United States Fidelity & Guar. Co. v. State of Oklahoma, 9201.

• Decision Date: 13 October 1967
• Docket Number: No. 9201.,9201.
• Parties: UNITED STATES FIDELITY AND GUARANTY COMPANY, a corporation, Appellant, v. STATE OF OKLAHOMA ex rel. Carl B. SEBRING, State Bank Commissioner of Oklahoma, Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

383 F.2d 417 (1967)

UNITED STATES FIDELITY AND GUARANTY COMPANY, a corporation, Appellant, v. STATE OF OKLAHOMA ex rel. Carl B. SEBRING, State Bank Commissioner of Oklahoma, Appellee.

No. 9201.

United States Court of Appeals Tenth Circuit.

October 13, 1967.

Edgar Fenton, of Fenton, Fenton, Smith, Reneau & Moon, Oklahoma City, Okl., for appellant.

Dwight Tolle, Okemah, Okl. (G. T. Blankenship, Atty. Gen. of Oklahoma, and W. J. Monroe, First Asst. Atty. Gen., with him on the brief), for appellee.

Before LEWIS and SETH, Circuit Judges, and BRATTON, District Judge.

BRATTON, District Judge.

This is an appeal from a judgment for the plaintiff receiver for a dissolved state bank allowing recovery of $162,609.86 against the defendant bonding company on two Bank Employee Dishonesty Blanket Bonds. Originally filed in state court, the suit was removed by defendant to federal district court upon the basis of diversity of citizenship and jurisdictional amount. A trial to the court was had, resulting in the judgment from which this appeal is taken.

On October 29, 1961, as a result of negotiations with M. W. Lee, the president of Farmers State Bank of Boley, Oklahoma, the bonding company issued a renewal bond to replace the bank's expiring employee fidelity bond. This was the last of a series of such bonds issued to the bank over a twenty year period. The amount of the renewal bond was $50,000.00. The second or excess blanket bond, negotiated at the same time as the renewal bond and as part of the same transaction, was issued on December 5, 1961, in the amount of one million dollars, less a deductible amount of $50,000.00. In December of 1961 the bonds were approved by the bank's board of directors, composed of Lee, his wife, her sister, and his brother-in-law.

The bank closed on March 6, 1962. The next day the state bank examiners began an examination of the bank's records and, within a few days, determined that losses had been sustained through embezzlement. A Notice of Loss was furnished defendant on March 27, 1962. Liquidation procedures were begun under the supervision of the District Court of Okfuskee County, Oklahoma. It was found that the bank had sustained losses of $162,609.86. The bank president admitted responsibility for the losses on June 20, 1963, and attributed them to his own fraudulent acts during several immediately preceding years. He had periodically taken bank money for use in his own business, covering his unauthorized withdrawals by using fictitious control accounts and his own business account into which he transferred the embezzled money to be later withdrawn, and by means of promissory notes signed by him in the names of nonexistent borrowers. He also issued certificates of deposit to bank customers of which no record was made in the bank's books, so that the money so deposited could be diverted to his own uses. Further, he had borrowed $10,000.00 from another bank for the purpose of showing greater assets in his own bank. He left the borrowed funds there, depositing them in a savings account maintained there by his bank. He also left with the bank's president a draft for the amount of the loan, to be charged against the savings account in the event that the loan was not otherwise paid. This draft was charged against the account the day before his own bank closed. In spite of the fact that he had not actually deposited the borrowed funds in his own bank, Lee made an entry for the amount of the loan in one of his control accounts and subsequently withdrew $10,000.00 for his own use.

The bonding company defends first upon the basis of a clause in the bond applications signed by Lee as president, stating that to the knowledge of the bank all employees had always performed their duties honestly.¹

This clause was in the application for the excess bond as well as the application for the original primary bond and is considered to be applicable to the renewal bond. Obviously, Lee knew of his own dishonest acts. While the evidence shows that the rest of the bank's board of directors had no knowledge of Lee's wrongful conduct and his fraud in procuring the bonds, the bonding company asserts that he was the sole representative of what was essentially a "one-man" bank, i. e., he was the bank's "alter ego", and his guilty knowledge became the bank's guilty knowledge. See Aetna Casualty & Surety Co. v. Local Building and Loan Ass'n, 162 Okl. 141, 19 P.2d 612, 86 A.L.R. 526 (1933). This argument is not convincing. The bank's board of directors met regularly, and board members took a fairly active part in bank affairs. The testimony given in the trial of this case indicates that board members examined the bank examiner's reports, checked on promissory notes and their security, and checked individual deposits and savings accounts. These examinations had failed to disclose Lee's fraud. The board considered and approved the acquisition of the two fidelity bonds in question, and such approval was duly recorded in the minutes of the board. The bonding company has failed to establish that Lee was the bank's sole representative. Maryland Casualty Co. v. Tulsa Industrial Loan and Investment Co., 83 F.2d 14, 105 A.L.R. 529 (10th Cir. 1936). See General American Life Insurance Co. v. Anderson, 46 F.Supp. 189 (W.D.Ky.1942).

Of equal inapplicability is the bonding company's argument that the bank cannot seek to enforce a contract procured by the misrepresentations of its agent (sole or otherwise) without having imputed to it the agent's guilty knowledge, unless it has changed its position before learning the facts. An agent's knowledge of matters within the scope of his authority is knowledge of his principal, Knox v. First Security Bank of Utah, 206 F.2d 823 (10th Cir. 1953), for it is presumed that such knowledge will be disclosed to the principal. An exception exists when the transaction is one in which the agent is secretly acting adversely to the principal. Great American Indemnity Co. v. First National Bank of Holdenville, Okl., 100 F.2d 763 (10th Cir. 1938); Restatement (Second), Agency §§ 280, 282 (1958). If the agent is defrauding his principal, it is not realistic to presume that this very knowledge will be disclosed to the principal. The exception is subject to the...