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

• Decision Date: 05 October 1896
• Citation: 80 F. 766
• Parties: GUARANTEE CO. OF NORTH AMERICA v. MECHANICS' SAV. BANK & TRUST CO. [1]
• Court: U.S. Court of Appeals — Sixth Circuit

80 F. 766

GUARANTEE CO. OF NORTH AMERICA v. MECHANICS' SAV. BANK & TRUST CO. ^[1]

United States Court of Appeals, Sixth Circuit.

October 5, 1896

[Copyrighted Material Omitted]

This was a bill in equity filed in the chancery court of Davidson county, Tenn., by the assignee for the benefit of creditors of the Mechanics' Savings Bank & Trust Company against the Union Bank & Trust Company, administrator of John Schardt, deceased, a corporation of Tennessee, and the Guarantee Company of North America, a corporation of Canada to state an account between the bank and John Schardt, its deceased cashier and teller, to obtain a decree properly applying certain credits to the debt in favor of Schardt, and to recover the balance ground to be owed by Schardt to the bank from the guarantee company, on two bonds or fidelity insurance contracts entered into by Schardt and the guarantee company with the bank, indemnifying it from loss by the dishonesty of Schardt; one covering his dishonest acts while he was teller of the bank, and the other for his dishonest acts while he was its cashier. The guarantee company removed the cause to the court below on the ground that there was in the case a separable controversy between the complainant a citizen of Tennessee, and the guarantee company, an alien corporation. The bonds sued on were joint and several obligations of Schardt and the guarantee company. Schardt's administrator demurred to the bill for want of equity in the state court, and the record shows no further proceeding against it. No motion to remand was made, and the cause proceeded in the court below against the guarantee company alone; the two parties stipulating that the cause should be heard in equity, or, if removed to the law docket that a jury should be waived, and trial had to the court.

Schardt was teller of the bank from January 16, 1888, until January 1, 1893. He was cashier from January, 1893, until his death April 17, 1893. The bond covering his acts as teller was given in 1888 for a year, and was renewed from year to year until January, 1893, when a new bond covering his acts as cashier was given. The teller's bond recited that the bank had delivered to the guarantee company a certain statement, and that it was agreed and understood that the statement constituted an essential part of the contract of indemnity. In consideration of $100 a year, the company then agreed to make good and reimburse to the employer such pecuniary loss as the employer shall have sustained by the fraudulent acts 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 this bond, and within six months from the employe's ceasing to be in the said service. The bond provided further that: 'The following provisions are also to be observed and binding as a part of this bond: That this bond is issued and renewed on the express understanding that the employe 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 defaults; and if the employer shall at any time during the currency of this bond condone any act or default on the part of the employe which would give the employer the right to claim hereunder, and shall continue the employe 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 employe so condoned. 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. That there shall be an inspection or audit of the accounts or books of the employe, on behalf of the employer, at least once in every twelve months from the date of this bond. That the company shall not in any wise be responsible to the employer under this bond to a greater extent than ten thousand dollars. ' By another provision, Schardt agreed to keep the company harmless from any payment it might have to make under the bond. The bond is signed by Schardt, the guarantee company, and the bank.

The statement referred to in the bond contained twenty questions and answer; concerning the bank's knowledge of Schardt's integrity and past business life, the character of supervision to which he was subjected in discharging his duties, and the salary paid him. Of these, the following only are material here: '(7) When was the last inspection of the office at which he was stationed made? A. December 24, 1887. (8) What is your custom in regard to the frequency of inspections? Are they at stated periods, or irregular, and what is the longest time allowed to elapse between inspections? A. Every quarter. (9) Has the bank a duly appointed and authorized inspector or inspectors? If not, by whom are the inspections made? A. The finance committee.' '(18) In the event of the employe filling the post of teller, how often, and by what officer, will the teller's cash be checked and counted. A. By the finance committee; quarterly. ' At the end of each year of the bond the bank received the following notice: 'It is necessary, before the bond can be renewed, that you obtain the certificate on the back hereof by your president or cashier, and on its return with the remittance of the premium, the renewal can be immediately effected. ' The certificate was accordingly filled up and signed by the cashier of the bank at each renewal. Among other things, it stated that the accounts of Schardt, the teller, had been examined and verified by the finance committee of the bank. On such certificate the bond was renewed.

The cashier's bond was given in January, 1893. By its terms Schardt and the company (the latter relying on a certain guaranty proposal signed by the president of the bank, and on its strict performance and observance thereafter) bound themselves, jointly and severally, in the sum of $20,000, to reimburse the bank to the extent of $20,000 for any loss sustained through Schardt's act or fraud in connection with his duties as cashier, and constituting embezzlement or larceny. The bond was made subject to certain conditions indorsed on it, among which were the following: '(1) Any misstatement of a material fact in the declaration within mentioned, or in any claim made under this bond, will render this bond void from the beginning. (2) That the said employer shall use all due and customary diligence in the supervision of said employe for the prevention of default, and to that end shall cause an inspection of his accounts to be made at least once within twelve months. ' The guaranty proposal contained 19 questions concerning Schardt, and circumstances of supervision, etc. Of these only the following are material: 'Q. 4. Have you known or heard anything unfavorable as to his habits or associations, past or present? Or of any matter concerning him about which you deem it advisable for the company to make inquiry? A. No.' 'Q. 12. Has there been any default in the bank by any employe in applicant's position? A. No. Q. 13. When were applicant's books and accounts (including cash, securities, and vouchers, if any) last examined, and by whom? A. December 31, 1892, by finance committee of bank (Were they found correct?), and found correct. Q. 14. In case of applicant handling cash or securities, how often will the same be examined, and compared with the books, accounts, and vouchers, and by whom? A. Not less than quarterly, and often monthly, by finance committee. * * * The above answers and representations are true, to the best of my knowledge and belief. ' This was signed by the president of the bank. While Schardt was teller, he kept the general ledger and the cash book, and made the daily statement of the bank. A clerk kept the individual ledger. The individual ledger was correctly kept. Whenever Schardt abstracted money from the deposits, he would place the items correctly in the cash book; but he would make false totals, less by the amount he had taken than the true total, and these false totals he would transfer to the individual deposit account on the general ledger. Until 1890 it had been the practice in the bank every month to take trial balances of the individual ledger accounts, and verify the balances thus shown with those of the general ledger. Schardt directed the clerk to discontinue this, and thereafter, from 1890 until the collapse of the bank, no balance was ever taken from the individual ledger, and no comparison was ever made between Schardt's balances as shown by the general ledger and those which could have been shown by the individual ledger. These two ledgers were out of balance $2,098 January 16, 1891; $19,600 January 1, 1892; and $69,700 January 1, 1893. The discrepancies were caused by Schardt's embezzlement of the deposits. In addition, to this amount Schardt embezzled $2,765.44 in the hear between January, 1891, and January, 1892, and $4,015.44 in the year between January 1, 1892, and January 1, 1893, of money received by him from the proceeds of notes due the bank, and in his custody for collection. The finance committee of the board of directors of the bank made quarterly examinations of the bank. These examinations consisted of checking over a statement made by Schardt of the condition of the bank, with the notes and securities and cash, which he produced, and with statements from other banks of credit balances. There is some doubt as to...