Reynolds v. Detroit Fidelity & Surety Co.

• Decision Date: 13 May 1927
• Docket Number: No. 4756.,4756.
• Citation: 19 F.2d 110
• Parties: REYNOLDS v. DETROIT FIDELITY & SURETY CO.
• Court: U.S. Court of Appeals — Sixth Circuit

19 F.2d 110 (1927)

REYNOLDS v. DETROIT FIDELITY & SURETY CO.

No. 4756.

Circuit Court of Appeals, Sixth Circuit.

May 13, 1927.

B. W. Waltermire and Dana F. Reynolds, both of Columbus, Ohio (Frederick N. Sinks, of Columbus, Ohio, on the brief), for plaintiff in error.

James I. Boulger and William R. Pomerene, both of Columbus, Ohio, for defendant in error.

Before DENISON, MOORMAN, and KNAPPEN, Circuit Judges.

KNAPPEN, Circuit Judge.

On September 1, 1923, defendant in error (referred to herein as the "surety") duly issued to the Ohio Industrial Endowment Fund Company (later referred to as the "employer") a bond to reimburse that company, within a limited amount stated in the bond, for such pecuniary losses as the latter might sustain during one year then next ensuing by any act of larceny or embezzlement of money, securities, or other personal property of the employer, or in the employer's possession, and for which the employer might be legally liable, committed by any of its employees named in the schedule attached to the bond, including its then vice president, one Josephson, who was its general manager. The bond contained three specific provisions as conditions precedent to recovery thereon: (1) That "the employer, on its becoming aware of any act which may be made the basis of any claim hereunder, shall immediately give the surety notice thereof in writing, by a registered letter addressed to the defendant in error at its address in Detroit, Mich."; (2) that the employer "shall, within 90 days after it has so become aware of such act as aforesaid, file with the surety its itemized claim hereunder at its own cost and expense, with full particulars therein duly sworn to"; (3) "no suit or action of any kind against the surety for the recovery of a claim under this bond shall be sustainable, unless the suit is commenced and the process served within the term of 12 months after the first discovery of any act of larceny or embezzlement as aforesaid."

On a trial by jury of an action brought on the bond there was ample and undisputed evidence of larceny and embezzlement by Josephson within the one-year term of the bond (and before notice to the surety of his defalcation) of an aggregate amount more than the penalty therein relating to him, viz. $10,000. At the close of the trial the surety moved for direction of verdict in its favor, by reason of the employer's asserted noncompliance with each of the three conditions precedent to recovery heretofore enumerated. The trial judge thought that the evidence presented a question of fact as to the time of performance of conditions 1 and 2, and instructed a verdict for the surety for noncompliance with the third condition. The sole question on this review concerns the propriety of such directed verdict.

Turning to the ground on which verdict was directed: An exact determination of the date of the employer's first discovery of any act of larceny or embezzlement is perhaps not easy. The bond provides that, "if the employer be a corporation which is the case here, * * * the acts or knowledge of the president, treasurer, secretary, cashier, or any officer or director of the corporation, shall be the acts or knowledge of the employer within the meaning hereof."

The suspicions, at least, of some of the officers and directors, date as early as April, 1924. But it would seem entirely fair to the employer (perhaps not to the surety) to adopt July 8, 1924, on which date the board of directors of the employer company received the report of two of its officers or directors, or both, in which various defalcations by Josephson were enumerated. Among other things, the report stated: "Inasmuch as Mr. Josephson was under bond to the company, this company should be called upon to make good to the amount of their bond for any losses sustained by the company through Mr. Josephson."¹ However, on July 15, 1924, the director of commerce of the state of Ohio had insisted that a charge of embezzlement be placed against Josephson, and on July 16, 1924, a receiver was appointed, and six days later gave the surety notice of the claim of Josephson's defalcation.

Counsel for the receiver contend that the directors can not be charged with notice of embezzlement until July 15th; but in construing the one-year limitation branch it is not important which of these two dates is taken, as suit was not begun until September 4, 1925. The receiver, while admitting that this action was not brought within 12 months after the discovery of any act of larceny or embezzlement by Josephson, seeks to avoid the bar thus otherwise created by asserting that by reason of the acts of the surety in reference to the claim for reimbursement, the terms of the bond limiting the right to sue within 12 months "were waived or suspended."²

As to this branch of the subject, the disposition of this review must turn on the validity or invalidity of the receiver's claim above stated, which is predicated upon the following facts: The receiver's first notice of claim of Josephson's defalcation was given the surety on July 22, 1924. The itemized claim, supported by affidavit, was furnished October 10, 1924. Receipt thereof was acknowledged by the surety by letter dated October 14, 1924, with the statement: "As soon as we have time to thoroughly digest this report, we will advise you further with reference thereto." The receiver, by letter dated November 19, 1924, after referring to his letter of October 10th, and the reply thereto of October 14th, said: "When may we expect to have further word from you with reference to this matter?" The surety, by letter of November 21, 1924, after acknowledging the receiver's communication of November 19th, said: "In reply, please be advised that this claim has been referred to Booth, Keating, Pomerene & Boulger, attorneys, Huntington Building, your city, for investigation. We have not received any report as yet from them, and assume that, on account of the rather complicated state of affairs surrounding the Ohio Industrial Endowment Fund Company, their investigation is progressing as rapidly as possible. Immediately upon receipt of their advices with reference to your claim filed under date of October 10, we will be glad to communicate further with you. Hoping this is entirely satisfactory, we are," etc.

Counsel for the respective parties stipulated in writing as follows: "That on or about the 7th day of July, 1925, Mr. Sinks, counsel for the receiver, called upon Mr. Pomerene as counsel for the surety company, and asked him what the surety company proposed as to the payment or settlement of the claim of the receiver of the Ohio Industrial Endowment Fund Company. Mr. Pomerene said he did not know that Mr. Josephson had embezzled anything, and asked for specifications as they then claimed them to be, as Mr. Pomerene further stated there had been many developments since the original arrest of Josephson, and he did not know what the receiver then claimed; that thereupon, to wit, on July 10, a copy of the specifications were mailed Mr. Pomerene, which he received on the 11th day of July, and found them to be the same as those which had originally been sent to the surety company."

Attorneys for the receiver, by letter of July 24, 1925, addressed to the Fidelity Company (the year had then elapsed), after stating that the receiver had written the latter several times in reference to the claim that the last communication in reply was under date of November 21, 1924, and its nature, the furnishing of specifications of the defalcations, the fact that there were many other defalcations by Josephson, and the latter's indictment and conviction in an Ohio state court, for the embezzlement of $89,000, concluded thus: "It seems to us that you should make prompt settlement of this claim without further controversy, and the purpose of this letter is to advise you that unless prompt settlement is made we shall be obliged, on behalf of the receiver, to bring suit upon this claim. We trust that this will...