American Surety Co. v. Pauly

• Decision Date: 20 February 1896
• Docket Number: 56.
• Citation: 72 F. 470
• Parties: AMERICAN SURETY CO. v. PAULY.
• Court: U.S. Court of Appeals — Second Circuit

72 F. 470

AMERICAN SURETY CO. v. PAULY.

No. 56.

United States Court of Appeals, Second Circuit.

February 20, 1896

George A. Strong, for plaintiff in error.

Wm Mitchell, for defendant in error.

Before LACOMBE and SHIPMAN, Circuit Judges.

LACOMBE Circuit Judge.

One J W. Collins, who had been cashier from the organization of the bank, in 1888, became its president in 1891. Thereupon George N. O'Brien was promoted, and made cashier. He applied to the defendant for a bond of indemnity to date from July 1 1891, for $15,000, in favor of the bank, as security covering his position in the bank's service. The defendant is a New York corporation, engaged in the business among other things, of issuing surety or guaranty bonds for persons in positions of public or private trust; and upon said application, and in consideration of a premium duly paid, it executed and delivered the bond in suit, which is correctly described by the trial judge as 'in legal effect an insurance policy, by which the defendant undertook to guaranty the bank against loss arising from the fraud or dishonesty of O'Brien. ' The material parts of such bond are as follows:

'This bond, made July 1, 1891, between the American Surety Company of New York, * * * of the first part, and George N. O'Brien, * * * hereinafter called the 'employe,' of the second part, and California National Bank, hereinafter called the 'employer,' of the third part. Whereas, the employe has been appointed in the service of the employer, and has been assigned to the office or position of cashier by the employer, and has applied to the American Surety Company of New York for the grant by it of this bond: Now, therefore, in consideration of the sum of $75 * * * as a premium for the term of twelve months ending on the first day of July, 1892, at 12 o'clock noon, it is hereby declared and agreed that, subject to the provisions herein contained, the company shall, within three months next after notice, accompanied by satisfactory proof of a loss, as hereinafter mentioned, has been given to the company, make good and reimburse to the employer all and any pecuniary loss sustained by the employer of moneys, securities, or other personal property in the possession of the employer, or for the possession of which he is responsible, by any act of fraud or dishonesty on the part of the employe in connection with the duties of the office or position hereinbefore referred to, or the duties to which in the employer's service he may be subsequently appointed, and occurring during the continuance of this bond, and discovered during said continuance, or within six months thereafter, and within six months from the death or dismissal or retirement of the employe from the service of the employer. It being understood that a written statement of such loss, certified by the duly-authorized officer or representative of the employer, and based upon the accounts of the employer, shall be prima facie evidence thereof; provided, always that the company shall not be liable by virtue of this bond for any mere error of judgment or injudicious exercise of discretion on the part of the employe in and about all or any matters wherein he shall have been vested with discretion, either by instruction or rules and regulations of the employer. And it is expressly understood and agreed that the company shall in no way be held liable hereunder to make good any loss which may accrue to the employer by reason of any act or thing done or left undone by the employe in obedience to or in pursuance of any direction, instruction, or authorization conveyed to or received by him from the employer or its duly-authorized officer in that behalf. * * * The following provisions also are to be observed and binding as a part of this bond: That the company shall be notified in writing at its office in the city of New York of any act on the part of the employe which may involve a loss for which the company is responsible hereunder as soon as practicable after the occurrence of such act shall have come to the knowledge of the employer. That any claim made in respect of this bond shall be in writing, addressed to the company, as aforesaid, as soon as practicable after the discovery of any loss for which the company is responsible hereunder, and within six months after the expiration or cancellation of this bond, as aforesaid. And upon the making of such claim this bond shall wholly cease and determine as regards any liability for any act or omission of the employe committed subsequent to the making of such claim, and shall be surrendered to the company on payment of such claim. That the company shall not in any wise be responsible under this bond to a greater extent than $15,000. * * * That no suit or proceeding at law or in equity shall be brought to recover any sum hereby insured, unless the same is commenced within one year from the making of any claim on the company.'

