548 F.

2d 166

THIRD FEDERAL SAVINGS & LOAN ASSOCIATION OF

CLEVELAND,
Plaintiff-Appellee,
v.
FIREMAN'S FUND INSURANCE COMPANY, DefendantAppellant and
Cross-Appellee,
and
J & V Mogilnicki, Inc., Third-Party Defendant,
and
James F. Rogers, Third-Party Defendant-Appellee and CrossAppellant.
Nos. 75-2004, 75-2005.

United States Court of Appeals,

Sixth Circuit.
Argued Oct. 12, 1976.
Decided Jan. 21, 1977.

Jay A. Hollingsworth, Hollingsworth & Hollingsworth, Cleveland, Ohio,

for appellant.
Stanley J. Zablotny, Cleveland, Ohio, William T. Boukalik, Climaco,
Goldberg & Boukalik, Cleveland, Ohio, for Third Federal Sav. & L. Ass'n
of Cleveland, James T. Rogers, Cleveland, Ohio, for James F. Rogers.
Before CELEBREZZE,* PECK and LIVELY, Circuit Judges.
LIVELY, Circuit Judge.

In this diversity action the district court, sitting without a jury, awarded
damages to the plaintiff, Third Federal Savings & Loan Association (the
Association) on its claim on a bond written by Fireman's Fund Insurance
Company (Fireman's Fund). The district court found that the Association

sustained losses within the coverage of the bond, primarily Clause (A) of the
insuring agreement which provided:FIDELITY
2 Any loss through any dishonest, fraudulent or criminal act of any of the
(A)
Employees, committed anywhere and whether committed alone or in collusion with
others . . ..
3

The holding of the district court was based on its finding that the third party
defendant James F. Rogers, an appraiser and inspector who worked on a fee
basis, was an employee of the Association.

The Association sustained losses on a number of construction loans which it

made to the third party defendant J & V Mogilnicki, Inc. It advanced money to
Mogilnicki in reliance on inspection reports prepared by Rogers and
representations by the president of Mogilnicki that construction had reached
certain stages on particular residences. When it was discovered that money had
been advanced for loans on six vacant lots and far in excess of amounts
permitted by the actual stage of completion of four others, the Association was
required to liquidate these ten Mogilnicki loans, and two others where
construction had been completed, at a loss. This action was brought to recover
losses on the twelve construction loans and one non-construction loan which
was liquidated at a loss when unpaid mechanics' and materialmen's liens were
asserted against the mortgaged property. Mogilnicki had constructed the
residence involved in the thirteenth claim, but Rogers was not involved.
Fireman's Fund filed third party complaints seeking indemnification from
Rogers and Mogilnicki.

At the beginning of the trial the district court announced that the issues would
be tried separately. The issue of Fireman's Fund's liability to the Association
would be tried first. If liability was found to exist, a separate hearing would be
held on the issue of damages. Finally, the third party claims would be heard
separately.

Following the district court's determination that Fireman's Fund was liable to
the Association for losses on ten of the twelve construction loans and the nonconstruction loan sued on (164 Joseph Street), a hearing was held on the
question of damages and they were fixed at $100,375.50. Thereafter the court,
without further hearings, granted summary judgment on the third party
complaints of Fireman's Fund against Rogers and Mogilnicki. Both Fireman's
Fund and Rogers have appealed.

The parties agree that liability under the bond depends, with respect to the ten

The parties agree that liability under the bond depends, with respect to the ten
construction loan losses now in dispute, upon whether Rogers was an employee
at the time he made false inspection reports. The evidence clearly supports the
district court's finding that Rogers ". . . did not personally inspect the various
properties involved herein on which he turned in inspection reports verifying
completion of construction when, in fact, construction had never been begun or
was incomplete." Without detailing the basis for its finding, the district court
held that Rogers was an employee of the Association; noting, however, that the
degree of control exercised by the employer is the "predominant theme" of the
cases dealing with the question.

