WACHOVIA BANK & T. CO. v. Manufacturers Cas. Ins. Co.

• Decision Date: 16 March 1959
• Docket Number: Civ. A. No. C-159-WS-57.
• Citation: 171 F. Supp. 369
• Court: U.S. District Court — Middle District of North Carolina
• Parties: WACHOVIA BANK AND TRUST COMPANY, Plaintiff, v. MANUFACTURERS CASUALTY INSURANCE COMPANY, Defendant.

171 F. Supp. 369

WACHOVIA BANK AND TRUST COMPANY, Plaintiff, v. MANUFACTURERS CASUALTY INSURANCE COMPANY, Defendant.

Civ. A. No. C-159-WS-57.

United States District Court M. D. North Carolina, Winston-Salem Division.

March 16, 1959.

Womble, Carlyle, Sandridge & Rice, Winston-Salem, N. C., for plaintiff.

Jordan, Wright & Henson, Greensboro, N. C., for defendant.

STANLEY, District Judge.

This action arises out of a banker's indemnity bond issued by the defendant, Manufacturers Casualty Insurance Company, hereinafter referred to as "Manufacturers", to the City Industrial and Savings Bank of Greensboro, hereinafter referred to as "City Industrial". The plaintiff, Wachovia Bank and Trust Company, hereinafter referred to as "Wachovia", brought this action under the bond as a successor in interest to City Industrial as a result of the merger of City Industrial with Wachovia.

The loss upon which this action is based arose as a result of an embezzlement of funds by a former teller of City Industrial. The embezzlement occurred prior to the merger of City Industrial with Wachovia and the principal question involved is whether the embezzlement was "discovered", in accordance with the bond provisions, prior to the effective date of the merger, at which time the coverage of the Manufacturers' bond expired.

Wachovia was covered by a banker's indemnity bond issued to it by the Hartford Accident and Indemnity Company. This bond contained provisions similar to Manufacturers' bond. Thus, Wachovia was covered by indemnity bonds as to embezzlement losses sustained and discovered both before and after the merger, and could have recovered against either Manufacturers or Hartford, depending on when the loss was discovered. Wachovia, however, elected to proceed only against Manufacturers. Hartford was made a third-party defendant upon motion of Manufacturers, but at the conclusion of the trial, a motion was granted, without objection on the part of Manufacturers, dismissing the third-party complaint.

The case was tried by the Court without a jury on August 6 and 7, 1958, in Greensboro, North Carolina. At the conclusion of the trial, the Court took the case under advisement pending the receipt of proposed findings of fact, conclusions of law, and supplemental briefs of the parties in support of their contentions. The proposed findings of fact, conclusions of law and briefs of the parties having been received, the Court, after considering the pleadings, evidence, stipulations, exhibits and briefs of the parties, now makes and files herein its Findings of Fact and Conclusions of Law, separately stated.

Findings of Fact

1. The plaintiff is a North Carolina corporation engaged in the banking and trust business, with its principal office located in Forsyth County, North Carolina.

2. The defendant is a Pennsylvania corporation engaged in the insurance business, with its principal office located in Philadelphia, Pennsylvania. It is authorized to do business in North Carolina.

3. The amount in controversy exceeds, exclusive of interest and costs, the sum of $3,000.

4. Under date of March 1, 1955, the defendant issued its Bankers Blanket Bond No. 505966 to City Industrial, in which the defendant agreed to indemnify and hold harmless City Industrial from any losses "sustained by the insured at any time but discovered after noon of the 1st day of March, 1955, and prior to the termination or cancellation of this bond as an entirety, as hereinafter set forth", including "any loss through any dishonest, fraudulent, or criminal act of any of the employees" of the insured. The bond also provided for written notice of loss "at the earliest practicable moment after discovery." The bond was sufficient in amount to cover the loss which gave rise to this action.

5. As of midnight, February 29, 1956, upon a consolidation of the insured, City Industrial, with Wachovia, the aforesaid bond was terminated in accordance with its provisions.

6. Prior to February 29, 1956, a loss in the amount of $17,800 was sustained by the insured, City Industrial, through the dishonest acts of Jerrlyn L. Black, one of its employees.

7. From and after midnight on February 29, 1956, City Industrial and Wachovia were consolidated through the merger of City Industrial with Wachovia. Through said consolidation and merger, the plaintiff became the owner of all the assets of City Industrial, including all rights of City Industrial under the aforesaid bond.

