United States Fidelity & Guaranty Company v. Bank of Batesville

• Decision Date: 06 July 1908
• Citation: 112 S.W. 957,87 Ark. 348
• Parties: UNITED STATES FIDELITY & GUARANTY COMPANY v. BANK OF BATESVILLE
• Court: Arkansas Supreme Court

112 S.W. 957

87 Ark. 348

UNITED STATES FIDELITY & GUARANTY COMPANY v. BANK OF BATESVILLE

Supreme Court of Arkansas

July 6, 1908

[Copyrighted Material Omitted]

Appeal from Independence Chancery Court; George T. Humphries Chancellor; reversed.

STATEMENT BY THE COURT.

This suit was originally brought in the Independence Circuit Court by appellee against appellants to recover on a fidelity bond written by the United States Fidelity & Guaranty Company hereinafter called "Guaranty Company," agreeing to indemnify the Bank of Batesville against loss by reason of any act of fraud or dishonesty amounting to larceny or embezzlement on the part of its employee, Matt. R. Smith.

The Fidelity & Deposit Company of Maryland was security upon the bond of said Guaranty Company given to the State as a condition of its admission to do business in this State, and was made a party defendant to the action.

The cause was transferred to equity on the motion of the defendants.

The guaranty bond on behalf of M. R. Smith to the Bank of Batesville was dated January 31, 1903, and expired January 30, 1904. On January 30, 1904, in consideration of twenty dollars paid to defendant Guaranty Company, the bond was renewed for a period beginning January 30, 1904, and ending January 30, 1905.

The bond contained the following among other provisions and obligations:

"Bond No. 286602.

"THE UNITED STATES FIDELITY AND GUARANTY COMPANY.

"Home Office, Baltimore, Md.

"Whereas M. R. Smith, hereinafter called 'the employee', has been appointed to a position of time check buyer in the services of Bank of Batesville, Mountain Home, Arkansas, hereinafter called 'Employer' and has been required to furnish bond for his honesty in the performance of his duties in the said position.

"And, whereas, the employer has delivered to the United States Fidelity & Guaranty Company, a corporation of the State of Maryland, hereinafter called 'the company,' a statement in writing setting forth the nature and character of the office or position to which the employee has been elected or appointed, the nature and character of his duties and responsibilities and the safeguards and check to be used upon the employee in the discharge of the duties of said office or position, and other matters, which statement is made a part hereof.

"Now, therefore, in consideration of the sum of twenty ($ 20.00) dollars paid as a premium, for the period from January 31, 1903, to January 30, 1904, at 12 o'clock noon, and upon the faith of said statement as aforesaid by the employer, which the employer hereby warrants to be true, it is hereby agreed and declared that, subject to the provisions and conditions precedent to the right upon the part of the employer to recover under this bond, the company shall, within three months next after notice, accompanied by satisfactory proof of a loss as hereinafter mentioned, has been given to the company, make good and reimburse to the employer all and any pecuniary loss sustained by the employer of money, securities or other personal property in the possession of the employee, or for the possession of which he is responsible by any act of fraud or dishonesty on the part of said employee in the discharge of the duties of his office or position as set forth in said statement referred to, amounting to larceny or embezzlement, and which shall have been committed during the continuance of this bond, or any renewal thereof, and discovered during said continuance, or within six months thereafter, or within six months from the death or dismissal, or retirement of the employee from the service of the said employer.

"Provided, always, that said company shall not be liable, by virtue of this bond for any mere error of judgment, or injudicious exercise of discretion on the part of said employee, in and about all or any matters wherein he shall have been vested with discretion, either by instruction, or by rule and regulations of the said employer. It is expressly understood and agreed that the said company shall in no way be held liable to make good any loss that may accrue to the said employer by reason of any act or thing done, or left undone, by the said employee, in obedience to or in pursuance of any direction, instruction, or authorization conveyed to and received by him from said employer, or its duly authorized agent in its behalf; and it is expressly understood and agreed that the said company shall in no way be held liable hereunder to make good any loss by robbery, or otherwise, that the said employer may sustain, except by the direct act or connivance of the said employee. * * *

"If the employer's written statement hereinbefore referred to shall be found in any respect untrue, this bond shall be void."

