only the value of securities released to Studey, stipulated at $51,025. The entire balance due the bank upon the note and interest was about $65,000.
The pertinent parts of the blanket bond state:
"Definition of property. Wherever used in this bond Property shall be deemed to mean money, currency, coin, bank notes, Federal Reserve notes, postage and revenue stamps, U.S. Savings Stamps, bullion, precious metals of all kinds and in any form and articles made therefrom, jewelry, watches, necklaces, bracelets, gems, precious and semi-precious stones, bonds, securities, evidences of debts, debentures, scrip, certificates, receipts, warrants, rights, transfers, coupons, drafts, bills of exchange, acceptances, notes, checks, withdrawal orders, money orders, travelers' letters of credit, bills of lading, abstracts of title, insurance policies, deeds, mortgages upon real estate and/or upon chattels and upon interests therein, and assignments of such policies, mortgages and instruments, and other valuable papers and documents, and all other instruments similar to or in the nature of the foregoing, in which the Insured has an interest or which are held by the Insured for any purpose or in any capacity and whether so held gratuitously or not and whether or not the Insured is liable therefor, and chattels which are not hereinbefore enumerated and for which the Insured is legally liable.
". . .
"The losses covered by this bond are as follows:
". . .
"(B) Any loss of Property through robbery, burglary, common-law or statutory larceny, theft, false pretenses, hold-up, misplacement, mysterious unexplainable disappearance, damage thereto or destruction thereof, whether effected with or without violence or with or without negligence on the part of any of the Employees, and any loss of subscription, conversion, redemption or deposit privileges through the misplacement or loss of Property, while the Property is (or is supposed to be) lodged or deposited within any offices or premises located anywhere, except in an office hereinafter excluded or in the mail or with a carrier for hire, other than an armored motor vehicle company, for the purpose of transportation.
". . .
"The foregoing agreement is subject to the following conditions and limitations:
"Section 1. This bond does not cover:
". . .
"(d) Any loss the result of the complete or partial nonpayment of or default upon any loan made by or obtained from the Insured, whether procured in good faith or through trick, artifice, fraud or false pretenses, except when covered by Insuring Clause (A), (D) or (E)"
The issue before us is:
Was the loss sustained by the bank due to the nonpayment of the loan so as to bar the bank's recovery under the loan exclusion clause contained in the bond?
The appellant argues that the bond covers the loss of surrendered securities because it was fraudulently induced to release them to Studey and because the securities were within the definition of property and covered by insuring clause (B). This contention is founded on the supposition that there is a difference between a loss due to nonpayment of a loan and a loss due to the fraudulent procurement of collateral security which secured the loan. Granted that there is this technical difference, the relevance of the distinction disappears upon analysis of the facts. The facts plainly show that the loss due to the missing securities was dependent upon the nonpayment of the loan. The loss occurred because all of these transactions were so intertwined with the basic loan agreement that to segregate them to support the bank's position would make the exclusion provisions in the bond meaningless. The bond specifically excluded under section 1(d) all losses which are the result of the complete or partial nonpayment of or default of any loan made or obtained from the insured, notwithstanding trick, artifice, fraud or false pretenses.
"Collateral security," in bank parlance, means some security additional to the personal obligation of the borrower. It implies the transfer to the creditor of an interest in some property, or obligation which furnishes a security in addition to the responsibility of the debtor. James Employees Credit Union v. Hawley (1958), 2 Wis.2d 490, 87 N.W.2d 299.
Basic to the entire transaction or transactions with Studey was the loan. The bank, of course, expected the loan to be repaid plus interest. To secure the loan, Studey and his wife gave their written promissory note and, as additional collateral, the securities. It was the failure to repay the loan that caused the loss. If Studey had paid the loan the bank would have suffered no loss because of its inability to return the securities to Studey.
Maryland Casualty Co. v. State Bank Trust Co. (5th Cir. 1970), 425 F.2d 979.
With respect to this analysis on these issues in question, there are no Wisconsin cases directly in point but there are some federal and other state cases which have dealt with the problem. Those courts have held that an exclusion clause similar to the one at bar negates coverage under the bond. Those courts reason that if it were not for the loan there would be no loss because the immediate and primary cause of the loss resulted from the nonpayment of the loan. The appellant proffers no case which really substantiates its position. Several cases are cited but they are distinguishable and not comparable to the facts of this case.
Depositors Trust Co. v. Maryland Casualty Co. (1961), 157 Me. 493, 174 A.2d 288; East Gadsden Bank v. United States Fidelity Guaranty Co. (5th Cir. 1969), 415 F.2d 357; Community Federal Savings Loan Asso. v. General Casualty Co. (8th Cir. 1960), 274 F.2d 620; Maryland Casualty Co. v. State Bank Trust Co., supra; and First National Bank of Memphis v. Aetna Casualty Surety Co. (6th Cir. 1962), 309 F.2d 702.
Appellant next argues that the securities were purloined by means of false pretenses from the bank's possession. This, in effect, is the same argument guised in different language. Even if one could steal his own securities by false pretenses from the bank, such act would still permeate the entire loan transaction in the instant case. The several courses of dealings between the parties were not independent and distinct acts, but a series of acts interrelated to the loan which Studey did not pay.
The bank also argues that a paid insurance or indemnity contract must be construed most favorably to the insured. The law states that when an indemnity bond is entered into for consideration, it partakes all of the essential features of insurance contracts and should be construed most strongly against the party preparing and furnishing the bond. Forest County v. United Surety Co. (1912), 149 Wis. 323, 136 N.W. 335, and First Nat. Bank v. United States Fidelity Guaranty Co. (1912), 150 Wis. 601, 137 N.W. 742. But because it has the characteristics of an insurance contract, not just one but all of the doctrines of construction for insurance policies apply. In Leatherman v. American Family Mutual Ins. Co. (1971), 52 Wis.2d 644, 190 N.W.2d 904, this court held that the doctrine of strict construction of such policies does not apply unless an ambiguity exists. In this case we find no ambiguity with respect to insuring clause (B) and the exclusion clause 1(d). The exclusion clause did not specifically except coverage insuring clause (B) from its effects as it did with the other three broad insuring clauses in the contract. Rather, the clause negated the full force and effect of only insuring clause (B). This provision specifically excludes losses procured by artifice, fraud, and false pretenses resulting from the nonpayment of loans. The language of the exclusion is unequivocal and should be given its plain meaning as written. The lack of ambiguity therefore precludes the application of the rule of strict construction and the loss claimed is excluded from coverage.
By the Court. — Judgment affirmed.