186 F.

2d 291

HOLLEY COAL CO.

v.
GLOBE INDEMNITY CO.
No. 6168.

United States Court of Appeals Fourth Circuit.

Argued November 20, 1950.
Decided December 27, 1950.

COPYRIGHT MATERIAL OMITTED Roy S. Samms, Jr., Charleston,

W. Va., and Bernard J. Pettigrew, Jr., Charleston, W. Va., for appellant.
Robert W. Lawson, Jr., Charleston, W. Va. (Stanley C. Morris and
Steptoe & Johnson, Charleston, W. Va., on the brief), for appellee.
Before PARKER, Chief Judge, and SOPER and DOBIE, Circuit Judges.
DOBIE, Circuit Judge.

This civil action was instituted in the Circuit Court of Kanawha County, West
Virginia, by Holley Coal Company (hereinafter called Holley Company) for
the purpose of recovery on an indemnity bond in the penalty of $10,000.00,
theretofore issued by defendant Globe Indemnity Company (hereinafter called
Globe), covering losses incurred during 1947 and 1948 through the alleged
defalcation of Holley Company's employees. On motion of defendant Globe,
this case was removed to the United States District Court for the Southern
District of West Virginia. The case was submitted to a jury on certain
interrogatories, and judgment was ultimately entered in favor of Globe on the
jury's answers to these interrogatories. Holley Company brings this appeal.

The bond agreed to indemnify Holley Company for any loss incurred through
the dishonest acts of its employees, the bond also stated that certain limitations
and conditions set forth in Sections A and B thereof should be conditions
precedent to recovery under the bond. Sections A and B, and the riders thereto,
defined "Employees" and expressly excepted from this definition the following
officers of Holley Company: A. J. Holley President; Blanche Holley

Vice President (his wife); Margaret Martin Secretary-Treasurer (his

daughter).
3

The Declaration filed by Holley Company in the West Virginia state court
averred that Holley Company had suffered a loss in excess of $10,000, because
of the embezzlement of an employee; it did not aver that those persons
expressly excepted from coverage were not, in whole or in part, responsible for
the loss. Holley Company presented its case solely by introducing evidence
tending to show that one Layton L. Bennett, an employee, embezzled the
money.

Globe's answer, filed in the United States District Court after removal, was in
essence a general denial of the averments of Holley Company's declaration, to
which was added a second defense stating that the action was not brought
within two months after the loss as required by the terms of the bond. This
answer was not signed. Later, over the objections of Holley Company that the
answer was not signed, Globe was permitted to file a first amended answer
which repeated the general denial and made more specific the second defense.
At the trial, however, it developed that Globe was defending on the theory that
A. J. Holley and the other persons expressly excepted from coverage were
responsible, either by themselves or in conjunction with "employees," for the
loss. Evidence tending to prove this defense was admitted by the District Judge
and interrogatories were submitted to the jury, The jury's answers to these
interrogatories supported this defense and the jury was discharged. Weeks later,
over the objection of Holley Company, Globe was permitted to file a second
amended answer incorporating this defense, and judgment was entered by the
District Court in favor of Globe.

The first question raised by this appeal, therefore, is whether the District Judge
properly permitted the complicity of those persons expressly excepted from
coverage to become an issue in the case. We think he did.

The bond seems to expressly provide that Holley Company must show as a
condition precedent to recovery that the loss was not attributable to those
persons excepted in the bond. Such a showing would thus become a part of
Holley Company's case (not an affirmative defense), to be pleaded and proved
by it. Federal Rules of Civil Procedure, Rule 9(c), 28 U.S.C.A.; McAllister v.
City of Riesel, Tex., 5 Cir., 146 F.2d 130.

