National Surety Co. v. Massachusetts Bonding & Ins. Co.

• Decision Date: 02 May 1927
• Docket Number: No. 216.,216.
• Citation: 19 F.2d 448
• Parties: NATIONAL SURETY CO. v. MASSACHUSETTS BONDING & INS. CO.
• Court: U.S. Court of Appeals — Second Circuit

19 F.2d 448 (1927)

NATIONAL SURETY CO. v. MASSACHUSETTS BONDING & INS. CO.

No. 216.

Circuit Court of Appeals, Second Circuit.

May 2, 1927.

Louis Marshall and James Marshall, both of New York City, for plaintiff in error.

Wellman, Smyth & Scofield, of New York City (Herbert C. Smyth and Roderic Wellman, both of New York City, of counsel), for defendant in error.

Before HOUGH, MANTON, and SWAN, Circuit Judges.

MANTON, Circuit Judge.

In November, 1910, one Allen was duly elected treasurer of the state of Idaho. The plaintiff below (hereinafter called National) executed and delivered Allen's official bond in the penal sum of $200,000, payable to the state of Idaho, the condition of the bond being, inter alia, that Allen should "pay over in accordance with the requirements of the statutes of the state of Idaho all moneys that may come into his hands by virtue of said office, and shall deliver to his successor in said office all writs, papers, books, records and other things pertaining to his said office which may be by law required to be so turned over."

Allen assumed office in January, 1911, and in the following month the defendant below (hereinafter called Massachusetts) executed and delivered to National what is called an "agreement" of reinsurance, wherein for a consideration named and paid it agreed "to pay to National upon demand the proportion of the whole loss sustained by National that the amount of the reinsurance applied for and granted bears to the total amount of the bond executed by the National in respect of Allen, including any sum or sums which National shall become liable to pay, * * * and also a like proportion of all expenses, costs, and counsel fees incurred by National in investigating, settling, or resisting any claim made and in defending, or attempting to defend any action brought against National, * * * and whenever National shall receive information of a derogatory nature affecting the risk insured or of a possible claim or claims prompting a special investigation, Massachusetts shall upon demand pay a like proportion of whatever costs or expenses shall be incurred by National in making such investigation and taking such steps as it may deem necessary to secure information or to prevent or check a loss or losses under said bond" respecting Allen as treasurer.

This agreement provided that Massachusetts should be "entitled to share with National in the proportion which the amount of the reinsurance bears to the amount of the bond and any and all rights, recourses, and benefits both as against the obligee Idaho in whose favor said bond was executed by the National and principal in behalf of whom said bond was executed, and any other person or persons, corporation or corporations, arising by operation of law or out of the provisions, reservation, and conditions of the said bond."

The agreement also provided that it was "understood that Massachusetts shall be liable in every detail that National is liable."

Allen served his two-year term of office as treasurer, and was re-elected in the fall of 1912, and in December of that year National again became surety on Allen's official bond, which was similar in language and amount to the instrument of 1910.

Allen had appointed as deputy state treasurer one Coleman, and shortly after National gave its bond in favor of Allen it executed and delivered in December, 1912, to the state of Idaho, another and different bond in the penal sum of $25,000, whereby it became surety for Coleman's good conduct as deputy treasurer in the same words as had been used in respect of Allen as treasurer. No reinsurance was ever procured in respect of this bond for Coleman.

National's second bond in favor of Allen became effective in January, 1913, when he took office for his second term, but not until June 4, 1913, did Massachusetts execute and deliver a second reinsurance agreement.

The language of this agreement is not identical with that of the earlier reinsurance agreement, but it was a part of the agreement "that Massachusetts shall be entitled to share with National in the proportion which the amount of the reinsurance bears to the amount of the bond in any and all collateral or indemnity held by National in connection with said bond and in any and all rights, recourses and benefits accruing to National in connection with the said bond."

It was also provided "that if National can procure a valid release from said bond either under the terms and conditions thereof or under the law, then National shall upon receipt of written notice from Massachusetts proceed to procure its release from said bond, and in the event of the failure or refusal of National so to do within fifteen days after the receipt of such notice, then the liability of Massachusetts hereunder shall immediately cease as to any and all future liability accruing to National."

