Hunter v. U.S. Fidelity & Guaranty Co.

• Decision Date: 13 June 1914
• Citation: 167 S.W. 692,129 Tenn. 572
• Parties: HUNTER ET AL. v. UNITED STATES FIDELITY & GUARANTY CO.
• Court: Tennessee Supreme Court

167 S.W. 692

129 Tenn. 572

HUNTER ET AL. v. UNITED STATES FIDELITY & GUARANTY CO.

Supreme Court of Tennessee.

June 13, 1914

Appeal from Chancery Court, Shelby County; J. P. Young, Judge.

Bill by James F. Hunter and others against the United States Fidelity & Guaranty Company. Decree for defendant, and complainants appeal. Reversed and remanded.

GREEN J.

This bill was brought by the receivers of the Bank of Collierville to recover from the defendant guaranty company $25,000, the penalty of a certain fidelity bond executed by the company to cover losses to the bank occasioned by reason of fraud or dishonesty of the bank's cashier, L. T. Ward.

The Bank of Collierville was placed in the hands of a receiver as an insolvent institution, and the defalcation of Ward upon investigation turned out to be about $38,000. Premiums had been duly paid on this bond, notice was regularly given, and the facts concerning Ward's default are not in dispute. The controversy here arises upon certain language of the bond, the application therefor, and an employer's certificate, upon which a renewal of the bond was had. The case depends for decision upon a proper construction of the several instruments.

In April, 1904, the bond in question was issued by the guaranty company to the bank in the penalty stated, upon a written application of the employer in which certain representations were made respecting Ward and his employment.

Referring first to the material statements in the application for the bond, we find the following:

"11. To whom and how frequently will he account for his handlings of funds and securities?

A. Twice a year, our auditing committee.

12. (a) What means will you use to ascertain whether his accounts are correct?

A. Audit.

(b) How frequently will they be examined?

A. Twice a year."

In the face of the bond occurs this paragraph:

"Whereas the employer has heretofore delivered to the company certain representations and promises relative to the duties and accounts of the employé and other matters, it is hereby understood and agreed that those representations and such promises, and any subsequent representation or promise of the employer hereafter required by or lodged with the company, shall constitute part of the basis and consideration of the contract hereinafter expressed."

This bond, executed by the guaranty company, as aforesaid, was renewed each year from the date of its issuance, May 1, 1904 until May 1, 1912, inclusive. Each renewal was to cover a period of 12 months from date. Ward was first ascertained to be a defaulter in the fall of 1912.

The guaranty company tendered to the receivers and subsequently paid into court the amount of Ward's shortages ascertained to have occurred prior to May 1, 1910. The company, however, claimed to be released from liability for Ward's defaults after that date by reason of a certain certificate made by the bank to procure the 1910 renewal.

Prior to the 1910 renewal, Ward was advised by the general agent of the guaranty company that it would be necessary for him to procure what was called a "continuation certificate" from the bank before this bond would be renewed for the ensuing year. A certificate was sent to Ward to be executed by his employer. The bank did execute it through its president, J. M. Glenn, and, upon such execution and return of the certificate, the bond was continued for another year. This certificate was in the following language:

"This is to certify that the books and accounts of Mr. L. T. Ward were examined by us from time to time in the regular course of business, and we found them correct in every respect, all moneys or property in his control or custody being accounted for with proper securities and funds on hand to balance his accounts, and he is not now in default. He has performed his duties in an acceptable and satisfactory manner, and no change has occurred in the terms or conditions of his employment as specified by us when the bond was executed.

Dated Collierville, this 2d day of May, 1910.

Signature of employer:

Bank of Collierville,

By J. M. Glenn, Pres't [Official Capacity]."

In its answer to the bill of the receivers, the guaranty company admitted all the facts stated in the bill, but averred that this certificate sent to it for the 1910 renewal was a false representation of facts material to the risk; that Ward was in default at that time; and that it continued the bond for that year and subsequent years on the faith of this certificate, and was accordingly released from liability on account of the obligation it had thus been induced to assume.

A jury was demanded by the complainants, and certain issues framed by them were tendered for submission. These issues were:

"(1) Was the United States Fidelity & Guaranty Company induced to make the renewal of its bond, which renewal was dated April 1, 1910, by any substantial misrepresentation of facts, and which facts were material to the risk then assumed or continued by the United States Fidelity & Guaranty Company?

(2) Did the Bank of Collierville fail, through its officers and directors, to use ordinary diligence and prudence in making in its regular course of business its examinations of the books and accounts of Mr. L. T. Ward, its cashier?"

After hearing the proof, the chancellor declined to submit either of these issues to the jury, and submitted to the jury only one issue which was tendered by the defendant as follows:

"Did J. M. Glenn, as president of the Bank of Collierville, sign the original employer's certificate dated May 2, 1910?"

There being no controversy upon the latter issue, the chancellor directed the jury to answer it in the affirmative, and thereupon rendered a decree in favor of the defendant, from which the complainants have appealed to this court.

It is virtually conceded by the learned counsel for the defendant that the submission of the second issue tendered by complainants would have been proper had not the certificate contained the phrase, referring to Ward, "and he is not now in default."

Leaving out of consideration the phrase above quoted, this certificate is a statement that the books and accounts of Ward were examined in the regular course of business and found correct. The words "all moneys or property in his control or custody being accounted for with proper securities and funds on hand to balance his accounts" constitute a parenthetical clause, qualifying and explaining the language previously used. They indicate the manner in which the books and accounts were found correct.

A certificate that books and accounts have been examined and found correct by an examining committee of a bank is not to be taken as a warranty of the absolute verity of said books and accounts. Such a statement merely means that an examination has been made as represented, and that no errors or falsifications have been discovered.

The Supreme Court of the United States has lately considered, in a similar case, the effect of a certificate such as this, and disposes of the matter thus:

"Finally it is said that the greater part of the loss occurred during the currency of renewal bonds, and that each renewal was made upon a certificate by the employer, which stated that just prior thereto the books and accounts of the employé 'were examined and found correct in every respect and all moneys accounted for.' It is said that this statement was untrue inasmuch as, at the date of such renewals, the books and accounts were not correct and the cashier was short in his cash. But the certificate was not to be taken as a warranty of the correctness of the accounts. The statement is that his books and accounts had been examined and

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