Opinion
No. 30884.
December 4, 1933.
1. INSURANCE.
Failure of bank to notify insurer of loss within ten days after discovery of defalcations by employees, as required by bankers' blanket bond, which neither provided that such failure relieved insurer from liability nor made notice of essence of bond, held not to preclude recovery by bank on bond, absent showing of prejudice to insurer.
2. INSURANCE.
Subsequent approval by board of directors of loan to president did not cure illegality of loan not approved by board when made, as respects insurer's liability on employees' fidelity bond issued to bank (Code 1930, section 3812).
3. INSURANCE.
Employees' fidelity bond, which provided for its termination upon discovery by bank of loss, terminated as to president when he loaned money to himself without approval of board of directors, if misappropriation was then known to cashier and vice president, and, if not, bond terminated when board subsequently approved loan (Code 1930, section 3812).
4. INSURANCE.
Employees' fidelity bond, which provided for its termination upon discovery by bank of loss, terminated as to assistant cashier when executive officer of bank acquired knowledge that cashier obtained loan without approval of board of directors, and, if not, bond terminated when board subsequently approved loan (Code 1930, section 3812).
5. INSURANCE.
Bankers' blanket bond, which provided for its termination upon discovery by bank of default under bond by employee, terminated as to president when vice president and cashier acquired knowledge that president withdrew money for his personal use from bank's cash box.
ON SUGGESTION OF ERROR. (Division A. April 23, 1934.) [154 So. 260. No. 30884.]1. APPEAL AND ERROR.
Counsel for either party who desire final judgment in Supreme Court on reversal of judgment appealed from must specifically state in briefs what such judgment should be and reasons therefor.
2. INSURANCE.
Knowledge of cashier of bank of its president's defalcations when committed was not constructive notice thereof to bank, as respects liability of surety on employees' fidelity bond which provided for its termination on discovery by bank of loss.
3. INSURANCE.
Loans by bank president to his partners for use in fishing partnership, not approved by board of directors of bank and evidenced by notes which were not signed by president as maker, held covered by employees' fidelity bond insuring bank against pecuniary loss through fraud or dishonesty of its employees directly or in connivance with others (Code 1930, section 3812).
4. INSURANCE.
Loans by bank president to corporation wherein he was one of its three stockholders who determined to apply therefor, subsequently approved by board of directors of bank, held not covered by employees' fidelity bond insuring bank against pecuniary loss through fraud or dishonesty of its employees directly or in connivance with others (Code 1930, section 3812).
5. INSURANCE.
Act of bank president in discounting notes owned by corporation wherein he was one of its three stockholders who determined to sell notes to bank whose board of directors subsequently approved such act held not covered by employees' fidelity bond insuring bank against pecuniary loss through fraud or dishonesty of its employees directly or in connivance with others (Code 1930, section 3812).
6. INSURANCE.
Bank had burden of proving that loan by its president to himself without approval of board of directors was made subsequent to time when bankers' blanket bond became effective (Code 1930, section 3812).
7. INSURANCE.
Absence evidence as to what hour of day president made loan to himself without approval of board of directors of bank, surety held not liable therefor on bankers' blanket bond which became effective at noon on same day (Code 1930, section 3812).
8. INSURANCE.
Loan by bank president to golf course partnership composed of his wife and others but in which he had no interest, though not approved by board of directors of bank, held not covered by bankers' blanket bond (Code 1930, section 3812).
9. APPEAL AND ERROR.
Supreme Court must remand cause to lower court for determination of amount of liability of surety on bankers' blanket bond where amount could not be determined from record and counsel could not agree thereon.
APPEAL from Chancery Court of Jackson County.
H.P. Heidelberg, of Pascagoula, P.M. Milner, of New Orleans, Louisiana, and Arthur G. Powell, of Atlanta, Georgia, for appellant.
The bond is not a bond within the definition given in Code of 1930, section 1365. It falls squarely within the definition of a contract of insurance as found in Code of 1930, section 5131.
Craft v. Standard Ins. Co., 220 Ala. 6, 123 So. 271; Fort Smith Van Buren District v. Johnson, 25 S.W.2d 417; Union Indemnity Co. v. Covington, 178 Ark. 533, 12 S.W.2d 884; F. D. Co. v. Crane, 178 Ark. 676, 12 S.W.2d 874.
