United States v. American Surety Co. of New York

• Decision Date: 23 April 1948
• Docket Number: Civ. No. 2074.
• Citation: 77 F. Supp. 318
• Court: U.S. District Court — District of Connecticut
• Parties: UNITED STATES v. AMERICAN SURETY CO. OF NEW YORK.

77 F. Supp. 318

UNITED STATES v. AMERICAN SURETY CO. OF NEW YORK.

Civ. No. 2074.

District Court, D. Connecticut.

February 13, 1948.

On Rehearing April 23, 1948.

Adrian W. Maher, U. S. Atty. and Edward J. Lonergan, Asst. U. S. Atty., both of Hartford, Conn., for plaintiff.

Cyril Coleman and Day, Berry & Howard, all of Hartford, Conn., for defendant.

SMITH, District Judge.

This is an action brought by the United States of America to recover from a surety company which wrote a bond conditioned upon the faithful performance of the duties of a postal employee.

Defendant admits that it is liable for $2,000, the face amount of the bond as originally written and has tendered payment of that amount.

The plaintiff claims that it is entitled to recover on the bond, the amount of $3,865.97, the total amount of the embezzlement of the employee from October 26, 1935 to November 27, 1944, the period during which the bond was in effect, less recoveries from the employee. The embezzlement did not, in any one year, exceed the sum of $2,000.

The sole question in the case is whether the penalty in the bond is to be construed as cumulative for each year in which a premium was paid, or a single penalty in the amount of $2,000 for the full period of the continuance of the employment of the employee, after the writing of the original bond. The bond does not specify any period other than "on and after October 26, 1935". The bond contains on its face the statement that "the premium of this bond is 65¢ per $1,000.00 * * * total premium charged, $1.30". It is stipulated, however, that annual premium payments were made to, and accepted by, the defendant on account of the bond by the employee from 1935 to 1944, inclusive.

The bond was executed and delivered in Connecticut. Connecticut law would, therefore, govern its interpretation, except insofar as the terms of the Federal statute requiring the bond which must have been in the contemplation of the parties at the time of its execution, may throw light upon the parties' intentions in using the language found in the bond.

The courts have differed in interpreting similar provisions in surety bonds. The Connecticut court has not, apparently, passed upon such a provision. Where the bond provides that the penalty shall not be cumulative, the courts have held the surety to the payment only of the single amount of the bond penalty even though the bond has been renewed by the payment of premiums from year to year.¹ Where the bond itself or the renewal receipts have not clearly negatived an intent to make the penalty cumulative for each renewal period, however, some courts have held that each payment of a premium for a period brought into effect a new bond in the same principal amount for the renewal period so that the obligee was entitled to payment of the amount of the defalcation in the original and in each renewal period up to the principal amount of the bond in each period.² Other courts have, however, held that the parties intended only to extend the time within which the original penalty would be a protection against default by the employee on the ground that a single contract is expressed, in nature similar to a life insurance contract, that is, an entire contract for the whole period of the employment, as the life contract is for the whole period of the life, even though separate premiums be paid for portions of the period.³ Some of the courts appear to be influenced in arriving at this interpretation of the language of the bond by provisions requiring claim to be made within a short period of months following the end of the term of the bond. In these cases, if the renewals be considered new bonds, the time for discovery of defalcation would start to run at the termination of the premium period, usually one year, and no recoveries could be had for defalcations in earlier years covered by the bond, if the loss was not discovered within the few months' period following the end of the year in which the loss occurred. Such language as to time of claim, however, is not available to us in this case as an aid in ascertaining the parties' intention, since it does not appear in the bond in question.

The reasons which lead the courts on the other side to hold each premium period a new bond stem partly from a reluctance to believe that the parties would contemplate the continued payment of premiums for periods after the entire penalty of the bond had been used up by as yet undiscovered defalcation by the employee when protection could have been obtained by the writing of a new bond each year or each premium period by a new surety. The bond in suit makes no reference to renewals or to annual or other periodic premium payments, nor do we have any evidence as to the wording of any premium receipts. Federal statutes permit payment and acceptance of the annual premium on corporate surety bonds furnished by postal employees as a compliance with the requirement for the renewal of such bonds within the meaning of sections 1-3 of Title 6 United States Code Annotated. Prior to 1928, section 5 of the Act of March 2, 1895 required the renewal of bonds every four years and an examination of bonds every two years with respect to their sufficiency. The Report of the House Committee indicates that the Congress felt that so long as the bonding...