Empire State Surety Co. v. Carroll County

• Decision Date: 28 February 1912
• Docket Number: 3,357-3,364.
• Citation: 194 F. 593
• Parties: EMPIRE STATE SURETY CO. v. CARROLL COUNTY et al.
• Court: U.S. Court of Appeals — Eighth Circuit

194 F. 593

EMPIRE STATE SURETY CO. v. CARROLL COUNTY et al.

Nos. 3,357-3,364.

United States Court of Appeals, Eighth Circuit.

February 28, 1912

[Copyrighted Material Omitted]

These are appeals from decrees of the Circuit Court which adjudged the claims of the Chicago & Northwestern Railway Company, of Carroll County, Iowa, of George L. McAllister, its treasurer and of the sureties on his bonds against each other, and for preferences in the payment of claims against the First National Bank of Iowa by the receiver of its property. The bank failed on October 17, 1908, owing the Railway Company about $2,000 and the county about $25,000. Its indebtedness to the county arose from the deposit with it between June 15 1908, and October 18, 1908, of county funds by the county treasurer without any order or direction of the county board to make such deposits so that the county treasurer and the sureties on his bonds were liable for any loss the county might sustain by the failure of the bank to pay the debt it incurred on account of these deposits. The term of office of the county treasurer commenced on January 1, 1907, and continued two years. The county board fixed the amount of his bonds at $60,000. In January, 1907, he gave a bond for $25,000 with the Empire State Surety Company as surety and a second bond for $25,000 with the Illinois Surety Company as surety, and in April, 1907, he gave a third bond for $10,000 with John Meyers, William Arts, and Theresia McAllister as sureties. For more than four months before the bank suspended payments it had been, and its officers had known that it was, insolvent. But its credit among those who were not aware of its condition had enabled it during this time to borrow of one to pay another and to continue its business. When it finally failed on October 17, 1908, it still had on hand $5,912.05 and the Surety Companies and the Railway Company respectively claimed that this was money paid into the bank by them after the bank officers knew that it was insolvent and that it could not repay the money thus paid into the bank by them, and that this money, therefore, became a trust fund which they were entitled to have applied to the payment of their claims in preference to the payment of the claims of other creditors.

In this state of the case, the Chicago & Northwestern Railway Company, on January 18, 1909, exhibited its bill in equity in the court below against the bank and Fowler, the receiver of its property, to secure a preference over other creditors in the payment of its claim against the bank. Thereupon, in April, 1909, the Empire State Surety Company and the Illinois Surety Company brought their bill in the same court against Carroll county, the First National Bank of Carroll, I. W. Fowler, the receiver of the property of this bank, George L. McAllister, the county treasurer, and John Meyers, William Arts, and Theresia McAllister, the sureties on his bond for $10,000, and prayed for an adjudication of the amount due to the county of Carroll from the bank, that the individual sureties be adjudged to be liable with the surety companies to pay their just share of the amount of the treasurer's debt to the county, and that the receiver of the bank be adjudged to pay this amount out of the proceeds of its property in preference to the payment of claims of other creditors. The Illinois Company subsequently discovered that McAllister, the principal named in the bond, never signed it, and thereupon it withdrew as complainant, became a defendant, and answered the bill of the Empire Company and denied all liability on its bond. Before the final hearing of these two suits the Railway Company was made a party in the suit of the Empire Company, all the parties to the latter suit were made parties to the suit of the Railway Company, and the two suits were by consent and by order of the court consolidated for final hearing. They were afterwards heard and decided by the Circuit Court, and decrees were rendered on the same day to the effect, among other things: (1) That the Illinois Company was liable on its bond for its just share of the debt of the treasurer to the county; (2) that the individual sureties were not liable for any part of that debt; (3) that the Chicago & Northwestern Railway Company was entitled to the payment in preference to other creditors of a balance of $1,895.80 out of the property of the bank; and (4) that the two surety companies were entitled to payment out of the property of the bank in preference to other creditors of $3,132.21. These conclusions are now assailed on every side by proper appeals in the cases in hand which demand their review by this court.

