Fidelity Guar. Co. v. Bk. of Moorhead

Full title: UNITED STATES FIDELITY GUARANTY CO. et al. v. CITIZENS' STATE BANK OF…

Court: Supreme Court of Mississippi, Division B

Date published: Apr 16, 1928

150 Miss. 386 (Miss. 1928)

116 So. 605

Opinion

No. 26824.

April 16, 1928.

1. INSURANCE. In action on bank cashier's bond, in which defendants pleaded payment of two items and plaintiff joined issue thereon, evidence that, when his acts were under investigation, cashier borrowed money and paid such items, held competent.

In action on fidelity bond of bank cashier, in which defendants pleaded payment of two items sued for and plaintiff joined issue thereon, evidence that cashier received items for deposit and made no record entry thereof, but when his acts were under investigation he borrowed from S. and paid this money to bank, held competent, since any testimony pertinent to the issue was competent.

2. INSURANCE. In action on bank cashier's bond based on cashier's fraud, evidence of acts of irregularity and alleged fraudulent dealings held competent.

In action on bank cashier's fidelity bond, in which plaintiff claimed its loss was due to fraudulent manipulation of its funds by cashier, evidence that cashier drew two drafts on another bank and that cash in plaintiff bank was reduced contemporaneously with drawing of drafts, although plaintiff bank sustained no loss by transaction, and that cashier instructed employee to add $1,500 to her cash at close of day's business in order to force balance and evidence of other acts of irregularity and alleged fraudulent dealings, held competent, since fraud was gist of inquiry.

3. INSURANCE. Bank, by seeking to pursue funds paid out by cashier on draft of another bank without authority, did not ratify cashier's acts barring recovery on cashier's bond.

Where cashier of plaintiff bank paid draft for $3,679.80 drawn by B. bank, to which plaintiff bank was under no obligation, after directors had instructed cashier not to deposit any money in B. bank and not to make loans exceeding $300, and plaintiff bank, believing its money had wrongfully come into B. bank, then being liquidated, sought to pursue funds, plaintiff did not by such acts ratify cashier's unauthorized acts so as to bar recovery on cashier's fidelity bond, since, if bank's effort to pursue funds had been successful and all or part of lost money recovered, it would have inured to benefit of bond company.

4. BANKS AND BANKING. Bank's ratification of cashier's acts of tortious nature, committed contrary to express order, must be made with full knowledge of facts.

Bank's ratification of acts of cashier of tortious nature, committed contrary to express order of bank, must be explicit and made with full knowledge of facts.

5. INSURANCE. Where bank sought to pursue funds paid out by cashier on draft without authority, without knowledge of all facts, there was no ratification barring recovery on cashier's bond.

Where cashier of plaintiff bank paid draft for $3,679.80 drawn by B. bank, to which it was under no obligation, after directors had instructed cashier not to deposit any money in B. bank and not to make loans exceeding $300, and plaintiff bank, believing its money had wrongfully come into B. bank, then being liquidated, made application for guaranty certificates, and, on refusal of state banking department to issue same, instituted suit in chancery court to compel issuance of certificates, before bank had knowledge of all facts, there was no ratification of cashier's unauthorized acts barring recovery on cashier's fidelity bond.

6. INSURANCE. Fidelity bonds must be construed by same principles of law applicable to insurance contracts.

Bank cashier's fidelity bonds must be construed by same principles of law applicable to contracts of insurance.

7. INSURANCE. Where language of cashier's fidelity bond is ambiguous, it must be construed most strongly in favor of bank.

Where language of bank cashier's fidelity bond is ambiguous, it must be construed most strongly in favor of bank.

8. INSURANCE. To establish liability on bank cashier's bond, proof need not be sufficient to convict of embezzlement.

To establish liability on bank cashier's fidelity bond indemnifying bank against such "loss as may be sustained by employer by reason of fraud or dishonesty of said employee in connection with the duties of his . . . position amounting to embezzlement or larceny," and providing that bond company should be responsible for moneys, securities, or property diverted from employer, proof need not be sufficient to convict of crime of embezzlement.

