First Nat. Bank of Crandon v. U.S. Fid. & Guar. Co. of Balt.

• Decision Date: 08 October 1912
• Court: Wisconsin Supreme Court
• Parties: FIRST NAT. BANK OF CRANDON v. UNITED STATES FIDELITY & GUARANTY CO. OF BALTIMORE.

150 Wis. 601

137 N.W. 742

FIRST NAT. BANK OF CRANDON

v.UNITED STATES FIDELITY & GUARANTY CO. OF BALTIMORE.

Supreme Court of Wisconsin.

Oct. 8, 1912.

Appeal from Circuit Court, Marathon County; A. H. Reid, Judge.

Action by the First National Bank of Crandon against the United States Fidelity & Guaranty Company of Baltimore. Judgment for plaintiff, and defendant appeals. Affirmed.

On September 28, 1909, the defendant for a valuable consideration executed and delivered to the plaintiff its contract of indemnity, whereby it agreed as follows: “That it will, at the expiration of three months after proofs of loss shall have been furnished to the company, pay to the employer the amount of any loss or damage that shall happen to the employer in respect to any funds, property or estate belonging to or in the custodyof the employer, through the dishonesty of any of the employés, or through any act of omission or commission of any of the employés, done or omitted in bad faith and not through mere negligence, incompetency, or any error of judgment, and whether such dishonesty or such act of omission or commission occurs in the performance of any duty or trust specially assigned to such employé or occurs otherwise,” not exceeding $10,000. The contract provided that it should cover acts occurring from April 15, 1909, to April 15, 1910, and that by agreement it might be continued in force from year to year. It was so continued for one year from April 15, 1910. One Eidsmoe was employed as assistant cashier by the plaintiff at the time the contract became effective, and held that position until January, 1910, when he was elected cashier. While acting as assistant cashier and cashier, Eidsmoe permitted one Price to obtain fictitious credit at the bank by the process of “kiting checks”; that is to say, by allowing Price to receive credit for checks drawn on other banks in which he had no funds to meet them, and by permitting him to withdraw from the plaintiff bank moneys to the amount of the fictitious checks so deposited. This practice covered a considerable period of time, and on July 26, 1910, Price had secured $26,220 of the funds of the bank by reason of the deposit of such fictitious checks. Plaintiff brought this action to recover $10,000, being the full amount of the bond.

The defendant set up four defenses in its answer.

As its first defense it pleaded the following clause in the contract: “The employer further covenants and agrees that if at any time during the term for which this bond is written, or during any continuance hereof, there shall come to the knowledge of the employer the fact that any employé for whom the company may be bound under this bond is dishonest or has in bad faith, and not through mere negligence or error of judgment, done or neglected to do any matter or thing, or that any such employé habitually gambles, uses intoxicating liquors to excess, frequents houses of ill fame, or is a spendthrift living beyond his or her means, the employer shall promptly notify the company of such fact, and the failure so to do shall relieve the company from all liability on account of such employé, in respect of loss or damage thereafter arising.” The answer then alleged that the defendant's officers and directors had knowledge of the practice pursued by Eidsmoe before Price had withdrawn any considerable sum from the bank, that the acts of Eidsmoe were authorized by the officers of the bank and therefore there was no wrongdoing on his part. but that, if they were not authorized, the defendant was discharged from liability because of plaintiff's failure to promptly notify defendant of Eidsmoe's wrongful acts after it had knowledge thereof.

For a second defense it was urged that Eidsmoe was assistant cashier when the contract was made, and that he was thereafter made cashier without notice to the defendant, that the losses sued for were sustained while he occupied the latter position, and that such change without notice was contrary to the representations made by the plaintiff in its application for a bond and operated to discharge the defendant from liability.

For a third defense, it was alleged that the plaintiff had not suffered any loss through Eidsmoe's acts; that Price was solvent, and had either paid or secured his indebtedness to the bank.

For a fourth defense, the defendant set forth that the acts of Eidsmoe were the result of incompetency and error in judgment, and not of bad faith, and that the bond did not indemnify the plaintiff against the mistakes or errors in judgment of its employés. By the terms of the contract, the defendant obligated itself to make good only such losses as occurred through the dishonesty or bad faith of the employé.

Among other things, the court found that between the 5th of January, 1910, and the 25th day of July, 1910, Eidsmoe knowingly and intentionally permitted, allowed, and assisted Price to withdraw from the funds of the bank money which he was not entitled to withdraw, to the amount of $26,220; that such withdrawal was accomplished by means of kiting checks, so that the amount so procured did not appear as an overdraft in the account of said Price on the books of the bank; that plaintiff collected of said Price $7,000, and no more, and that, by the acts of Eidsmoe, it suffered loss and damage amounting to over $19,000; that Eidsmoe allowed said Price to withdraw said sums of money and acted in collusion with him, knowing that it was a breach of his duty as an employé of said bank so to do, and with knowledge that the funds of the bank were being thereby illegally transferred to said Price; that Price had engaged in the process of kiting checks as early as October, 1908, and the fact that he was doing or had done so came to the knowledge of W. B. McArthur, president of the plaintiff bank, as early as the month of May, 1909, at which time and from that time forward the said McArthur instructed said Eidsmoe to accept no checks of said Price without satisfactory assurance, either by advice from the bank, indorsements secured, or a similar method, that the same would be paid on presentation; that then, for the first time, Eidsmoe understood the process and effect of kiting checks, and he then observed McArthur's instructions and the practice of accepting Price's checks on outside banks, whether secured or not, practically ceased in June, 1909, and that up to this time Eidsmoe acted wholly in good faith; that McArthur had no notice or knowledge that said instructions were not being followed, or that said Price was thereafter carrying on the process of kiting checks, until the month of August, 1910, when said loss was discovered by the bank examiner, and was reported to the officers and directors of the bank; that except, as above found, neither the plaintiff nor any of its officers or directors had any knowledge of the said process of kiting checks or of the said withdrawal of the funds of the bank or any wrongful or unlawful acts of said Eidsmoe until after the said discovery of the bank examiner; that the promotion of the said Eidsmoe from the position of assistant cashier to cashier did not substantially change the duties which he performed, was not contrary to any representation or warranty made by plaintiff in its application for the bond or renewal thereof, and was not a material change in the risk and hazard insured against by the policy.

As conclusions of law, the court found that the acts of Eidsmoe constituted dishonesty and acts of omission and commission done and committed in bad...