National City Bank v. National Security Co.

• Citation: 58 F.2d 7
• Decision Date: 14 April 1932
• Docket Number: No. 5901.,5901.
• Parties: NATIONAL CITY BANK v. NATIONAL SECURITY CO.
• Court: United States Courts of Appeals. United States Court of Appeals (6th Circuit)

58 F.2d 7 (1932)

NATIONAL CITY BANK v. NATIONAL SECURITY CO.

No. 5901.

Circuit Court of Appeals, Sixth Circuit.

April 14, 1932.

R. L. Bartels, of Memphis, Tenn., for appellant.

M. G. Evans, of Memphis, Tenn. (Sivley, Evans & McCadden, of Memphis, Tenn., on the brief), for appellee.

Before MOORMAN, HICKS, and HICKENLOOPER, Circuit Judges.

MOORMAN, Circuit Judge.

In National City Bank v. Carter, 31 F. (2d) 25, this court affirmed the trial court's decision that the bank was liable to Carter for a fraud practiced upon him by Hunter, one of its vice presidents. As a result of that decision the bank brought this action against the appellee surety company to recover on the bond which it had issued to the bank to indemnify it against Hunter's dishonest acts. Upon motion at the trial the District Court directed a verdict for the surety company and entered judgment thereon on the ground that the bank did not give the company the notice required by the bond. The bank appeals.

The scheme to defraud Carter was effected through the bank on December 27, 1920. Carter filed suit against the bank on April 1, 1922. This was the first knowledge the bank had of Carter's claim against it. The suit came on for trial October 7, 1924, and an order of mistrial was entered October 9, 1924. Thereupon the bank on October 10, 1924, notified the surety company for the first time of Carter's claim and the pending suit. The bond was executed January 1, 1919, and was in effect at the time Hunter committed the acts for which the bank was held liable. After setting forth the agreement to indemnify the bank against certain losses it states:

"The foregoing agreement is subject to the following conditions and limitations: * * *

"4. The insured shall give to the underwriter written notice of any loss hereunder as soon as possible after the insured shall learn of such loss, and within ninety days after learning of such loss shall file with the underwriter an itemized proof of claim duly sworn to."

Both parties seem to concede and we accept it as settled on the authority of Ocean Accident & Guarantee Corp. v. Old Nat. Bank, 4 F.(2d) 753 (6 C. C. A.), Home Ins. Co. v. Peoria & P. U. Ry. Co., 178 Ill. 64, 52 N. E. 862, and other cases, that the word "loss" refers to a condition in which the insured would be subjected to a claim or demand "out of which a legal liability might arise," and not to an adjudged liability.

The bank contends that, as the bond does not specifically provide that the failure to give notice of the loss shall forfeit the bond or preclude a recovery thereon, the provision requiring the insured to give such notice as soon as possible is not a condition precedent and does not defeat recovery. The bond provides that it "is subject to the following conditions and limitations," one of which is that the insured shall give notice as soon as possible after learning of the loss. It does not state in terms that notice is a condition precedent or that failure to give notice shall forfeit the bond. It is plain, however, according to the current of authority, that, where one of the conditions of an indemnity bond is the giving of notice of the loss within an agreed time, if notice is not given within such time, there is no liability on the bond. In Guarantee Co. of North America v. Mechanics' Sav. Bank & Trust Co., 183 U. S. 402, 22 S. Ct. 124, 125, 46 L. Ed. 253 (on certiorari to 6 C. C. A. 100 F. 559), a teller's bond, after stating that "the following provisions are also to be observed and binding as a part of this bond," provided that the bank should at once notify the surety company upon becoming aware that the employee was speculating, gambling, or engaged in any disreputable or unlawful habits or pursuits. The court held that the failure to give notice of information that the teller was speculating defeated a recovery on the bond, saying that the rule that doubtful language in a bond is to be interpreted in favor of the insured cannot "be availed of to refine away terms of a contract expressed with sufficient clearness to convey the plain meaning of the parties, and embodying requirements compliance with which is made the condition to liability thereon." See, also, Travelers' Ins. Co. v. Nax (C. C. A.) 142 F. 653; Reynolds v. Detroit Fidelity & Surety Co., 19 F. (2d) 110 (6 C. C. A.); Callen v. Massachusetts Protective Ass'n (C. C. A.) 24 F.(2d) 694; Wachovia Bank & Trust Co. v. Independence Indemnity Co. (C. C. A.) 37 F.(2d) 550; St. Louis Architectural Iron Co. v. New Amsterdam Cas. Co. (C. C. A.) 40 F.(2d) 344; Home Bldg. & Sav. Ass'n v. New Amsterdam Cas. Co. (C. C. A.) 45 F.(2d) 989.

In order to take the case out of the general rule announced by the foregoing authorities, the bank relies upon section 6086 of the Code of Tennessee 1932 (Shannon's Tennessee Code, § 3275a1), which provides that insurance policies issued to or for the benefit of any citizen or resident of the state, except certain policies not here material, shall be "construed solely according to the laws of this state" (the state of Tennessee). The bank contends that, although the construction of insurance contracts is ordinarily a matter of general commercial law upon which the federal courts are not bound to follow the state decisions, yet this statute requires a construction of the contract here in question in accordance with the construction that would be placed upon it by the courts of Tennessee. We cannot accept the view that a state by legislative act can impose upon the federal courts the duty of determining a question of general law according to the decisions of the state courts, nor can we assume that this statute contemplates the imposition of such duty or was framed with any other purpose in view than to declare a local policy binding upon the state courts. Since Swift v. Tyson, 16 Pet. 1, 10 L. Ed. 865, it has been uniformly held that the word "laws," as used in the Conformity Act and other statutes similar to the one here involved, means statute laws as construed by the highest courts of the state, and not decisions of the state courts on questions of general law. This was expressly held in Russell v. Grigsby, 168 F. 577 (6 C. C. A.), unaffected on this point by the reversal in 222 U. S. 149, 32 S. Ct. 58, 56 L. Ed. 133, 36 L. R. A. (N. S.) 642, Ann. Cas. 1913B, 863. The statement in Rife v. Lumber Underwriters, 204 F. 32, 39 (6 C. C. A.), that the validity and interpretation of the policy there in dispute were "to be determined by the laws of that state" (that is, the state of Tennessee), obviously referred to the statute laws.

While the decisions of the Tennessee courts are not...