The evidence disclosed that Rogers maintained an office as a real estate broker
and appraiser in his home. Though he worked as a broker and appraiser for
others, the bulk of his income during the years in question came from the
Association. He was paid an agreed sum for each appraisal and each inspection
which he made for the Association. This case concerns inspections only, and
the procedure followed in connection with inspections was described in the
testimony. Upon being notified by the secretary of the Association that an
inspection was required, Rogers would be given a "Periodic Inspection Report."
This was a form prepared by the Association. Such a report form was prepared
for each construction loan, showing the location of the construction site. This
form listed 62 items of work involved in constructing a building, with a series
of blocks opposite each item. These blocks were in columns each of which was
dated and represented an inspection. The inspector placed his initials at the top
of the column for each inspection and his estimate of the percentage of
completion on the date of inspection at the foot of the column. Rogers was
required to travel to the site of the residence under construction and make an
inspection. After presumably making such an inspection he would return the
report, with inspection data filled in, to the office of the Association. There was
no testimony that he was given any instructions other than the date his report
was required. Since the loan committee of the Association met on Mondays,
Rogers often made appraisals and inspections on weekends when the
Association offices were closed.

The appellants contend that the evidence does not support the district court's
finding that Rogers was an employee of the Association. He was paid once or
twice a month upon submission of statements to the Association listing the
appraisals and inspections he had made since the last statement. He was never
furnished with an employee's withholding statement (W-2). The Association did
not withhold income tax or deduct Social Security employee contributions from
his pay and made no Social Security employer contributions on his behalf.
Furthermore, Rogers was not listed as an employee for purposes of workmen's
compensation or unemployment compensation. Rogers was not entitled to

fringe benefits such as health and life insurance and participation in a pension
program, but it was testified that there were other part-time employees who did
not share in these benefits. Rogers paid all of his expenses in connection with
inspections and appraisals for the Association and did independent appraisals
for other organizations. He had no set working hours. It is argued that all of
these facts indicate that Rogers was an independent contractor rather than an
employee of the Association. These factors are indicative of some relationship
other than that of employer and employee. However, they are not sufficient by
themselves to require such a conclusion.
10

The district court also found it to be "of critical importance" that the application
which the Association prepared and filed with the agent of Fireman's Fund prior
to issuance of the bond listed among its employees, "Edgar G. Robison . . .
Appraisor (sic)." Robison was a full-time employee, and it was testified that
Rogers replaced him and performed the same services for the Association that
Robison had performed. The appellants point out, however, that the Association
did not list another appraiser named Ebner who was working on a part-time
basis at the time the application was filed. The secretary of the Association
testified that Ebner did the same type work as Rogers, under the direction and
control of the witness, and was paid in the same manner, but was not listed on
the application "because he was not considered an employee." The district court
reasoned that Fireman's Fund assumed the risk of loss from acts of "the bank's
appraiser" and pointed out that the bond did not require the Association to
notify the insurer of changes in personnel.

11

On the bond application the Association indicated that it did not require a rider
covering "agent" who performed services in connection with the ordinary
conduct of its business. Though the definition of "employee" in the bond
included "conveyancers," described as persons who prepare deeds, check titles,
or otherwise "assist the Insured in the making . . . of mortgage loans . . .," no
one was listed in this category on the application. The Association could have
elected coverage for dishonesty or fraud of agents, but did not do so. It listed
one full-time appraiser as an employee, but did not list a part-time fee appraiser
because he was not considered an employee. Under these circumstances we
find little support in the application for the district court's conclusion that the
parties contemplated coverage for the acts of part-time as well as full-time
appraisers. However, the dispositive question on this appeal is whether the
district court was correct in holding that Rogers was an employee, not whether
his acts would be covered if he was working for the Association in some other
capacity.

