Mechanics' Sav. Bank & Trust Co. v. Guarantee Co. of North America

Decision Date08 June 1895
Citation68 F. 459
PartiesMECHANICS' SAVINGS BANK & TRUST CO. v. GUARANTEE CO. OF NORTH AMERICA et al.
CourtU.S. District Court — Middle District of Tennessee

Edward H. East, for plaintiff.

Granbery & Marks, for defendant.

CLARK District Judge.

Plaintiff is a banking institution, organized under the laws of the state of Tennessee, with its chief and only office and place of business in the city of Nashville during all the time it was a going concern, with a capital stock of $50,000. Defendant guarantee company is a corporation organized under the laws of the Dominion of Canada for the purpose of carrying on the business of furnishing bonds of suretyship and guarantee, and has been engaged in such business since 1872. Defendant Union Bank & Trust Company is a corporation organized under the laws of the state of Tennessee, and is administrator of John Schardt, deceased. The guarantee company has a local agent and manager, residing in Nashville (Mr. Cooley), who has resided there all his life, and has been such agent since 1882, having given up the banking business to become such agent, with large experience in banking in the position of cashier among others. It is a part of the duties of the local agent to gather information concerning applicants for bonds, as well as persons already bonded in the company, and for this purpose detectives are at times engaged to follow up the habits of persons bonded. This company also has a branch board located at Nashville. John Schardt was teller and collector in plaintiff bank from 1888 to January 1, 1893, when he was elected cashier, which position he held until April 17, 1893, when the bank closed its doors made a general assignment for the equal benefit of its creditors, and on the same day Schardt departed this life. This suit is brought for the use of the assignee of the bank.

Schardt as teller, was required to furnish bond in the sum of $10,000, which was done, with defendant guarantee company as his surety, to make good to the bank any pecuniary loss on account of Schardt's fraudulent acts in said position and this bond was renewed each year, and was in force during the year 1892, and at the time Schardt became cashier January 1, 1893. Bond was furnished as cashier in the sum of $20,000, January 1, 1893, for the same purpose as the teller's bond, with the same company as surety, and for the year 1893. The annual premium for each bond was $100, paid by the bank. The assignee coming into possession, expert accountants and bookkeepers were at once employed, and put to work on the books of the bank. The assignee furnished an accountant, and one was employed on behalf of Schardt's estate, but the guarantee company, on request, declined to select one on its behalf. It was shown in the result that Schardt had been a defaulter during the years 1890, 1891, and 1892 as teller, and also during his short term as cashier. The amount of embezzlements during the years 1890 and 1891 was comparatively small, and has been paid out of collections from assets transferred by Schardt to the bank to secure it, just before his death, and the events of those years may be put aside without further notice. The embezzlements in the year 1892 amounted in the aggregate to $50,649.90, without interest, and those for the short time in 1893 during the currency of the cashier's bond amounted to $22,964.17, besides interest. Total amount of embezzlements in both positions and during all the years names was $101,342.73, a little more than double the amount of the capital stock of the bank. Bill was filed in state chancery court for account and decree on the bonds, alleging that Schardt had assigned certain policies on his life for the benefit of the bank, amounting in all to $80,000, some of which had been paid and others were in suit and contested. The case was removed to this court.

What is called a 'guarantee proposal' was made for each bond, similar to the application in life insurance. In the proposal for the teller's bond in questions 8 and 9 the bank was asked as to its custom in making inspections of the accounts of the office, and answered that this was done quarterly by the finance committee, and this statement is made part of the contract. This is a written statement. The bond provides that the bank 'shall observe or cause to be observed all due and customary supervision over said employe for the prevention of default,' and 'that the employer shall at once notify the company, on his becoming aware of the said employe being engaged in speculation or gambling, or indulging in any disreputable or unlawful habits or pursuits, ' and 'that there shall be an inspection or audit of the accounts and books of the employee on behalf of the employer at least once in every twelve months from the date of this bond. ' On and before each renewal of this bond from year to year the bank furnished to the company a certificate, in which it was stated, among other things, that the accounts of Schardt, the teller, had been examined and verified by the finance committee of the bank. The defense is rested on the falsity of this statement, and failure to observe these promissory stipulations. The contention is that the quarterly examinations and the examination or audit once in every 12 months were not made; that customary supervision was not observed; and that speculation by Schardt was known by the bank officers, and not communicated to the guarantee company; and that the finance committee had not examined and audited the teller's accounts, as represented in the certificate on which the bond was renewed. It is to be observed that this statement in the certificate is not made part of the contract, as the other statements, and its position is that of a written representation in an application not incorporated in the bond or policy issued thereon. This is not important, however, in the view taken of the case.

Recovery on the cashier's bonds is resisted upon the grounds: (1) That the answer in the proposal to the question whether there had ever been a default by any one in that position in the bank was false, it being in the negative. (2) That the statement in answer to question 13, that the books and accounts of the teller were examined December 31, 1892, by the finance committee, and found correct, was false. (3) That Schardt was insured as cashier only, while he was permitted to perform the duties of general bookkeeper, increasing his opportunities to commit and conceal his embezzlements. (4) That the bank stated in answer to the question that it had heard nothing unfavorable to Schardt's habits, or of matters which should be made known to the guarantee company, and that this was false, the officers having heard of speculation on Schardt's part.

Before taking up these points separately, it will be of service to refer to some cases as bearing on the questions generally, and as showing the tendency of the ruling on similar contracts. Although of more recent origin than the ordinary forms of insurance, such as fire, marine, and life, that this bond is a branch of insurance is clearly apparent. Cases involving this form of contract are extremely few, still, that the law of insurance applies by analogy is undoubtedly true, and this was fully recognized and clearly stated by the circuit court of appeals for this circuit in Supreme Council Catholic Knights of America v. Fidelity & Casualty Co. of New York, 63 F. 48, 11 C.C.A. 96, in which Judge Lurton, delivering the opinion, said:

'With reference to bonds of this kind, executed upon a consideration, and by a corporation organized to make such bonds for profit, the rule of construction applied to ordinary sureties is not applicable. The bond is in the terms prescribed by the surety, and any doubtful language should be construed most strongly against the surety, and in favor of the indemnity, which the assured had reasonable grounds to expect. The rule applicable to fire and life insurance is the rule, by analogy, most applicable to a contract like that in this case.'

This method of furnishing bond to make good loss is rapidly superseding all others in the case of officers of private corporations, and I am advised that legislation by the general assembly in session enables companies engaging in this business to make bonds for all public officials of the state and counties thereof. The business is, therefore, becoming one of vast public as well as private importance, and it cannot be objected if rules of reasonably stringent liability are applied to these contracts, as in other forms of insurance. Conditions on which forfeiture of the contract is claimed being construed strongly against insurer and liberally in favor of insured, the burden is on defendant, and the defense must be clearly made out. Cotton v. Casualty Co., 41 F. 506; Steel v. Insurance Co., 2 C.C.A. 463, 51 F. 723, and cases cited; Moulor v. Insurance Co., 111 U.S. 341, 4 Sup.Ct. 466; Supreme Council Catholic Knights of America v. Fidelity & Casualty Co. of New York, 63 F....

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