9. INSURANCE. To create liability on cashier's bond, cashier need not have appropriated money to his own use.

In order to establish liability on bank cashier's fidelity bond indemnifying bank against such "loss as may be sustained by employer by reason of fraud or dishonesty of said employee in connection with the duties of his . . . position amounting to embezzlement or larency," and providing that bond company should be responsible for moneys, securities, or property diverted from employer, it was not necessary for bank to show that cashier had appropriated money to his own use.

APPEAL from circuit court of Sunflower county; HON. S.F. DAVIS, Judge.

Elbert Johnson, for appellant.

I. We shall argue three propositions, namely (1) that the court over the objections of the defendants in the court below admitted evidence that was incompetent and materially prejudiced their case. (2) That the appellee ratified the acts of its cashier and agent in cashing the draft for three thousand six hundred seventy-nine dollars and eighty cents and accepting therefor the two cashier's checks of the Bank of Commerce; (3) and that the items sued for in the first and second counts having been paid, there is no liability under the bond, because the appellee has not sustained a pecuniary loss by reason of the fraud or dishonesty of its cashier, Foster, amounting to embezzlement or larceny. On either the question of ratification (2) or of liability on the bond (3), a peremptory instruction should have been granted to this appellant; and hence as to it the case should be reversed, and judgment entered here for it. The issue on the first and second counts of the declaration was whether or not the items sued for in those counts had been paid; the only plea filed to the first two counts was a plea of payment, on which the plaintiff joined issue. The testimony that Foster, as the cashier of the appellee bank, received a deposit of one thousand five hundred dollars and a deposit of three hundred dollars made by a representative of the First National Bank, of Corinth, and personally issued deposit slips therefor and did not give the First National Bank credit for the amounts deposited was, on the issue, irrelevant and incompetent, and highly prejudicial to the defendants in the determination of the issues raised by the allegations in the third count. Again, testimony was offered with reference to certain drafts for three thousand six hundred dollars and for two thousand and thirty-five dollars drawn in April, 1926, by the Citizens' State Bank on the Bank of Commerce.

It seems that in May, 1925, the Citizens' State Bank deposited five thousand two hundred dollars with the Bank of Commerce at Boyle. This money was duly repaid yet testimony was admitted with reference thereto, although the matter had nothing to do with the items sued for. Testimony was admitted that in May, 1925, more than a year before the claims sued on arose, some changes were made by Mr. Foster in the bank's books. An employee of the Citizens' State Bank, was introduced as a witness to prove that three or four months before the Bank of Commerce failed, Mr. Foster told her at one time that when she balanced the books the cash would be short and that she would have to add a certain amount to make the cash balance, that she did so and it balanced; what caused the shortage and what connection it had with the claim here sued on does not appear. All this testimony was of no probative value, since no connection whatsoever was shown between the matters testified about and the matters involved in the suit; appellee made effort to impeach his good faith in handling the draft, the proceeds of which were sued for in the third count, by showing or attempting to show, intimating and insinuating that there had been some frauds, theretofore committed by him in other and wholly distinct transactions; the issue on the third count of the declaration so far as this appellant is concerned was whether or not the Citizens' State Bank had sustained the pecuniary loss complained of by reason of the fraud or dishonesty of Foster, its cashier, in connection with the duties of his office or position, amounting to embezzlement or larceny. The testimony should have been confined to this issue. Evidence of other and distinct transactions was incompetent to prove fraud or dishonesty amounting to embezzlement or larceny, on the part of the bank's cashier, and should have been excluded. Cocke et al. v. Carrington Shoe Co., 18 So. 683.