12

In William H. Sill Mortgages, Inc. v. Ohio Casualty Co., 412 F.2d 341, 344

(6th Cir. 1969), a case involving the same question and facts similar to those
now before us, the court wrote:
13
Whether
Stockford was an employee is a question of fact. The principal test of an
employer and employee relationship is control. Under the finding of facts of the trial
judge, which we find not to be clearly erroneous, Mr. Sill had a very close
supervision and control over Stockford. Mr. Sill was in almost daily contact with
Stockford instructing him and advising him with reference to processing mortgages
through the Sill company. The findings of fact of the trial judge with reference to the
employer and employee relationship are not clearly erroneous and they support the
legal conclusion that Stockford was an employee of the plaintiff company within the
meaning of the bond.
14

The Sill case applied Michigan law. The Ohio courts have also stressed control
as the decisive factor in determining whether the relationship of employer and
employee exists in a particular situation. The Supreme Court of Ohio stated the
law in paragraphs 1 and 3 of the Syllabus of Councell v. Douglas, 163 Ohio St.
292, 126 N.E.2d 597 (1955), as follows:

15The relationship of principal and agent or master and servant is distinguished from
1.
the relationship of employer and independent contractor by the following test: Did
the employer retain control of, or the right to control, the mode and manner of doing
the work contracted for? If he did, the relationship is that of principal and agent or
master and servant. If he did not but is interested merely in the ultimate result to be
accomplished, the relationship is that of employer and independent contractor.
16Where one employs another to do certain work for him, the mere right reserved by
3.
the employer to direct as to the quantity of work to be done, or the condition of the
work when completed, is not a right to control the mode or manner of doing the
work so as to justify the conclusion that the relationship between the employer and
the contractor is either that of principal and agent or master and servant. (Paragraph
four of the syllabus in Hughes v. Railway Co., 39 Ohio St. 461, approved and
followed.)
17

In Councell the question was whether tort liability should be imposed upon one
party for the acts of another through application of the doctrine of respondeat
superior. The same test of the right to control the manner or mode of
performing the work has been applied in workmen's compensation cases, e.g.,
Bobik v. Industrial Commission, 146 Ohio St. 187, 64 N.E.2d 829 (1946), and
unemployment compensation cases, Commercial Motor Freight, Inc. v. Ebright,
143 Ohio St. 127, 54 N.E.2d 297 (1944).

18

In an action under the Federal Tort Claims Act this court found that the rule for

18

In an action under the Federal Tort Claims Act this court found that the rule for
determining whether a relationship of employer and employee exists is
substantially the same under Ohio and federal law. The court cited Bobik,
supra, and Ebright, supra, and adopted the following statement from an opinion
of the Ohio Court:

19 general rule to determine whether a relationship is that of employer and

The
employee or independent contractor may be stated as follows:
20 the right to control the manner or means of performing the work is in the person
"If
for whom the work is performed, the relationship is that of employer and employee
or master and servant; but if the control of the manner or means of performing the
work is delegated to the person performing the work, the relationship is that of
independent contractor." Behner v. Indus. Comm., 154 Ohio St. 433, 437, 96 N.E.2d
403, 405.
21
Fisher
v. United States, 356 F.2d 706, 708 (6th Cir.), cert. denied, 385 U.S. 819, 87
S.Ct. 41, 17 L.Ed.2d 57 (1966).
22

In offering coverage by separate rider for acts of agents who are not employees
and requiring individual designation of conveyancers, Fireman's Fund may be
held to have limited coverage under insurance agreement (A) to "employees"
within the ordinary meaning of the word. Cf. Morfoot v. Stake, 174 Ohio St.
506, 190 N.E.2d 573 (1963). Since right to control is the hallmark of an
employer-employee relationship, the exposure of Fireman's Fund may not be
expanded by construing the bond to cover the acts of persons who performed
services for the Association but were not subject to such control. There is no
such ambiguity in the language of the bond as to require a construction in favor
of the insured. See Trinity Universal Insurance Co. v. Cincinnati Insurance Co.,
513 F.2d 915 (6th Cir. 1975).

