World Secret Service Ass'n v. Travelers Indem. Co.

• Decision Date: 27 August 1965
• Citation: 396 S.W.2d 848,55 Tenn.App. 122
• Parties: The WORLD SECRET SERVICE ASSOCIATION, Inc., Appellant, v. The TRAVELERS INDEMNITY COMPANY, Appellee.
• Court: Tennessee Court of Appeals

Page 848

396 S.W.2d 848

55 Tenn.App. 122

The WORLD SECRET SERVICE ASSOCIATION, Inc., Appellant, v. The TRAVELERS INDEMNITY COMPANY, Appellee.

Court of Appeals of Tennessee, Middle Section.

Aug. 27, 1965 Certiorari Denied by Supreme Court Dec. 6, 1965.

Cecil Sims, Nashville, for appellant.

S. McP. Glasgow, Jr., Nashville, for appellee.

HUMPHREYS, Judge.

This is a suit on a fidelity bond executed by Travelers guaranteeing the fidelity of the Association's secretary-treasurer, Maxwell Earl Allen, who, it was alleged, had embezzled funds in excess of the face amount of the bond, $5,000.00.

The execution of the fidelity bond was admitted by Travelers, which denied that complainant had suffered any loss for which it was liable under the bond and denied any substantive liability, and by way of further and special defense, defendant denied liability upon the grounds:

(1) That the Association's loss, if any, was discovered by it in November or December of 1960, in spite of which no notice of the loss was given Travelers until May, 1961, and so notice of the loss was not given within ten days after discovery as required by the bond.

(2) That the Association did not file with Travelers the written, itemized proof of loss, duly sworn to, within two months after discovery of the loss, as required by the terms of the bond.

(3) That the loss, if any, under the bond was not discovered by complainant within twelve months from the date of commission of the act causing the loss, as required by the bond.

The Chancellor dismissed the bill by a written memorandum, in the course of which he said:

'This suit is on a fidelity bond, one provision of the bond being:

'2. That within 10 days after discovery, the Insured shall give the Underwriter notice of loss.'

From the ample evidence in this case, particularly the depositions of DeVries, Allen and Ackerman, it is quite evident that complainant discovered the shortage in December 1960. Much activity resulted from this discovery but the defendant was not given notice as required until May 1961.

I think the law is clear that the 10 day notice provision must be complied with before the underwriter can be held liable.' Tr. p. 234.

The Association assigns the Chancellor's dismissal of the bill as error, contending that a fidelity bond must be construed as any other insurance policy is construed, and that unless it provides in terms for a forfeiture in event of the failure to give notice within ten days, such a provision will not be construed as a forfeiture as a matter of law; second, that there is no substantial proof in the record to justify the conclusion the Association discovered the misappropriation of funds in 1960.

At this point, we should also mention that Travelers has an assignment of error, growing out of the failure of the Chancellor to award it the twenty-five per cent statutory penalty provided for by T. C. A. § 56-1106, amounting to $1,250.00.

First, let us say that we agree with the Chancellor, that the evidence preponderates in favor of Travelers' contention that, although the Association became aware in November-December 1960 of the facts and circumstances with respect to the manner of the handling of its funds by its Secretary-Treasurer, Maxwell Earl Allen, upon which facts and circumstances it has sued, no notice of this was given to Travelers until May, 1961.

The word 'discovery' used in a fidelity bond means the knowledge of facts and circumstances sufficient to satisfy persons of ordinary prudence that a loss has occurred. Nashville & American Trust Co. v. Aetna Casualty & Surety Co., 21 Tenn.App. 366, 110 S.W.2d 1041; King's Inc. v. Maryland Casualty Co., 169 Tenn. 404, 88 S.W.2d 456; Fourth & First Bank & Trust Co., etc. v. Standard Accident Ins. Co., 12 Tenn.App. 311.

Although it is true as here contended that DeVries and Ackerman testified, in substance, that they had no actual knowledge of a defalcation until sometime after November--December, 1960, it is evident, as the Chancellor found, that they became aware during this November-December period of the salient facts and circumstances with respect to Allen's handling of the Association's funds, his writing of checks payable to himself in rather large amounts, and other matters, amounting to such 'discovery', as required notice to be given as provided in the bond.