The delay in executing the second reinsurance agreement was due to correspondence between the parties to this suit regarding what was called in Idaho "depository liability." This meant that the state's money was deposited in divers state banks, but each bank having such deposits was required to give bond to the state securing the same. Massachusetts desired assurances from National that this "depository liability" was "satisfactorily covered," and on May 21, 1913, National wrote that it was so advised, but was not "as yet in a position to furnish * * * documentary evidence to that effect."

In May, 1913, one Ensign was an official of National resident in Idaho, and he, on May 20, 1913, furnished information in writing to National as to the nature of the depository liability of the Idaho banks. This information of Ensign was subsequently proven to be erroneous; that is, some of the bonds of chartered companies were in process of cancellation, and the personal sureties were not, as Ensign said they were "O. K." But there is no proof nor finding to the effect that Ensign was not furnishing the best information he could get, or that he was in any way faithless as an employee or officer of National.

This report of Ensign was sent to Massachusetts by National on November 3, 1913, but in the meantime, and on or about June 2d of that year, Massachusetts had written to National that it was "agreeable to us to execute the reinsurance agreement on your assurance that the depository feature is properly covered, and we will receive detailed information to that effect as soon as you are in a position to furnish it."

Apparently by the same mail the second reinsurance agreement went forward. In March, 1914, a representative of National went to Idaho, investigated the treasurer's office as best he could, and reported in substance that Allen was looked upon as honest, but that Coleman was probably thoroughly bad, but of such political influence that it was "dangerous to leave him in, and it is dangerous to put him out, and the danger of one offsets the danger of the other. I am inclined to think that he is too smart to actually steal." This report, or the substance of it, was not communicated to Massachusetts by National.

The crash came in October, 1914. Allen resigned as state treasurer, was indicted for peculation, pleaded guilty, and was duly sentenced. Coleman seems to have admitted peculations of his own to the extent of $22,000, and also seems to have escaped prosecution.

Among the methods of covering up the wrongdoing of Allen was that of maintaining in the Idaho Trust & Savings Bank what was called by some of the witnesses a "bogus deposit," which at periods of examination could be and was made to serve as representing cash on deposit with that bank and belonging to the state. Shortly after Allen had been indicted, it was shown that in the opinion of National's assistant general solicitor this bank was legally liable to the state treasurer, and therefore to the state, to the extent of the alleged "bogus deposit," viz. $62,000.

The state of Idaho, however, did not, so far as this record shows, pursue anybody except National as surety on Allen's bond. It brought no suit on Coleman's bond, but on the Allen bond recovered judgment against National in 1916, which judgment, for $147,361.02, National paid in September, 1916.

But before this, and in December, 1914, National had substantially admitted its liability on Allen's bond, and had accepted from the Idaho Trust & Savings Bank the sum of $22,000 in settlement and satisfaction of any claim which it, as a paying surety, might ultimately have against this bank.

After having paid the Idaho judgment, the National demanded payment from its reinsurer in the amount agreed on, viz. one-eighth of what National had been obliged to pay. Payment was refused, and this action brought, in which National agreed that it must account for the $22,000 obtained from the Idaho Trust & Savings Bank.

The court below held in substance that National was entitled to recover along the lines of its demand, but that it must also make contribution to or for its reinsurer on account of the Coleman bond, and as if a third party had been surety upon that bond, and National by subrogation had recovered $22,000, upon it.

We now consider the defenses. By paying the judgment obtained against it by the state, the National became subrogated to any cause of action existing in behalf of the state against the Idaho Trust & Savings Bank. The Massachusetts argues that, because a settlement was made with the Idaho for a sum less than the amount that might have been recovered against it (Idaho), the National is accountable for the utmost amount that might have been recovered, but for such settlement.

The action is upon two reinsurance agreements. In the second, the Massachusetts agreed to pay immediately to the reinsured one-eighth of any sum or sums which the insured became liable to pay under the bond for defaults occurring during the terms mentioned therein, and it contained the same provisions as to...