Post v. Maryland Cas. Co.

• Decision Date: 19 December 1939
• Docket Number: 27370.
• Citation: 97 P.2d 173,2 Wn.2d 21
• Parties: POST v. MARYLAND CASUALTY CO. (two cases).
• Court: Washington Supreme Court

97 P.2d 173

2 Wn.2d 21

POST v. MARYLAND CASUALTY CO. (two cases).

No. 27370.

Supreme Court of Washington, En Banc.

December 19, 1939

Actions on a fidelity bond by Herbert E. Post, as liquidating receiver of the Morrison Investement Company, and Herbert E Post, as receiver of Morrison & Co., Inc., against the Maryland Casualty Company. The cases were consolidated. From adverse judgments, defendant appeals.

Causes remanded, with directions.

BEALS MILLARD, and MAIN, JJ., dissenting.

Appeal from Superior Court, Pierce County; W. O. Chapman, judge.

Charles T. Peterson, of Tacoma, for appellant.

Reuben C. Carlson and Hayden, Metzger & Blair, all of Tacoma, for respondent.

BLAKE Chief Justice.

These are two actions on a fidelity bond brought by the Receiver of Morrison & Company and Morrison Investment Company, two corporations owned, managed and manipulated by Stanley G Morrison, to swindle friends, acquaintances and strangers.

The bond, executed February 21, 1933, at the instance of Morrison, ran to 'Morrison Investment Company and/or Morrison & Company, Inc.,' called 'the Employer.' By its terms, the surety agreed to 'reimburse the Employer for any and all loss of money, securities or other personal property (including that for which the Employer may be responsible to others), which the Employer shall have sustained by reason of any act or acts of Fraud, Dishonesty, Forgery, Embezzlement, Wrongful Abstraction or Wilful Misapplication on the part of any Employee named in the schedule hereto attached, * * *'

Under the schedule, Morrison's fidelity to his Employer was guaranteed in the amount of twenty-five thousand dollars. The bond was continued in force by the payment of annual premiums until February, 1936. By that time, Morrison had appropriated to his own use assets of each corporation in excess of twenty-five thousand dollars. Herbert E. Post was appointed Receiver of both corporations and as such brought actions in behalf of each for the full amount of the guarantee. The cases were consolidated and tried Before a jury which returned a verdict for twenty-five thousand dollars in each case. From judgments entered upon the verdicts, defendant appeals.

The bond contained the following stipulation:

'This Bond is executed upon the following express conditions, which are conditions precedent to the right of the Employer to recover hereunder:

'* * * that the Employer shall not have had at the date hereof, * * * any knowledge of any act of fraud or dishonesty committed by any of said Employees while in the service of the Employer or elsewhere; * * *' (Italics supplied.)

That Morrison, prior to the time the bond was executed, February 21, 1933, had been guilty of fraud and dishonesty in the management of Morrison & Company, there can be no dispute. We do not understand the respondent to contend otherwise. Indeed, he is in no position to dispute it, for claims upon which he bases his right to recover extent to defalcations of Morrison prior to that date.

Morrison & Company was organized in 1928, but did not commence operations until June, 1932. Morrison owned all the stock except that held by directors as qualifying shares. Morrison Investment Company was organized February 16, 1933. All stock in that company, except qualifying shares held by directors, stood in the name of Morrison & Company, Inc. Although Morrison & Company was engaged in other insurance and real estate business, the principal use Morrison made of both corporations was to obtain money from the investing public for his own ends.

Morrison's method was to obtain money from investors upon the representation that the former company would purchase Home Owners Loan Corporation bonds which would be pooled with bonds purchased with the money of other investors. When the bonds so pooled were sold, the profits were to go one half to Morrison & Company and one half to the investors in ratio to the amount of their investment. Receipts were delivered to investors embodying the terms upon which their money was to be used and under which profits were to be distributed, as above outlined. So far as the record shows, none of the money so obtained was invested in H. O. L. C. bonds. Morrison Investment Company was manipulated in much the same manner. Its ostensible objective was to buy and sell shares in savings and loan associations. That Morrison did an extensive business, of acquiring and selling shares in savings and loan associations, there can be no doubt, but, when the debacle came in 1936, the amount of such in the portfolios of the corporations was negligible. In his operations in shares of savings and loan associations, Morrison sometimes used one or the other of the corporations as a conduit to sluice the savings of the investors into his own pocket. But on some occasions his operation on the investor was more brazenly direct. A typical instance: On February 20, 1933, David Fleetwood executed and delivered to Morrison the following assignment of his savings account in the Capital Savings and Loan Association: 'You are hereby authorized to transfer $10,000.00 from my Savings account #5253 to Savings Account #16070 in the name of Stanley G. Morrison.'