II. Ratification. Foster, the cashier of the Citizens' State Bank paid the draft of three thousand six hundred seventy-nine dollars and eighty cents drawn on it by the Bank of Commerce at Boyle, and accepted in payment thereof the cashier's checks issued and delivered to the Citizens' State Bank by the Bank of Commerce. On January 13, 1927, just three days after the declaration in this suit was filed, the Citizens' State Bank made proof to the State Banking Department of its claim, swearing that it was the bona-fide owner and holder of the cashier's checks and as such was entitled to have issued to it a guaranty certificate or certificates therefor. The situation is just as if the Citizens' State Bank had sued the Bank of Commerce on the cashier's checks issued by it; after having sued the Bank of Commerce, with knowledge of the facts under which the cashier's checks were delivered to it, it could not be heard to say that its cashier was without authority to accept the cashier's checks. 2 C.J., page 520; 31 Cyc., page 1285; 21 R.C.L., pp. 927, 928, sec. 106; 2 C.J., p. 513, Sec. 132; Van Dyke v. State, 24 Ala. 81; 31 Cyc., p. 1280; Meyer, Weiss Company v. Morgan, 51 Miss. 21; Watson v. Southern Insurance Co., 31 So. 904; Hartsell v. Roberts et al. (Ala.), 64 So. 90; Newman v. Morgan (Ala.), 81 So. 548. The principles of ratification by acts are as applicable to corporations as to private persons. Am. Leading Cases (5 Ed.), note page 719; Planters Bank v. Sharp et al., 4 S. M. 75, 82; Bank of Augusta et al. v. Conrey, 28 Miss. 667; Walker v. M. O.R.R. Co., 34 Miss. 245, 255; 1 Am. Eng. Ency. of Law (2 Ed.), page 1185, note 4; Shoninger v. Peabody (Conn.), 14 A.S.R. 88.

III. The Bond. The bond declared on provides that the appellant, the United States Fidelity Guaranty Company, will make good and reimburse to the appellee, the Citizens' State Bank, such pecuniary loss as may be sustained by the latter by reason of the fraud of dishonesty of E.H. Foster, its cashier, in connection with the duties of his office or positions, amounting to embezzlement or larceny. The bond provides that the acts of fraud or dishonesty must amount to embezzlement or larceny, but the declaration charges only embezzlement, so larceny is eliminated. The bond does not engage to reimburse the appellee for any loss which may be sustained by reason of the fraud or dishonesty of E.H. Foster, its cashier, but only by reason of such fraud or dishonesty of said cashier, as amounts to embezzlement. The instructions take from the consideration of the jury the question of whether or not the alleged fraud or dishonesty amounts to embezzlement. Conceding now, for the sake of the argument, that his acts were fraudulent or dishonest, the question arises whether there is any liability on the bond if the fraud or dishonesty does not amount to embezzlement; in other words, whether any meaning is to be attached to the phrase in the bond, "amounting to embezzlement or larceny." The general rule is that if it is fairly and reasonably susceptible of two constructions, one favorable to the insured and the other to the surety company, the construction most favorable to the insured must be adopted; but the rule does not apply if the terms of the contract, like the terms of the one here, are unequivocal and unambiguous. Ill. Surety Co. v. Donaldson (Ala.), 79 So. 667, 674. In the case of City Trust, Safe Deposit Surety Company v. Lee (Ill.), 68 N.E. 485, the bond guaranteed loss sustained through the dishonesty or any act of fraud of the employee amounting to larceny or embezzlement, and the court held that the phrase, "amounting to larceny or embezzlement," did not qualify the word "dishonest," but only the word "fraud." A later case in the Illinois appellate court construing a bond guaranteeing against loss by any act of fraud or dishonesty amounting to larceny or embezzlement, held that the words "amounting to larceny or embezzlement" qualified the word "act," so that unless the fraud or dishonesty amounting to larceny or embezzlement, there was no liability on the bond. American Bonding Co., etc., v. New Amsterdam Casualty Co., 125 Ill. App. 33. Embezzlement is a statutory crime and for one to be guilty thereof, the money or property embezzled must be converted to his own use or misappropriated to benefit himself. Clark v. State, 69 So. 497; Bell v. State, 70 So. 456. In the case of Maryland Casualty Company v. Hall, 125 Miss. 792, 88 So. 407, the point was whether proper notice of the loss has been given as required by the bond. The bond insured against loss sustained by reason of acts amounting to larceny or embezzlement; the court held that notice thereunder was not to be given until the employer had knowledge of the facts that would constitute the crime.