We contend that as to three of the employees — Lindinger, Watts and Hudson — the bank knew of their default, as evidenced by the cash items, at the time the bond went into effect in February, 1931, and, therefore, the bond never went into effect as to any one of them, but only as to other employees of the bank, not here involved.
It must be kept in mind that section 3812 applies only to the loans made to officers and employees personally and not also, as complainant's theory seems to be, to firms and companies in which such officer or employee may be interested. The words "on his own note or obligation," are used; and the statute is to be strictly construed against liability.
Bramlette v. Joseph, 111 Miss. 379, 71 So. 643.
We contend that the making of a loan excessive under the provisions of section 4151 is not a violation of a fidelity bond, even with all the provisions of section 3827 imported into it; for a violation of section 4151 is not a violation of any provision of the chapter on banking; and section 3827 speaks only of violations of the chapter on banking.
State v. Southern Surety Co., 127 So. 805, 70 A.L.R. 296; Corsicana National Bank v. Johnson, 251 U.S. 68, 83, 64 L.Ed. 141, 152; Gamble v. Brown, 29 F.2d 366, 375; Curtis v. Metcalf, 265 Fed. 293.
Renewal of a loan is not a borrowing of money within the section.
Anderson v. Gailey, 33 F.2d 589; Morenstecher v. Westervelt, 87 Fed. 157; Curtis v. Metcalf, 265 Fed. 293, 296.
The bank is conclusively bound by knowledge of any fact entered on its own books. If illegal or excessive loans are entered on the books of the bank, the bank and its stockholders are conclusively charged with knowledge thereof.
Curtis v. Connley, 257 U.S. 260, 263, 66 L.Ed. 222, 226; Boyd v. Applewhite, 121 Miss. 900, 84 So. 16; Martin v. Webb, 110 U.S. 7, 28 L.Ed. 49; Ellis v. Gates Merct. Co., 103 Miss. 560, 60 So. 649.
Of course after the Superintendent of Banks took charge, knowledge possessed by him or his liquidator in charge is knowledge of the bank, at least so far as complainant, as his assignee, is concerned.
Hughes v. Reed, 46 F.2d 435.
The courts are divided as to whether the statute of limitations runs from the date of the abstraction, in case of illegal loans, or from the date the non-participating directors discover it, in case the facts have been concealed; but all agree that the cause of action arises when the illegal loan is made and is not suspended until after it shall have been determined whether the notes and securities taken in the illegal transaction can be collected or not.
Corsicana National Bank v. Johnson, 251 U.S. 86, 64 L.Ed. 153; Anderson v. Gailey, 33 F.2d 589, 591; Hughes v. Reed, 46 F.2d 435, 441 (3); Payne v. Ostrus, 50 F.2d 1039, 1043 (9).
It is our contention, therefore, that from the moment the bank had knowledge, either from recitals on its minutes, or through the knowledge of its president (except as to the president's own defaults) or of its vice-president or its cashier (except as to the cashier's own defaults) that such an illegal and tortious abstraction of its funds had occurred, whether through the form of illegal or excessive loans or otherwise, as would constitute a default or loss, it had such knowledge as terminated the bond and put in operation the condition of the bond as to giving notice.
Both bonds contained, as a condition of the company's liability, that within ten days after the discovery of a loss, written notice should be given the company. It is undisputed that such notice was not given as to any of the losses claimed in the suit.
25 C.J. 1100, sec. 12B; U.S.F. G. v. Citizens Bank, 150 Miss. 386, 116 So. 605; Maryland Casualty Co. case, 125 Miss. 792, 88 So. 407.
Equity refuses aid to those guilty of laches.
21 C.J. 210 and 180; Griffith's Mississippi Chancery Practice, sections 32, 33, 41-43.
Ford, White Morse, of Pascagoula, for appellee.
The testimony of Mr. Jane shows that there is no approval of these loans in the directors' minutes, neither were they authorized by the directors before the loans were made. Liability is based on section 3812, Code of 1930, which is identical with the Laws of 1922, chapter 162, section 44, which was in effect prior to the time the present code was adopted.
Little v. Newhouse, 145 So. 608, 164 Miss. 619; Boyd v. Applewhite, 121 Miss. 879.
