Town of Hamden v. American Surety Co.

• Court: U.S. Court of Appeals — Second Circuit
• Writing for the Court: MANTON, SWAN, and CHASE, Circuit
• Citation: Town of Hamden v. American Surety Co., 93 F.2d 482 (2nd Cir. 1937)
• Decision Date: 20 December 1937
• Docket Number: No. 42.,42.
• Parties: TOWN OF HAMDEN v. AMERICAN SURETY CO.

93 F.2d 482 (1937)

TOWN OF HAMDEN v. AMERICAN SURETY CO.^*

No. 42.

Circuit Court of Appeals, Second Circuit.

December 20, 1937.

Cummings & Lockwood, of Stamford, Conn. (Mark W. Norman, Raymond E. Hackett, and Francis K. Norman, all of Stamford, Conn., of counsel), for appellant.

Edwin A. Clark, F. Raymond Rochford, and Curtiss K. Thompson, all of New Haven, Conn., for appellee.

Before MANTON, SWAN, and CHASE, Circuit Judges.

SWAN, Circuit Judge.

This is an action by the Town of Hamden to recover the penalty of an official bond for $65,000 executed by Carle Van de Bogart, treasurer of the town, as principal, and by the defendant as surety. The bond was conditioned upon the treasurer's faithful performance of all the duties of his office for a term beginning October 5, 1931. The action was brought in a state court and was removed to the District Court on the ground of diverse citizenship. By stipulation a jury was waived. The case was tried to Judge Hincks, who made general findings in favor of the plaintiff on the first, second, and fourth counts of the complaint. No issues were framed upon the third count, a demurrer thereto having been sustained. From the resulting judgment the defendant has appealed.

On October 5, 1931, Van de Bogart was re-elected treasurer of the Town of Hamden for his fourth successive two-year term. To qualify for this term of office he gave the bond in suit, upon which the defendant was surety. At the close of business on December 16, 1931, he had funds of the town aggregating some $324,000 on deposit in various accounts in the Hamden Bank & Trust Company, of which he was then, and had long been, an officer and director. On December 17, 1931, the bank was closed by order of the state bank commissioner, and thereafter a receiver was appointed by the state court. Van de Bogart resigned as town treasurer on December 29, 1931, and subsequently was adjudicated a bankrupt. The present action was begun in January, 1933, to recover from the surety on the town treasurer's bond for losses sustained by the town through the closing of the bank, which has never reopened. The first count charged Van de Bogart with failing to account for and pay over to his successor $324,728.18 of the money received by him as treasurer. The second count charged that the money which he had on deposit with the bank at the time of its closing exceeded 30 per cent. of its combined capital, surplus and undivided profits, in violation of section 512, Conn.Gen.Stats.1930 Revision, which imposes such a limitation upon bank deposits by public officers. The fourth count charged Van de Bogart with making a deposit of $50,527.40 of town funds shortly before the bank's closing and solely for the purpose of improving its unsound financial condition. The defendant's answer to the complaint set up separate and special defenses to each of the counts. The answer was attacked by a motion to expunge portions thereof and by demurrer. This appeal raises only the correctness of the District Court's rulings on such motion and demurrer.

The first subject to be considered, since it attacks the validity of the bond, is the third defense, to which a demurrer was sustained. This defense alleged that during his prior term of office as town treasurer Van de Bogart had maintained in the bank deposits greatly in excess of the legal limit; that this fact was known to the selectmen throughout 1931 and was disclosed in the annual report filed by the treasurer in October, 1930, and accepted at a town meeting on November 24, 1930; that a majority of the board of selectmen were directors of the bank and knew that its resources were insufficient on October 5, 1931, to permit withdrawal of the town's funds, or the excessive portion thereof, then on deposit in the bank; that the amount of the bond required of the treasurer was increased from $20,000 to $65,000; and that the defendant executed and delivered said bond as surety without knowledge of the foregoing facts. In brief, the contention of the defendant is that the failure of the selectmen to disclose these facts when they accepted the treasurer's bond amounted to a fraudulent concealment of facts material to the surety's risk and rendered the bond voidable from its inception.

