183 U.S. 402 (1902), 48, Guarantee Company of North America v. Mechanics Savings Bank and Trust Company

Docket Nº:No. 48
Citation:183 U.S. 402, 22 S.Ct. 124, 46 L.Ed. 253
Party Name:Guarantee Company of North America v. Mechanics Savings Bank and Trust Company
Case Date:January 06, 1902
Court:United States Supreme Court

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183 U.S. 402 (1902)

22 S.Ct. 124, 46 L.Ed. 253

Guarantee Company of North America


Mechanics Savings Bank and Trust Company

No. 48

United States Supreme Court

January 6, 1902

Argued April 23-24, 1901




Where a bond insuring a bank against such pecuniary loss as it might sustain by reason of the fraudulent acts of its teller contained a provision that the company would notify the insuring company on "becoming aware" of the teller's "being engaged in speculation or gambling," it is the duty of the bank to give such notice, when informed that the teller is speculating, although, while confessing the fact of speculating, he asserts that he has ceased to do so.

When the teller is in fact engaged in speculation and the bank is so informed, it cannot recover on such a bond for losses occurring through his fraudulent acts after the information is received when it has not notified the company of what it has heard or made any investigation, but has accepted the teller's assurance of present innocence as sufficient on the mere ground that it had confidence in his integrity.

When, at the time the teller's bond was renewed, the books of the bank showed that he was a defaulter in the sum of $19,600 understated liabilities, and of $3,765.44 abstracted from bills receivable, both of which could have been detected by the taking of a trial balance or a mere comparison between the books kept by him and the individual ledger kept by another person, and by a correct footing of the notes, the bank is open to the charge of laches, and a certificate that the accounts of the teller had been examined and verified is not truthful.

Where it is known to the president of the bank that the insuring company regards engagement in speculation as unfavorable to an employee's habits, and he is informed that the employ is speculating, a representation by the president that lie has not known or heard anything unfavorable to the employ's habits, past or present, or of any matters concerning him about which the president deems it advisable for the company to make inquiry, is a misrepresentation.

This was a bill in equity brought by the Mechanics' Savings Bank & Trust Company for the use of J. J. Pryor, assignee, against the Guarantee Company of North America for an accounting and for a decree for the amount alleged to be due

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complainant on two bonds executed by the guarantee company to the bank, one insuring the latter corporation against such pecuniary loss as it might sustain by reason of the fraudulent acts of John Schardt, as teller and collector, and the other insuring the same corporation against pecuniary loss by reason of fraudulent acts committed by him in his office of cashier. On hearing, a decree was rendered against the guarantee company on both bonds, 68 F. 459, which was affirmed on appeal. 80 F. 766. The case was then brought to this Court by certiorari, and the decree of the circuit court of appeals was reversed, and the cause remanded, on the ground that the decree of the circuit court was not final. 173 U.S. 582.

The guarantee company subsequently made an unsuccessful attempt to have the cause reopened for additional evidence alleged to have been discovered since the first decree. A final decree was rendered against the company, which, on appeal to the Circuit Court of Appeals for the Sixth Circuit, was modified and affirmed, 100 F. 559, and the present certiorari was then allowed.

The Mechanics' Savings Bank & Trust Company was a banking institution located at Nashville, Tennessee, with a capital of fifty thousand dollars. John Schardt was its teller from 1888 to January, 1893, when he was elected cashier, and remained such until his death on April 17 following. As teller and cashier, he embezzled more than $100,000 of the funds of the bank, beginning in 1890 and continuing until about the time of his death. In discovering the defalcation, the bank ascertained its insolvency, closed its doors, and made a general assignment for the benefit of its creditors.

The Guarantee Company of North America was a company organized under the laws of the Dominion of Canada, and engaged in the business of guaranteeing pecuniary losses by the fraudulent acts of persons in positions of trust, and issued to the bank in 1888 a bond for the period of one year on Schardt as teller for $10,000, which was subsequently renewed

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each year until January, 1893, when it issued a bond on Schardt as cashier for $20,000.

The defalcation of more than one hundred thousand dollars was occasioned by losses in speculation, and, just prior to Schardt's death, he assigned to the bank some property of slight value and about eighty thousand dollars of life insurance as indemnity. From these collaterals the bank realized the sum of $46,448.86, and for the remainder of the default the company was held liable to the extent of each bond. On the second appeal to the circuit court of appeals, that court found the default under the cashier's bond to have been some six thousand dollars less than as ascertained by the circuit court, and modified the decree accordingly.

The teller's bond was dated January 16, 1888, and described Schardt as the employee and the bank as the employer. It provided:

Whereas the employee has been appointed in the service of the said employer, and has been assigned to the office or position of teller and collector, by the said employer, and application has been made to the Guarantee Company of North America for the grant by them of this bond;

And whereas the 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 sum of one hundred dollars lawful money of the United States of America, to the said company, as a premium for the term of twelve months, ending on the 16th day of January, 1889 at 12 o'clock, noon, and in order to effect a continuance of the currency of this bond, a like premium hereafter to be paid to the said company, on or before the 16th day of January in each year, as a premium for the ensuing year, so long as the said employer may wish to continue this bond, and the said company shall consent to receive said premiums, it is hereby agreed that the company shall, within three months after proof satisfactory to the directors, make good and reimburse to the employer such pecuniary loss as the employer shall have sustained by the fraudulent acts

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of the employee, in connection with the duties of his said office or position, or with any other duties assigned to him, by the employer in the said service, committed by him and discovered during the continuance of the currency of this bond, and within six months from the employee's ceasing to be in the said service.

The following provisions are also to be observed and binding as a part of this bond:

The actual payment of the premium and its acceptance by this company, either for the issue or renewal of this bond, is essential to its currency, and a condition precedent to the right or claim hereunder.

[22 S.Ct. 126]

That this bond is issued and renewed on the express understanding that the employee has not within the knowledge of the said employer at any former period, either in this or other employment, been guilty of any default or serious dereliction of duty.

That the employer shall observe or cause to be observed all due and customary supervision over the said employee 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 employee which would give the employer the right to claim hereunder, and shall continue the employee in his service, without notification to the company, the said company will not be responsible hereunto for any default which may occur subsequent to said act or default of said employee, so condoned.

That the employer shall at once notify the company on his becoming aware of the said employee being engaged in speculation or gambling, or indulging in any disreputable or unlawful habits or pursuits.

That there shall be an inspection or audit of the accounts or books of the employee on behalf of the employer at least once in every twelve months from the date of this bond.

That the company shall be notified in writing of any act on the part of said employee which may involve a loss for which the company is responsible hereunder to the employer immediately or without unreasonable delay, after the occurrence of such act shall have come to the knowledge of the employer; and

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upon the making of such a claim, this bond shall wholly cease and determine as regards any liability for any act of the employee committed subsequent to the making of such claim, and shall be surrendered to the company on the payment of all claims due hereunder.

* * * *

That the company may cancel this bond at any time by notifying the employer and refunding the premium paid less a pro rata part thereof for the time said bond shall have been in force; but said cancellation shall not affect or impair the company's liability hereunder for any acts committed or discovered previous to such cancellation during the currency of this bond, and within three months after said cancellation.

* * * *

The statement referred to was signed by the then cashier, and delivered to the company before the bond was issued. It commenced with a communication from the managing director of the guarantee company, desiring answers to certain accompanying questions. These answers were given by the cashier, who also declared his answers and...

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