Whenever it is shown that an officer of a bank or corporation or other person in a similar fiduciary relation has been dealing with his own institution, it is the universal principle of law that the burden is on him to show that his dealings have been fair and honest, in other words, that his corporation has not suffered as the result of his acts.
First National Bank v. Lang, 9 A.L.R. 1139; 7 R.C.L. 480, sec. 461; Christy v. Clay Products Co., 253 S.W. 106; Hotaling v. Hotaling, 56 A.L.R. 734; Holcomb v. Forsythe, 113 So. 516.
A loan of money shall not be made by a corporation to any stockholder therein.
Section 4151, Code of 1930.
The total liability to a bank by a person, company, corporation or firm for money loaned including in the liabilities of a firm or company the liabilities of the several members thereof, shall not exceed twenty-five per cent of the aggregate paid in capital and surplus of said bank.
Section 3810, Code of 1930; Section 4151, Code of 1930; Jefferson County v. Arraghi, 54 Miss. 658; Memphis, etc., R.R. Co. v. Scruggs, 50 Miss. 284.
There can be no ratification by the directors of a bank of a contract made by the officer which the bank cannot lawfully make.
7 C.J. 537, sec. 140; Swindell v. Bainbridge State Bank, 3 Ga. 364, 60 S.E. 13; United Order of Good Samaritans v. Meekin, 155 Ark. 407, 28 A.L.R. 89.
It is believed that the loans made to Mr. Lindinger during the years 1929 to 1931, inclusive, were not properly authorized by the directors, were in excess of the legal limit allowed by law, could not be ratified by subsequent action, and that the whole of the loans could be collected.
Corsicanna National Bank v. Johnson, 251 U.S. 68, 64 L.Ed. 146; Federal Surety Co. v. Wolcott, 116 Okla. 186, 243 P. 936, 46 A.L.R. 973; Minor v. Mechanics National Bank, 7 L.Ed. 47; Christy v. Foster, 61 Fed. 551.
Certainly it is elementary law that a person who occupies trustee or fiduciary position cannot deal with the property of the trust to his own advantage.
7 R.C.L., p. 456, sec. 441, p. 479, sec. 461; Aetna Casualty Co. v. Austin, 285 S.W. 957; National Surety Co. v. State, 161 N.E. 832; Brandon v. Holman, 41 F.2d 586.
Manifestly, Mr. Lindinger had no right to act for the bank and for the fish company at the same time, but the proof shows that this is just what was done.
Citizens National Bank v. Blizzard, L.R.A. 1918A, p. 129; Greenwood Ice Coal Co. v. Ga. Home Ins. Co., 73 Miss. 46; Riverside Development Co. v. Fire Ins. Co., 105 Miss. 184; Scott County Milling Co. v. Powers, 112 Miss. 798; Cooper v. Robertson Investment Co., 117 Miss. 108; Corsicanna National Bank v. Johnson, 251 U.S. 68, 64 L.Ed. 146.
The sale of a note by a president or cashier to a bank of which he is manager can never be ratified without some action of the directors.
5 Cyc. 466; National Surety Co. v. State, 161 N.E. 573, 62 A.L.R. 412.
Section 3827 of the Code of 1930 controls the provisions of the bond given in January, 1931, the blanket bond.
The other schedule bond covering the years 1929 and 1930, is controlled by the provisions of chapter 185, Laws 1920.
The court will observe that with the exception of the cash items, which began along in 1930, and the overdrafts, which began a short time before the bank closed, the true nature of practically all the other items was concealed, and did not appear until about the time the bank closed. As to them, it was a case of concealed fraud, because Mr. Lindinger's connection with these transactions was not known until the bank failed and the banking department and other outsiders began to dig into it.
3 R.C.L. 420, sec. 476; Gause v. Com. Trust Co., 24 L.R.A. (N.S.) 967.
The law wisely requires that officers shall give bond for the faithful discharge of their duties. It does not contemplate that the bondsmen shall be released through failure of the directors to act or to report a matter which they could not authorize.
The mere neglect of the directors of a bank to examine into the conditions of the bank has been held no valid reason why the sureties on the bond of an officer thereof should not be held liable for his principal's default.
