National Surety Company v. State ex rel. Rathburn

• Citation: 161 N.E. 832,90 Ind.App. 524
• Decision Date: 30 March 1928
• Docket Number: 12,813
• Parties: NATIONAL SURETY COMPANY v. STATE OF INDIANA, EX REL. RATHBURN
• Court: Indiana Appellate Court

161 N.E. 832

90 Ind.App. 524

NATIONAL SURETY COMPANY v. STATE OF INDIANA, EX REL. RATHBURN

No. 12,813

Court of Appeals of Indiana

March 30, 1928

Rehearing denied June 28, 1928.

Transfer denied December 20, 1929.

From Newton Circuit Court; L. D. Carey, Special Judge.

Action by the State of Indiana on the relation of one Rathburn as receiver of the Discount and Deposit State Bank of Kentland against Amos D. Morris, as principal, and the National Surety Company, as surety, on the bond of said Morris as cashier. From a judgment for the relator, the defendant surety company appealed.

Affirmed.

Moses B. Lairy, Frederick VanNuys, Edward E. Gates, George M Barnard, Julian C. Ralston and Raymond L. Walker, for appellant.

Donald Fraser, William H. Isham, William S. Isham, Charles H. Stuart, Allison E. Stuart and Dan W. Simms, for appellee.

MCMAHAN J. Dausman, J., absent.

OPINION

MCMAHAN, J.--

This is an action by appellee as receiver of the Discount and Deposit State Bank of Kentland against Amos D. Morris, as principal and the National Surety Company, as surety, to recover for a breach of the official bond of Morris as cashier of the bank. The cause was tried by the court. The court found the facts specially and stated its conclusions thereon, and judgment was rendered against both defendants for the full penalty of the bond, with interest because of delay. The amount of the judgment is $ 5,493.33.

The bank was organized under the laws of this state and did a general banking business. Appellant was the surety on the bond of Morris as cashier. The bond was executed January 16, 1917, for the period of one year, was renewed yearly, and was in full force during all the time covered by the finding of facts. The bond was given to secure the bank against such pecuniary loss as might be sustained through the failure of Morris to "honestly and faithfully" discharge his duties as cashier. The bond contains a number of conditions tending to limit and guard the liability of the surety, requiring the employer to give a certain notice by registered letter of any loss within 20 days after discovery of loss, requiring discovery of loss and filing of suit within six months after expiration of bond, and within six months of death, dismissal, or retirement of the employee, requiring itemized and verified statement of loss showing in detail the items of loss, showing amount of loss, dates of same, if known, date of discovery, etc. The 12th condition of the bond provides: "That the surety shall not be liable for any error of judgment or injudicious exercise of discretion on the part of the employee or for any loss which may be sustained by the employer by reason of any act done or left undone by following the customary course of business or usage of the employer, or in obedience to the direction, instruction, or authorization of the president, vice president, or other officer of the employer, or board of directors."

Warren T. McCray was president of the bank from December, 1915, to August 24, 1923, and, although he moved to Indianapolis with his family in January, 1921, he was a member of the board of directors of the bank and chairman of the committee of loans and discounts. During the time McCray was president and Morris cashier, the bank had in force a by-law providing that no officer or director should obtain any money from the bank upon his note without first procuring the written approval of at least three directors of the bank. In December, 1917, at a meeting when McCray and Morris were present, the board of directors adopted and spread of record a resolution which provided that the bank should not discount notes or bills of exchange for any one person or firm in excess of 20 per cent of the capital and surplus of the bank; that rediscounts for any one person or firm should not exceed 50 per cent of the capital of the bank. The capital of the bank was $ 70,000, and the surplus did not exceed $ 30,000. In July, 1922, McCray tendered to Morris for discount a note for $ 15,000, purporting to have been executed by the "Orchard Lake Stock Farm," which was a trade name adopted by McCray. This note was in fact the note of McCray. Morris at that time knew there was no such firm or corporation and knew that the note so tendered for discount was the note of McCray. Morris accepted such note, discounted the same, and placed the proceeds thereof in the checking account of McCray. Another note for $ 15,000, purporting to be the note of a named realty company, was tendered to Morris for discount in July, 1922. This note was also the direct obligation of McCray, as Morris knew. It was also discounted by Morris and the proceeds thereof placed in McCray's checking account. The indorsement and the discounting of said notes was not approved by three directors. At that time, McCray was indebted to the bank in the sum of $ 180,000 which Morris well knew. Another note of McCray, in the sum of $ 10,000, was discounted by Morris under like circumstances. When said notes were discounted, McCray was insolvent and continued to be insolvent up to May, 1924, when he was adjudged a bankrupt and later discharged. These notes were at all times valueless and nothing has ever been paid on them. The total of said notes, plus interest, has been lost to the bank. Morris later reported all loans by serial number to the board of directors at their meetings, and the same were approved. McCray was reputed to be a man of great wealth and a man of good standing in the community, and the board of directors believed him to be solvent.

When Morris discounted and loaned the money of the bank to McCray, he knew that all of McCray's real estate was encumbered; that McCray had spent large sums of money in making political campaigns; that McCray had been heavily indebted to the bank for many years; that this indebtedness had gradually increased; that he had made many efforts to refinance his business and to secure money with which to reduce his excessive loans from the bank; that he was greatly pressed by his financial obligations and was trying to borrow money in large sums from different sources for the purpose of reducing his excessive loans in the bank. When Morris discounted the McCray notes and made the loans, he also knew that all of McCray's efforts to secure money elsewhere to reduce his indebtedness had failed.

The complaint in this action was not filed until more than six months after the bank discovered and knew of the losses because of said McCray notes. No notice of such losses was given the surety company prior to the filing of the complaint in this action. While Morris knew McCray was in financial trouble and had been trying to borrow money from other sources for the purpose of reducing his excessive loans in the bank, he believed McCray was solvent, that each of said notes was good, and he did not have any intention or purpose to wrong or defraud the bank.

The court concluded as a matter of law that: (1) The law was with the plaintiff; (2) that the bond was valid; (3) that the conditions and limitations in the bond were unlawful and void; (4) that there had been a breach in the bond in that Morris had not faithfully discharged his duties, and that, by reason thereof, the bank had lost $ 40,000; and (5) that the receiver should recover the full penalty named in the bond, $ 5,000, plus interest from October, 1924, to date of judgment.

Appellant contends the court erred in the first, third and fourth conclusions of law.

In support of the contention that the court erred in the first and fourth conclusions of law, appellant says the bond sued on was given to indemnify the bank from loss resulting from the failure of Morris to discharge his duties as cashier in an honest and faithful manner, and that it was not intended to cover losses on loans made in good faith by the cashier with the approval of the directors of the bank to a person, who, at the...