Fidelity & Deposit Co. v. People's Bank of Sanford

• Decision Date: 02 October 1934
• Docket Number: No. 3600.,3600.
• Citation: 72 F.2d 932
• Parties: FIDELITY & DEPOSIT CO. OF MARYLAND v. PEOPLE'S BANK OF SANFORD et al.
• Court: U.S. Court of Appeals — Fourth Circuit

72 F.2d 932 (1934)

FIDELITY & DEPOSIT CO. OF MARYLAND v. PEOPLE'S BANK OF SANFORD et al.

No. 3600.

Circuit Court of Appeals, Fourth Circuit.

October 2, 1934.

COPYRIGHT MATERIAL OMITTED

Julius C. Smith, of Greensboro, N. C., and I. C. Wright, of Wilmington, N. C. (J. C. Pittman, of Sanford, N. C., on the brief), for appellant.

K. R. Hoyle and Clauson L. Williams, both of Sanford, N. C. (E. L. Gavin, of Sanford, N. C., on the brief), for appellees.

Before PARKER and SOPER, Circuit Judges, and MEEKINS, District Judge.

PARKER, Circuit Judge.

This is an appeal from a decree entered in favor of plaintiffs on a bond guaranteeing the fidelity of the cashier of a bank. Suit was originally instituted on the bond by the bank itself; but later the administration of the bank's affairs was taken over by the commissioner of banks of the state of North Carolina, and he was made a party plaintiff by order of court. Although the case is essentially one at law, it was heard in equity by the court below, without objection from appellant, and was brought here by appeal in equity. We review it, therefore, as though it were an equity cause. Twist v. Prairie Oil & Gas Co., 274 U. S. 684, 692, 47 S. Ct. 755, 71 L. Ed. 1297; Fidelity-Phenix Fire Ins. Co. v. Benedict Coal Corp. (C. C. A. 4th) 64 F.(2d) 347, 348. This does not mean, however, that we will hear the case de novo, or will assume the function of auditors with respect to the voluminous books and records which have been certified to the court, but that we will review it as we do any other equity case under the rule that the findings of fact of the trial judge will not be reversed unless clearly wrong. Fidelity-Phenix Fire Ins. Co. v. Benedict Coal Corp., supra; U. S. Industrial Chemical Co. v. Theroz Co. (C. C. A. 4th) 25 F.(2d) 387; New York Life Ins. Co. v. Simons (C. C. A. 1st) 60 F.(2d) 30.

The original plaintiff in the cause was the People's Bank of Sanford, a small bank with a capital stock of $25,000 at Sanford, N. C. It was organized in 1919 with one H. C. Newbold as cashier; and from the time of its organization until its doors were closed on April 7, 1930, he was in charge of its affairs and had the complete trust and confidence of its other officers and directors, as well as of the public at large. For a number of years prior to 1927, he had given bond in the sum of $25,000 for the faithful discharge of his duties, with the ?tna Casualty Company as surety; but when the time came to renew the bond in 1927, an insurance and real estate company which he owned and controlled, and which represented the Fidelity & Deposit Company of Maryland, had that company execute the bond. This bond, which is the one sued on, was in the sum of $25,000 and was issued September 23, 1927, as of September 16th. It undertook to indemnify the bank against any loss which it might sustain "in respect of any moneys, funds, securities or other personal property of the Employer, or for which the Employer may be responsible, through any act of fraud, dishonesty, larceny, theft, embezzlement, forgery, misappropriation, wrongful abstraction or misapplication, or any other dishonest or criminal act or omission committed by Henry Clay Newbold (hereinafter called the Employee), acting alone or in collusion with others, while in any position in the continuous employ of the Employer, after 12 o'clock, noon, of the 16th day of September, 1927, but before the Employer shall become aware of any default on the part of the employee, and discovered before the expiration of three years from the termination of such employment or cancellation of this bond, whichever may first happen." It required that claims for loss thereunder should be itemized, with full particulars "including the amount and date of each item." And it contained the following provision, which becomes significant in view of one of the contentions of defendant, viz.: "No preliminary application by the Employer for this bond is necessary. This contract incorporates the entire agreement between the Surety and Employer, and no statement of facts in any application or other outside writing which might be claimed to be the inducement for making this bond shall be allowed in any way to affect its validity."