Upon the same day, ten thousand dollars was transferred from Fleetwood's account to Morrison's account No. 16070 which, likewise on the same day, was assigned to a purchaser who paid Morrison in the neighborhood of five thousand dollars in cash for Fleetwood's shares. This was one of the items upon which the Receiver based his claim against the bond. An investor, who was also vice president of Morrison & Company, testified that he knew, as early as January, 1933, that Morrison was using corporation funds 'in his private deals.'

So, it is clear that, prior to the inception of the obligation on the bond, Morrison had been guilty of acts 'of fraud and dishonesty.' It was at his instance, as president of both corporations, that the bond was procured. His concealment of his own acts of fraud and dishonesty constituted a fraud upon the surety and a breach of the above quoted stipulation in the bond. Guarantee Company of North America v. Mechanics' Savings Bank & Trust Company, 183 U.S. 402, 22 S.Ct. 124, 46 L.Ed. 253.

It is held generally that concealment by an employer obligee of previous defalcations of the employee, whose fidelity is guaranteed, releases the surety of its obligation when the bond contains a stipulation such as that above quoted, or when previous defalcations are not disclosed in the employee's statement in support of the application for the bond. Guarantee Company of North America v. Mechanics' Savings Bank & Trust Company, supra; Franklin Bank v. Cooper, 36 Me. 179; Glidden v. United States Fidelity & Guaranty Co., 198 Mass. 109, 84 N.E. 143; W. A. Thomas Co. v. National Surety Co., 142 Minn. 460, 172 N.W. 697; Sunderland Roofing & Supply Co. v. United States Fidelity & Guaranty Co., 84 Neb. 791, 122 N.W. 25; United States Life Insurance Co. v. Salmon, 91 Hun 535, 36 N.Y.S. 830 (affirmed 157 N.Y. 682, 51 N.E. 1094); McIntosh v. Dakota Trust Co., 52 N.D. 752, 204 N.W. 818, 40 A.L.R. 1021; Dinsmore v. Tidball, 34 Ohio St. 411; Herbert v. Lee, 118 Tenn. 133, 101 S.W. 175, 12 L.R.A., N.S., 247, 121 Am.St.Rep. 989, 11 Ann.Cas. 1029; Connecticut Gen. Life Ins. Co. v. Chase, 72 Vt. 176, 47 A. 825, 53 L.R.A. 510; Willapa Pulp & Paper Mils v. American Employers' Insurance Co., 175 Wash. 255, 27 P.2d 134.

It is also a general rule, which has been invoked frequently by this court, that a corporation is chargeable with constructive notice of facts knowledge of which is acquired by an agent while acting within the scope of his authority. 3 Fletcher Cyclopedia Corporations, § 790; Gaskill v. Northern Assurance Co., 73 Wash. 668, 132 P. 643; Hitt Fireworks Co. v. Scandinavian American Bank, 114 Wash. 167, 195 P. 13, 196 P. 629; Hedrick v. Washington National Ins. Co., 186 Wash. 263, 57 P.2d 1038.

The rule does not apply, however, when the interest of the officer or agent in the transaction is adverse to the corporation. 3 Fletcher Cyclopedia Corporations, § 819; Mooney v. Mooney Co., 71 Wash. 258, 128 P. 225; German-American State Bank v. Soap Lake Salts Remedy Co., 77 Wash. 332, 137 P. 461; Centralia State Bank v. Hackett, 139 Wash. 394, 247 P. 463.

The rule is based upon a presumption that the agent will disclose his knowledge to the corporation. The exception to the rule is based upon a contrary presumption, that the agent, when acting in his own interest, and adversely to the interest of the corporation will conceal his knowledge. But the exception to the rule does not apply unless the interests of the agent and the corporation are really adverse. 3 Fletcher Cyclopedia Corporations, § 821.

The rule and its exception have led to two lines of decisions in actions on fidelity bonds where the fraud is perpetrated by the officer or agent whose fidelity is guaranteed. The following cases hold that the exception to the rule applies, and that knowledge of the officer procuring the bond, of his own fraudulent acts, is not to be imputed to the corporation. United States Fidelity & Guaranty Co. v. Muir, 2 Cir., 115 F. 264; Aetna Indemnity Co. v. City of Haverhill, 1 Cir., 142 F. 124; Fidelity & Deposit Co. of Maryland v. People's Bank of Sanford, 4 Cir., 72 F.2d 932; Hall v. Aetna Casualty & Surety Co., 2 Cir., 89 F.2d 885; American Indemnity Co. v. Shaw, Tex.Civ.App., 64 S.W.2d 367; Aetna Casualty & Surety Co. v. Local Building & Loan Association, 162 Okl. 141, 19 P.2d 612, 86 A.L.R. 526; Maryland Casualty Co. v. Tulsa Industrial Loan & Investment Co., 10 Cir., 83 F.2d 14, 105 A.L.R. 529.

There is, however, a qualification to the exception which is definitely recognized by the supreme...