3 R.C.L. 485, sec. 114; Minor v. Mechanics National Bank, 7 L.Ed. 47; Brandon v. Holman, 41 F.2d 586; "Connivance," Words Phrases and Bouvier's Law Dictionary; Ida County Savings Bank v. Seidensticker, 92 N.W. 862; Fidelity Deposit Co. v. Courtney, 46 L.Ed. 1193.
This court has held that to recover on a surety bond, it need not be shown that the money was converted to the bonded employee's use.
Fidelity Guaranty Co. v. Bank of Moorhead, 150 Miss. 386, 415.
A bank has the right to disavow a transaction on discovery of the facts and pursue the bond.
Fitchberg Savings Bank v. Mass. Bond Ins. Co., 74 A.L.R. 274; Corsicanna Bank v. Johnson, 64 L.Ed. 146.
New questions cannot be raised in the Supreme Court for the first time, even if the points would have been well taken if raised in the court below.
Y. M.V.R.R. Co. v. Sebulsky, 109 Miss. 228; Devitt v. Foster, 159 Miss. 687; Houston v. King, 119 Miss. 347; Williams v. Butts, 124 Miss. 661; Vicksburg Mfg. Co. v. Jaffray Const. Co., 94 Miss. 282; Anderson v. Maxwell, 94 Miss. 138; Adams v. Clarksdale, 95 Miss. 88; George v. L. N.R.R. Co., 88 Miss. 306; Griswald v. Simmons, 50 Miss. 137; Anderson v. Leland, 48 Miss. 253; Griffith's Chancery Practice, secs. 676-677.
We contend that any bond which used the language like this blanket bond, and where it is given as the official bond of the officers, and the contract is to insure against loss by dishonesty of employees, it is a fidelity bond under the law of Mississippi, both by statute and court decisions.
Section 758, Code of 1930; Union Indemnity Co. v. Metal Works, 150 Miss. 332; Section 217, Laws of 1918; Adams v. Williams, 97 Miss. 113; Section 3827, Code of 1930; First Fourth Bank v. F. D. Co., 45 A.L.R. 610.
It is not true that liabilities on the old bond were compromised or settled. No consideration was paid for any such settlement. The rider and the bonds must be considered in favor of the insured under familiar rules of interpretation.
We respectfully submit to the court and counsel, that we have not misapplied section 3810, by adding the indebtedness of the partnership to Mr. Lindinger's personal indebtedness. Undoubtedly, each and every partner owed all the debts of the partnership. The liability of partners is joint and several, and not a joint liability.
Wise v. Cobb, 135 Miss. 673; Dinwiddie v. Glass, 111 Miss. 449; Hattiesburg Hwd. Co. v. Pittsburgh Steel Co., 115 Miss. 663.
The matter now up before this court is whether the surety is liable for the losses sustained by the bank through the wrongful acts of certain officers. If it were the law that liability could be defeated by knowledge of the officers, all of whom might be wrongdoers, the bond would be of no protection.
American Surety Co. v. Pauly, 42 L.Ed. 977, 170 U.S. 133; Fidelity Casualty Co. v. Gates City National Bank, 33 L.R.A. 821; Ventress v. Wallace, 111 Miss. 357; Bank of Tarboro v. F. D. Co., 83 Am. St. Rep. 682; Bank of Commerce v. Union Indemnity Co., 142 So. 156.
We are sure that the Supreme Court of Mississippi will not hold, and has not held, that a contract of insurance like this will be forfeited because of failure to give notice of loss within any particular time.
F. D. Co. v. Courtney, 46 L.Ed. 1193; American Surety Co. v. Pauly, 42 L.Ed. 977; 25 C.J. 1102; Aetna Indemnity Co. v. Crowe, 154 Fed. 545; Aetna Indemnity Co. v. Farmers National Bank, 169 Fed. 737, 54 L.Ed. 344; Maryland Cas. Co. v. Hall, 125 Miss. 792; Employers Liability Assurance Co. v. Lbr. Co., 111 Miss. 759; Southern States Fire Ins. Co. v. Hand-Jordan Co., 112 Miss. 565; Amer. Nat. Ins. Co. v. Waters, 133 Miss. 28; 14 R.C.L. 1328, sec. 501; U.S.F. G. Co. v. Bank of Moorhead, 150 Miss. 386; Section 2294, Code of 1930; National Surety Co. v. Mitchell, 162 Miss. 197, 138 So. 808; U.S.F. G. Co. v. Poetker, L.R.A. 1917B, p. 984; Atlantic Horse Ins. Co. v. Nero, 108 Miss. 321; 22 R.C.L. 511, par. 197.