There was no suspicion of any defalcation on the part of Newbold until the evening of April 5, 1930, when a committee of the directors was to prepare a financial statement of the bank's affairs pursuant to a call for such statement by the state corporation commission. At this time Newbold notified the committee that it was unnecessary to examine the bank's affairs, as he was short $48,000 and had put in his unsecured note to cover the shortage. Upon further questioning he admitted that he had taken the money embraced in the shortage, but refused to disclose the manner in which it had been taken or what had been done with it. An examination of the bank's records disclosed that he had discounted unsecured notes signed by himself for $10,000 on March 17th, $10,000 on March 21st, $8,000 on March 24th, and $5,500 on April 2d, and that he had taken all of these notes out of the bank on April 5th, together with a note of his brother, indorsed by him, in the sum of $4,000, and on that date had put in the bank his note of $44,480 in order to make the books balance. The bank was thereupon closed and placed in the hands of the state corporation commission; but, upon the directors executing a note for the amount necessary to make it solvent, it was allowed to reopen. On September 15, 1930, in a suit charging embezzlement and fraudulent misapplication of funds on or about April 5, 1930, it obtained judgment against Newbold for the sum of $44,480; and shortly thereafter Newbold was tried in a criminal action and sentenced to a term in the state penitentiary.

The bank duly filed with defendant a proof of claim under the bond, setting forth the shortage of defendant as above narrated and certain false entries discovered upon the examination of the books; and, on October 17, 1930, it filed suit on the bond against defendant, alleging in general terms embezzlement and misappropriation of funds by Newbold during the term of the bond of the sum of $44,480, pleading the judgment theretofore obtained against Newbold on account of the embezzlement, and attaching as an exhibit to its complaint copy of the proof of claim filed with the defendant. Thereafter it filed an amendment to the complaint, setting up the report of an auditor which pointed out various items running over a period of years as representing embezzlements or misapplications of funds by Newbold. This was filed, not in lieu of the original complaint, but "as an addition to and in supplement and amplification of the matters set out in the original claim as filed with the defendant" and with a prayer that "plaintiff recover of the defendant upon the same, as a portion of its claim." Defendant filed an answer which challenged the right of plaintiff to maintain the suit and denied that plaintiff had sustained any loss during the term of the bond. As an additional defense, the answer pleaded that plaintiff's officers, having had notice of shortages and misapplications on the part of Newbold prior to the execution of the bond, did not disclose to defendant the facts with regard thereto, and asked that the bond be declared void for this reason.

The case was referred by the judge below to a special master, who took voluminous testimony, covering transactions of the bank from the time of its organization, and made a report sustaining the validity of the bond, but holding that defendant was liable thereunder only with respect to an unauthorized loan made by Newbold on November 10, 1929, and the shortage on April 5, 1930, represented by the difference between the $44,480 note and the aggregate amount of the notes simultaneously withdrawn from the bank. Both sides filed exceptions to the report and the case was fully heard by the District Judge, who set aside the report and findings of the special master and made new findings in accordance with his view of what the evidence established. These findings covered the facts heretofore narrated. And there were specific findings to the effect that the bank was not aware of any fraudulent or dishonest act on the part of Newbold prior to the execution of the bond and first acquired knowledge of his fraudulent acts on April 5, 1930; that the circumstances surrounding a loan to his brother in 1921, which was the matter chiefly relied on as proof of knowledge by the officers of the bank of default on his part prior to the execution of the bond, were not such as to cause the officers to think that he was guilty of any wrong and that they were guilty of no wrong in failing to disclose this matter to the defendant when the bond was executed; that during the period of the bond the bank sustained a loss as a result of Newbold's embezzlement and wrongful misapplication of the bank's funds in an amount far in excess of the $25,000 penalty of the bond; and that his fraudulent conduct in falsifying the books of the bank had prevented its officers discovering the losses which it had sustained. The thirteenth finding, which is of particular importance, was as follows:

"From December 31, 1929, to April 5, 1930, the bank's assets were depleted as follows:

                  Loans collected over and above
                   loans made .................. $23,812.42
                  Liberty bonds ................     500.00
                  Cash .........................     128.00
                  Cash items ...................  12,744.23
                  Shortage in cash .............   7,608.19
                                                 __________
                      Total .................... $44,824.19
                

"Crediting these items with $4,000.00 since collected on the H. L. Newbold note leaves $40,824.19. These items, coupled with Newbold's admission that he took the bank's money, when considered in connection with his several notes, convince me that more than $25,000.00 was taken by him from...