Fidelity & Deposit Co. of Maryland v. Courtney

• Decision Date: 13 July 1900
• Docket Number: 751.
• Parties: FIDELITY & DEPOSIT CO. OF MARYLAND v. COURTNEY.
• Court: U.S. Court of Appeals — Sixth Circuit

103 F. 599

FIDELITY & DEPOSIT CO. OF MARYLAND v. COURTNEY.

No. 751.

United States Court of Appeals, Sixth Circuit.

July 13, 1900

This action was brought by the receiver of the German National Bank against the Fidelity & Deposit Company of Maryland to recover upon a bond given to indemnify the bank against loss by fraudulent acts of J. M. McKnight as president thereof. It appears in the record that on June 1, 1894, McKnight was elected vice president, and executed his bond for one year. Upon June 1, 1895, he was elected president, and the bond was renewed by him as president, and was again renewed for the further period of one year. The petition sets up various defaults, aggregating $18,742.74, and prays judgment for the penalty of the bond in the sum of $10,000. The bond contained among others, the following provisions: 'Whereas, the employe has been appointed in the service of the employer and has been assigned to the office or position of * * * by the employer, and application has been made to the Fidelity and Deposit Company of Maryland for this bond; and whereas the said employer has delivered to the company a certain statement, and it being agreed and understood that such statement constitutes an essential part of the contract hereinafter expressed: Now, therefore, in consideration of the payment of the sum of-- -- dollars, lawful money of the United States of America, to the company as a premium for the term commencing at the date hereof and ending on the-- -- day of-- --, eighteen hundred and ninety-- --, at 12 o'clock noon, the company does hereby agree that it will, within three months after receipt of proof satisfactory to its directors, and subject to the conditions hereinafter expressed, reimburse the employer to an amount not in excess of the penalty of this bond, for such pecuniary loss as the employer shall have sustained by any fraudulent act or acts committed by the employe during the continuance of this bond in the performance of the duties of his said office or position, or of such other position as he may be subsequently appointed to or called to fill by the employer in said service, of money, securities, or other personal property belonging to the employer, or for which the employer is responsible. This bond may be continued from year to year, at the option of the employer, at the same or an agreed premium rate, so long as the company shall consent to receive the same, in which case the company shall remain liable for any dishonest act of the employe occurring between the original date of this bond and the time to which it shall have been continued. This bond is issued and continued upon and subject to the following conditions and provisions; * * * That the employer shall immediately give the company notice, in writing, of the discovery of any default or loss hereunder and shall file with the company his or their claims hereunder, with full particulars thereof, as soon as practicable thereafter; and no claim which shall not be so filed by the employer with the company within six months after the expiration or cancellation of this bond, or within six months after the employe shall have ceased to be in the employer's service, shall be payable hereunder. * * * That, upon notification to the company of any loss hereunder, the company's liability shall thereupon terminate as regards any subsequent act of the employe. That the employer shall observe, or cause to be observed, due and customary supervision over the employe for the prevention of default; and, if the employer shall at any time during the currency of this bond condone any act or default on the part of the employe which would give the employer the right to claim hereunder, and shall continue the employe in its service, without written notification to the company, the company shall not be responsible hereunder for any default of the employe which may occur subsequent to such act or default so condoned. * * * That there shall be a complete inspection of the accounts and books of the employe on behalf of the employer at least once in every twelve months from the date of this bond, such inspection to include examination of all cash and securities of which the employe shall have custody or charge. That the employe has not, within the knowledge of the employer, been at any time in arrears or default either in this or other employment. That the employer shall at once notify the company on becoming aware of the employe being engaged in speculation or gambling, or indulging in any disreputable or unlawful habits or pursuits. * * * That the company may, upon giving one month's notice, in writing, to the employer, cancel its responsibility hereunder is so far as it concerns the acts or defaults of the employe subsequent to the end of such month; in which event it will, upon request of the employer, refund the proportion of the premium paid for the unexpired term of this bond.'