If we adopt the view that the directors knew and yet did nothing, they must be deemed to have been in collusion with the wrongdoing, or knowingly connived in it. That view would not release the surety.
3 R.C.L., pp. 486-487, sec. 114; Ida County Savings Bank v. Seidensticker, 92 N.W. 862; McShane v. Howard National Bank, 10 L.R.A. 552; Fidelity Casualty Co. v. Gates City National Bank, 33 L.R.A. 823; Brandon v. Hollman, 41 F.2d 586; Minor v. Mechanics Bank of Alexander, 7 L.Ed. 47.
The taking of a note and extension of time for the payment of an obligation does not release a compensated surety in the absence of a showing of material prejudice by this act.
Hartford Accident Indemnity Co. v. Nelson Mfg. Co., 160 Miss. 504; U.S.F. G. Co. v. Citizens State Bank of Moorhead, 150 Miss. 412.
The beneficiary does not guarantee that all the other officers and employees of the bank will be honest and faithful, but the surety guarantees that the employee insured, "shall stand as a rock in faithfulness and that although surrounded by thieves, that he, at least, will be honest."
3 R.C.L. 485, sec. 114.
One would not be expected to give notice unless a loss had been discovered, and further, if no loss was discovered, there could be no notice.
Maryland Casualty Co. v. Hall, 125 Miss. 792; L.R.A. 1916F 715; First National Bank v. U.S.F. G. Co., 150 Wis. 601, 137 N.W. 742; Bank of Commerce Trust Co. v. Union Indemnity Co., 142 So. 157; Fidelity Casualty Co. v. Gates City National Bank, 33 L.R.A. (old series) 823; Aetna Indemnity Co. v. Farmers National Bank, 169 Fed. 738; Fidelity Deposit Co. v. Courtney, 46 L.Ed. 1193.
We respectfully submit that this honorable court by declaring a termination of the first bond in May, 1929, has overlooked the fact that the bond was renewed in the early part of 1930, and a new premium paid. Under the authorities and particularly the decisions of this honorable court, this renewal constituted a new contract.
U.S.F. G. Co. v. Williams, 96 Miss. 10.
The giving of a surety bond is made mandatory; the conditions are written into that bond irrespective of what the bond itself may contain.
Section 3827, Code of 1930; Union Indemnity Co. v. Acme Metal Works, 150 Miss. 332; Myers v. Daughdrill, 141 So. 583, 163 Miss. 298; State v. Mitchell, 87 Miss. 551; Adams v. Williams, 97 Miss. 113; U.S.F. G. Co. v. Poeteker, L.R.A. 1917B 984; 22 R.C.L. 497, sec. 177; Adams v. Williams, 97 Miss. 113; Charleston v. Davison, 101 S.E. 728.
Argued orally by Arthur G. Powell, for appellant, and by E.J. Ford and J.I. Ford, for appellee.
The appellee sued the appellant on an employees' fidelity bond and also the defaulting employees. The decree awarded judgments against the employees and also the appellant, who executed the bond. The appeal is by the appellant, the surety, only.
The case presented by the record, in so far as is necessary for an understanding of the questions decided, is, in substance, as follows:
On the 28th day of December, 1928, the appellant executed and delivered to the Merchants' Marine Bank of Pascagoula, Mississippi, a schedule employees' fidelity bond insuring the fidelity of certain officers and employees of the bank, among whom were W.J. Lindinger, president, in the sum of twenty-five thousand dollars, L.A. Watts, cashier, in the sum of twenty thousand dollars, and T.W. Hudson, assistant cashier, in the sum of ten thousand dollars. On the 25th day of February, 1931, a bankers' blanket bond was executed by the appellant to the same bank by which it agreed to indemnify the bank "against the direct loss, sustained while this bond is in force and discovered as hereinafter provided, of any money or securities, or both, as defined in section 5 hereof, in which the insured has a pecuniary interest, or held by the insured as collateral, or as bailee, trustee or agent, and whether or not the insured is liable herefor (such money and securities being hereinafter called property), in an amount not exceeding fifty thousand dollars ($50,000), as follows: (A) Through any dishonest act, wherever committed, of any of the employees, as defined in section 6 hereof, whether acting alone or in collusion with others." A rider attached to this bond provided, in substance, that it should continue in force and secure the payment of any of the bank's losses under the schedule employees' liability bond that would have been recoverable by it on that bond, not to exceed the penalty of the new bond.