Be that as it may, Rules 15(b) and 15(c) of the Federal Rules of Civil Procedure
state:

"(b) Amendments to Conform to the Evidence. When issues not raised by the
pleadings are tried by express or implied consent of the parties, they shall be
treated in all respects as if they had been raised in the pleadings. Such
amendment of the pleadings as may be necessary to cause them to conform to
the evidence and to raise these issues may be made upon motion of any party at
any time, even after judgment; but failure so to amend does not affect the result
of the trial of these issues. If evidence is objected to at the trial on the ground
that it is not within the issues made by the pleadings, the court may allow the
pleadings to be amended and shall do so freely when the presentation of the
merits of the action will be subserved thereby and the objecting party fails to
satisfy the court that the admission of such evidence would prejudice him in
maintaining his action or defense upon the merits. The court may grant a
continuance to enable the objecting party to meet such evidence.

"(c) Relation Back of Amendments. Whenever the claim or defense asserted in

the amended pleading arose out of the conduct, transaction, or occurrence set
forth or attempted to be set forth in the original pleading, the amendment
relates back to the date of the original pleading."

10

We think that this issue was tried with the implied consent of Holley Company.
Prior to this case, two other legal proceedings had issued from the alleged
embezzlement of the funds in question. One, a criminal action against Layton
Bennett, resulted in his acquittal. Another, a suit by Layton Bennett against A.
J. Holley for malicious prosecution and other alleged wrongs growing from the
criminal proceeding, resulted in a mistrial. These cases involved almost
identically the facts and testimony presented in the instant case. Globe's defense
was thus well known to Holley Company when this case was tried below.
Counsel for Globe had referred to this defense in his opening statement and this
reference was commented upon by Holley Company's counsel. Much of the
evidence tending to establish this defense was not objected to, and such
objections as were made were based on the grounds of prejudice to Holley
Company or on general irrelevancy, not on the ground that the evidence was
irrelevant to the issues raised by the pleadings. Also, Holley Company
expressly stated in the court below that it had no exceptions to the
interrogatories submitted to the jury, some of which presented this issue. And
no exceptions were taken to that part of the charge to the jury which dealt with
this issue. We do not say that failure to take timely exception in these matters
will necessarily shield error but we do think that this failure indicates Holley
Company's consent that this issue be tried.

11

The Federal Rules of Civil Procedure indicate a policy to disregard

technicalities and form and to determine the rights of litigants on the merits. To

that end these rules are to be liberally construed. Mitchell v. White

Consolidated, 7 Cir., 177 F.2d 500; Ray v. Morris, 7 Cir., 170 F.2d 498;
Fakouri v. Cadais, 5 Cir., 147 F.2d 667, certiorari denied 326 U.S. 742, 66
S.Ct. 54, 90 L.Ed. 443. Amendments are to be liberally allowed where no
prejudice results. United States v. Koike, 9 Cir., 164 F.2d 155; Blair v. United
States, 8 Cir., 147 F.2d 840; Tahir Erk v. Glenn L. Martin Co., 4 Cir., 116 F.2d
865. And the trial court has wide discretion in the allowance of amendments.
Sheridan Wyoming Coal Co. v. Krug, 84 U.S.App. D.C. 172, 172 F. 2d 282,
reversed on other grounds, Chapman v. Sheridan-Wyoming Coal Corp., 338
U.S. 621, 70 S.Ct. 392; Schuckman v. Rubenstein, 6 Cir., 164 F.2d 952,
certiorari denied 333 U.S. 875, 68 S.Ct. 905, 92 L.Ed. 1151.
12

Holley Company was prejudiced neither by the trial of the issue of the
complicity of those persons excepted from coverage, nor by the second
amended answer covering this issue. Holley Company was in no way surprised,
it impliedly consented to the trial of this issue, and the allowance of the second
amended answer could not have affected the jury's answers to the
interrogatories, since it followed the jury's discharge. By Rule 15(c), this
amendment related back to the date of the original answer and supported all
evidence admissible to establish A. J. Holley's connection with the loss.