The amended answer recites the provisions of the bond, and sets up that neither the bank nor the receiver ever gave notice to the Fidelity & Deposit Company of Maryland of the defaults as required; that the bank did not observe the due and customary supervision over McKnight; that the vice president, who was also a director, knew of the embezzlements of McKnight, yet neither the bank nor the receiver notified the company until long after the bank was closed, in January, 1897; that the receiver did not file his claim against said company until the 18th of February, 1897; that this notice did not give the particulars of McKnight's default, and that defendant did not fully know the same until the 2d of July, 1897; that Rudolph Reutlinger was teller and cashier, and as such had charge of such financial affairs as pertained to said offices; that Adolph Reutlinger was vice president, and was daily in the bank, and thoroughly familiar with all its business affairs, and with the acts and defaults of said McKnight as president; that the directors were also familiar with McKnight's overdrafts; that McKnight's defaults and embezzlements were known to the directors, who allowed them to go on without the knowledge of the Fidelity & Deposit Company; that during the time McKnight was in office the books were out of balance about $3,000; that the directors and officers allowed McKnight to be constantly overdrawn in his personal account; that his overdraft, January 18, 1896, was $1,340.14, and on June 8, 1896, it was $626.23, and that, day in and day out, he was overdrawn, of which fact the directors had knowledge, and these irregular acts and defaults were not known to said defendant, otherwise it would have canceled the bond; that before the renewal of the bond, in 1895-1896, it wrote the bank to ascertain if McKnight had been conducting himself properly, and was informed by the cashier that McKnight had discharged his duties faithfully; that such statements were made with the knowledge of the directors, but that said statements were false and fraudulent, which at the time was unknown to said defendant; and that thereby the company was led to renew the bond, which otherwise would have been canceled. And by another amended answer it is charged that McKnight's wrongdoings were known to the directors of the bank when they occurred, or within a few days thereafter, but that said defendant was not notified until long after the bank went into the hands of a receiver. Replication was filed, and the case went to trial, resulting in a verdict for plaintiff. Testimony was offered tending to show various transactions of McKnight's in the course of his business in the bank; among other things, the overdrafts of McKnight, and that checks were given by him, and carried by the cashier as cash items, at the direction of McKnight, for a considerable length of time. There is also testimony tending to show that McKnight, while a candidate for office of mayor in the city of Louisville, which office was to be filed by the council of said city, obtained $1,000 for one Edmunds, in bills of $100 each, which money was obtained on Edmunds' check, he, at the time, having no account at the bank as an individual, but Edmunds & Co. had an account there. Edmunds testified he understood the check was to be taken care of by McKnight. It was also testified that a loan was procured of $2,000 to Britt and Reeder, which money was obtained at the bank after banking hours, and that McKnight said he had a big scheme on hand, and it appeared this money was given for the purpose of obtaining an illegal contract with the councilmen as to possible legislation which might come before them. McKnight, on being asked for an explanation of the matter, claimed that it was all right; that the note was good; that the matter was brought before the board of directors, where McKnight made an explanation to the same effect, and that it seemed to satisfy the board.

E. T. McDermott, for plaintiff in error.

Wm. M. Smith, for defendant in error.

Before LURTON, DAY, and SEVERENS, Circuit Judges.

DAY Circuit Judge, after thus stating the case, .

1. It is unnecessary to enter into a detailed account of the various defaults, or comment upon the knowledge thereof of the bank directors, as there was a conflict of testimony upon that subject, upon which the court charged the jury as follows:

'There was also evidence tending to show that J. M. McKnight was president of the bank, and the other officers of the bank, including the directory, had entire confidence in his honesty and integrity up to the time the bank was closed; that none of them had any knowledge that any act of his in the management of said bank was fraudulent or dishonest, until after the closing of the bank; that said bank had a discount committee, who regularly examined and passed on

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