Not only does this appear from the revealing examination of these witnesses, who reflect a marked excellence in parrying questions until pinned down, it also appears from the stipulated testimony of John K. Neidow, a district adjuster for Travelers. In the course of this stipulated testimony, Neidow testified as follows:

'DeVries confirmed that the World Secret Service Association really became suspicious of Allen when Check No. 526 written November 15, 1960, by Allen and payable to the Statler Hilton at Detroit, Michigan, for $1,519.22 was returned because of insufficient funds about November 30, 1960. DeVries indicated this check was for convention dated August 31, 1960, and he indicated too that a Mrs. Watts, who is a member of the Board of Directors of The World Secret Service Association, and who could be reached at Detroit, had just turned over, according to DeVries, $2,200 in convention fees to Allen prior to the writing of this check.

According to DeVries, the insufficient funds was called to the attention of Mr. Ackerman, president of the World Secret Service Association who maintains his office in Toledo, on or about November 30, 1960, or possibly no later than the first week of December, 1960. At that time, according to DeVries, an investigation of Allen began by Ackerman going to Louisville and 'putting the pressure' on Allen so that Ackerman was allowed to pick up the accounts or what records Allen did have of his association funds and return them to Toledo. At that time, according to DeVries, December, 1960, Ackerman's auditors went over the books and according to DeVries again indicated in some form or another that 'things were not right.' DeVries stated that from January 1, 1961 to March 16, 1961, Ackerman's signature appeared on all World Secret Service checks drawn, pointed out Checks 537 through 545. This is in the form of a countersignature. According to DeVries, all records confiscated by Ackerman during his first visit to him in November or December of 1960 were returned to Allen during the latter part of December, 1960, although there is no correspondence on the subject according to DeVries between Ackerman and Allen but just personal conversations between the two parties at Louisville, Kentucky.

Mr. DeVries also pointed out to me that on November 15, 1960, the same date that Allen wrote the Statler Hilton check which 'bounced,' Allen also wrote Check 527 payable to himself in the amount of $250. DeVries said this check again had no supporting voucher, just that it was written to Allen and charged to 'personal.' According to DeVries, Ackerman, Hardgrave, and Samardick, all of whom are members of the Board of Directors of The World Secret Service Association, were to investigate Maxwell Allen at the request of the Chairman of the Board of The World Secret Service Association, namely a Harry Machelle who resided in Oakland, California. I could obtain no information from Mr. DeVries on the results of this investigation by The World Secret Service Board.

* * *

* * *

My next meeting with Mr. DeVries was at his office on October 19, 1961, in the company also of Joseph Ackerman, president of The World Secret Service Association. At that time, I was positively informed by Mr. Ackerman that The World Secret Service Association first became aware of the possible financial troubles because of the actions of former Secretary-Treasurer of The World Secret Service Association, Maxwell, sometime in November, 1960. Ackerman told me he was called at that time by Mr. Bob Samardick (Robert P. Samardick, Sr., of Omaha, Nebraska) who phoned Ackerman from Omaha indicating to him that 'something was wrong in the office.' Ackerman told me this meant the office of the Secretary-Treasurer of The World Secret Service Association. Ackerman then indicated and confirmed that he went to Maxwell in Louisville on November 7, 1960, about these matters and also commented at the same instance that he was a very close friend of Allen having known him for approximately 20 years. In fact, he commented that Allen was one of his best friends. Ackerman gave me further background indicating, in fact, he had nominated Allen six times previously for the Secretary-Treasurer position. Ackerman indicated that he asked Allen point blank in Louisville on November 7, 1960, the financial condition of The World Secret Service Association. At that time Ackerman states he was told by Allen that there was a shortage now (November, 1960) of $1,800. Ackerman reports also that Allen indicated to him that the books were presently being audited by his accountant and would be available soon for any official of The World Secret Service Association to inspect in the near future.'

We think the conclusion is inescapable that during the November-December 1960 period the Association, through its officers, became aware of such facts and circumstances with respect to the handling of its funds (the same facts and circumstances, in the main, which it now contends prove a defalcation) as required it to give the ten-day notice provided in its undertaking.

The question then recurs, did the failure of the Association to give notice release Travelers from liability under its contract?

Travelers contends on authority of Nashville & American Trust Co. v. Aetna Casualty &...