The Merchants' Marine Bank of Pascagoula was liquidated by the state superintendent of banks, and all of its assets and choses in action were sold by the superintendent to the appellee, a new and different bank of the same name. Among the choses in action thus acquired by the appellee was the old bank's right to recover on these two bonds for any defalcation of its employees covered thereby. The defalcations, to recover for which this suit is brought by the new bank, were committed by the three officers whose names are hereinbefore set forth, and consist, as to all of them, in either lending themselves money belonging to the bank or obtaining such loans without "first having obtained the approval of a majority of the board of directors of the bank, or of an executive board or discounting committee selected by a majority of the board of directors," as required by section 56, p. 317, chapter 207, Laws 1916, now section 3812, Code 1930; and, as to Lindinger, the obtaining of loans from the bank in excess of the amount permitted by section 54, chapter 124, Laws 1914, now section 3810, Code 1930, and the statute now appearing as section 4151, Code 1930; and the withdrawal of money for his personal use from the bank's cash box, leaving therein a written memoranda of the sums withdrawn by him.
The second bond, the one here sued on, provides that: "At the earliest practicable moment, and at all events not later than ten days, after the insured shall discover any loss hereunder, the insured shall give the Underwriter notice thereof by registered letter or telegram, addressed to it at its home office, and shall also, within three months after such discovery, furnish to the Underwriter at its home office affirmative proof of loss with full particulars." No notice was given the appellant by the bank of the defalcations of its employees within ten days after the appellant claims they were discovered by the bank, and none was, in fact, given until a comparatively short time before the insitution of this suit. The bond does not provide that the failure to give the notice shall relieve the appellant from liability thereon, nor does it, by necessary implication, make the provision for notice of the essence of the contract. Consequently, the bank's failure to give the required notice cannot be availed of by the appellant, unless it is made to appear that the failure so to do has resulted in such prejudice to its rights under the bond as would make it inequitable to permit a recovery thereon, and such is not the case here. Employers' Liability Assurance Corp. v. Jones County Lumber Co., 111 Miss. 759, 72 So. 152. This case has not been qualified by the discussion in subsequent cases as to whether the notices there given under such a contract, though not within the time stipulated, were given within a reasonable time thereafter.
Both of the bonds provide for their termination on the happening of certain events, one of which is, in the first bond, "upon discovery of loss through that employee," and under the second, "upon discovery by the insured of any default under the bond by an employee."
The first defalcation by Lindinger was on May 15, 1929. He then owed the bank eleven thousand dollars, which he increased to fourteen thousand six hundred dollars; that is, he obtained, by making to himself, a new loan of three thousand six hundred dollars. This loan was not authorized in the manner required by the statute hereinbefore cited, but was afterwards approved by the board of directors at its quarterly meeting on June 6, 1929. This, as counsel for the appellee correctly say, did not cure the illegality of the loan; indeed, it is one of the defalcations sued on. Had the board of directors the right to waive the requirement of the statute that the loan should have been previously authorized, it may be that it had the right to waive it after the loan was made, but it had no such right. German Savings Bank of Des Moines, Iowa, v. Des Moines National Bank of Des Moines, Iowa, 122 Iowa, 737, 98 N.W. 606. The statute expressly requires the approval of such a loan to be of such character as that, when the loan is made, the approval may become a part of the records of the bank. We are dealing here with a question of power and not of the manner in which the power may be exercised. The course here pursued by the directors of the bank, as disclosed by the record, seems to have been to disregard the statute entirely and to permit loans to be made to its officers and employees without reference thereto; such loans being subject only to their subsequent approval. To hold that such conduct is lawful would result in a judicial repeal of the statute.
