American Bonding Co. of Baltimore v. Ballard County Bank's Assignee

• Decision Date: 26 May 1915
• Citation: 165 Ky. 63,176 S.W. 368
• Parties: AMERICAN BONDING CO. OF BALTIMORE v. BALLARD COUNTY BANK'S ASSIGNEE ET AL.
• Court: Kentucky Court of Appeals

176 S.W. 368

165 Ky. 63

AMERICAN BONDING CO. OF BALTIMORE v. BALLARD COUNTY BANK'S ASSIGNEE ET AL.

Court of Appeals of Kentucky.

May 26, 1915

Appeal from Circuit Court, Ballard County.

Action by the Ballard County Bank's Assignee and others against the American Bonding Company of Baltimore. Judgment for the plaintiffs, and defendant appeals. Reversed and remanded with directions.

Eaton &amp Boyd, of Paducah, for appellant.

Hendrick & Nichols, of Paducah, for appellee.

HURT J.

This is an appeal of the American Bonding Company of Baltimore, Md from a judgment rendered against it in the Ballard circuit court, in favor of J. M. Page, assignee of the Ballard County Bank, for the sum of $2,642.59, on account of losses sustained by the bank from the period extending from February 28, 1910, to June 3, 1911, by the peculations of one W. F. Purdy, Jr., who was the cashier of the bank, and which acts amount to embezzlement or larceny from the bank. The appellant was the surety of Purdy in a bond executed to the bank covering the honesty of Purdy, and undertaking to make good to the bank losses it should sustain from Purdy's embezzling or stealing the assets of the bank during said period. The appellant first became surety of Purdy, in a bond to the bank, on the 28th day of February, 1909, for the period of one year thereafter, and was renewed by certificates of renewal on February 28, 1910, and again on February 28, 1911, but on June 3, 1911, Purdy fled the country, and an examination was then had of the affairs of the bank, which developed the fact that during the years which he had been cashier, since the year 1901, he had substantially embezzled and stolen in all about $14,000, $11,000 of which he had purloined previous to the execution of the bond on February 28, 1910.

The appellant sought to avoid liability upon the bond on account of: First. Alleged false, fraudulent, and untrue statements made by the Ballard County Bank to induce the appellant to sign the original bond and the renewals of same. Second. On account of alleged warranties, and the breach of certain conditions of the bonds, which appellant alleged were precedent to its liability on the bond and the renewals of it. Third. That the bank had not properly exercised the necessary supervision over the cashier, as agreed in the application and bond, to prevent the theft of the assets of the bank. Fourth. That $1,120 of the judgment recovered was embraced in an amended petition filed in the case more than a year after the 3d day of June, 1911, and of which no itemized statement had been made and presented to the appellant, and demand made for its payment within six months after the liability upon the bond and the renewals had ceased.

When application was made by Purdy to appellant to become surety upon his bond to appellee, the appellant forwarded to appellee a printed form, containing questions to be answered by appellee, touching its knowledge of the habits, life, and character of Purdy, and the state of his accounts with the appellee. The record shows that such information was sought by appellant of several other persons, and among them a former employer of Purdy, and the information elicited from all these sources was very favorable to Purdy.

Among the questions propounded to appellee, and the answers thereto, were the following:

"Q. Has the applicant uniformly given satisfaction in his personal conduct and habits? A. Yes. Q. Have you any knowledge or any information of, or are you aware of, any habit of the applicant, or of any circumstances unfavorably affecting the risk to the surety on the bond applied for? If so, state particulars. A. No. Q. Is the applicant now, or has he been from any cause, indebted to the bank or its officers? If so, give particulars, stating amount, how incurred, and how payment is secured. A. No. Q. Will the applicant have access to the treasury of the bank? If so, under what restrictions? A. None. Q. 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. Monthly report to directors, and annual examination by employed examiner. Q. Has applicant always faithfully, honestly, and punctually accounted to you for all moneys and property heretofore under his control or custody, as your employé? A. Yes. Q. Are applicant's accounts at this date in every respect correct, and proper securities, property, and funds on hand to balance his accounts? A. Yes.

It is agreed that the above answers shall be warranties and form a part of, and be conditions precedent to, the issuance, continuance, or any renewal of, or substitution for, the bond that may be issued by the American Bonding Company of Baltimore, in favor of the undersigned, upon the person above named."

This paper was dated as of the 19th day of February, 1909, and is signed by W. B. Nichols, president of the bank. On the 10th day of March, 1909, the bond was executed, but by its terms was to insure the appellee, against the dishonesty of its cashier, for the term commencing on February 28, 1909, and ending on the 28th day of February, 1910. At the expiration of that period, the appellant gave appellee notice of that fact, and requested it to fill and sign the following certificate:

"To American Bonding Company of Baltimore:

This is to certify, that since the issue of the above bond, Mr. W. F. Purdy, Jr., hereinafter called employé, has faithfully, honestly, and punctually accounted for all money and property in said employé's control or custody as my or our employé, has always had proper funds and securities on hand, and is not now in default as such employé."

This was subscribed by appellee, by E. O. Sexton, president. Upon receipt of this certificate, the appellant issued and delivered to appellee a certificate of renewal of the bond, for the period of one year, thereafter. At the expiration of the last-named period, upon receipt from appellee of another certificate, similar to the one above quoted, the appellant again issued and delivered to appellee a certificate of renewal of the bond, for the period from February 28, 1911, until February 28, 1912. The bond, among other undertakings and conditions, contained the following:

"This bond is made, issued, and accepted upon the following conditions: First. That all statements made or which may at any time be made by the employer, or by any of his or its officers, in connection with this bond or any renewal hereof, are warranted by the employer to be true; that the employé has not been in arrears or in default in any position in the employer's service; that he has not, to the knowledge of the employer, or any of his or its officers, been in arrears or in default in any other position; * * * that the employer shall observe, or cause to be observed, all due and customary supervision over said employé for the prevention of default; that there shall be careful inspection of the accounts and books of said employé at least once in every twelve months, from the date of this bond," etc.

The appellant insists that the appellee procured it to execute the bond, and the renewals thereof, by false, fraudulent, and untrue statements, which were material to its proposed risk, in representations made by it, to the effect that its cashier was not then nor had theretofore been indebted to it, nor to its officers; that he had always faithfully, honestly, and punctually accounted for all moneys and property theretofore under his control or custody; that his accounts at that date were correct, and proper securities, property, and funds on hand to balance his accounts; and that under the contract, by which appellant had made, these representations were warranted to be true by appellee, and for that reason were conditions precedent to its right of recovery upon the bond.

There is no doubt about the representations being false. The proof shows, without dispute, that when appellee signed and delivered to appellant the paper containing the representations, on the 19th day of February, 1909, Purdy was then a defaulter to the bank in a large sum. It is as undisputed, however, that the fact of his defalcation was, at that time, unknown to the bank or its officers. His habits, so far as known to any one, were good and moral. His home life was conducive to happiness. He apparently gave his time and attention, industriously, to the business of the bank. He was, however, so skillful a manipulator of the books of the bank, and hid his speculations and concealed the false entries upon the books with such skill, that he successfully deceived an expert bank examiner on several occasions, and the state bank examiner upon as many as two occasions, when they made examinations of the bank and its books, and his method of conducting the bank.

The statement relied upon to defeat recovery upon the bond were statements made in an application for fidelity insurance, and the construction to be placed upon them is governed by a statute, in...