In our opinion, the demurrer was properly sustained. Under the Connecticut statutes the town treasurer must annually give a bond with surety in a form approved by the tax commissioner and in an amount fixed by the selectmen. The bond must be procured from a surety company of good standing, approved by the selectmen, and the premium thereon is paid by the town treasurer upon order of the selectmen. Sections 303, 355, Conn.Gen.Stats. 1930 Revision. In fixing at $65,000 the amount of the bond for the year beginning October 5, 1931, the selectmen of the Town of Hamden acted upon a suggestion of the tax commissioner which was sent to all Connecticut towns with a view to having the amounts of such bonds bear a more nearly uniform ratio to the amount of taxes levied. So far as appears from the pleadings, the bond may have been tendered by the treasurer with the surety's signature already affixed; all that the selectmen were required to do by the statute was to approve the "good standing" of the surety company and to order payment of the premium. There is no allegation that any representative of the defendant was present when the bond was delivered or that any information was requested from the town as to the treasurer's conduct during his earlier terms or as to the condition of the Bank in which he had kept deposits. The treasurer's 1930 report which disclosed the excessive deposits during his prior term was a matter of public record. Sections 320, 356, Conn.Gen.Stats. 1930 Revision. Under these circumstances it would be an extreme position to hold that the town was guilty of fraudulent concealment in accepting the tendered bond without hunting up some agent of the surety and informing him of facts material to the surety's risk. Such a position is not supported by the authorities. Watertown Savings Bank v. Mattoon, 78 Conn. 388, 62 A. 622, was an action against the surety upon a bond required by statute of the treasurer of a savings bank. The surety pleaded that the directors of the bank fraudulently concealed from the surety knowledge that the treasurer had previously embezzled funds of the bank. A demurrer to this defense was sustained, Chief Justice Torrance saying at page 393 of 78 Conn., 62 A. 622, 624:

"There is nothing in the answer to show that the sureties signed the bond at the request of the directors, or in the presence of the directors, or that the sureties applied to the directors for any information concerning the character or conduct of Mattoon. In short, there is nothing to show that the directors knew anything about the bond or the sureties thereon until it was presented to them for acceptance. It does not appear that the directors had any opportunity to disclose until after the bond was executed and delivered to the bank."

In Magee v. Manhattan Life Ins. Co., 92 U.S. 93, 99, 23 L.Ed. 699, it was held that the creditor was under no duty to search for the surety and warn him of the danger of the step he was about to take. Because of the public interest involved and the limited authority of an official board whose duty is merely to accept the bond, this rule is particularly applicable to the bonds of public officers. See Town of Winthrop v. Soule, 175 Mass. 400, 56 N.E. 575; Hogue v. State, 28 Ind.App. 285, 62 N.E. 656; Frownfelter, Myers et al. v. State, 66 Md. 80, 5 A. 410; Cawley v. People, 95 Ill. 249; U. S. Fidelity & Guaranty Co. v. Commonwealth, Ky., 104 S.W. 1029, 31 Ky.Law Rep. 1179; County of Pine v. Willard, 39 Minn. 125, 39 N.W. 71, 1 L.R. A. 118, 12 Am.St.Rep. 622; City of Luverne v. Skyberg, 169 Minn. 234, 211 N.W. 5, 6; City of Hallettsville v. Long, 11 Tex.Civ. App. 180, 32 S.W. 567; Independent School District v. Hubbard, 110 Iowa 58, 81 N.W. 241, 80 Am.St.Rep. 271. The facts alleged in the defendant's answer were not sufficient to establish an affirmative duty on the part of the town or the selectmen to warn the surety of the treasurer's prior violation of section 512 or of the shaky condition of the bank in which town funds had been deposited. Hence there was no error in sustaining the demurrer.

Complaint is made of the court's action in sustaining the demurrer to the fourth defense, which set up what is referred to as the subrogation defense. This alleged that the bank closed with town funds amounting to $324,728.18 on deposit therein; that on May 25, 1932, the town filed with the bank's receiver a "claim and reclaimer," asserting that the town funds, having been illegally received by the bank, were held by it as trustee ex maleficio; that thereafter the town took no steps to have its claim and reclaimer adjudicated, but consented to the payment of dividends to itself and other depositors as common creditors, and that the remaining assets in the commercial department of the bank were insufficient to pay to the town the balance remaining due upon its deposit. In short, the defense is that the town waived its claim to preferential payment and thereby impaired the surety's right of subrogation. Obviously, there could not be, and is not, any allegation of payment by the surety in this defense. The principle is too well established to require citation of authority that in general a surety must pay before rights of subrogation accrue. But the appellant contends that two recent decisions by the Supreme Court have established that payment is not an inflexible condition precedent, at least on the question of what conduct by the creditor will discharge a surety. American Surety Co. v. Greek Catholic Union, 284 U.S. 563, 52 S. Ct. 235, 76 L.Ed. 490; Aetna Casualty & Surety Co. v. Phoenix Nat. Bank & Trust Co., 285 U.S. 209, 52 S.Ct. 329, 76 L.Ed. 709. In the former case the obligee, immediately...