The damage as well as the injury to the bank was complete when Lindinger received the unauthorized loan. It could have immediately sued him and the appellant therefor. Corsicana National Bank v. Johnson, 251 U.S. 68, 40 S.Ct. 82, 64 L.Ed. 141. Of course, had Lindinger refunded the money, the appellant's liability therefor would have been discharged. The first bond, therefore, terminated as to Lindinger, when this misappropriation of three thousand six hundred dollars of the bank's money was discovered by it, which occurred at the time it was committed, if the appellant's contention that it was then known to the cashier and an active vice-president of the bank is true; if not, when the board of directors shortly thereafter formally approved the loan. Only recoverable liabilities on the first bond were brought into and secured by the second.
Hudson's first defalcation occurred in June, 1929, when he obtained either a new loan or increased the amount of a former loan not covered by the bond. The appellant's liability as to Hudson terminated when this defalcation became known to the bank. The board of directors knew of it when it approved the loan a short time thereafter, and it may be that knowledge of it was early acquired by an executive officer of the bank other than Hudson, with which knowledge the bank must be charged.
The only defalcation on the part of Watts occurred early in June, when he also obtained an unauthorized loan of money, which was discovered by the bank when the board of directors a short time thereafter approved it. The approval, as hereinbefore said, did not relieve it of its illegality.
The only defalcations under the second bond were by Lindinger. The appellant says that this bond is not an employees' fidelity bond, but that it simply insures the bank against loss inflicted upon it by its employees of a specifically designated character. It will be unnecessary for us to decide this question, for the only defalcation thereunder here made is admitted by the appellant to be covered by the bond. That defalcation is by Lindinger on April 2, 1931, when he withdrew for his personal use three hundred dollars from the bank's cash box, leaving a cash item ticket therefor therein, which defalcation seems to have become immediately known to an active vice-president and the cashier of the bank. This bond, therefore, then terminated as to Lindinger, and that is the only item recoverable thereon.
The decree of the court below will be reversed, in so far as it affects the appellant, for further proceedings not inconsistent with this opinion.
Reversed and remanded.
ON SUGGESTION OF ERROR.
The decree of the court below herein was reversed on a former day, and the cause remanded. It appeared then that the appellee was probably entitled to a final judgment on some of the items sued for, but we were unable to arrive at any satisfactory conclusion relative thereto without the further assistance of counsel, the case not having been argued with the view to a judgment here for the appellee in event the court should hold that it was entitled to recover less than the amount awarded in the court below. That assistance has now been given.
In this connection we desire to suggest that where counsel for either party desire a final judgment in this court, in event the judgment or decree appealed from is reversed, they should specifically state in their briefs filed on the hearing what this judgment should be, and the reasons therefor.
The correctness of our former decision is challenged, but after mature consideration we have determined to adhere thereto.
The three bank officers whose fidelity was here insured are W.J. Lindinger, its president, L.A. Watts, its cashier, and T.W. Hudson, its assistant cashier. The defalcations by Watts and Hudson, on which recovery can be had under our former decision, are not now in dispute, and a decree will be entered here therefor. These defalcations on the part of Watts amount to one thousand six hundred seventy-five dollars, and on the part of Hudson to four hundred dollars.
As to Lindinger, and dealing now with the appellant's liability under the schedule employees' fidelity bond executed by it on December 28, 1928, Watts, the cashier, knew of each of Lindinger's defalcations when committed, and the first question to be here decided is whether this knowledge of Watts should be held to be constructive notice to the bank. It is true that ordinarily the knowledge of a bank's cashier is imputed to it, but that rules does not apply in favor of the surety on a bank employee's fidelity bond. This exception to the rule is supported by numerous authorities giving the reasons therefor, and is exemplified by the line of cases in which appear Fidelity Casualty Co. v. Gate City National Bank, 97 Ga. 634, 25 S.E. 392, 33 L.R.A. 821, 54 Am. St. Rep. 440, and Fidelity Deposit Co. of Maryland v. Courtney, 186 U.S. 342, 22 S.Ct. 833, 46 L.Ed. 1193.
