First Nat. Bank v. National Sur. Co.

• Decision Date: 09 May 1904
• Docket Number: 1,250.
• Citation: 130 F. 401
• Parties: FIRST NAT. BANK OF NASHVILLE v. NATIONAL SURETY CO.
• Court: U.S. Court of Appeals — Sixth Circuit

130 F. 401

FIRST NAT. BANK OF NASHVILLE v. NATIONAL SURETY CO.

No. 1,250.

United States Court of Appeals, Sixth Circuit.

May 9, 1904

Walter Stokes and James C. Bradford, for plaintiff in error.

Granbery & Trabue, for defendant in error.

Before LURTON, SEVERENS, and RICHARDS, Circuit Judges.

LURTON Circuit Judge, .

This was an action by the First National Bank of Nashville, Tenn against the National Surety Company, on a bond of indemnity made by the latter company, to recover a loss sustained through the dishonest conduct of one W. W. Lea, an individual bookkeeper in the service of the bank. Upon the pleadings and evidence Judge Clark directed a verdict for the surety company.

By the bond the surety company agreed to pay to the bank 'the amount of any loss or damage that shall happen to the employer, in respect of any funds, property or estate belonging to or in the custody of the employer, through the dishonesty of any of the employees, or through any act of omission or commission of any of the employees, done or omitted in bad faith, and not through mere negligence incompetency, or any error of judgment,' etc. The bond covered a number of the bank's employes, of whom W. W Lea was one. Lea was the bookkeeper, and kept the individual ledger containing accounts of those depositors the initial letters of whose names were one of the letters of the alphabet from A to K, inclusive. Among those depositors whose accounts were kept by him was the mercantile firm of Connor & Brady. This firm did business with the plaintiff for a number of years. Their account was what is called an 'active' one, and almost daily deposits were made and checks drawn thereon. Lea neither received nor paid out any money. Deposits were paid to the receiving teller, who, during same day turned over to the assistant teller memoranda of the deposits called 'deposit slips.' A list of these was made out by the assistant teller, which was handed to the individual bookkeepers, who entered therefrom, on a book called the 'scratcher,' the amount of each deposit and the name of the depositor. Checks were paid by the paying teller, who, after payment, turned same over to the assistant teller, who, after making a list of them, handed them to the individual bookkeepers. The latter then entered them on the scratcher. At the close of each day the individual bookkeepers transferred from the scratcher to the individual ledgers the deposits and checks thus recorded thereon. This ledger should therefore show deposits and checks corresponding with the entries made on the scratcher. The account of each customer was balanced at the end of each day, and, if properly kept, showed the precise condition of the depositor's account after crediting each deposit and charging each paid check. The account of Connor & Brady was in this way kept by Lea. There was evidence tending to show that in the interest of Connor & Brady, and for the purpose of defrauding the bank, the account of that firm was falsified in three distinct ways, the object being to give Connor & Brady fictitious credit balances against which they could draw. One of the methods was to post from the scratcher a larger deposit than shown. To illustrate: On July 2, 1900, the firm deposited $503.70 which was honestly entered by Lea on the scratcher from the deposit slips handed him by the assistant teller. In posting this to their account on the individual ledger, this deposit was entered as $1,503.70. Another method was by charging a check as for a less amount than shown by the scratchbook entry. Thus, on June 29, 1900, checks drawn by them were paid which aggregated $631.10, and were properly entered on the scratcher, but posted in their ledger account as $331.10, thus increasing their credit balance by $300. A third method was by false extensions of footings and balances. An example is this: On May 7, 1900, by false additions, their credit balance was increased $1,000. This system of false entries was begun and continued for nearly five years, and on May 1, 1900, Connor & Brady had overdrawn their account $50,029, although the account on the ledger did not show any overdraft at all, in consequence of the skill with which fictitious credits had been given them through Lea's methods. Detection had been successfully avoided by methods not necessary to state, and on May 1, 1900, Lea bore an untarnished reputation, and was so represented for the purpose of securing the bond now in suit, which went into force, as of that date, for the term of one year. For the loss which had or might be sustained as a consequence of Lea's dishonest methods prior to the currency of this bond, it is not sought to hold the appellee responsible. For the two years preceding May 1, 1900, a bond with a different surety had been in force, and during that term of two years it is shown that Connor & Brady had increased their overdraft by about $21,000, and for that loss a claim was made against the surety company responsible. This suit is for the loss incurred through the continuance of Lea's dishonest practices during the currency of the bond made by the National Surety Company.