The complaint alleges that during the continuance of the employment and services of the said M. R. Smith as time check buyer, from the 31st day of January, 1903, to April 21, 1904, the plaintiff advanced to Smith various sums of money with which to buy time checks, amounting in all to $ 120,529.22. That Smith accounted for $ 116, 185.22, and is short in his account by $ 4,344.00. An itemized statement of the account is exhibited with the complaint.

The defendants' answer was a general denial, and contained an averment that they were not liable on the bond, except for the pecuniary loss caused by the larceny or embezzlement of the employee, and that they were discharged from liability on the bond by reason of statements of the bank, on the faith of which the bond was issued, containing misrepresentations and promises unfulfilled that render the bond void.

The facts are as follows: During the years 1902, 1903 and 1904, what is generally known as the White River branch of the Iron Mountain railroad was in course of construction. J. H. Reynolds & Company had the general contract to construct the whole line. Under them were between twelve and seventeen subcontractors. It was the practice of these subcontractors to give their laborers between the first and tenth of the month a time check, evidencing the amount of labor performed during the preceding month and the sum due therefor to the laborer. These time checks were not paid until the 25th of the month. Nearly all the laborers wanted their wages in cash before the 25th of the month, and it soon became the custom along the line of the railroad for various parties to buy these time checks at various rates of discount, and take an assignment of them from the laborers. In order to obtain this discount and to get most of the time checks, the plaintiff bank arranged with the contractors and the several subcontractors to buy them, and employed M. R. Smith as its agent for that purpose. His duty was to go among the laborers at the camps of the subcontractors and buy all the time checks that were offered for sale at a discount. The bank furnished him money for that purpose. Afterwards, in order that he might get all the time checks that were for sale, Smith, with the knowledge of the bank, arranged with the subcontractors to leave sufficient money with them to buy the time checks that were offered for sale at a discount. He would visit the camps at intervals, take up the time checks for the money he had left, and would forward the time checks with a statement of the same, and of his expenditures to the bank. This method was pursued until about the 1st day of August, 1903, when, with the knowledge of the bank, he arranged to deposit funds to the credit of the various subcontractors with whom he was dealing in the banks most accessible to their camps, and in paying for time checks the subcontractors would draw upon their respective accounts. Smith would settle with them at stated periods, and the time checks would be forwarded to the bank, or a statement of amounts expended for time checks would be sent to Reynolds, the principal contractor, who would give Smith a receipt for the same, and Smith would in turn forward the receipt to the plaintiff bank. On pay day Reynolds would remit to the bank in settlement. This custom of sending in the receipts instead of the time checks commenced about the 1st of May, 1903. Smith was at first given a salary of $ 50 per month. This was afterwards increased to $ 60 and then to $ 65 per month. He was allowed a liberal expense account, which was usually sent in at the end of the month, and was not required to be itemized.

On March 24, 1904, Mr. Thomas, assistant cashier of the bank, went to Yellville, Ark., to see Smith for the purpose of checking his accounts. Smith was sick with small pox, and Thomas did not get to see him. Afterwards Thomas arranged a meeting with the subcontractors for the purpose of checking up Smith's accounts.

About the 5th of April, 1904, the bank notified Smith that a checking up of his accounts disclosed that he was short. Afterwards, when Smith became well, he tried to assist the bank in its checking up and to find out where the discrepancy in his accounts lay.

The above is a general statement of the plan adopted and used by the parties in the business of buying and discounting time checks. A large mass of testimony was taken showing the details of the work and the various accounts and transactions that were entered into on account of the business, which we do not deem necessary to abstract here. Other facts will be stated under their appropriate heading in the opinion.

The chancellor found that amounts aggregating $ 817.23 were drawn by Smith on his account as agent at the Bank of Yellville. That such appropriation was without the authority of the plaintiff bank; and that the same amounted in law to larceny and embezzlement of such funds. That various other sums were shown to have been spent by said Smith during the period of his employment and...