EMPLOYERS LIABILITY ASSUR. CORPORATION v. Wasson
| Decision Date | 12 February 1935 |
| Docket Number | 10027.,No. 10026,10026 |
| Parties | EMPLOYERS' LIABILITY ASSUR. CORPORATION, LIMITED, OF LONDON, ENGLAND, v. WASSON, Bank Com'r. GIBSON v. SAME. |
| Court | U.S. Court of Appeals — Eighth Circuit |
Martin K. Fulk, of Little Rock, Ark. (Henry Donham, of Little Rock, Ark., on the brief), for appellants.
Wallace Townsend, of Little Rock, Ark. (S. S. Jefferies, of Little Rock, Ark., on the brief), for appellee.
Before GARDNER, SANBORN, and VAN VALKENBURGH, Circuit Judges.
This is a suit in equity brought by appellee to recover upon a fidelity bond executed by appellant Employers' Liability Assurance Corporation, Limited, of London, England. An accounting was prayed and judgment demanded against Ray S. Gibson, principal, and the Employers' Liability Assurance Corporation, Limited, of London, England, surety. No question is raised as to the form of the action or the sufficiency of the pleadings. The bond is dated April 13, 1931, and obligates the surety to respond to the Union Trust Company for any loss sustained through any act of larceny or embezzlement committed by its employee, Ray S. Gibson, during the period of one year commencing April 13, 1931. The question of liability depends upon the relations of and transactions among Gibson, Union Trust Company, Voss-Hutton Company, and the Wholesalers' Service Corporation. To understand the issues presented, it is necessary to relate the facts in some detail.
In 1930, Gibson organized the Wholesalers' Service Corporation, to finance title retaining installment contracts. The Voss-Hutton Company was an Arkansas corporation engaged, at Little Rock, Ark., in the business of selling automobile supplies and radios at wholesale. At the time of the organization of the company, Voss-Hutton Company was indebted to Union Trust Company. As the Voss-Hutton Company made sales through various retail dealers, it received contracts providing for monthly installment payments, which retained title to the property in Voss-Hutton Company. These contracts were then discounted or sold by Voss-Hutton Company to Wholesalers' Service Corporation (Gibson's company). These contracts the Voss-Hutton Company unqualifiedly indorsed, and the Wholesalers' Service Corporation then took them to the American Exchange Bank of Little Rock, which issued its trust certificate showing that the contracts were held as collateral obligations of the Wholesalers' Service Corporation to the Union Trust Company. The American Exchange Bank obligated itself to return either the collateral notes or their face value to the Union Trust Company. In November, 1930, the American Exchange Bank failed, and commencing in January, 1931, the collateral contracts were handled directly by the Union Trust Company.
At the first meeting of the board of directors of the Wholesalers' Service Corporation, held July 25, 1930, Ray S. Gibson was elected president and general manager, and other officers were also elected. Gibson's salary was fixed at $325 per month, and as general manager he was authorized to employ office help, to borrow money, collect accounts, deposit to the credit of the corporation, and draw checks upon the account. This corporation began business in August, 1930, borrowing $500, most of which was used for expenses of incorporating, and no other capital was ever put into the business.
Beginning in August, 1930, this company continued to handle business for the Voss-Hutton Company until October, 1931, when the Service Corporation ceased to do business. During its period of operation it dealt exclusively with Voss-Hutton Company, and with no others. On receipt of a contract from the Voss-Hutton Company, the Service Corporation would take it to the Union Trust Company, which would lend the Service Corporation the face value of the contract, and the contract was deposited in the bank as collateral security for payment. The proceeds of the loan would then be deposited in the Union Trust Company to the account of the Wholesalers' Service Corporation, and a check on that account would be given to the Voss-Hutton Company for the face value of the contract, less a carrying charge of 7 per cent., making a gross per annum profit at the rate of 17 or 18 per cent., which represented the gross profit of the Wholesalers' Service Corporation in the transaction. On the loans from the bank, the Wholesalers' Service Corporation agreed to pay 7 per cent. interest per annum.
