Southern Surety Co. v. MacMillan Co.

• Decision Date: 23 May 1932
• Docket Number: No. 535.,535.
• Citation: 58 F.2d 541
• Parties: SOUTHERN SURETY CO. v. MacMILLAN CO.
• Court: U.S. Court of Appeals — Tenth Circuit

58 F.2d 541 (1932)

SOUTHERN SURETY CO. v. MacMILLAN CO.

No. 535.

Circuit Court of Appeals, Tenth Circuit.

April 12, 1932.

Rehearing Denied May 23, 1932.

Paul Pinson, of Tulsa, Okl. (R. C. Allen, I. J. Underwood, and Sam S. Canterbury, all of Tulsa, Okl., on the brief), for appellant.

Bruce McClelland, Jr., of Oklahoma City, Okl. (Philip Pierce, Louie G. Kneeland, and Robert O. Bailey, all of Oklahoma City, Okl., on the brief), for appellee.

Before PHILLIPS and McDERMOTT, Circuit Judges, and KENNEDY, District Judge.

McDERMOTT, Circuit Judge.

The appellee recovered a judgment of $17,890.66 upon a bond issued by appellant by which the performance of a certain contract between the Oklahoma Book Company and appellee was assured. The trial was without a jury, and upon a stipulation as to the evidentiary facts. The principal error assigned is that the trial court denied defendant's motion for judgment on such facts. The petition alleged the contracts hereafter referred to, and that the Oklahoma Book Company had failed to account for $3,804.70 cash due for books admittedly sold, and for $25,019.28 of books delivered to it, which the book company had reported as unsold, but which had been disposed of; and that notice of such default was given defendant on August 2, August 8, and September 21, 1929, as required by the bond. The prayer is for $20,000, the penal sum of the bond.

The answer admitted the execution of the bond, but alleged that the plaintiff had knowledge that the book company was not complying with its contract, but was embezzling funds; that it failed to notify the defendant; that all of the shortages sued for arose after plaintiff acquired such knowledge; that by its failure to give such notice "the rights of this answering defendant were thereby prejudiced and that this defendant thereby has been discharged and released and is liable for nothing herein"; that, had defendant been given such notice, it could have terminated its further liability. Defendant further alleges that plaintiff received $6,918.35 from the liquidation of the book company, and that defendant's liability could not in any event, exceed $13,081.65. It is further alleged that the bond terminated on August 5, 1928, because the charter of the book company expired on that day; that it accepted premiums on the bond after that date without knowledge of the expiration of the charter; that no liability exists on account of defaults on August 5, 1928, because of failure of plaintiff to notify it thereof within 60 days, to its prejudice. Plaintiff's replication denies that it was aware that the book company was not faithfully performing its contract prior to the notice to the defendant; it admits the receipt of a dividend of $6,918.35, but alleges that its net loss exceeded the penal sum of the bond; that upon the expiration of the charter of the book company, a new charter was secured on August 24, 1928, and the business was carried on without interruption; that plaintiff had no knowledge of the expiration of said charter.

The material facts as stipulated are: On June 30, 1924, a contract was entered into between plaintiff and the state of Oklahoma, by which plaintiff agreed to supply promptly, through a depository at Oklahoma City, certain school books for sale and distribution, for a period of 5 years, at certain prices; and further agreed to maintain agencies accessible to the patrons of the common schools throughout the state. That contract specifically provides that the various terms "shall be construed both as covenants * * * and as conditions to the continuance of the contract."

This state contract was incorporated by reference in a contract of August 18, 1924, between the plaintiff and the book company. By that contract, plaintiff agreed to deliver on consignment, to the book company, within 30 days after notice of the quantity necessary, sufficient books to meet the market demand. The book company agreed to place such books on sale at points throughout Oklahoma, and was to receive a 10 per cent. discount for its services and expenses in distributing such books. The book company further agreed:

"Sixth: The party of the second part agrees to remit to the party of the first part on the first day of November, January, March and May of each year of this contract, payment in full for the sale of all books made by them up to the first day of October, January, February and April, respectively, said remittance to be accompanied by a statement showing the total sales at state contract prices and the total sales at exchange prices.