13

Holley Company argues further, that even if this defense were properly
litigated, the evidence was irrelevant to the issue. A. J. Holley was virtual sole
owner of the Holley Company, a corporation. It has already been said that
Globe's defense was the participation of A. J. Holley in the defalcation, that he
was, in short, stealing his own money. It was implicit in Globe's theory and
evidence that this was done to evade federal income taxes. Thus, we think that
the Federal Income Tax Lien, even though it was not filed until December,
1949, roughly two years after the funds disappeared, was properly admitted to
show that A. J. Holley had tax troubles and a motive for acquiring the funds of
the Holley Company in a tax-free manner. This lien covered a period, 19411946, before any money disappeared, and A. J. Holley's tax difficulties must
have been in his mind for a long time.

14

And examples of A. J. Holley's purchasing for his own or his family's use a
motorboat, shares in gas wells, etc., with funds of the Holley Company, at least
one of which items (the motorboat) was entered fictitiously on the books as a
business expense, do constitute evidence of a scheme to defraud the federal
government and provide further evidence of an inclination to abstract business
funds. West Virginia follows the general rule that evidence of such specific acts
is admissible to show scheme, plan, or design; First National Bank of
Pennsboro v. Barker, 75 W. Va. 244, 83 S.E. 898; and by Federal Rules of

Civil Procedure, Rule 43(a), the same evidence is admissible in the federal
courts sitting in West Virginia.
15

Objection is also made by Holley Company to the permitted filing of the first
amended answer, the reason being that the original answer was unsigned.
Reliance is placed on Rule 11 which provides that an unsigned pleading "may
be stricken as sham and false". But an unsigned pleading is not invalid. In re
Legon, D.C., 85 F.Supp. 946; Pallant v. Sinatra, D.C., 7 F.R.D. 293. Striking
the pleading is within the sound discretion of the court. The District Court did
not abuse its discretion; no reason appeared for this failure to sign other than
oversight. And the first amended answer, which contained everything the
original answer contained, was signed. Likewise was signed the second
amended answer, on the allegations of which the ultimate judgment was based.

16

The second major question presented by this appeal concerns the manner in
which the issues were submitted to the jury. The heart of the case went to the
jury on Interrogatories 2 and 4. No. 2 asked:

17

"Was any loss of money by Holley Coal Company caused by any dishonest act
or acts committed by any one or more of its employees, other than A. J. Holley,
Blanche Holley or Margaret Martin, acting directly or in collusion with others,
after June 6, 1947?" Answer: "Yes." No. 4, when first given to the jury, read:
"Was this loss due to an act of Layton L. Bennett?" It was later changed to read:
"To whose acts was this loss due?" Answer: "The clerical employees of the
Holley Coal Company, in collusion with A. J. Holley, Blanche Holley, and
Margaret Martin."

18

Holley Company argues that this change in No. 4 was prejudicial to it, that the
answers to these interrogatories are inconsistent, and that the jury either
misunderstood No. 4 or was mislead by the court's charge.

19

We do not find these answers inconsistent. The jury appears to have thought
that A. J. Holley and his wife and daughter colluded with or abetted certain
clerical employees in the removal of the money, among whom Layton L.
Bennett may, or may not, have been. The court in its charge to the jury
explained that the phrase "in collusion with others" in Interrogatory No. 2
would cover collusion with A. J. Holley and the others excepted from the
coverage of the bond. The jury's answers to the interrogatories are thus
consistent with the theory upon which Globe defended.

20

We have carefully examined the District Court's charge to the jury; it appears to

have been fair and correct. It severally discussed the evidentiary facts and
pointed out the inferences that might be drawn from these facts, some of them
favorable to Globe, some favorable to Holley Company. It left open and, with
one qualification that we shall soon discuss, correctly framed for the jury the
important issue, that of deciding who took the money; and the District Judge
did not betray any personal opinion he may have had in the matter. The charge
clearly framed the issue, the interrogatories simply put this issue to the jury.
There is no merit in the contention of Holley Company that the jury
misunderstood the interrogatories or might have been mislead by the charge.
Nor do we think that the changing of Interrogatory No. 4 prejudiced the jury
against Holley Company. The jury apparently understood the case, and this
change was an improvement in that it elicited not only a decision on Holley
Company's theory that Bennett took the money, but also a decision on Globe's
theory that A. J. Holley and the others excepted from the bond participated in
taking this money.
21

