Federal Deposit Ins. Corp. v. American Surety Co. of NY, 2325.

• Decision Date: 30 June 1941
• Docket Number: No. 2325.,2325.
• Citation: 39 F. Supp. 551
• Parties: FEDERAL DEPOSIT INS. CORPORATION v. AMERICAN SURETY CO. OF NEW YORK.
• Court: U.S. District Court — Western District of Kentucky

39 F. Supp. 551

FEDERAL DEPOSIT INS. CORPORATION v. AMERICAN SURETY CO. OF NEW YORK.

No. 2325.

District Court, W. D. Kentucky, at Louisville.

June 30, 1941.

COPYRIGHT MATERIAL OMITTED

Wilson W. Wyatt, Baldwin C. Burnam, and Peter, Heyburn, Marshall & Wyatt, all of Louisville, Ky., for plaintiff.

J. McCauley Smith, Squire Ogden, and Ogden, Galphin, Tarrant & Street, all of Louisville, Ky., for defendant.

MILLER, District Judge.

The Federal Deposit Insurance Corporation as receiver of the Taylor National Bank of Campbellsville, Kentucky, brought this action to recover of the defendant, American Surety Company of New York, the sum of $11,008.06 with 6% interest from July 13, 1938 as the unpaid balance due to it under the defendant's Bankers Blanket Bond whereby the defendant agreed to indemnify the insured in an amount not exceeding $25,000 against direct loss sustained through any dishonest act of any of its employees. The Taylor National Bank claims to have suffered a loss covered by the bond in excess of the $25,000 coverage by reason of the dishonest acts of its President, T. O. Morton; that the defendant paid the plaintiff on July 13, 1938 upon said claim the amount of $13,991.94 leaving unpaid the balance herein sued for. The defendant admits the execution and existence of the Bankers Blanket Bond sued upon, the loss to the plaintiff while the bond was in force and effect by reason of the dishonest acts of Morton, its president, but claims that it is entitled to an offset in the amount of $11,008.06 by reason of its subrogation to a claim on the part of the Committee of John Catron, a person of unsound mind, against the Taylor National Bank by reason of its having paid to the estate of said John Catron a loss caused said estate by its Committee on whose bond the defendant was surety.

Findings of Fact

Prior to January 1, 1930, John Catron, a resident of Taylor County, Kentucky, was adjudged to be a person of unsound mind by judgment of the Taylor County Court, and by said judgment M. D. Tucker was appointed Committee of said John Catron and duly qualified. Tucker as Committee of said Catron became the owner and holder of a warrant duly issued by Taylor County, Kentucky, in the principal amount of $7,802.53, payable in 1930 out of the county levy of 1930 and bearing interest at 6%. This warrant was a non-negotiable instrument. On September 11, 1931 the Taylor County Court accepted the resignation of Tucker as Committee of John Catron and appointed T. O. Morton as the successor Committee of John Catron. Morton executed and filed in the County Court a bond in the penal sum of $15,000, conditioned upon the faithful performance of his duties of such Committee. This bond was executed by the defendant American Surety Company as surety. On or about November 5, 1936 the Taylor County Court required Morton as such Committee to execute an additional surety bond which Morton did execute in the additional sum of $3,000 with the defendant American Surety Company as his surety thereon. On September 11, 1931, T. O. Morton as Committee of John Catron received from Tucker, former Committee of Catron, the Taylor County warrant above referred to together with other securities and cash constituting the estate of the incompetent. At that time Morton was President and a Director of the Taylor National Bank of Campbellsville, Kentucky. The bank had outstanding 250 shares of capital stock, of the par value of $100 each which were owned of record by the following persons: T. O. Morton, 160 shares; Mrs. Zelma Morton, wife of T. O. Morton, 10 shares; S. S. Goode, father of Mrs. Zelma Morton, 10 shares; O. L. Goode, a nephew of S. S. Goode, 56 shares; Mrs. O. L. Goode, 4 shares; G. L. Gowdy, 10 shares. T. O. Morton was a dominating officer in the bank and transacted most of its important business affairs.

