Hack v. American Surety Co. of New York
| Citation | 96 F.2d 939 |
| Decision Date | 01 June 1938 |
| Docket Number | No. 6260.,6260. |
| Parties | HACK v. AMERICAN SURETY CO. OF NEW YORK. |
| Court | United States Courts of Appeals. United States Court of Appeals (7th Circuit) |
Burke G. Slaymaker and Hugh E. Reynolds, both of Indianapolis, Ind. (Slaymaker, Merrell & Locke, of Indianapolis, Ind., of counsel), for appellant.
Miller, Miller & Bredell, of Indianapolis, Ind. (Samuel D. Miller, Sidney S. Miller, and Harold H. Bredell, all of Indianapolis, Ind., of counsel), for appellee.
White, Wright & Boleman, of Indianapolis, Ind., amicus curiæ for New Amsterdam Casualty Co.
Kane, Blain & Hollowell, of Indianapolis, Ind., amicus curiæ for Fidelity & Deposit Co. of Maryland.
A. J. Rucker, Frank Symmes, and Fae Patrick, all of Indianapolis, Ind., amicus curiæ for Asa G. Smith, receiver.
Before EVANS, SPARKS, and MAJOR, Circuit Judges.
Judgment was entered in the District Court for $120,917.94, upon two "Bankers' Blanket Bonds" issued by defendant surety company to cover losses through fraud and misfeasance perpetrated by the bank's officers.
The defendant surety company, in October, 1922, issued two bonds to the bank, each for the face amount of $25,000, one primary, and one to cover excess loss. They were thereafter renewed annually, and expired in October, 1926. The bank, of which plaintiff was appointed successor receiver on March 1, 1933, closed in October, 1930. The losses arose by reason of various fraudulent and irregular practices of the bank's president and secretary. This action on the bonds was begun, June 12, 1933, in the Indiana Circuit Court and removed to the Federal court. A jury trial was waived, and the court, because of the complexity of the issues, on its own motion referred the cause to a common law auditor, who, after hearing the evidence, made findings in favor of the plaintiff. The District Court also made special findings of fact and conclusions of law, upon which it predicated its judgment. The judgment was determined on the theory that the liability under the bonds was cumulative, that is, a new liability arose, for each successive year. It may be itemized as follows:
Primary Excess
Bond Bond
1922-23 ........ _______ _______
1923-24 ........ $24,480 _______
1924-25 ........ 25,000 $25,000
1925-26 ........ 25,000 _______ ___________
$ 99,480
6% interest 21,437.94
___________
$120,917.94
An Indiana statute, section 3948, Burns' Ann.St.1926, requires bank officers to be bonded, and it is over the interpretation of this section and especially its proviso, that the sharply-controverted issue on this appeal arises. The section reads:
"No president, vice-president, treasurer, or secretary, or other active officer of such company, shall enter upon the discharge of his duties until he shall have executed a bond to the company, conditioned for the honest and faithful discharge of his duties, in such sum and with such surety or sureties as may be approved by the board of directors, nor until such bond, so approved, has been filed in the office of and approved by the bank commissioner of the State of Indiana; Provided, however, such individual bond shall not be required of any such officer if a blanket bond covering all the active officers and employees of such company, in an amount and with a surety or sureties approved by the board of directors, shall have been filed in the office of and approved by said bank commissioner * * *."
The bond is set forth in the margin.1
The Facts: This controversy primarily concerns legal issues, and it is unnecessary to describe in detail the many intricate fraudulent manipulations of the bank's officers, J. Edward Morris and Mark Rinehart, which resulted in the losses for which plaintiff seeks to hold defendant. An understanding of the situation may be had if we first chronologically state the more important facts:
Bank organized ................... March 8, 1912
J. Edward Morris, President
and director from .............. 1918-1930
Bonds Nos. 799398-A and '9-A
executed October 26, 1922 and
renewed in 1923, 1924, and 1925
expiring ....................... October, 1926
Mark V. Rinehart, secretary
and director ................... 1922-1930
Special and regular dividends
of $24,000 paid out from ....... December 24, 1923 to
July 1, 1926
Morris took $70,000 through
mortgages ....................... 1924-1925.
Check for $5,000, of which Morris
took proceeds ................... 1925.
Bonds terminated .................. October 26, 1926.
Bank closed by Bank Commissioner
................................. October 27, 1930.
