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COURT OF
APPEALS
DECISION
DATED AND
RELEASED
July
25, 1996
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NOTICE
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A party may file with the Supreme Court a petition to review an
adverse decision by the Court of Appeals.
See § 808.10 and Rule
809.62, Stats.
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This opinion is subject to further editing. If published, the official version will appear in the bound
volume of the Official Reports.
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Nos. 95-0249
95-1298
STATE OF WISCONSIN IN
COURT OF APPEALS
Case No. 95-0249
Trial Court Case Nos. 88-CV-5106 and 89-CV-1566
EDWARD
J. KRAWCZYK, SPECIAL TRUSTEE OF
THE
WANDERER'S REST INTERMENT SOCIETY
PERPETUAL
CARE TRUST FUND,
Plaintiff-Appellant,
v.
BANK
OF SUN PRAIRIE, WILLIAM J. LIVINGSTON
AND
VIRGINIA SURETY CO., INC., INDIVIDUALLY,
CORPORATELY,
OR AS THE ASSIGNEES OF
WANDERER'S
REST CEMETERY, INC.,
GLENVIEW
SERVICE CORPORATION
AND
RAYMOND TURNER,
Defendants-Third-Party
Plaintiffs-Respondents,
J.
DAVID KREKELER, COLLINS, BEATTY & KREKELER, S.C.,
Third-Party
Defendant,
A. G.
EDWARDS & SONS, INC.,
Third-Party
Defendant-Co-Appellant,
NATIONAL
UNION FIRE INSURANCE COMPANY
OF
PITTSBURGH,
Third-Party
Defendant,
------------------------------------------------------------------------------------------------------------
GLENVIEW
MEMORIAL GARDENS,
A
WISCONSIN CEMETERY ASSOCIATION,
Plaintiff-Appellant,
v.
BANK
OF SUN PRAIRIE,
WILLIAM
J. LIVINGSTON AND
VIRGINIA
SURETY CO., INC.,
Defendants-Third-Party
Plaintiffs-Respondents.
------------------------------------------------------------------------------------------------------------
Case No. 95-1298
Trial Court Case Nos. 88-CV-5106 and 89-CV-1566
EDMUND
J. KRAWCZYK, SPECIAL TRUSTEE OF
THE
WANDERER'S REST INTERMENT SOCIETY
PERPETUAL
CARE TRUST FUND,
Plaintiff,
v.
BANK
OF SUN PRAIRIE,
Defendant-Third-Party
Plaintiff,
WILLIAM
J. LIVINGSTON AND VIRGINIA
SURETY
CO., INC., INDIVIDUALLY,
CORPORATELY,
OR AS THE ASSIGNEES OF
WANDERER'S
REST CEMETERY, INC.,
GLENVIEW
SERVICE CORPORATION AND
RAYMOND
TURNER,
Defendants-Third-Party
Plaintiffs-Respondents,
v.
J.
DAVID KREKELER, COLLINS, BEATTY &
KREKELER,
S.C., A. G. EDWARDS & SONS, INC.,
AND
NATIONAL UNION FIRE INSURANCE COMPANY
OF
PITTSBURGH,
Third-Party
Defendants,
THE
OHIO CASUALTY INSURANCE COMPANY,
Appellant.
------------------------------------------------------------------------------------------------------------
GLENVIEW
MEMORIAL GARDENS,
A
WISCONSIN CEMETERY ASSOCIATION,
Plaintiff,
v.
BANK
OF SUN PRAIRIE,
Defendant-Third-Party
Plaintiff,
WILLIAM
J. LIVINGSTON
AND
VIRGINIA SURETY CO., INC.,
Defendants-Third-Party
Plaintiffs-Respondents,
THE
OHIO CASUALTY INSURANCE COMPANY,
Appellant.
APPEALS
from orders of the circuit court for Dane County: MICHAEL B. TORPHY, JR., Judge.
Affirmed in part; reversed in part and cause remanded.
Before
Eich, C.J., Gartzke, P.J., and Sundby, J.
GARTZKE,
P.J. Plaintiffs Edmund J. Krawczyk, as
special trustee of a cemetery trust fund, and Glenview Memorial Gardens appeal
from an order dismissing their claims against William Livingston and his insurer. A.G. Edwards & Sons, a third-party
defendant, appeals from the same order.
Ohio Casualty appeals from an order denying its motion to substitute for
plaintiffs and Livingston's employer, the Bank of Sun Prairie, in their claims
against Livingston. We consolidated the
appeals.