On September 11, 1931, and following his qualification as Committee for John Catron, T. O. Morton sold and delivered to the Taylor National Bank the Taylor County warrant above referred to, and the Taylor National Bank acting solely by and through its President, T. O. Morton, purchased the Taylor County warrant at its face value of $7,802.53, which amount it credited to the individual checking account of T. O. Morton in the Taylor National Bank. At the close of business on September 10, 1931 there was a balance of $2,474.52 in the individual checking account of T. O. Morton. On September 11, 1931 said checking account was credited with two deposits in the respective amounts of $1,115.78 and $7,802.53. On September 11, 1931 there cleared through the Taylor National Bank against the individual account of Morton the following checks drawn by T. O. Morton: Check payable to the order of H. T. Parrott in the sum of $7,000, which was in payment of thirty-five shares of stock of the Farmers and Peoples Bank of Campbellsville, Kentucky, which was consolidated with the Taylor National Bank on September 15, 1931; check payable to the order of H. T. Parrott in the sum of $2,625; check payable to the Taylor National Bank in the sum of $500, with the designation on the face of the check — "for note." As a result of these withdrawals the books of the Taylor National Bank showed a balance in the individual account of Morton, as of the close of business of September 11, 1931, of $1,267.83. The Taylor County warrant remained in the possession of the Taylor National Bank at all times from September 11, 1931 until the appointment of the plaintiff as Receiver for said bank on August 24, 1937, and after its appointment as Receiver the plaintiff continued to hold possession of said warrant until it collected and received from Taylor County, Kentucky, the principal of said warrant in full on July 19, 1938. The Taylor National Bank and the plaintiff as its Receiver collected interest from Taylor County, Kentucky, upon the face amount of said warrant at the rate of 6% per annum from March 21, 1931 to July 19, 1938. The sale of the Taylor County warrant to the Taylor National Bank by T. O. Morton as Committee of John Catron was with the fraudulent intent on the part of Morton to convert said warrant and its proceeds to his own use. The account of T. O. Morton, Committee, received from Morton personally an amount in cash equal to the interest paid by Taylor County on the warrant for the period of March 21, 1931 to October 15, 1935. On October 15, 1935 Morton as Committee purported to sell the Taylor County warrant and replace it with United States Treasury Bonds, 3¼% and so indicated by his records as said Committee. His account as said Committee received interest on these bonds from Oct. 15, 1935 to April 15, 1936.

On November 1, 1937 by order of the Taylor County Court, T. O. Morton was removed as Committee of John Catron, and Ralph T. Garnett was appointed as successor Committee of John Catron, gave bond with proper surety and duly qualified as such Committee. The only assets of the estate of John Catron turned over to said Garnett as his Committee were (a) a checking account in the sum of $111.55 in the Taylor National Bank; (b) a checking account in the sum of $40 in the Taylor National Bank. Thereafter Ralph T. Garnett, the successor Committee, instituted an action against the American Surety Company of New York on its bond as surety for T. O. Morton, Committee of John Catron, and on March 9, 1938 judgment was rendered by the Taylor County Court in said action in which it was ordered and adjudged that Ralph T. Garnett, Committee of John Catron, incompetent, recover of American Surety Company of New York the sum of $17,507.21; that American Surety Company of New York be subrogated to all the rights of Garnett, the successor Committee, against the Taylor National Bank; and that upon the payment of the aforesaid amount Garnett as said Committee should execute and deliver to the American Surety Company of New York an assignment of any and all claims that Garnett as said Committee had or might have against the Taylor National Bank by reason of its dealings with the assets of the estate of John Catron. On March 9, 1938 the American Surety Company of New York paid to Garnett as such Committee the sum of $17,507.21 which included the loss to the estate on account of the Taylor County warrant. At that time Garnett executed and delivered to the Surety Company the assignment referred to. This settlement was based on the assumption that the U. S. Government bonds had been held by the Committee on and after October 15, 1935, as shown by the Committee's records, and the estate was entitled to interest as called for by that investment instead of the interest as was paid by the Taylor County warrant. The settlement included the sum of $731.25 as interest on $15,000 Treasury Bonds, 3¼%, unaccounted for by the Committee. Of this amount, $380.37 is the pro rata part applicable to principal amount of the Taylor County warrant reinvested in these bonds.

On September 26, 1933 the defendant American Surety Company of New York, in consideration of a premium paid to it and of an annual premium to be paid thereafter, issued and delivered to the Taylor National Bank its Bankers Blanket Bond wherein the Surety Company agreed to indemnify the bank against the direct loss sustained while the bond was in force in an amount not exceeding $15,000 caused through any dishonest act of any employee of the bank, whether acting alone or in collusion with others. On May 11, 1936, in consideration of additional premium paid and to be paid by the insured the American Surety Company increased the coverage under the bond from $15,000 to $25,000 as to all losses sustained after April 27, 1936. Said bond was in full force and effect from September 25, 1933 until the closing of the Taylor National Bank of Campbellsville, Kentucky, on June 30, 1937. During the currency of said bond T. O. Morton was a salaried officer, director and manager of the insured bank with his office in...