First Nat. Bank v. U.S. Fidelity & Guaranty Co.

• Citation: 75 S.W. 1076,110 Tenn. 10
• Parties: FIRST NAT. BANK OF NASHVILLE v. UNITED STATES FIDELITY & GUARANTY CO.
• Decision Date: 06 July 1903
• Court: Supreme Court of Tennessee

75 S.W. 1076

110 Tenn. 10

FIRST NAT. BANK OF NASHVILLE v. UNITED STATES FIDELITY & GUARANTY CO.

Supreme Court of Tennessee.

July 6, 1903

Appeal from Chancery Court, Davidson County; H. H. Cook, Chancellor.

Suit by the First National Bank of Nashville against the United States Fidelity & Guaranty Company. From a decree for complainant, defendant appeals. Modified.

Boyd & McNeilly, for appellant.

Stokes & Stokes, for appellee.

McALISTER J.

This bill was preferred by complainant bank against the guaranty company to recover the penalty of a bond executed by the guaranty company to the bank as indemnity against all or any pecuniary loss sustained by the bank, occasioned by the fraud or dishonesty of one W. W. Lea, an individual bookkeeper in said bank, and occurring during the continuance of the bond or of any renewal thereof, and discovered during such continuance or renewal, or any time thereafter. The bond was in the penalty of $7,000, and covered any losses occurring between May 1, 1898, and May 1, 1899. This bond was renewed on the 4th of May, 1899, so as to guaranty the fidelity of said W. W. Lea in the sum of $7,000 from the 1st of May 1899, to May 1, 1900, subject to all the amounts and conditions set forth and expressed in the original bond. The Court of Chancery Appeals find that during the period from May 1, 1898, to May 1, 1899, and during the currency of the original bond, complainant bank sustained a pecuniary loss of $7,217.50, occasioned by the fraud and dishonesty of the said W. W. Lea while acting as individual bookkeeper for the bank and that during the currency of the renewal bond, from May 1 1899, to May 1, 1900, the bank sustained a pecuniary loss of $13,157.20. Proofs of loss were furnished the fidelity and guaranty company as required by the bond, but the defendant company declined to pay upon the following grounds set up in its answer, namely: First, that at the time the bond was executed and delivered by the defendant guaranty company to the bank, and as a condition precedent to the execution of the bond, the defendant sent the complainant bank, for proper execution, an employer's statement, in which, among other questions propounded to the bank, were the following, viz (1) Whether Mr. Lea's accounts had been audited, and, if so, when, and by whom; (2) whether all the accounts of his office were found in every respect correct; (3) whether he had been or was then in arrears, default, or with unsettled balance. The cashier of the bank replied to these questions, viz.: "When last examined or audited by complainant, on the 22d April, 1898, all the accounts of his office [referring to W. W. Lea] were found in every respect correct up to April 22, 1898." It is further averred in the answer that when the renewal bond was executed, May 4, 1899, a similar statement was made by the bank's cashier in reply to the defendant's question, viz.: "This is to certify that on the -- day of -- the books and accounts of Mr. Lea, in our employ as --, were examined by us, and we found them correct in every respect, and all moneys handled by him accounted for. He has performed his duties in an acceptable and satisfactory manner, and we know of no reason why the guaranty bond should not be continued." The answer then proceeds to aver that these statements were untrue and false, and that the defendant's officers and agents knew them to be untrue and false, or with the least diligence could have ascertained them to be untrue. It is then averred that, as a matter of fact, at the date of the execution of the first bond, and at the time said statement was made, to wit, on the 28th May, 1898, the defendant Lea was a defaulter to the complainant bank in a sum not less than $700, and that said defalcation had existed for a long time prior to May 1, 1898. It is further averred that at the time of the renewal of the bond on the 4th May, 1899, said Lea was a defaulter in a sum not less than $800, and that these facts were known to the bank, or by the exercise of ordinary diligence could have been known. The answer further avers that the statement made by the officers of the bank in respect of the correctness of the accounts of W. W. Lea were warranties to the defendant and inducements for making such bonds, and that said bonds were therefore void because of the breach of said warranties, and because of these untrue and false statements.

The Court of Chancery Appeals find that there is no controversy in respect of the execution of the bonds, and it is conceded that the premiums were paid. That court further finds there is no question as to the default of the defendant Lea. It also finds that Mr. Watts, cashier of the bank, in reply to questions asked by the guaranty company, made the following statement, viz.: "The replies of the applicant herein are, to the best of my knowledge and belief, correct. He has been in the service of the undersigned employer since March, 1875, filling positions of various --, and has continuously filled the position for which this bond is required since --, 18--. He has always, to the best of my knowledge and belief, given satisfaction in his personal conduct and performance of duties, and kept his accounts faithfully and without default. When last examined or audited by committee, on the 22d day of April, 1898, all the accounts of his office were found in every respect correct up to April 22, 1898. He has not been, nor is he at present, so far as I know or believe, in arrears, default, or with unsettled balance in this or any previous service. I know of nothing concerning his habits or antecedents affecting his title to confidence, and I know of no reason why the guaranty hereby applied for should not be granted." When the renewal bond was executed the cashier of the bank, in reply to questions submitted by the guaranty company, filled out the following statement, viz.: "The United States Fidelity and Guaranty Co.: This is to certify that on the -- day of --, 189-, the books and accounts of Mr. Lea, in our employ as --, were examined by us, and we found them correct in every respect, and all moneys handled by him accounted for. He has performed his duties in an acceptable and satisfactory manner, and we know of no reason why the guaranty bond should not be continued. His salary is now $1,300, and he is employed as bookkeeper."

The Court of Chancery Appeals find, as a matter of fact, that on the 1st of May, 1898, when the original bond was executed, Lea was a defaulter in excess of $480, $280 of which occurred in one account. When the renewal bond was executed, about the 1st of May, 1899, Lea was a defaulter to an amount aggregating about $800. The Court of Chancery Appeals further finds that the books and accounts of Lea had been examined by a committee of the directors on the 22d April, 1898, who reported in writing as follows, viz.: "On the 18th April, 1898, we, your examining committee, began, and continued until completed, an examination of the affairs of the bank. We find the cash in the hands of the receiving and paying tellers to agree with the amounts shown by the books; the time and demand loans, notes in attorney's hands, bills of exchange, and funds in transit, under charge of the assistant cashier, to balance with the general books. The general accounts balance. The individual accounts were checked and proved to be correct, as shown by the general ledger, except that the bookkeeper from A to K [referring to Lea] was out of balance about $400, and the bookkeeper from L to Z about $150. The committee thinks that these discrepancies will be found by the respective bookkeepers, as they were hurried in going over their books, that the committee might begin their work. We believe that the books are correctly kept, and that the affairs of the bank are in satisfactory condition." It appears that after the report was made Lea claimed that he had discovered an error of $400, which left the books within $21 of a balance.

Lea reported this to the committee, and satisfied them and the cashier, Mr. Watts, that his books were out of balance only $21. The Court of Chancery Appeals finds that when...