We
deem the questions to be:
(1) whether third persons can state a claim against a bank officer
for their economic loss caused by the officer's negligence; and
(2) whether an insurer which had issued a "blanket bond" to the
bank covering the bank's loss from theft and had settled with the bank is
entitled to be substituted for the bank in an action against the officer. We answer the first question, No, and the
second question, Yes, and therefore affirm the dismissal order and reverse the
order denying substitution.
I. PROCEDURAL BACKGROUND
The
Bank of Sun Prairie was the trustee of trusts established to maintain
Wanderer's Rest Cemetery in Milwaukee and Glenview Memorial Gardens cemetery in
Ixonia. Livingston, a vice-president
and trust officer of the bank, administered the trusts. Plaintiff Krawczyk, as special trustee of
the Wanderer's Rest trust fund, and plaintiff Glenview sued the bank and
Livingston and the bank's directors and officers liability insurer, Virginia
Surety Company. Plaintiffs alleged that
the bank and Livingston had negligently and in breach of their fiduciary duty
transferred the trust funds to unauthorized entities, one of whom was A.G.
Edwards, a securities firm. Those
entities disbursed the funds to persons who misappropriated them. The bank, Livingston and Virginia Surety
filed a third-party complaint against A.G. Edwards, and it counterclaimed
against Livingston and Virginia Surety.
The trial court dismissed plaintiffs' claims and A.G. Edwards' counterclaim. The plaintiffs and A.G. Edwards appeal.
Ohio
Casualty had issued a fidelity and theft policy to the bank. Ohio Casualty settled the plaintiffs' claims
against the bank for $437,000 and moved to substitute itself for the plaintiffs
Krawczyk and Glenview and for the bank in the underlying actions in order to
pursue their claims against Livingston and Virginia Surety as their
assignee. The trial court denied the
motion to substitute, and Ohio Casualty appeals from that order. We consolidated the appeals.
II. FACTS
In
1986 an attorney representing Raymond Turner informed the bank
and Livingston that Turner had purchased the cemeteries and that nothing
prevented the trust funds from being transferred to a trustee located outside
Wisconsin. The attorney subsequently
instructed the bank and Livingston to transfer the trust funds to Francis
Baratto at Thomson-McKinnon Securities in New York. On April 11, 1986, Turner appeared and filed with the bank a
notice removing the bank as trustee and a corporate resolution to appoint him
as successor trustee. The bank and Livingston, as its trust
officer, then began transferring the trust funds to Thomson. Francis Baratto, at Thomson, disbursed at
least $150,000 to Turner and his colleague.
The trust funds remaining in Thomson were transferred to A.G. Edwards
after Baratto moved to that firm. By
October 1986 Baratto had disbursed about $220,000 in trust funds from A.G.
Edwards to Turner and his colleague, and they misappropriated the funds.
Plaintiffs
Krawczyk, as special trustee, and Glenview brought the underlying actions,
alleging the bank and Livingston had been negligent and had breached the bank's
fiduciary duty to Wanderer's Rest and Glenview. The bank, Livingston and Virginia Surety filed a third-party
plaintiffs' complaint against A.G. Edwards & Sons, Inc. and others as third-party
defendants. The court granted summary judgment to
Livingston, concluding as a matter of law that his only duty was to his
principal, the Bank of Sun Prairie.
Ohio
Casualty then settled with the plaintiffs and the bank. The settlement agreement provides that
plaintiffs and the bank assign their claims against Livingston and Virginia
Surety to Ohio Casualty and that Ohio Casualty is subrogated to the plaintiffs'
and the bank's rights against Livingston and Virginia Surety and to the bank's
right to contribution from Livingston, Virginia Surety and A.G. Edwards. Plaintiffs covenant not to sue the
bank. Plaintiffs and the bank
"make no warranties or representations as to the substantive or procedural
viability or merits" of the rights assigned or that they are subject to
subrogation.
III. AGENT'S LIABILITY TO PERSONS OTHER THAN
PRINCIPAL
The
trial court concluded that plaintiffs Krawczyk and Glenview lacked standing to
sue Livingston for either breach of fiduciary duty or negligence. The court ruled that as the bank's agent,
Livingston owed a fiduciary duty only to the bank. On the negligence claim, the trial court reasoned that because
Livingston performed his duties as a trust officer within the scope of his
employment with the bank, he owed no duty of care to the plaintiffs. Whether the bank owed a fiduciary duty as
trustee would be determined at trial because of factual disputes as to the
nature of the trustee agreements.
Plaintiffs
Krawczyk and Glenview do not dispute the trial court's conclusion that they cannot
maintain an action for breach of fiduciary duty against Livingston. They argue the trial court erred when it
ruled they could not state a claim against Livingston for negligence.
The
court relied upon Restatement (Second)
of Agency §§ 352 and 357 (1958).