The one reservation we have mentioned in discussing the charge is that the
District Judge inferred that Holley Company could recover if an "employee"
participated in the theft, and this irrespective of the complicity of those persons
expressly excepted from coverage. This is an incorrect statement of the law;
participation by those persons excepted from coverage would bar recovery. The
District Court recognized this when it entered judgment for Globe, and the
contrary is not argued here. The point is, that when the jury returned the
answers to the interrogatories, it had been led to believe that Holley Company
would recover on the basis of those answers. Had this been a case where a
general verdict had been returned by the jury for Holley Company, we would
reverse because of this error in the charge. But here we have a judgment
entered by the District Court, which is consistent with the jury's answers to the
interrogatories. And Holley Company was not prejudiced by this instruction.

22

Finally, the question of the sufficiency of proof has been raised. It is true that
when fraud or dishonesty is an element of a civil suit, it must be shown by clear
and convincing evidence. See Hardware Mut. Ins. Co. of Minnesota v. Jacob
Hieb, Inc., 8 Cir., 146 F.2d 447, 452. But it is also true that when we review a
judgment returned on conflicting evidence, we must take that view of the
evidence most favorable to the appellee (Globe here). We must assume that the
jury disregarded or disbelieved all evidence inconsistent with its answers to the
interrogatories. Lavender v. Kurn, 327 U.S. 645, 654, 66 S.Ct. 740, 90 L.Ed.
916; Traders and General Ins. Co. v. Powell, 8 Cir., 177 F.2d 660. We think
that the jury heard evidence which can be called clear and convincing proof of
fraud and misappropriation on the part of A. J. Holley and the others.

23

From the evidence favorable to Globe, the jury could reasonably infer the facts
set out below in this paragraph. A. J. Holley, by reason of tax difficulties and
the prospect of paying lower income taxes, had a motive for acquiring the
money by misappropriation, rather than by salary and dividends. A. J. Holley
habitually intermingled the assets of Holley Company with those of an
automobile business he also owned, without taking care to see that proper
bookkeeping entries were made to show the respective earnings of the two
businesses. Funds of the Holley Company were used to buy articles for the
personal use of A. J. Holley and members of his family, and at least one of
these expenditures was fictitiously entered on the books of the corporation as a
business expense. A. J. Holley caused to be entered on the books of the Holley
Company large sums as prospecting expenses which sums in whole or in part
were never spent for that purpose. A. J. Holley caused to be withdrawn from
Holley Company's account larger sums than were necessary to cover the
payroll. This excess appeared in the pay envelopes of A. J. Holley and other
members of his family who were employed by Holley Company, which excess
was not accounted for in the books of Holley Company and exceeded the
salaries that those persons were ostensibly entitled to receive.

24

Presumably the jury accepted this view of the evidence and discarded and
disbelieved that evidence tending to show that Layton Bennett had himself,
without the collusion of Holley Company's excepted officers, embezzled the
money. We think that these findings will clearly support the ultimate
conclusion of the jury that A. J. Holley and the others excepted were
responsible for the disappearance of the money. The motive was present, a
practice of habitual intermingling of funds and loose accounting methods were
proven, and it could be readily inferred that the pay envelopes of the Holleys
were being padded. The money could have disappeared either by this padding,
or by being siphoned into other Holley activities, or by a combination of both.

25

This case was really tried with two alternatives: one pointing to Layton
Bennett's sole dishonesty, the second to the dishonesty of A. J. Holley and the
others excepted from the bond. The essential questions presented are those of
the credibility of witnesses, which is peculiarly the province of the jury.

26

The judgment of the District Court is affirmed.

27

Affirmed.