General Reinsurance Corporation v. Southern Surety Co.

• Decision Date: 14 June 1928
• Docket Number: 7696.,No. 7692-7694,7692-7694
• Citation: 27 F.2d 265
• Parties: GENERAL REINSURANCE CORPORATION v. SOUTHERN SURETY CO. OF DES MOINES, IOWA, and three other cases.
• Court: U.S. Court of Appeals — Eighth Circuit

27 F.2d 265 (1928)

GENERAL REINSURANCE CORPORATION v. SOUTHERN SURETY CO. OF DES MOINES, IOWA, and three other cases.

Nos. 7692-7694, 7696.

Circuit Court of Appeals, Eighth Circuit.

June 14, 1928.

Eugene D. Perry and Fred A. Little, both of Des Moines, Iowa (George H. Peaks, of Chicago, Ill., and Harley H. Stipp, Robert J. Bannister, and Vincent Starzinger, all of Des Moines, Iowa, on the brief), for plaintiff in error General Reinsurance Corporation.

Eugene D. Perry and Fred A. Little, both of Des Moines, Iowa (Frank J. Comfort, Harley H. Stipp, Robert J. Bannister, and Vincent Starzinger, all of Des Moines, Iowa, on the brief), for plaintiff in error Massachusetts Bonding & Ins. Co.

Eugene D. Perry and Fred A. Little, both of Des Moines, Iowa (Harley H. Stipp, Robert J. Bannister, and Vincent Starzinger, all of Des Moines, Iowa, on the brief), for plaintiffs in error Fidelity & Casualty Co. and Independence Indemnity Co. of Philadelphia.

J. L. Parrish and James C. Davis, both of Des Moines, Iowa, for defendant in error.

Before WALTER H. SANBORN and BOOTH, Circuit Judges, and MILLER, District Judge.

BOOTH, Circuit Judge.

There are here four writs of error to four judgments entered against the four plaintiffs in error, defendants below, respectively, upon verdicts directed by the trial court in favor of defendant in error, plaintiff below. Three of the cases were consolidated for trial; the fourth one, against the Independence Indemnity Company of Philadelphia, was tried separately. The four cases were originally commenced in the state district court of Polk county, Iowa, and were removed to the United States District Court for the Southern District of Iowa on the ground of diversity of citizenship and requisite amount involved. The questions involved in each of the cases are largely the same.

In the case against the Independence Indemnity Company, the Southern Surety Company in its complaint alleged that on February 25, 1924, the Carnegie Trust Company of Carnegie, Pa., hereafter called the Trust Company, as principal, and the Southern Surety Company, as surety, executed and delivered to the county of Allegheny, Pennsylvania, a depository bond in the penal sum of $1,100,000; that a copy of the bond attached to the complaint recited that the Trust Company had been selected as a depository of the county fund of said county for the term of the present county treasurer of said county beginning on the first Monday of January, 1924; that it had entered into an agreement with the county for the faithful performance of its duties as such depository, and for the payment of certain interest on daily balances. The bond was conditioned as follows:

"Now the condition of this obligation is such, that, if the said principal shall well, honestly, and faithfully keep, pay out, and account for all the county's funds and property of said county that may come into its hands, and make payments of all interest on moneys deposited in such depositories in accordance with said contract, then this obligation to be void; otherwise, to be and remain in full force and virtue."

The complaint further alleged that on or about the 25th of April, 1925, the trust company became insolvent and suspended business, and was taken charge of by the commissioner of banking of the state of Pennsylvania; that on that date there was due to the county from the trust company the sum of $1,329,107.35. The complaint further alleged that on or about February 26, 1924, the defendant had by contract duly executed, reinsured plaintiff against a certain "proportion of any sum which plaintiff might be required to pay by reason of the execution, as surety for the Carnegie Trust Company, of the bond referred to." In the reinsurance contract was the following provision:

"3. The amount of liability retained by the reinsured at its own risk on principal while this agreement remains in force shall in no event be less than one hundred fifty thousand and 00/100 (150,000) dollars ($150,000.00)."

The complaint further alleged that demand had been made by the county of Allegheny upon plaintiff for payment in accordance with the terms of said bond; that plaintiff had determined that it was liable under said bond and had notified defendant to that effect, and also had given notice to defendant that it intended to make payment on said bond by a named date, and had requested defendant to pay its share of the loss, but that defendant had refused to pay the same. The complaint further alleged that plaintiff had paid upon said bond $1,099,244.65, and it set out the amount claimed to be defendant's share of the loss, for which amount it demanded judgment.