"Stock reports are to accompany these quarterly statements and these stock reports are to indicate the number of books on hand in the central depository and also the number in the hands of the agencies throughout the State of Oklahoma."

By paragraph 9, the book company agreed to be "accountable and responsible" to plaintiff for all books delivered.

To secure the performance of this contract, the book company and the defendant herein joined in the bond sued on; this bond incorporated the contract by reference; the pertinent provisions of the bond are:

"Now, the condition of the above obligation is such, that if the said Principal shall faithfully perform said contract on its part, and comply with and perform all and singular promises, obligations and conditions of the said contract, including the safe custody of all monies and proper remittance of the same, according to its terms, and shall perform all the promises, obligations and conditions laid upon The MacMillan Company by their contract with the State of Oklahoma bearing date of June 30th, 1924, regarding the keeping of a sufficient stock of its adopted texts to meet all demands and shall render satisfactory service in the distribution of the same, then this obligation to be void; otherwise to remain in full force and effect.

"Provided, That the MacMillan Company shall keep, do and perform each and every, all and singular the matters and things set forth and specified in said contract, to be by The MacMillan Company kept, done and performed and exclusively at the times and in the manner as in said contract specified:

"Provided Further, That in the event of any default on the part of the Principal, written notice thereof by registered letter, with a verified statement of the facts showing such default and the date thereof, shall within sixty days after such default be mailed to the Surety at its office in Des Moines, Iowa.

"Provided Further, That the Surety may at any time terminate this obligation by giving thirty days' written notice by registered letter to The MacMillan Company of its desire to terminate this obligation but without prejudice to any claim for default during the time in which the bond was in force, although such default may not have been discovered when this bond was terminated, refunding to the Principal in this bond the pro rata unearned premium.

"Provided Further, That the said Surety shall not be liable for any amount in excess of the penalty of this bond."

No notice of any default was given the defendant until August 2, 1929. It is stipulated that the plaintiff did not suspect any error in the reports made from time to time, as to books on hand, until July 30, 1929. It did know that the quarterly reports were made late in many instances, and when made, were not accompanied by a full remittance of amounts due as shown by the reports; that the book company was falling behind in its cash remittances in substantial amounts; no notice of such delinquencies was given the defendant, as was agreed in the bond. The report due May 1, 1926, was made May 29, and full remittance did not accompany it, as the book company stated that a state warrant could not be collected before June 10. The reports due in the spring of 1928 were many days late, and were not then accompanied by remittances in full. In September, 1928, an indebtedness of $9,624.76 had been overdue for several months. On October 31, 1928, the book company was indebted for $3,624.76 on account of the preceding year's business. On November 24, 1928, a reconcilement of inventories disclosed a large error in the book company's books, growing out of the dishonesty of one of its employees; and the book company acknowledged an indebtedness in excess of $10,000 more than its books showed, for which a trade acceptance was given and paid. At that time, the indebtedness, including the trade acceptance, was $16,340.15. Without further detailing the proof, it discloses that the book company had been tardy in its reports and remittances as early as 1926; that it was delinquent in payment of substantial amounts conceded to be owing in 1928; that the delinquency was more than $16,000 in the fall of 1928, reduced to $3,804.70 by May, 1929; and that no notice of any such delinquency was given until in August, 1929, when plaintiff learned that the reported inventory of books on hand was false.

The defendant contends that the bond was terminated when the charter of the book company expired in 1928, relying upon the analogy of the death of an individual principal. Both parties were in ignorance of the fact that the charter expired; both contracted for a term extending beyond the corporate life. A new charter was promptly secured, and the business was maintained without interruption during the few days between the expiration of the old and the granting of the new charter. No prejudice of any kind is even claimed, and the circumstance of the charter expiring was an incident without significance. Illinois Surety Co. v. John Davis Co., 244 U. S. 376, 37 S. Ct. 614, 61 L. Ed. 1206, is very closely in point, and is adverse to defendant's contention. We think the bond was not discharged by this circumstance.

The principal defense to the bond is that the plaintiff failed to notify the defendant, as it agreed to do, of defaults on the part of the principal. It is urged, with much force, that in a...