In Reed et al. v. Fidelity Casualty Co. of New York (Penn.), 42 A. 294, the bond insured against any pecuniary loss by reason of the fraudulent or dishonest acts of the employee amounting to embezzlement or larceny. The court held that unless a criminal offense could be proven against the employee, the bond does not insure against his acts. The language in the bond construed in that case is almost identical with the language in the case at bar. In Williams v. U.S.F. G. Company (Md.), 66 A. 495, the court held that there could be no recovery for any acts or conduct of the employee which fell short of larceny or embezzlement, and that by embezzlement was meant the statutory offense consisting of the fraudulent appropriation to one's own use of money or goods entrusted to him by another. In The Guarantee Company of North America v. Mechanics Savings Bank Trust Company, 100 Fed. 559, 40 C.C.A. 542, the obligation of the bond was that the surety should make good the losses resulting from such fraudulent acts of the employer's cashier as were equivalent to embezzlement or larceny. The cashier paid overdrafts not authorized by the bank; but he did not appropriate the moneys to his own use or receive any benefit therefrom. The court says: "That the loss was not one which by any fair interpretation would bring it within the obligation of the surety on the bond of the cashier." In Farmers State Bank v. Title Guaranty Trust Company (Mo.), 113 S.W. 1147, the obligation in the bond sued on was in the exact language of the obligation in the bond here sued on (Tr., p. 71 bottom, and 72 top), and the precise question we are now discussing was before the court. The court held that there was no embezzlement by Woolf, the cashier and hence no liability on the bond. Incompetent evidence having been admitted materially prejudicing the rights of this appellant, and the learned trial judge having erred also in refusing to grant it the peremptory instruction on either or both of the grounds hereinabove set forth and argued, we most respectfully submit that on principle and authority not only should the case be reversed, but judgment should be rendered here for this appellant.

Forrest G. Cooper and P.W. Allen, for appellee.

The Citizens' State Bank contends, on the one hand, that Foster, its cashier, fraudulently and dishonestly diverted from its funds three thousand six hundred seventy-nine dollars and eighty cents and that it has suffered a loss of that amount; that the fraudulent diversion was accomplished through a scheme or conspiracy of its cashier. The surety company on the other hand, contends that Foster's diversion of the funds of the Moorhead Bank was not fraudulent, did not amount to embezzlement and was simply an unwise and unauthorized act of its cashier. They further contend that the Citizens State Bank by its conduct has ratified the fraudulent diversion. They further contend that certain incompetent evidence was allowed. The Fidelity bond (Tr., p. 16), exhibited with the declaration, obligates the surety company to "make good and reimburse to the said employer such pecuniary loss as may be sustained by the employer by reason of the fraud or dishonesty of said employee in connection with the duties of his office or position amounting to embezzlement or larceny . . . it being the true intent and meaning of this bond that the company shall be responsible as aforesaid for monies, securities or property diverted from the employer within the period specified in this bond." (Italics ours.)

The plaintiff filed its replications to these three special pleas, setting up ratification, in which the Moorhead Bank denied that at the time of the diversion of said funds the Bank of Commerce had issued any cashier's checks, or that the plaintiff had them in its possession; denied that Foster gave them all the facts in regard to said transaction; denied that it ratified or approved the dishonest acts of Foster; that its officers, without express authority from it, did request the banking department to protect the bank in its rights to the stolen and diverted funds, but at the time of said request and the filing of said replications plaintiff was not in possession of all the material facts and circumstances in connection therewith; did not then know whether said transactions could be proved as valid or invalid, fraudulent or honest; that it did not thereby accept said cashier's checks in payment of said fraudulent diversion; that it did not request the surrender of said cashier's checks; that all of its acts in connection with the banking department and said cashier's checks were to preserve for the benefit of itself and the surety company whatever rights it had in said diverted funds, and at that time did not know what its rights were; that at that time plaintiff did not know that said cashier's checks were a part of the fraudulent scheme of the defendant Foster to embezzle and cover up the embezzlement of the bank's funds; that in filing said suit the bank was taking the only course open to pursue the stolen funds and that said action in pursuing said stolen funds inured to the benefit of all parties to this cause, including the surety company, and was made at a time when the plaintiff was not in possession of all the material facts and circumstances showing whether said transaction was valid or invalid; that it did not ratify or intend to ratify the fraudulent and dishonest conduct of Foster, its cashier; that the only method of pursuing the stolen funds which went into the failing Bank of Commerce must have been done within six months after the Bank of Commerce failed; that it did not file said motion until just before the six months' statute of limitations expired; that the Citizens State Bank was induced to pursue the stolen funds or to seek to recover the money in the Bank of Commerce of Boyle by the acts and representations of the defendants themselves who sought to make the plaintiff believe that the transaction was valid and regular; and at that time the plaintiff was not in possession of the material facts and circumstances, therefore, the defendants are estopped to claim ratification by reason of its own representations.