The answer of the defendant admitted the execution of the bond as surety by the surety company, the insolvency of the trust company, and the execution of the reinsurance contract. The answer alleged that the Surety Company had not performed the condition of the reinsurance contract relative to its retaining $150,000 of risk on the principal. The answer further alleged that several years prior to the signing of the bond John A. Bell, president of the trust company, and H. M. Kephart, the state treasurer of Pennsylvania, had entered into a conspiracy to manipulate the public funds for their own personal benefit; that it was part of said scheme to cause false and fraudulent entries to be made upon the books of the trust company, with which company large amounts of the state funds were deposited; that by this means Bell was enabled to, and did, fraudulently use money belonging to the state for his own personal transactions, at least temporarily; that all these facts were known to the surety company at the time of the making of the reinsurance contract, were unknown to defendant, and were fraudulently and intentionally concealed from defendant by plaintiff; that said facts were material to the risk. The answer further alleged that because of such fraud defendant had elected to rescind the reinsurance contract.

The reply denied the allegations of new matter contained in the answer. On the trial, at the close of all the evidence the court granted the motion of plaintiff and directed a verdict in its favor. No question is raised as to the amount of the verdict, if any recovery was warranted on the record made.

The Facts.

There was evidence tending to establish the following facts:

The Carnegie Trust Company of Carnegie, Pa., was a banking and trust company organized under the laws of the state of Pennsylvania, and operating under the supervision of the banking department of that state, and at the time of the transactions in controversy it was apparently a prosperous and dividend-paying institution. About the 11th day of February, 1924, the trust company made a written application to the surety company for a depository bond in the sum of $1,400,000 in favor of Allegheny county. The application contained, among other things, a statement of the assets and liabilities of the trust company, showing total assets of $5,440,039.64, a capital of $225,000, and surplus and profits of $446,000. Subsequently the amount of the bond applied for was reduced to $1,100,000. The original application was delivered to W. J. Zwinggi, the district manager of the surety company at Pittsburgh. Along with the application was delivered a contract executed by John A. Bell, president of the trust company, agreeing to indemnify the surety company against loss by reason of executing the bond. The surety company being unable to carry so large a risk without reinsurance, Mr. Zwinggi proceeded to submit to other companies, among whom was the plaintiff in error, propositions of reinsurance, resulting in the reinsuring of said principal bond by the plaintiff in error in this cause in the sum of $100,000, and by the plaintiffs in error in the other causes in various amounts. April 25, 1925, the trust company failed; the surety company settled with the county, and called upon the various plaintiffs in error to contribute their proportionate share, which they refused to do. Whereupon the surety company brought suit.

Prior and up to January 1, 1924, the surety company was surety for the trust company as principal on the trust company's depository bond to the county in the sum of $1,400,000, of which amount all but $150,000 was reinsured in various companies. One of the reinsurers was the United States Guarantee Company of New York to the extent of $25,000. This bond expired January 1, 1924. Instead of discharging its liability under its bond and exonerating the surety company, the trust company elected to retain the money and continue as depository by giving a new bond. The surety company bond in the case at bar is the renewal thereof.

During the years 1918, 1919, and 1920 one H. M. Kephart was treasurer of the state of Pennsylvania, and during all of said time, as well as during the years 1921, 1922, 1923, and 1924, John A. Bell was president of the trust company, and during all of said time the trust company was a depository of public moneys belonging to said county. In 1922 a statutory hearing was had before the auditor general of the state at Harrisburg, Pa., relative to the misuse of state funds by said treasurer, H. M. Kephart, during the years 1918, 1919, 1920, and 1921, in which investigation Main & Co., certified public accountants, were employed to audit the books of the state treasurer, county treasurer, and of divers banks with whom Kephart had maintained relations, among which was the trust company. Main & Co. at the conclusion of its audit, about May 18, 1921, filed with the auditor general its partial report, and on May 19, 1922, its final supplemental report, with reference to said audit. To set out in hæc verba these reports would unduly extend this opinion. We think the conclusions will suffice.

"In Conclusion.

"The results of the practices referred to in this report may be briefly set forth as follows:

"(1) Certain funds, of...