The contention is that, through false entries made after May 1, 1900, the credit balance of Connor & Brady was fraudulently increased to the extent of $3,384.71, and that for this amount the surety company is liable. Lea neither received nor paid out a dollar of the bank's money. He was only a bookkeeper, and his dishonesty consisted only in so falsifying the account of Connor & Brady as to enable that firm to overdraw its account. The mere fact that Lea fraudulently increased the balance in favor of Connor & Brady by any of the methods described is not enough to fasten responsibility upon his surety. The bond is to indemnify the bank against any 'loss' through his dishonesty. It follows, therefore, that unless Connor & Brady, through Lea's fraudulent practices, did draw out more money by check than they deposited, no loss would be shown. Now the plaintiff says that this is just what did occur, and that Connor & Brady did draw out $3,384.71 more than they deposited. And so it is shown that between May 1, 1900, and July 16, 1900, the checks drawn by Connor & Brady and paid by the bank exceeded their deposits by $3,384.71. If the account had then been closed and Connor & Brady did not make this overdraft good, a case of a 'loss' under the bond would be made out. But the defendant says the account was not then closed, and that Connor & Brady continued to make deposits and draw checks, and that by August 6, 1900, their aggregate deposits after May 1, 1900, had exceeded their checks by more than $500, and that, when the account was finally closed by the bankruptcy in November of 1900, their excess of deposits over checks was more than $10,000, and that the bank did not, after the bond went into effect, sustain any loss by reason of Lea's practices.

During what period of this time was the bond operative as an indemnity? The term contracted for was one entire year. But it was evidently subject to termination by the discontinuance of Lea's services, for in that event there would be no one upon which it could operate. On July 16, 1900, Lea was given a two-weeks vacation, in pursuance of a general custom of the bank, during which his salary went on. He was due to return August 1st. He did not return then or at any other time. Whether his vacation was extended does not appear. No reason for suspecting his books was entertained when he went away, and the testimony of Mr. Watts, the cashier of the bank, was that between August 8 and 12, 1900, it was ascertained that his books 'were out of balance with the general ledger, and thereupon an expert was put upon the books to ascertain whether or not this information was the result of fraud and dishonesty upon the part of Lea. ' That the bank did not regard Lea as out of its service prior to this discovery is clear, for as late as August 17th the cashier wrote to the surety company, saying, among other things:

'Mr. Lea left our offices recently to take his vacation under custom recently adopted and has not yet returned. There is a chance for his accounts to be irregular and we are now beginning an investigation.'

He was absent on leave, and with salary, up to August 1, 1900. Manifestly his employment continued up to that date. The account exhibited shows that up to July 26th there was a gain in deposits over checks paid of $1,767.75, and the cashier testifies that by August 6th the deposits exceeded checks by more than $500. There was no suspicion as to the correctness of Lea's books before August 8th, and no reason for regarding his employment as ended until his absence beyond his leave was explained by discovery of his frauds. We therefore conclude, as an inference of law and fact, that his employment did not terminate prior to the discovery of facts casting suspicion upon his books. The bond was therefore in force at least up to August 6, 1900, at which date the deposits during its currency exceeded checks drawn and paid during same period.

Now, if we are to segregate the account of Connor & Brady during that period beginning May 1, and ending August 6, 1900, no loss resulted from Lea's fraudulent entries, because the deposits during that time exceeded checks drawn against the account. But the bank contends that the account of Connor &amp Brady shows that on July 16, 1900, it was overdrawn $3,384.71, and that this overdraft was made possible only by the concealed fraudulent posting of their account by Lea, and that at that date the bank had actually sustained the loss for which it now sues, and that the deposits made after July 16, 1900, should be applied as payments upon the oldest items of overdraft, and not in satisfaction of...