Indemnity Ins. Co. of North America v. Holiway

• Decision Date: 15 October 1936
• Docket Number: 8 Div. 735
• Citation: 170 So. 329,233 Ala. 100
• Parties: INDEMNITY INS. CO. OF NORTH AMERICA v. HOLIWAY.
• Court: Alabama Supreme Court

170 So. 329

233 Ala. 100

INDEMNITY INS. CO. OF NORTH AMERICA v. HOLIWAY.

8 Div. 735

Supreme Court of Alabama

October 15, 1936

Appeal from Circuit Court, Lauderdale County; C.P. Almon, Judge.

Action on bond by Ethel Holiway against the Indemnity Insurance Company of North America. From a judgment for plaintiff defendant appeals.

Reversed and remanded.

Jones &amp Poellnitz, of Florence, and W.H. Sadler, Jr., of Birmingham for appellant.

L.R. Timberlake, of Florence, for appellee.

FOSTER Justice.

This is an action at law tried by the court without a jury upon the basis of a fidelity bond or insurance contract. It is dated February 3, 1927, and recites that plaintiff has intrusted to one J.R. McGarry the sum of $18,000 to be invested, and the proceeds paid to plaintiff. The contract or bond was conditioned to indemnify and hold plaintiff harmless from any loss she might sustain by reason of the acts of McGarry, amounting to larceny or embezzlement.

The pleas were in short by consent of any matter shown by the evidence.

The evidence was that prior to the execution of the bond plaintiff had placed in the possession of McGarry sums aggregating an amount near $18,000, and not much thereafter. He made annual statements to her beginning in 1926, showing the amount of each investment. They were all in evidence except those for 1929, 1930, and 1931; the last was dated February, 1932. This suit was begun by service October 4, 1933.

Plaintiff gave McGarry instructions to loan the money on real estate mortgages not exceeding 50 per cent. of its value. McGarry was an officer of the Alabama Trust & Savings Bank, and he did not testify in the case.

Counsel in argument do not claim any act of larceny by McGarry, but several acts of embezzlement. The court found that the amount so embezzled exceeded $18,000, the maximum amount of liability on the bond, and rendered judgment for that amount.

The bond is limited to acts of larceny and embezzlement, so that the only issue is whether he embezzled plaintiff's funds. The bond was continued in effect by the payment of annual premiums until McGarry ceased his operations for plaintiff. As applied to private business transactions and the facts of this suit, the situation is probably controlled by sections 3960 and 3966, Code, relating to the embezzlement of private funds. The gravamen of the offense is that a person shall rightfully come into possession of personal property as agent, trustee, etc., and shall fraudulently convert it to his own use (now also to the use of another--section 3960, Code), or fraudulently secrete it with intent to convert it to his own use or the use of another. Knight v. State, 152 Ala. 56, 44 So. 585; Pullam v. State, 78 Ala. 31, 56 Am.Rep. 21.

The term "embezzlement" has a technical meaning. It involves two elements; a breach of duty or trust in respect to property in his rightful possession, and the wrongful and fraudulent appropriation to his own use. The essence of the offense is the intent with which the act is done. That intent may be inferred from the doing of wrongful acts which will naturally and ordinarily produce loss, and that he has knowledge of the facts from which such loss will probably result. Reeves v. State, 95 Ala. 31, 41, 42, 11 So. 158.

Loans may be made contrary to legal duty without subjecting the person making them to a charge of embezzlement. But the statute "may be violated by fraudulent transactions under the guise of loans. *** The distinction is between the making of mere irregular, unsafe, or reckless loans of the bank's money, which would amount to maladministration only, and pretended loans made in bad faith, *** and with fraudulent intent, and pretended borrower being an officer, agent, clerk, or servant, having control and custody of money of the bank by virtue of his office or employment, which control and custody is shared by those making the pretended fraudulent loan, and who participate in the fraudulent purpose of the pretended borrower." "A transaction such as is herein above referred to would not be a loan in any sense of the law; it would be a fraud, and such fraud may be accompanied by facts and circumstances which would constitute it embezzlement or a fraudulent conversion to the use of the accused, within the meaning of the statute." Reeves v. State, supra, 95 Ala. 31, at page 44, 11 So. 158, 163.

To be a violation of the statute applicable, except for the conversion of public funds, there must be a fraudulent conversion, either to the use of accused or another. Section 3960, Code; Cephus v. State, 16 Ala.App. 499, 79 So. 197. Since fraud is a mental attitude, proof of it takes a wide range. Fraud may be inferred and its inference is justified when one knowingly does an act which will probably result in injury to another. This has been applied to various situations, as when such a person buys goods in the course of a mercantile business without disclosing his financial condition. 24 Alabama & Southern Digest, 293, Sales, k 45; 11 Michie Digest, 639.

When a trustee, agent, or bank officer lends money, in trust with him or his bank, to another, such a loan does not constitute embezzlement or a fraudulent conversion of that money to the use of such borrower, if it was a bona fide loan, as distinguished from one which is pretended, as when the borrower had no reasonable expectation or intention of repaying it and the trustee knew, or is charged in fact with knowledge, that such was the status of the borrower. That is a fraudulent conversion under the guise of a loan. And so, when such trustee converts the trust money to his own use, there must be a fraudulent intent. This rule has been changed as respects certain public funds. Section 3961, Code; McGilvary v. State, 228 Ala. 553, 154 So. 601; Garner v. State, 229 Ala. 600, 158 So. 546; Ex parte Cowart, 201 Ala. 525, 78 So. 879; Id., 201 Ala. 55, 77 So. 349. In this respect, as in all others, the question of intent is one of inference to be drawn from all the circumstances which include a wide range.

A loan made by a trustee to himself is a conversion. It is embezzlement if, when made, the trustee had no reasonable expectation of being able to pay it or without adequate security, or if a repayment was dependent upon some uncertain contingency.

In this case the evidence was very meager. Much light could be thrown on the various transactions by more detail. This would include the solvency of the borrowers, as then known to themselves and to McGarry; values of pledged property; the prospects of quick sales to meet the loans; local economic and business conditions (such as were nation wide are judicially known); the personal character and integrity of the borrowers, as well as the purpose and details of the loans, all as known to McGarry. The courts will not presume fraud, nor infer it, merely because the loans were "irregular, unsafe, or reckless." Reeves v. State, supra. But those are material factors to be considered when others exist to determine whether fraud should be inferred.

But, when the trustee himself uses the money contrary to the instructions of the owner, by pretending to make a loan to himself, or for his own benefit, when he is insolvent or has no reasonable expectation of being able to repay it, or it is dependent upon the result of speculation or chance, or without adequate security, the jury or court trying without a jury may properly infer a fraudulent intent.

But in our Reeves Case, supra, 95 Ala. 31, at page 45, 11 So. 158 it was held that, if Reeves, an officer of the bank, made a loan of bank funds to himself, the other officers...