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SOUTHGATE BANK v. FIDELITY & DEPOSIT CO. OF MD.

June 15, 1990.

THE SOUTHGATE BANK, Appellee/Cross-Appellant,
v.
FIDELITY & DEPOSIT COMPANY OF MARYLAND, Appellant/Cross-Appellee.



Fidelity & Deposit Company of Maryland (F&D) and the law firm of Sloan, Listrom, Eisenbarth, Sloan & Glassman (Sloan) appeal from a jury verdict and trial court sanctions concerning plaintiff The Southgate Bank's (Bank) blanket bond insurance coverage.

We affirm in part and reverse in part. The facts will be detailed only as necessary in deciding the issues presented by the appeal.

Kroh Brothers Development Corporation sought to borrow money from the Bank, which would have exceeded Bank's lending limit. Instead, brothers George and John Kroh personally borrowed $675,000 each with their wives signing the notes as co-borrowers and co-obligors. We are concerned only with the loan to George and Carolyn Kroh.

  The loan went into default and Bank sued George and Carolyn to collect the debt. George then filed bankruptcy proceedings in Missouri. Carolyn in her answer pled her signature on the note was not genuine (George's personal secretary admitted signing Carolyn's signature on the note).

  Subsequently, Bank filed a proof of loss with F&D under its blanket bond, which covered loss from forgeries. F&D denied coverage and refused to pay the claim.

  Bank, at F&D's request and pursuant to Bank's contractual obligation to protect F&D's potential subrogation rights against George, filed a complaint in George's bankruptcy case seeking a nondischargeable judgment for the debt. F&D did not intervene in the bankruptcy action.

[14 Kan. App. 2d 456]

     

  The bankruptcy court, based "on the evidence of record, and the consent of [George's] counsel," found that George had represented to Bank that the note had been executed and delivered by Carolyn; that in consideration of and in reliance on the note, Bank extended credit; that Carolyn's signature had been forged; and that George had actual knowledge of the forgery. Accordingly, the bankruptcy court granted Bank a nondischargeable judgment against George in the amount of $675,000, plus $154,602 in interest, with interest continuing to accrue at the contract rate.

  Eventually, the trial court took judicial notice of the bankruptcy court's finding that Carolyn's signature was forged. The jury found that F&D had breached its obligation to Bank with respect to the note under section D of the blanket bond.

  Post-trial, the district court denied Bank's request for fees pursuant to K.S.A. 40-256; denied F&D's motion for new trial; and granted sanctions against F&D and Sloan. F&D and Sloan appealed, and Bank cross-appealed.

  THE APPEAL

  F&D contends the trial court erred in judicially noticing the bankruptcy findings and in precluding it from relitigating the issue of whether Carolyn's signature on the note was forged.

  Traditionally, a former finding is binding only on the parties to the proceeding in which it was rendered and their privies. Keith v. Schiefen-Stockham Insurance Agency, Inc., 209 Kan. 537, 546, 498 P.2d 265 (1972). F&D argues it was not in privity with its insured Bank; it was not a party to the nondischargeability complaint in George's bankruptcy case.

  As we read Patrons Mut. Ins. Ass'n v. Harmon, 240 Kan. 707, 711, 732 P.2d 741 (1987), where there is a separate action on the coverage question, issues decided against the insurer's interest in an underlying tort suit can have binding or estoppel effect. On the other hand, a reservation of the coverage question in an underlying action can preclude application of collateral estoppel. See State Farm Fire & Casualty Co. v. Finney, 244 Kan. 545, 549, 770 P.2d 460 (1989).

  In the present case, the complaint in bankruptcy court was filed pursuant to Bank's contractual obligation to protect F&D's subrogation rights against George, and at F&D's request. F&D

[14 Kan. App. 2d 457]

      did not intervene or protect its right to litigate the issue of forgery (and therefore coverage) in a later action.

  Additionally, F&D's actions are analogous to invited error. Having requested Bank to pursue the forgery issue in bankruptcy court, it cannot now complain that Bank was successful in achieving that which was requested: a nondischargeable judgment against George based on forgery and fraud. See ...


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