United States Fidelity & Guaranty Co. v. Maxwell

• Decision Date: 20 February 1922
• Docket Number: 158
• Citation: 237 S.W. 708,152 Ark. 64
• Parties: UNITED STATES FIDELITY & GUARANTY COMPANY v. MAXWELL
• Court: Arkansas Supreme Court

237 S.W. 708

152 Ark. 64

UNITED STATES FIDELITY & GUARANTY COMPANY v. MAXWELL

No. 158

Supreme Court of Arkansas

February 20, 1922

Appeal from Mississippi Chancery Court, Chickasawba District; Archer Wheatley, Chancellor; reversed.

Decree reversed and cause remanded.

Block & Kirsch and Joseph H. Norville, for appellant.

The terms of the policy made the employer's statement a part thereof. 4 Ark. 251; 26 Ark. 249; 89 Ark. 239; 127 Ark. 535; 18 Ark. 65; 45 Ark. 17; 49 Ark. 320; 94 Ark. 90. The representations and promises therein were warranties. 80 Ark 49; 89 Ark. 481; 105 Ark. 115; 236 Ill. 444; 19 L. R. A. (N S.) 88. A warranty is a matter of contract, must appear from the contract itself, and show that it was the intent of the parties to warrant. 58 Ark. 532; 66 N.C. 70; Metc. (Mass.) 114; 35 Conn. 225; 69 Mass. 580.

The warranties and covenants relied on by appellant are not in contravention of substantive or statutory law, 183 U.S. 402; 176 S.W. 368.

The breach of the promissory warranty to audit voided the bonds. 58 Ark. 277; 53 Ark. 753; 61 Ark. 207; 57 Ark. 279; 87 Ark 349; 74 Ark. 603.

The bonds were voided by the retention of the employees after knowledge of their peculations; by the failure of the bank to notify the surety upon discovering acts capable of giving rise to a claim; and by not making claim within the time specified in the bond. 108 U.S. 402; 224 F. 866; 67 So. 318.

The bonds were void because of the misrepresentations of the bank in stating and warranting that the accounts of the applicants were correct. 36 Me. 179; 10 Bush (Ky.) 23.

The failure of the bank to notify the surety that audits had not been made voided all renewals of the policies.

Driver & Simpson and Moore, Smith, Moore & Trieber, for appellee.

The employer's statements were not copied into the bonds, nor attached to same, nor do the bonds contain express stipulations that they were part of the bonds, and therefore can be nothing but representations, and were in no sense warranties. 133 Ark. 348; 236 Ill. 444; 105 Ark. 101.

The knowledge of Sudbury was not such as required the bank to give notice to the surety, as he was in no sense aware of the wrongdoing of the officers accused. 118 Iowa 729; 92 N.W 686; 170 U.S. 160; 186 U.S. 342; 154 F. 545; 200 F. 675; 38 S.E. 908.

Appellant waived whatever grounds of forfeiture it otherwise had by calling upon the appellee for further proofs after discovery, or opportunity to discover, the forfeiture. 53 Ark. 494; 67 Ark. 584; 14 R. C. L. (Ins.) par. 376. It either had the information of the forfeiture, or else it intentionally acted without such knowledge, which is the same in legal effect, in sending the telegram, the effect of which was that appellant was ready to settle upon being advised of the value of the property turned over to the bank by the defaulting officers. 114 Md. 130, 91 A. 753; 121 Mich. 591; 80 N.W. 573; 72 Iowa 261; 33 N.W. 663; 117 Pa. 492; 35 A. 612.

Appellant having elected to reduce its claim, arising from its bond to the Mo. State Life Ins. Co., to a judgment in the administration of the affairs of the bank, can not rightfully be permitted to disregard such judgment and claim the residue of the amount for which it has received no payment, as a set-off against a judgment under its bonds to the bank.

Block & Kirsch and Joseph H. Norville, for appellant. in reply.

The rights of third parties are not affected by the appointment of a receiver of a banking corporation. 98 Ark. 200; 138 Ark. 38. The indebtedness of a bank to a depositor can be set-off in full against his indebtedness to the bank. 98 Ark. 294; 141 Ark. 16; 134 Ark. 311.

In order that there may be an election of remedies, a party must have two or more such remedies. Here the appellant only had one, which was to prove its claim against the bank. Sec. 3 C. J., Election of Remedies, pgs. 5, 21 and 26.

The employer's statements need not be physically attached to the bond.

There can be no waiver without knowledge of the facts. 53 Ark. 494; 67 Ark. 584; 14 R. C. L. par. 376; 112 Ark. 176; 87 Ark. 326.