J. Edward Morris died ............. March 27, 1931.
Hack, plaintiff, appointed receiver
................................. March 1, 1933.
This action filed in state court .. June 12, 1933.
Judgment for $120,917.94 .......... Jan. 15, 1937.
The facts, though not unusual, are not pleasing. Two unprincipled men so beguiled the bank's directors into the belief that they were the embodiment of integrity, that the directors neglected for over a decade to independently investigate the bank's affairs, but implicitly relied on these officials' statements and approved all their recommendations. The unscrupulous officers were thereby enabled through the subterfuge of controlled corporations to filch a very large amount of the bank's assets. Morris was president of five such companies, and Rinehart controlled two others, as well as being a participant in Morris' companies.
This case has been thoroughly briefed by both sides, and outsiders have filed briefs as amici curiæ. Defendant has raised many interesting questions. The importance of the legal issues here propounded is such that they deserve specific enumeration.
(1) Were defendant's "blanket bonds" "statutory bonds"? Are they "official" bonds subject to rules of construction applicable to such bonds?
(2) If "statutory" bonds, does the fact that they are in the Indiana statute specifically covered in the proviso, free them from conditions heretofore held by the Indiana Supreme Court to inhere in statutory bonds; namely, inhibition against imposing periods of limitation of liability, etc.?
(3) What period of limitation is applicable? (a) The one year limitation provided for by the policy? (b) The three year limitation of statute applicable to foreign corporations? (c) The five year limitation on public officers' bonds? (d) The ten year limitation provided by Indiana statute for suits on contract?
(4) When does the period of limitation begin to run? From the date of the fraudulent act, the date of discovery or when the misdeeds should have been discovered, or the date when the defrauding officer terminated his office?
(5) Is a fidelity surety released from liability because of insured's execution of covenants not to sue, with bank's directors?
(6) Did surety have right of subrogation, and if so was it released from liability if such right of subrogation were lost by plaintiff's covenants not to sue?
(7) How is amount of the loss, if any, to be determined? Shall entire amount of subject matter of fraudulent transactions be recovered? At what date should loss be measured, and should solvency of third party be considered?
(8) Are the bonds to be treated as annually cumulative in coverage or only for $25,000 per policy no matter how many years they were in force?
(9) Does interest run from date of misappropriation? from date of demand? of institution of suit? or from date of judgment?
The importance of holding the bonds statutory and official bonds is apparent. If statutory and official bonds, we must exclude those express provisions, unconsonant with the statute and include the statutory provisions which have been omitted by the parties.
We conclude that the bonds here involved are statutory and official bonds. We so conclude for the following reasons:
(a) The Supreme Court of the State of Indiana in the case of United States Fidelity & Guaranty Co. v. Poetker. 180 Ind. 255, 102 N.E. 372, L.R.A.1917B, 984, so construed the bond of a bank cashier. The Indiana statute is involved, and the construction of the Indiana statute by the Indiana Supreme Court is of controlling weight with us. McGuire v. Sherwin-Williams Co., 7 Cir., 87 F.2d 112; Andris v. Du Pont Cellophane Co., 7 Cir., 93 F.2d 421. See, also, Boseman v. Conn. Gen. Life Ins. Co., 301 U.S. 196, 57 S.Ct. 686, 81 L.Ed. 1036, 110 A.L.R. 732.
(b) The statute required a bond to be given and these were the only bonds procured. The statute provided for approval by the board of directors and filing with the State Bank Commissioner. These bonds were approved and were filed (at least the renewals) with the Bank Commissioner. The statute required the bond to cover "honest and faithful" discharge of duties; the bonds covered "dishonest" acts. These facts indicate an intention to take a course pursuant to that prescribed by the statute.
United States Fidelity & Guaranty Co. v. Poetker, 1913, 180 Ind. 255, 102 N.E. 372, 373, L.R.A.1917B, 984, involved a suit by a bank receiver upon a surety bond for breaches of the bond committed by the bank's cashier. Judgment was rendered for the full penalty of the bond ($25,000), with interest (from date of demand). This was not a blanket bond. The bond provided for notice of discovery of acts upon which loss was claimed within a certain period of time, and provided that no suit be brought after twelve months from the date of discovery of the loss. The bond had numerous other provisions which qualified and avoided liability. This bond was approved by the directors and filed with the state. It was renewed three times.
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