The bank suspended payment, and its assets were taken possession of by the bank examiner November 13, 1891. The plaintiff was appointed receiver, and duly qualified as such on December 29, 1891. Having discovered, as he believed, acts of fraud and dishonesty on the part of O'Brien, resulting in loss to the bank, the receiver, after giving written notice, and sending to the company written proof of loss, the receipt of both of which was acknowledged, began this suit. By the complaint and the bill of particulars recovery is sought for various items, but at the close of the trial the court left it to the jury to determine as to certain transactions of October 13, and 14, 1891, only. The facts relating to these transactions are, briefly, as follows: On October 12, 1891, Collins, the president, was in New York, and effected a loan from the Western National Bank of that city to the California Bank. This loan was made on a note of the California Bank for $20,000, and on the security of promissory notes the property of the California Bank amounting to $36,230. The proceeds of the loan were credited by the Western National Bank to the California Bank, and subsequently drawn out by it. The loan was to the bank, and not to Collins. A truthful record of this transaction upon the books of the California Bank would have been a credit of the amount to 'Bills payable,' and a debit of the same to the Western National Bank. The actual entries on the books are a debit to the Western National, and a credit to J. W. Collins in his individual account, and no credit to 'Bills payable.' The result of such entries is that the proceeds of the loan obtained on the credit of the California Bank and by pledge of its collaterals, and which should have remained subject only to its disposal, were left subject to the order of Collins by his personal check. These entries were thus made in entire good faith, so far as appears, by the bookkeeper, in consequence of the act of O'Brien. On October 13, 1891, he filled up in his own handwriting a deposit tag, which represented that by telegraphic dispatch Collins had that day made a deposit in the California Bank of '$20,000. Western National.' On the same day a precisely similar transaction took place between Collins and the United States National Bank, whereby commercial paper the property of the California Bank was rediscounted, and the transaction falsely recorded on the books of said bank, by reason of a similar false deposit tag, prepared by O'Brien himself. The amount credited to Collins on this tag was $24,500. It thus appeared that, as a result of O'Brien's acts in filling up these two deposit tags with statements which were false in fact, Collins' account with the bank was inflated in the amount of $44,500. It further appeared that when the bank suspended payment on November 12, 1891, there was standing to his credit $11,420.90 only; that is to say, the aggregate amount drawn out by Collins exceeded whatever balance he had standing to his credit on October 12, 1891, plus all subsequent deposits (except the two above described), by $33,079.10. The bank therefore lost that sum by reason of these false credits, for, had it not been for the false credits, Collins' account would have been exhausted, and presumably his checks not honored, before any of this $33,079.10 was drawn out. That these two deposit tags were written by O'Brien is not disputed. They are in his handwriting. He was called as a witness by plaintiff, but declined to testify, on the ground that his answers might tend to incriminate him, since he was indicted by the grand jury upon certain charges growing out of his connection with the affairs and management of the bank. That the entries upon the tags were false is abundantly established on the proof. They called for entries to the credit of Collins on his individual account of the amounts obtained from the United States Bank and the Western National Bank, and the officers of those banks testified that their transactions of October 12th with Collins were loans, not to him, but to the California Bank. The mere fact, however, that the entries on the tags were false did not by itself prove 'fraud or dishonesty' on the part of O'Brien; non constat that he acted ignorantly or negligently. There was, however, evidence that, although Collins' account showed that he had at all times a balance to his credit, he was in fact largely indebted to the bank by reason of other similar false entries; that on other occasions O'Brien himself had made similar entries. O'Brien's age, experience, and connection with the bank were shown, it appearing that he had been in control of the bank (during the absence of Collins) for several weeks at the time this transaction took place. Letters of his were introduced, tending to show knowledge of irregularities, and it was...