Harrison v. Lumbermen & Mechanics' Ins. Co.

• Decision Date: 11 November 1879
• Citation: 8 Mo.App. 37
• Parties: EDWIN HARRISON, Respondent, v. LUMBERMEN AND MECHANICS' INSURANCE COMPANY, Appellant.
• Court: Missouri Court of Appeals

8 Mo.App. 37

EDWIN HARRISON, Respondent,

v.LUMBERMEN AND MECHANICS' INSURANCE COMPANY, Appellant.

St. Louis Court of Appeals, Missouri.

Nov. 11, 1879.

1. Where the relations of the obligee and the surety are such that the latter has a right to expect that all the material facts which directly affect his liability as surety will be disclosed by the former, the concealment of such facts, whatever the motive is a fraud upon the surety.

2. That the surety is a director of the corporation obligee does not imply any laches on his part in not inquiring as to the particular facts concealed, no ground for suspicion appearing.

3. The knowledge of the president is the knowledge of the corporation.

APPEAL from the St. Louis Circuit Court.

Affirmed.

OVERALL & JUDSON, for the appellant: It is not the duty of one receiving security from his employee or debtor to disclose to the surety every fact that materially increases the risk; his duty in such case is not analogous to that of assured to the underwriter.-- Hamilton v. Watson, 12 Cl. & Fin. 119; Insurance Co. v. Lloyd, 10 Exch. 523; Magee v. Insurance Co., 92 U. S. 93; Bank v. Stevens, 39 Me. 532; The State v. Atherton, 40 Mo. 209. Mere non-disclosure of past misconduct, known to the obligee and unknown to the surety, no inquiry being made by the surety, is not fraudulent in any sense.-- Ætna Ins. Co. v. Mabbett, 18 Wis. 667; Ham v. Greve, 34 Ind. 48; Etting v. Bank, 11 Wheat. 59; Roper v. Trustees, 9 Cent. L. J. 226; The State v. Dunn, 11 La. An. 549. The knowledge of the president was not sufficient to charge the corporation with fraudulent concealment.-- Wayne v. Bank, 52 Pa. St. 343. The defendant, being a director, was bound to know the facts alleged to have been fraudulently concealed from him.-- Bank v. Cooper, 39 Mo. 546; Bank v. Root, 2 Mass. 552.

CLINE, JAMISON & DAY, for the respondent: It was the duty of defendant to disclose to the surety every fact that materially increased his risk, or that was calculated to prevent a prudent man from undertaking the obligation.--1 Story's Eq. Jur. 219, sect. 215; Pidcock v. Bishop, 3 Barn. & Cress. 605; Owen v. Homan, 3 Eng. Law. & Eq. 121; 4 H. L. Cas. 997; Squire v. Whitton, 1 H. L. Cas. 333; Railton v. Matthews, 10 Cl. & Fin. 935; Hamilton v. Watson, 12 Cl. & Fin. 119; North British Ins. Co. v. Lloyd, 28 Eng. Law & Eq. 456; 10 Exch. 523; Evans v. Keeland, 9 Ala. 42. Leith Banking Co. v. Bell, 8 Show. & D. 721; Crew's Case, 7 De G. M. & G. 43. When a party, knowing himself to be cheated by his clerk, requires security under such circumstances as to hold the clerk out to others as a trustworthy person, and another becomes his surety, acting under the impression that he is so considered by his employer, the contract of suretyship will be void.-- Mathley's Case (cited in 1 Dow. Parl. Cas. 249), 11 Wheat. 68, note d; Smith v. Bank, 1 Dow's Parl. Cas. 272; Etting v. Bank, 11 Wheat. 59; Bank v. Cooper, 36 Me. 195; Sooy v. The State, 39 N. J. L. 135.

HAYDEN, J., delivered the opinion of the court.

The case was referred, and the referee reported the material facts, in substance as follows: The plaintiff was a stockholder in the defendant company, and from 1872 until 1876, a director. One Bull had for several years before 1873 been secretary of the company, and as such he received the moneys of the company, which were also disbursed through him upon order of the proper officer. In the fall or early winter of 1873, Bull became a defaulter in his accounts with the company. Mr. Pritchard was at this time president of the company, and continued such until May, 1876. On the defalcation becoming known to Pritchard, he and the vice-president, for the company, accepted in satisfaction a note which was secured by a deed of trust given by the mother of Bull upon her real estate, which note was finally paid in 1877. Bull continued to act as secretary of the company until June, 1877, his conversion of the company's funds having been disclosed to no one or its officers except the president and vice-president.

The present suit is for the recovery of two dividends declared on capital stock; and in its answer the defendant set up that Bull was employed by the defendant as its secretary on May 6, 1876, and that in August, 1876, the plaintiff became a surety on the bond of Bull, conditioned for the future faithful discharge of his duties as secretary, and payment to the proper person of all moneys, etc. The answer then avers a breach of the bond in respect to the conversion and failure to pay moneys on the part of Bull. To this counter-claim the plea is, that the defendant fraudulently concealed from the plaintiff the first embezzlement, and that if the plaintiff had known of it he would not have signed the bond; and such the referee found to be the facts.

The defendant claims there was error in the referee's legal conclusion, which was confirmed by the court below, that the defendant's failure to give plaintiff notice of the first conversion of the funds of the company rendered the bond void as against the plaintiff, and discharged the latter. It is denied that the mere non-disclosure of past misconduct known to the obligee, but unknown to, and not inquired into by the surety, is fraudulent in any sense.

The rule in regard to the obligation of disclosure on the part of the creditor, or obligee, of facts affecting the risk of the surety, but unknown to him, is sometimes laid down, even in judicial opinions, in very unqualified terms. It is often taken for granted that no distinction exists between the non-disclosure of material facts by a creditor and by an insurer. See 1 Story's Eq. Jur., sects. 215, 216. But, as was observed in an English case decided by judges of high authority, the contract of insurance is peculiar, and rests largely on mercantile usage. North British Ins. Co. v. Lloyd, 10 Exch. 531. Still, the two contracts seem to have this in common: that intent to deceive by suppression of a material fact is not essential to the avoidance of the contract. But they are distinguished in this: that no element of trust or confidence reposed, necessarily or from the course of business, arises between creditor and surety,--the two, as often happens, dealing at arm's length. If the facts of the decided cases were considered, it will be found that they fall far short of sustaining the doctrine as it is often expressed. Though passages not infrequently occur in the books which apparently support the statement that the duty of the obligee is to disclose to the surety every fact that materially affects the latter's risk, or that is of a nature to prevent a prudent man from undertaking the obligation, such certainly is not the rule. On the other hand, the decided cases, both American and English, to which the defendant appeals as exploding the general rule which would be necessary to maintain the plaintiff's case, indicate only a refusal to accept such unqualified doctrine as the above. Franklin Bank v....