MCCULLOCH C. J. SMITH, J.

OPINION

MCCULLOCH, C. J.

This is an action on two policies of insurance issued by appellant company, whereby the company undertook to reimburse to the assured such pecuniary loss as might be sustained by the assured by reason of the fraud or dishonesty of two of its employees in connection with their respective duties amounting to embezzlement or larceny. The bonds were each in the sum of $ 10,000, and were issued to the Bank of Blytheville, a banking institution doing business at Blytheville, Arkansas, the undertaking being to reimburse for loss caused by the misconduct of B. H. Wilhite and W. O. Anthony, respectively, the cashier and assistant cashier of the bank.

The original bonds were issued and dated March 17, 1914, to cover a period of one year, and were renewed from time to time under the same terms and stipulations. The bank was found to be insolvent, and was taken over by the Bank Commissioner on March 11, 1920, while the last renewal was in force, and this action was instituted by the Bank Commissioner as receiver. The action was commenced in the circuit court, but on motion of appellant and without objection it was transferred to the chancery court, where it proceeded to a final decree.

An audit of the books of the bank and an examination of its affairs disclosed the fact that at the time of the failure Wilhite and Anthony were short in their accounts in the sum of $ 896,244.96, and were indebted to the bank in that sum. The items of the defalcation consisted of overdrafts of those parties in the sum of $ 607,526.65, promissory notes in the sum of $ 19,800, and certain other items consisting of unreported collections from other banks, bills payable, time deposits and cash, all aggregating $ 268,919.41. Subsequently, Wilhite and Anthony turned over to the Bank Commissioner, on their indebtedness to the bank, property of the estimated value of $ 216,000, leaving a shortage of approximately $ 680,000.

The application for the policies, which was signed by Mr. Sudbury, the president of the bank, contained the following statements:

"EMPLOYER'S STATEMENT.

"For completion by proper officer on behalf of the employer, the company desires to have answers to the following questions, and the answers will be taken as the basis of the bond if issued.

* * *

"Will any examination of the applicant's accounts be made outside of the audit of the State or National Bank Examiners?

"Yes.

"How frequently will this examination be made, and by whom?

"Once or twice each year by some reputable auditing firm.

* * *

"Are the applicant's accounts correct in every respect at this date?

"Yes.

"Will the applicant authorize the loans and discounts of the bank?

"No.

* * *

"It is agreed that the above representations are to be taken as the basis of the said bond applied for, or any renewal or continuation of the same that may be issued by the United States Fidelity & Guaranty Company to the undersigned on behalf of the applicant herein."

The policy also contained the following introductory clause:

"Whereas, the employer has heretofore delivered to the company certain representations and promises relative to the duties and accounts of the employee, and other matters, it is hereby understood and agreed that those representations and such promises, and any subsequent representation or promise of the employer, hereafter required by or lodged with the company, are hereby expressly warranted to be true."

The defense offered by appellant and sought to be maintained in the trial of the cause was that the statements contained in the application were warranties, and that there was a breach of the warranty with respect to the truth of each of the questions set forth. The first question, therefore, presented for our consideration is, whether the statements in the application were warranties or mere representations.

The distinction between warranties in a contract and mere misrepresentations which induce the execution thereof--what constitutes the one or the other, and what is the legal effect of each--is well understood and too well settled by the decisions of this court to need further comment. Providence Life Assurance Society v Reutlinger, 58 Ark. 528, 25 S.W. 835. It has been decided by this court that a mere reference in a policy to the application does not constitute a warranty, even though the application itself contains a statement that the truth of the statements shall constitute a warranty. The reason for this rule is that the policy itself is the last word between the contracting parties and should be the evidence of the extent of the contract. Metropolitan Life Ins. Co. v. Johnson, 105 Ark. 101, 150 S.W. 393; Southern Surety Co. v. Barbara, 133 Ark. 220, 202 S.W. 231; American Life & Accident Assn. v. Walton, 133 Ark. 348, 202 S.W. 20. The policy itself must contain an express warranty or by proper reference must incorporate therein the application which contains it, otherwise the statements in the application are deemed to be mere representations. American Life & Accident Assn. v. Walton, supra; Spence v. Central Accident Ins. Co. 236 Ill. 444, 86 N.E. 104. Measured by this rule, the language of the policy in the present case is sufficient to constitute a warranty of the truth of the statements and stipulations in the application. The clause in the policy which we have quoted specifically refers to the application and expressly provides that the representations and promises therein "are hereby expressly warranted to be true." It is difficult to conceive of more definite language expressing the contract to be that the representations and...