Picklesimer v. United States Fidelity & Guaranty Co.

• Decision Date: 12 January 1932
• Docket Number: No. 3163.,3163.
• Citation: 54 F.2d 1022
• Parties: PICKLESIMER v. UNITED STATES FIDELITY & GUARANTY CO.
• Court: U.S. Court of Appeals — Fourth Circuit

54 F.2d 1022 (1932)

PICKLESIMER v. UNITED STATES FIDELITY & GUARANTY CO.

No. 3163.

Circuit Court of Appeals, Fourth Circuit.

January 12, 1932.

Randolph Bias, of Williamson, W. Va., and Robert S. Spilman, of Charleston, W. Va. (Price, Smith & Spilman, of Charleston, W. Va., on the brief), for appellant.

Wells Goodykoontz, of Williamson, W. Va., and Fred O. Blue, of Charleston, W. Va. (Blue, Dayton & Campbell, of Charleston, W. Va., and Goodykoontz & Slaven, of

Williamson, W. Va., on the brief), for appellee.

Before PARKER, NORTHCOTT, and SOPER, Circuit Judges.

SOPER, Circuit Judge.

The Day & Night Bank of Williamson, W. Va., a state institution, went into the hands of Hayes Picklesimer, receiver, by appointment of the state commissioner of banking on April 7, 1925. On December 22, 1926, the receiver brought suit in the circuit court of Mingo county, subsequently removed to the District Court of the Southern District of West Virginia, against the United States Fidelity & Guaranty Company, a Maryland corporation, to recover upon two bonds of indemnity whereby the bonding company agreed to make good to the bank any pecuniary loss of money it might sustain by reason of fraud or dishonesty of W. P. T. Varney, its vice president. The first bond was dated June 5, 1924, and indemnified the bank against loss to the extent of $25,000; the second bond, dated March 4, 1925, was in the sum of $15,000. The receiver claimed a loss of $8,335.21 under the first bond; and a loss of $29,850.53 under the second. The bonding company filed pleas denying liability. By written stipulation of the parties, a trial by jury was waived, and it was agreed that the issues of fact and questions of law arising should be tried and determined by the court without the intervention of a jury, and the action was referred to a special commissioner appointed by the court to take the testimony and to report to the court his findings of fact and conclusions of law, together with any exceptions thereto by either party, for the consideration and action of the court. See Barnes West Virginia Code 1923, c. 129, § 10; West Virginia Code of 1931, c. 56, art. 7, § 10.

The commissioner reported that the receiver had failed to show that any losses claimed were sustained during the life of the first bond. This finding was sustained by the District Judge, and, since its correctness is established by the proof and is not seriously disputed by the appellant, we need not further consider it. On the second bond, the commissioner found that the bank had suffered a loss through Varney's fraudulent acts during the period covered by the bond in an amount exceeding the full penalty thereof; but he nevertheless decided that no recovery could be had. He held that the bond was invalid because the allegations of the receiver, in a bill of complaint filed by him in a chancery suit in the state court against certain officers of the bank to recover for losses sustained by reason of their neglect and misconduct, showed that officers of the bank had made untruthful statements in the application for the second bond with reference to Varney's past behavior and services as vice president of the bank.

Exceptions to the report were filed by both parties to the suit. The District Judge found for the defendants on both bonds, sustaining the commissioner completely as to the first bond, but holding that the second bond was invalid for a reason that did not seem sufficient to the commissioner. The District Judge based his decision directly upon a statement by A. B. Scott, president of the bank, called "employer's declaration," made on the 4th day of March, 1925, in the application for the second bond for the purpose of inducing the company to execute it. The statement reads:

"The foregoing applicant (Varney) has been in the service of the undersigned employer 5 years and ______ months and the duties required have always been performed in a faithful and satisfactory manner. The accounts were last audited on the 24th day of Feb. 1925, and were correct in every particular. There has never come to the notice or knowledge of the employer any act, fact or information tending to indicate that applicant is negligent, unreliable, deceitful, dishonest or unworthy of confidence. As far as the employer knows, applicant's habits are good and the employer knows no reason why you cannot safely assume the suretyship applied for.

"The above and foregoing statements and representations are made for the purpose of inducing the United States Fidelity and Guaranty Company to execute said bond."

The District Judge made a special finding of fact to the effect that when the statement was made, the bank already knew that Varney was negligent, unreliable, deceitful, and unworthy of confidence, if not actually dishonest; and, since the bond provided that, if any statements made in the schedule furnished by the employer to the company were untrue, the bond should be void as to the employee to whom the statement referred, the District Judge held that the receiver could not recover on the second bond. The receiver excepted to this finding and appealed. There is abundant evidence to support the special finding of fact; we need only to summarize the evidence bearing on the knowledge of the bank when the application for the bond was made.

The Day & Night Bank of Williamson was organized under the laws of West Virginia on March 29, 1919. In the following year, John H. Greene became the president and served until March 4, 1925. On that day, A. B. Scott, who had been a director for many years, succeeded to the office of president and held it until the receiver was appointed. Varney was a director of the bank from its organization until March 24, 1925. He was also cashier from the beginning until June 5, 1924. He then became vice president, and the first bond sued on in this case was given. He remained vice president until January, 1925, when he failed of election. Shortly thereafter, he got control of the stock of the bank; and on March 4, 1925, he was reelected vice president, and the second bond in suit was given.

The receiver claimed losses under the second bond amounting to $29,850.53, arising from various forgeries, bad checks, overdrafts, and other improper actions of Varney after the bond was given. We shall confine our attention, however, to improper conduct on the part of Varney prior to March 4, 1925, and then known to the officers of the bank.

At the outset, it should be noticed that under the law of West Virginia (Barnes West Virginia Code 1923, c. 54, § 79a (1), a loan of more than 20 per cent. of the capital stock, surplus, and undivided profits of a state bank to a single individual was forbidden; and it was further provided that no officer, director, or employee of a bank should borrow directly or indirectly from the bank any sum of money, without the written approval of a majority of the board of directors or discount committee thereof, and also that, if any officer, director, or employee of the bank should own or control a majority of the stock of any corporation, a loan to that corporation should be considered for the purpose of the statute as a loan to the officer, director, or employee.

Varney dominated certain coal companies, which were large borrowers from the bank. They were known as the Ira Coal Company, Tug Valley Fuel Company, and Bailey Thacker Coal Company. He owned or controlled a majority of the stock of the Ira Coal Company. He used his position as cashier of the bank to extend these companies credit far beyond the legal limit; and his activities in their behalf were disclosed to the bank by an examination by state bank examiners on October 2, 1922. The result of their investigations were summarized in a letter of October 4, 1922, written by the state banking commissioner of West Virginia to the president of the bank after the examination had been completed. The commissioner said:

"Briefly, I feel that Mr. Varney, your Cashier, is using entirely too much of the Bank's money for his own account and the account of his coal companies. On day of examination Mr. Varney was indebted to your bank in the sum of $7,950.00 directly and was endorser on paper amounting to $17,518.47. In addition to this Mr. Varney's account was overdrawn on day of examination in the sum of $1,468.11, and it seems from the report made by the Examiners that Mr. Varney's account is continually overdrawn.

"I have no disposition to embarrass Mr. Varney in any way, but at the same time I am forced to advise you...