John F. Stout (Halleck F. Rose, on the brief), for Empire State Surety co.

James C. Davis (A. A. McLaughlin, on the brief), for Chicago & N.W. Ry. Co.

Emmet Tinley (W. E. Mitchell, on the brief), for Illinois Surety Co.

George S. Wright, for appellees Meyers, McAllister, and Arts.

F. F. Oldham (W. R. Lee and E. A. Robb, on the brief), for First Nat. Bank of Carroll, Iowa, and I. W. Fowler, receiver.

E. A. Wissler (W. R. Lee and E. A. Robb, on the brief), for appellant Carroll County, Iowa.

Before SANBORN, HOOK, and ADAMS, Circuit Judges.

SANBORN Circuit Judge (after stating the facts as above).

1. Did the failure of the principal, the county treasurer, to sign the bond of his surety, the Illinois Company, relieve that company from liability thereon? The statutes of Iowa 1897, Secs. 1177, 1183, required the county treasurer to give a bond conditioned, among other things, to 'promptly account for all balances of money remaining in his hands at the termination of his office' and to 'promptly pay over to the officer or person entitled thereto, the moneys which may come into his hands by virtue of his office,' and it is for a breach of these conditions of the bond and of these only that the Illinois Company is charged with liability in these cases. The statutes also provided that the sureties on such a bond should 'be liable for all money or public property that may come into the hands of such officer at any time during his possession of the office' (section 1183); that the county treasurer should take and subscribe a prescribed oath of office on the bond, or on a paper attached thereto (section 1181); that the penal sum for which he should give bond should be fixed by the board of supervisors of the county (section 1185); and that his bond should be approved, or disapproved, by that board within five days after its presentation for that purpose and should be indorsed, in case of approval, to that effect and filed (section 1188). In this state of the law the treasurer applied to the agent of the Illinois Company in Iowa to furnish him as his surety his official bond in the penal sum of $25,000 and the agent sent his application and a blank form of the bond to the company at its general office in Illinois. The company there filled the blanks for the names of the obligors with the name of the treasurer as principal and with its own name as surety, and the blank for the amount of the bond with $25,000, executed it, and sent it back to its agent in Iowa, who caused it to be delivered to the treasurer with a direction to him that he should execute it as principal before he delivered it. The treasurer then subscribed and executed his official oath, which was written on the bond, and without signing it as principal delivered it to the county as his official bond, and it was accepted as such and filed with the county auditor.

The Illinois Company and its officers expected and intended that the treasurer should sign the bond as principal and that it should not be delivered to the county until it was so signed by them, exacted no promise of and made no agreement with the treasurer to that effect, and they gave no notice to the county of their expectation or intention in this regard other than the notice, if any, inferable from the absence of the treasurer's signature on the bond. The county, the treasurer, and the Surety Company all believed, and the county permitted the treasurer to receive and hold its funds during the term of the bond in reliance upon its belief, that the Surety Company was legally bound thereby. There is no evidence that the Surety Company ever made any investigation to find out whether or not the treasurer had signed the bond before this litigation arose. It collected its premium in 1907 for its services as surety on this bond during that year and again in 1908 for its services as surety on this bond during the second year. No one discovered the alleged defect in the bond now asserted until many months after the defalcation of the treasurer, and, when the Illinois Company discovered it, it tendered repayment of the premiums and insisted that it never was liable upon the bond.

It was undoubtedly lawful for the county to take and for the Surety Company to give a bond made and executed by itself only conditioned as prescribed by section 1183 of the statutes of Iowa, to indemnify the county against the defalcations of the treasurer. If the Surety Company had intentionally made and delivered, and the county had intentionally accepted and relied upon, such a bond, it is clear that the Surety Company could not have escaped liability thereon, for there is no prohibition in the statutes of such a contract, and it would have constituted a valid agreement under the common law. Nor can there be any doubt that the Surety Company would not have been bound by the bond it executed if it had distinctly notified the county so that the latter knew before it received the bond that the Surety Company did not intend to be and declared that it would not be bound by the bond unless it was executed by the treasurer as...