23

The finding of the district court that Rogers was an employee within the bond
does not detail the evidence upon which it was based. No reference is made to
testimony or other evidence which established that the Association had the
"right to control the mode or manner of doing the work . . .," Councell, supra.
We have searched the record and have found no substantial evidence that the
Association exercised or claimed the right to exercise control over the manner
in which Rogers carried out inspections. There is no evidence that the
Association gave Rogers instructions or directions as to how the inspections
should be performed. He was an experienced real estate broker and appraiser,
and the Association appears to have relied on this experience.

24

When viewed in the light of clearly established principles of the governing law

of Ohio, the testimony and documentary evidence together with the reasonable
inferences which might be drawn therefrom point to the conclusion that James
F. Rogers was not an employee of Third Federal Savings & Loan Association
within the meaning of the Fireman's Fund bond. The finding of the trial court
on this question is binding on this court unless it is clearly erroneous. Rule
52(a), Fed.R. Civ.P. In United States v. United States Gypsum Co., 333 U.S.
364, 395, 68 S.Ct. 525, 542, 92 L.Ed. 746 (1948), the Supreme Court wrote:
25finding is "clearly erroneous" when although there is evidence to support it, the
A
reviewing court on the entire evidence is left with the definite and firm conviction
that a mistake has been committed.
26

We have such a conviction in this case, based on the entire record.

27

The ten construction loan losses for which the district court awarded damages
all represented residences which were only partially completed or on which no
work had been done. The court held that there could be no recovery for losses
from two construction loans on property on Kenilworth and Willard Avenue.
Construction was completed on both of these residences and it was not claimed
that dishonesty of an inspector had caused the losses. The Association's claims
were based on fraudulent misrepresentations by the president of Mogilnicki.
The bond, in insuring agreement (E), provided coverage for loss of property
through any form of fraud or dishonesty by any person. Fireman's Fund
contended, and the district court agreed, that recovery for the Kenilworth and
Willard Avenue losses was precluded by exclusion 2(d), which provides:

EXCLUSIONS
Section 2. This Bond Does Not Cover:
28 Any loss the result of the complete or partial nonpayment of or default upon any
(d)
loan made by or obtained from the Insured, whether procured in good faith or
through trick, artifice, fraud or dishonesty, except when covered by Insuring
Agreement (A) (employee dishonesty) or (D) (forgery).
29

The Association has not appealed from this determination.

30

The district court concluded, however, that exclusion clause 2(d) did not apply
to the property at 164 Joseph Street, upon which the Association had not made
a construction loan, and found liability under insuring agreement (E). In this
instance the Association provided permanent financing to the purchaser of the
completed residence. It was discovered later that Mogilnicki had failed to pay

all the suppliers of labor and material. The Association paid off mechanics'
liens after taking title from the purchaser, and eventually resold the property at
a loss. The loss did not result from employee dishonesty or forgery, the
exceptions to operation of exclusion clause 2(d).
31

The presence of exclusion clause 2(d) precludes the treatment of the bond as
credit insurance. Yet the actual cause of the Association's loss on the Joseph
Street property was a defect in the purchaser's title to the property mortgaged to
the Association as security for its loan. The reasoning of the court in First
National Bank of Memphis v. Aetna Casualty & Surety Co., 309 F.2d 702 (6th
Cir. 1962), cert. denied, 372 U.S. 953, 83 S.Ct. 951, 9 L.Ed.2d 977 (1963),
applies with equal force to this case. It is clear from the language of exclusion
clause 2(d) that it applies to losses on loans induced by fraud if the losses are
actually the result of default. See Community Fed. Sav. & L. v. General
Casualty Co., 274 F.2d 620, 625 (8th Cir. 1960). Thus, even though Mogilnicki
may have acted fraudulently in deeding the property to the purchaser without
paying the suppliers of labor and materials, this fraud did not remove the
Association's ultimate loss on the loan from the terms of the exclusion.

32

The judgment of the district court is reversed with directions that the complaint
and third party complaints be dismissed. The appellants Fireman's Fund
Insurance Company and James F. Rogers will recover their costs on appeal.

Judge Celebrezze did not participate in this decision