Restatement (Second) of Agency
§ 352 provides:
An agent is not liable for harm to a person other than
his principal because of his failure adequately to perform his duties to his
principal, unless physical harm results from reliance upon performance of the
duties by the agent, or unless the agent has taken control of land or other
tangible things.
Restatement (Second) of Agency § 357 provides, "An agent who intentionally
or negligently fails to perform duties to his principal is not thereby liable
to a person whose economic interests are thereby harmed."
Plaintiffs
assert that although Restatement
(Second) of Agency § 357 correctly states the law as to an agent's
liability to a third party for the agent's breach of his duty to his principal,
Restatement (Second) of Agency
§§ 343 and 350 compel a different conclusion regarding an agent's tortious
conduct as to others. Restatement (Second) of Agency
§ 343 provides:
An agent who does an act otherwise a tort is not
relieved from liability by the fact that he acted at the command of the
principal or on account of the principal, except where he is exercising a
privilege of the principal, or a privilege held by him for the protection of the
principal's interests, or where the principal owes no duty or less than the
normal duty of care to the person harmed.
Restatement (Second) of Agency § 350 provides, "An agent is subject to
liability if, by his acts, he creates an unreasonable risk of harm to the
interests of others protected against negligent invasion."
Moreover,
plaintiffs assert that Wisconsin has a broader concept of duty than that
described in Restatement (Second) of
Agency §§ 352 and 357.
Under Wisconsin case law:
The
duty of any person is the obligation of due care to refrain from any act which
will cause foreseeable harm to others even though the nature of that harm and
the identity of the harmed person or harmed interest is unknown at the time of
the act. This is the view of the
minority in Palsgraf v. Long Island R.R. Co. (1928), 248 N.Y.
339, 162 N.E. 99....
....
A
defendant's duty is established when it can be said that it was foreseeable
that his act or omission to act may cause harm to someone. A party is negligent when he commits an act
when some harm to someone is foreseeable.
Once negligence is established, the defendant is liable for
unforeseeable consequences as well as foreseeable ones. In addition, he is liable to unforeseeable
plaintiffs.
A.E. Inv. Corp. v. Link Builders, Inc., 62 Wis.2d 479, 483-84, 214 N.W.2d 764, 766 (1974).
The
Wisconsin appellate courts have cited and approved Restatement (Second) of Agency § 343. See, e.g., Ford v. Wisconsin
Real Estate Examining Bd., 48 Wis.2d 91, 102, 179 N.W.2d 786, 792
(1970), cert denied, 401 U.S. 993 (1971); Purtell v. Tehan,
29 Wis.2d 631, 639, 139 N.W.2d 655, 659 (1966); Grube v. Daun,
173 Wis.2d 30, 51, 496 N.W.2d 106, 113 (Ct. App. 1992). Our supreme court cited and approved Restatement (Second) of Agency
§ 350 in Bruss v. Milwaukee Sporting Goods Co., 34 Wis.2d
688, 697, 150 N.W.2d 337, 341 (1967).
However,
when determining an agent's liability to persons other than his principal the
Wisconsin Supreme Court in Greenberg v. Stewart Title Guaranty Co.,
171 Wis.2d 485, 492 N.W.2d 147 (1992), employed an analysis different from that
in A.E. Investment Corp., 62 Wis.2d at 483-84, 214 N.W.2d at 766,
and Restatement (Second) of Agency
§§ 343 and 350. Plaintiff
Greenberg purchased real estate title insurance from Stewart Title. Southeastern Title Company had searched the
title as Stewart's agent, but failed to discover title defects. Greenberg claimed the title was
unmerchantable and sued Stewart and Southeastern for their negligence. The Greenberg court held that
a title insurer such as Stewart is not liable in negligence for a defect in
title, unless the insurer had assumed the duty to conduct a reasonable search
in addition to contracting to insure title.
Because Stewart had not assumed that duty, Stewart was not liable in
negligence to Greenberg. Id.
at 496, 492 N.W.2d at 152.
Greenberg
contended that even if Stewart owed him no duty to make a reasonable title
search, Stewart's agent, Southeastern, was liable to him for its negligence
since Southeastern was not a party to the insurance contract between Greenberg
and Stewart. The Greenberg
court held, "In the present case, Southeastern, the agent, performed its
services solely for the benefit of [Stewart] and owed no duty to
Greenberg. Thus, no action in tort may
be brought against Southeastern." Id.
at 498, 492 N.W.2d at 153.
