AMERICAN SURETY CO. V. PAULY

• Decision Date: 18 April 1898
• Citation: 170 U. S. 160
• Court: U.S. Supreme Court

American Surety Co. v. Pauly (No. 2)

No. 169

Argued January 7, 1898

Decided April 18, 1898

170 U.S. 160

ERROR TO THE CIRCUIT COURT OF

APPEALS FOR THE SECOND CIRCUIT

Syllabus

This was an action upon a bond guaranteeing a national bank against loss by any act of fraud or dishonesty by its President. The bond was similar in its provisions to the one referred to in the case preceding this, and contained among other provisions the following:

"Now therefore in consideration, . . . it is hereby declared and agreed, that subject to the provision herein contained, the company shall, within

Page 170 U. S. 161

three months next after notice, accompanied by satisfactory proof of a loss, as hereinafter mentioned, has been given to the company, make good and reimburse to the employer all and any pecuniary loss sustained by the employer of moneys, securities or other personal property in the possession of the employ, or for the possession of which he is responsible, by any act of fraud or dishonesty on the part of the employee in connection with the duties of the office or position hereinbefore referred to, or the duties to which in the employer's service he may be subsequently appointed and occurring during the continuance of this bond and discovered during said continuance, or within six months thereafter and within six months from the death or dismissal or retirement of the employ from the service of the employer, it being understood that a written statement of such loss, certified by the duly authorized officer or representative of the employer, and based upon the accounts of the employ, shall be prima facie evidence thereof."

Held:

(1) That this language was susceptible of two constructions, equally reasonable, and that the one most favorable to the insured should be accepted, namely, that the required written statement of loss arising from the fraud or dishonesty of the president of the bank, based upon its accounts, was admissible in evidence if suit was brought, and was prima facie sufficient to establish the loss.

(2) That within the meaning of the bond in suit, the president of the bank remained in its service at least up to the day on which the receiver took possession of books, papers and assets.

The case is stated in the opinion.

MR. JUSTICE HARLAN delivered the opinion of the Court.

This is an action by the receiver of the California National Bank of San Diego, California, upon a bond given July 1, 1891, by the American Surety Company of New York to indemnify that banking association against loss by any act of fraud or dishonesty on the part of John W. Collins in connection with the duties of the office or position of president of the above bank, or the duties to which in the employer's (the bank's) service he might be subsequently appointed, and occurring during the continuance of the bond,

"and discovered

Page 170 U. S. 162

during said continuance or within six months thereafter and within six months from the death or dismissal or retirement of the employee [Collins] from the service of the employer."

The bond in this case is similar to the bond of the surety company, of like date, insuring the fidelity and integrity of George N. O'Brien as cashier of the bank, and which was involved in the preceding case of Surety Co. v. Pauly, (No. 1), ante, 170 U. S. 133. With a few exceptions, the questions of law raised by the assignments of error in the present case are concluded by what was determined in that case.

1. It is contended that the receiver did not comply with the provision in the bond requiring written notice to the company

"of any act on the part of the employee which may involve a loss for which the company is responsible hereunder as soon as practicable after the occurrence of such act shall have come to the knowledge of the employer."

The import of this provision was considered in the former case. The material inquiry here is whether notice was given to the company of the acts of fraud and dishonesty on the part of Collins of which complaint is made as soon as practicable after the occurrence of such acts came to the knowledge of the receiver.

