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