In
Greenberg, the plaintiff's damages were purely economic, but it
is immaterial that an agent's negligence causes only economic damage to a third
person. In Wisconsin, a negligent actor
is liable for economic harm. See
A.E. Inv. Corp. v. Link Builders, Inc., 62 Wis.2d at 490-91, 214
N.W.2d at 770 (complaint stated claim for economic loss against architect who
designed building for a contractor and knew plaintiffs would operate business
in the building when plaintiff alleged design failure); Citizens State
Bank v. Timm, Schmidt and Co., S.C., 113 Wis.2d 376, 335 N.W.2d 361
(1983) (lender stated claim for lender's loss against accountants for having
negligently prepared financial statement for their client on which lender
relied); Hap's Aerial Enterprises, Inc. v. General Aviation Corp.,
173 Wis.2d 459, 496 N.W.2d 680 (Ct. App. 1992) (aircraft buyer stated claim for
economic loss caused by defendant's negligent inspection performed for the
prior owner).
When
the pertinent supreme court precedents appear to lead to different results, we
follow that court's last pronouncement.
Spacesaver Corp. v. DOR, 140 Wis.2d 498, 502, 410 N.W.2d
646, 648 (Ct. App. 1987). We hold, on
the basis of Greenberg, 171 Wis.2d at 498, 492 N.W.2d at 153,
that Livingston, as a negligent agent, is not liable for economic losses he caused
to persons other than his principal, the bank.
IV. SUBSTITUTION
We
conclude the trial court should have granted Ohio Casualty's motion to
substitute to the interest of the bank in the action. Our disposition of the claims of Krawczyk
and Glenview against Livingston moots the assignment issue as to those
plaintiffs. Because Krawczyk and
Glenview have no claim against Livingston for his negligence, Ohio Casualty
acquired nothing by the assignment from those plaintiffs.
Livingston
and Virginia Surety rely on First National Bank v. Hansen, 84
Wis.2d 422, 267 N.W.2d 367 (1978), as did the trial court. The Hansen court held that a
fidelity bond insurer which makes good a bank's losses arising out of a bank
employee's fraudulent and dishonest acts is not subrogated to the bank's right
to sue its directors for their negligence in failing to prevent those
losses. Id. at 428-33,
267 N.W.2d at 370-72.
In
Hansen, bonding companies had issued fidelity bank bonds insuring
a bank against losses resulting from the dishonest acts of its employees. The bank sued the bonding companies on the
bonds for losses caused by the dishonest acts of the bank's
vice-president. Claiming they were
subrogated to the bank's claims against its officers and directors, the bonding
companies impleaded the officers and directors on grounds that their negligence
had permitted the defalcations to occur.
The court affirmed a summary judgment dismissing the third-party
complaint against the officers and directors.
The
Hansen court noted that no court had previously considered
whether a subrogation action can be brought against the officers and directors
of an insured employer "for negligently permitting the default" by an
employee or other officer. Id.
at 430, 267 N.W.2d at 371 (footnote omitted).
The court held that the equitable nature of subrogation does not permit
the insurer to exercise its right of subrogation against its own insured, and
the same principles apply when the insurer attempts to exercise its right of
subrogation against its insured's negligent officer or director. Id. at 430-31, 267 N.W.2d at
371. The court said:
In this case the negligence of the Bank ... is but the
negligence of its officers and directors whose duty is to supervise the
operations of the bank. Since the
bonding companies have no claim based on negligence against the Bank, we hold
that equity will not permit the fidelity insurer to avoid that result by suing
the officers and directors individually.
Id. at 432, 267 N.W.2d at 372.
The
Hansen holding is limited to whether a subrogation action lies
against a bank's officers and directors for "negligently permitting"
an employee or other officer to "default" in his duty to the
bank. Neither its holding nor its
reasoning protects the "defaulting" employee/officer--in this case
Livingston--from a claim by an insurer on an assignment by the employer of its
rights against the employee to the insurer.
The
Hansen court recognized that "[u]pon payment of the loss
caused by the wrongful acts of a bonded employee, a fidelity insurer becomes
subrogated to any right of action the employer may have against the defaulting
employee." Id. at
429, 267 N.W.2d at 370. Although no
claim is made that Livingston acted dishonestly, his alleged negligence was a
substantial cause of the bank's loss, and in that sense his position is
comparable to that of the "defaulting" employee referred to by the Hansen
court.
The
merits of the claim Ohio Casualty acquired by assignment from the bank are not
before us.
V. CONCLUSION
We
conclude that the order dismissing Krawczyk's and Glenview's claims must be
affirmed and the order denying Ohio Casualty's motion to substitute for the
plaintiffs and the bank must be reversed.
By
the Court.—Orders affirmed in
part; reversed in part and cause remanded for further proceedings.