The evidence was very conflicting as to the time when the receiver first became aware of the fraudulent acts of Collins as president of the bank. The first written notice by the receiver to the company of any claim under Collins' bond arising out of fraudulent or dishonest acts on his part was given May 23, 1892. The terms of that notice appear in the opinion in the former case. There was evidence tending to show that although the receiver had reason, in the months of January, February, March, or April, 1892, to believe that there were irregularities on the part of Collins, as president of the bank, he did not become aware of any specific acts of fraud or dishonesty by him until the expert bookkeeper employed to examine the bank's books informed him, a few days prior to May 23, 1892, that he had discovered false entries showing fraud and dishonesty on the part of both Collins and

Page 170 U. S. 163

O'Brien. The conflict in the evidence upon the issue as to the time when the receiver first acquired knowledge of the frauds in question was submitted to the jury under instructions to which, in our judgment, no objection can properly be made. The court instructed the jury that it was incumbent upon the receiver to satisfy them by a fair preponderance of evidence that he notified the company of any act on the part of Collins, "likely to involve a loss for which the company might become responsible, as soon as practicable after the act came to his knowledge." It said:

"Now it was not incumbent upon the plaintiff to give notice as soon as practicable after he may have had suspicions of dishonest conduct on the part of the president, but it was his duty, when he became satisfied that the president had committed some specific act of fraud or dishonesty which was likely to involve the defendant in loss, to give notice in writing. This provision does not require that the notice shall be given immediately, but it requires that it shall be given with reasonable promptness after the discovery, and it is a question of fact for the jury to say, upon the evidence, in view of the particular circumstances of the case, whether such a notice has been given with reasonable promptness. The notice in this case was given on the 23d day of May, 1892, and it will become necessary for you to inquire and determine when it was that knowledge came to the plaintiff -- when he became chargeable with knowledge that the president had committed some specific act of fraud or dishonesty likely to render the defendant liable upon its bond."

Again:

"The testimony of Mr. Bloodgood you will recall, which, if I remember it correctly, is to the effect that he entered upon the investigation of the facts in reference to the president's accounts, and the misapplication of funds by him, about the first of April, and completed that investigation some time in May, and, as soon as he completed it, he then informed the plaintiff of the result. Now I will charge you as matter of law in this case that if the plaintiff had made discovery of any specific act which he believed might render the defendant liable for loss prior to the first day of May,

Page 170 U. S. 164

1892, the notice was not given with reasonable promptness, but if a discovery was not made until after that time, then you can say and decide, as a question of fact, whether or not it was given with reasonable promptness, having been given on the 23d day of May."

These instructions were rather more favorable to the surety company than were those on the same point in the suit on the bond guarantying the fidelity and integrity of the cashier of the bank.

In our judgment, for the reasons stated in the opinion in the former case, it was proper to instruct the jury that the receiver need not have given the required notice on mere suspicion as to acts by Collins involving fraud or dishonesty on his part as president of the bank, but was bound to do so only when satisfied that he had committed some specific act of fraud or dishonesty likely to involve loss to the company. Nor was it error to leave it to the jury to say whether, under the proof and looking at all the circumstances, a notice given May 23d of a loss discovered after May first was given with reasonable promptness.

2. It is insisted that the instructions of the trial court in reference to the effect to be given to the written statement of loss made by the receiver were erroneous. The provision in the bond upon which this contention rests is in these words:

"Now therefore in consideration, . . . it is hereby declared and agreed that, subject to the provision herein contained, the company shall, within three months next after notice, accompanied by satisfactory proof, of a loss, as hereinafter mentioned, has been given to thee company, make good and reimburse to the employer all and any pecuniary loss sustained by the employer of moneys, securities, or other personal property in the possession of the employe, or for the possession of which he is responsible, by any act of fraud or dishonesty on the part of the employe in connection with the duties of the office or position hereinbefore referred to, or the duties to which in the employer's service he may be subsequently appointed, and occurring during the continuance of this bond and discovered during said continuance

Page 170 U. S. 165

or within six months thereafter and within six months from the death or dismissal or retirement of the employee from the service of the employer, it being understood that a written statement of such loss, certified by the duly authorized officer or representative of the employer, and based upon the accounts of the employee, shall be prima facie evidence thereof."

The court said to the jury:

"Now there is a provision in the policy to the effect that a written statement of loss, certified by the duly authorized officer...