The bank's board of directors, as stated in the former opinion, obtained notice of the transactions by Lindinger, alleged to constitute breaches of his bond, on June 6, 1929, at its quarterly meeting then held, whereat it approved all of these transactions. These were:
May 15, 1929 — Loan to himself not previously authorized ........................................ $3,600.00 May 31, 1929 — Loan to himself not previously authorized ........................................ 980.50 June 4, 1929 — Loan to himself not previously authorized ........................................ 2,640.00 March 27, 1929 — Loan to Canty Gautier ........... 2,600.00 April 11, 1929 — Henry LaForce note, discounted .... 208.07 April 29, 1929 — Loan to Canty Gautier ........... 600.00 May 13, 1929 — Loan to Scranton Fish Company ....... 2,000.00 May 15, 1929 — Bennie Charlton note, discounted .... 900.00
The schedule employees' fidelity bond insured the bank against "such pecuniary loss as the employer shall sustain of money or other personal property through the fraud, dishonesty . . . of or by any of the employees listed in the schedule forming part of this bond directly or in connivance with others," etc. The loans made by Lindinger to himself in violation of section 3812, Code 1930, were held, in our former opinion, to be dishonest acts for which the bond was liable.
Canty, Gautier, and Lindinger were partners owning a boat engaged in the fishing business. The money loaned Canty and Gautier by Lindinger was for the use of the partnership, Lindinger guaranteeing to them the payment of his pro rata thereof. The reason why Lindinger's name was not included in the notes as one of the makers thereof was that he preferred it not to be so, because he was an officer of the bank. While these loans were not made on Lindinger's "own note or obligation" (section 3812, Code 1930), he was indirectly obligated to the payment thereof, and whether expressly so intended or not was but a scheme to defeat the prohibition of the statute and within its intendment. To hold otherwise would render the statute a nullity because of the easy manner by which officers and employees of a bank could do indirectly that which it expressly forbids. These loans, therefore, come within the same category as the loans by Lindinger to himself alone.
The Scranton Fish Company was a corporation, of which Lindinger, Canty, and Gautier each owned a third of the stock. Lindinger was not an officer of the corporation, but in borrowing the money loaned it by Lindinger for the bank he and the other two stockholders determined whether the loan should be applied for, and Lindinger himself determined whether the bank should lend it. This loan is not within the provisions of the statute. It is not necessary for us to determine whether it is of such a fraudulent or dishonest character as to come within the terms of the bond. No crime was committed by Lindinger in making it, and the bank had the right to approve and adopt it; this it did through its board of directors, therefore, there is not liability on the bond therefor. The Bennie Charlton and Henry LaForce notes were owned by the Scranton Fish Company and discounted to the bank, Lindinger represented the bank in discounting the notes and participated with the other two stockholders of the fish company in determining whether the notes should be sold to the bank. What has just herein been said with reference to the loan to the Scranton Fish Company applies here.
This brings us to the appellant's liability for Lindinger's alleged defalcations under the second, or banker's blanket, bond. These are:
February 25, 1931 — Loan to himself (Hibernia Bank item) ........................................... $325.77 March 21, 1931 — Loan to Fairyland Golf Course ........ 50.00 April 2, 1931 — Loan to himself ....................... 200.00 April 28, 1931 — Loan to Fairyland Golf Course ........ 52.36 April 28, 1931 — Loan to himself (Cincinnati Boat item) ................................................ 703.64
This bond became effective at noon on the 25th day of February, 1931. The evidence is silent as to what hour of February 25, 1931, the Hibernia Bank transaction took place, and the burden was on the appellee to prove that it took place subsequent to noon of that day. There can be no recovery for this item. The Fairyland Golf Course was a partnership composed of Lindinger's wife and others, but in which he had no interest. The loans to this partnership were not within the statute and are in the same category as the Scranton Fish Company, LaForce, and Charlton notes; no recovery can be had therefor.
The loan of two hundred dollars by Lindinger to himself comes within our former opinion. This leaves only the Cincinnati boat item of seven hundred three dollars and sixty-four cents undisposed of. Counsel are in hopeless conflict as to what the amount of this item should be, and we are wholly unable ourselves to determine it on the present record. It seems that the appellant is probably liable for something thereon, so that all we can do with reference thereto is to remand the cause to the lower court for the determination thereof.
A final decree will be rendered here for the appellee for the items hereinbefore said to constitute liabilities on the bonds, and the cause will be remanded for trial only as to the appellant's liability on the Cincinnati boat item.
Sustained in part and overruled in part.