After pledging these contracts, which were in the nature of title retaining notes, as collateral, the Wholesalers' Service Corporation, with the consent of the bank, undertook the collection of the installments as they became due. Each contract bore the indorsement of the dealer through whom the merchandise was sold, and it was the practice for the Wholesalers' Service Corporation each month to send to the dealer monthly statements, listing all of the contracts handled by such dealer, with the amounts of the monthly payments due thereon. The dealer would then undertake to collect from his customers, the makers of the contracts, and would remit by check to the Wholesalers' Service Corporation the total amount so collected, accompanied by a statement showing the amount to be credited to each purchaser. The Wholesalers' Service Corporation kept a daily record in its cashbook of collections received and deposits made, and individual ledger sheets were kept upon each contract, showing the record of payments made. A card index system was also kept, listing individual customer's accounts, and credits as received were placed upon these cards.
For the purpose of reconciling collections which were being made, the Voss-Hutton Company, before delivering contracts to the Wholesalers' Service Corporation, made a record of each contract, showing the name of the maker, the merchandise sold, the amount of the contract, and the due dates of the installments. A. E. Davies, treasurer and bookkeeper of Voss-Hutton Company, once a month went to the office of the Wholesalers' Service Corporation and obtained from the card index there kept a list of the collections which had been received. This was compared with a similar list furnished by the Wholesalers' Service Corporation to the bank.
The Wholesalers' Service Corporation paid on its obligations to the bank by checks on its account. A check for a lump sum would be given, and a list furnished to the bank, showing the name of the makers and the amount with which each contract was to be credited. The only source of income of the Wholesalers' Service Corporation during its period of operation was the 7 per cent. discount or carrying charge which it received on each contract. Checks for all purposes, including operating expenses, were drawn on the only account kept by the Wholesalers' Service Corporation, and the expenses so paid included Gibson's salary.
As Gibson, or the Wholesalers' Service Corporation, was permitted to collect on the pledged contracts, the Union Trust Company applied for and secured a bond written by the United States Fidelity & Guaranty Company to protect it from misapplication of funds. This bond was canceled April 11, 1931, because the Guaranty Company was of the view that Gibson was not an employee of the Union Trust Company. The Union Trust Company then applied to appellant Employers' Liability Assurance Corporation for a similar bond. Gibson made written application dated April 15, 1931, disclosing that he was president and manager of a finance corporation, and that his duties were collection of accounts. This application discloses the Union Trust Company as his employer, and declares that the statements therein contained are true. The Union Trust Company, also for the purpose of procuring the bond, executed an "Employer's Statement for Fidelity Bond." It contains, among others, the following questions and answers:
Questions Answers
3. Is the Applicant at
present in your employment
and, if
so, how long have
you employed him
and in what position? Yes —
Several months
4. Have his duties
while in your service
always been performed
in a faithful
and satisfactory
manner? Yes.
6. With respect to the duties and responsibilities
of the applicant, please reply as fully as possible
to the following questions:
A. State position of Applicant, A. Collection of accounts
the duties — not authorized
that will devolve on to sign checks.
him, and whether
authorized to endorse
checks.
B. In what ways will B. Collection of accounts.
moneys pass through
his hands, by collection,
remittances
by post, or how?
C. What is the largest C. $1600.00
sum he will have in
his hands at any one
time, and for how
long?
D. How often and to D. Audit made semi-annually.
whom will you require
him to render
and account of cash
received, and pay
the same over?
E. Are moneys to be E. Yes.
paid into the bank
by Applicant? If so,
how often will the
bank-book be inspected Account is checked
and checked? once each month.
F. By whom will moneys F. By Gibson.
be drawn out of
bank?
H. How often will you H. Cash account will
balance his cash accounts, not be balanced by
and how will us. Collections will
you check their accuracy? be checked monthly.
Please explain
fully.
I. Will the balance in I. All funds are to be
his hands, if any, be paid to banks by Applicant.
counted
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