8. The Federal Bureau of Investigation recovered from Jerrlyn L. Black $4,500 of the embezzled funds and delivered same to the United States Marshal for this district. On or about April 22, 1958, the United States Marshal, pursuant to order of this Court, paid to the plaintiff said sum of $4,500. The amount in controversy between the parties is $17,800, the total amount of the embezzlement, less the $4,500, or $13,300, plus interest and cost.

9. Proof of loss in due form was properly filed on April 16, 1956, within the time prescribed in the bond.

10. On February 29, 1956, the day prior to the merger, various personnel of other branches of Wachovia were present at City Industrial to make preliminary examinations prior to the merger which was to become effective as of midnight that date.

11. Edward T. Shipley, the General Auditor of Wachovia, and Hampton E. Morgan, an Auditor of Wachovia, and Robert F. Goodwin, Comptroller of Wachovia, arrived at City Industrial about 2 o'clock on the afternoon of February 29, 1956. While other Wachovia employees were engaged in examining the loan portfolio and making a cash verification, only Morgan, under the supervision of Shipley, was assigned to checking the savings account ledger cards.

12. Morgan's first task at City Industrial was to run an adding machine tape on the savings account ledger cards while Shipley was to run a trial balance of the general ledger of City Industrial. No previous examination of the savings department of City Industrial had been made by any Wachovia personnel prior to this time.

13. On February 29, 1956, and at all times material to this controversy, W. A. Balsley was President of City Industrial, Connie V. Sutton was Vice-President and Cashier, Claude W. Fleming was Assistant Cashier and a Teller, and Miss Jerrlyn L. Black and Miss Lillian Bush were Tellers.

14. Prior to the merger, the following accounting procedures were employed at the tellers' windows and in the savings department of City Industrial. When either a deposit or withdrawal was to be made by a customer, a deposit or withdrawal slip was supposed to be prepared by the customer and presented to the teller along with the customer's pass book. Each teller would handle all types of transactions that came through the bank, and each teller had an individual cash drawer. At the end of the banking day each teller would total the withdrawal and deposit slips and post these totals to the teller's individual cash book. The individual cash books would in turn be posted to the cash journal. This combined total was in turn posted to the savings account entry in the general ledger. The general ledger contained a daily compilation of the changes in all the assets and liabilities of City Industrial. The posting from the cash journal was one of various entries to be made in the general ledger. The compilation and posting to the cash journal and to the general ledger were generally both done by Miss Bush. The deposit and withdrawal slips, after being posted to the individual cash books, were combined and posted to the savings account ledger cards. There was an individual ledger card for each savings account in the bank. These postings were made either by Fleming or Miss Black. After posting, the withdrawal deposit slips were placed in a filing cabinet. At night, the cash, notes and savings account ledger cards were locked in the safe. None of the other records, including the withdrawal and deposit slips, were locked up at night. The withdrawal and deposit slips were kept in the front of a divider of a filing cabinet drawer until they had accumulated for a period of six weeks to two months. They were then combined, bundled, identified and placed behind the divider in the drawer. They would accumulate there for approximately six months and they would then be stored in other filing cabinets or packaged in cartons in order to make space available in the current file drawer.

15. An adding machine tape of the savings account ledger cards was generally made by Miss Black every two weeks. These tapes were retained only for a very short time and there would never be more than one to four tapes available. These tapes were placed behind the savings account ledger cards until discarded. No physical audit of the bank had apparently ever been made. Cash in the custody of the individual tellers was verified only once a year. While Fleming had some awareness of the desirable banking procedure to verify a teller's cash prior to vacation, Miss Black was away from the bank on vacation from February 18, 1956, to February 27, 1956, and her cash was not verified either before leaving or after returning from vacation.

16. For a period of about six weeks prior to the merger, various workmen were engaged in enlarging the bank in accordance with the merger plans. The wall at the rear of the bank had been knocked out during this period and a temporary wall installed. A new vault was placed in the bank. This work was in progress during the working day and periodically would continue into the evening after the bank had closed. The work necessitated occasionally moving about the equipment and files of the bank. While there was no evidence that any of the workmen tampered with any of the records, all of the records, except the aforesaid ones locked in the safe, were accessible at night. At the beginning of the week of the merger, at the direction of Sutton, a number of cartons containing withdrawal and deposit slips...