We alleged in our declaration that Foster was under the domination of C.E. Young, or the Bank of Commerce and was under secret obligations to them and that his conduct was the result of a conspiracy between him and Young. First of all let's see what the records show as to the principals in the drama of high finance. First we have C.E. Young, President of the Bank of Commerce. Young and Foster were associated together in the Bank of Commerce, one as cashier and the other as president. The Bank of Commerce is wrecked just at the time the Citizens' State Bank is about to be wrecked by Foster. The court did not allow us to show where Young was, but bank officials who wreck banks should be behind prison bars. The court ruled out all records of the Bank of Commerce. (Tr. p. 195.) We believe the court was too strict in ruling out this evidence and while it did not go before a jury in the lower court, still the records of the Bank of Commerce are before this court and they disclose as competent that the Bank of Commerce was short when Foster left there as cashier and the amount is similar to the amounts involved in this case. This man Foster is thoroughly dishonest and fraudulent. This is important in considering his motives in this transaction. We find him stealing one thousand five hundred dollars and a few days later three hundred dollars of the bank's money. That was competent as proof on all three of the counts. This stealing took place about the same time as the diversion of the funds to the Bank of Commerce. Foster stole one thousand five hundred dollars on June 15, 1926, and the three hundred dollars on June 22, 1926, just three days before Young drew the draft in question. Foster in his every act is favoring The Bank of Commerce and Young. He admits that he owes both Young and the Bank of Commerce. He admitted that Young was the best friend he ever had in the world. We proved that there were numerous mysterious telephone conversations between Young and Foster. That whenever Young demanded money from Foster. Foster gave it from the funds of the Citizens' State Bank. (Tr., pp. 103-4.) Foster's acts and conduct following the failure of the Bank of Commerce show his guilt. His first act, after knowing the Bank of Commerce had failed, was to call his co-conspirator Young over the telephone. (Tr., p. 389.) His next act was to tell the other confederate, Hill, that they had played the mischief. (Tr., p. 401.) When confronted by the bank examiners and some of the officials of the Citizens' State Bank he declines to talk until he can see his lawyer. (Tr., p. 113.) Honest cashiers who act honestly can afford to talk without first talking with their lawyers. We next find Foster after the failure admitting to Dr. Harvey his liability on the diversion (Tr., p. 346) and admitting the same to the officials of the bank. (Tr., p. 114.) We next find him admitting that he had not made correct entry of the transactions in the bank's records. Where did the bank first find the draft? Foster was fired on or about July 21, 1926 (Tr., p. 100). Some three weeks later, after Foster had scoured the country and searched for friends to help him dig up the embezzled money, Foster comes up and delivers up the draft from his own pocket where it had been folded and kept. Where do we find the cashier's checks when the unwholly scheme is discovered? In the Citizens' State Bank? No. We find them in the failed bank which issued them. The Moorhead bank records do not disclose the transaction at all, except in the remittance letter which is not an entry on the records at all.

Appellants state that it was error to admit evidence with reference to the three thousand six hundred dollars and the two thousand and thirty-five dollar items. There is shown that same mysterious three thousand six hundred dollar item which, with interest, is about the same amount Foster was found short; that item with other items were not handled in the regular course of their dealings; those drafts were drawn on the Boyle bank; they went through the New Orleans bank to the credit of the Citizens' State Bank and were paid by the Boyle bank at a time when appellee had no money in the Boyle bank, and at a time after Foster had been positively prohibited from placing any money in the Boyle bank. Coincident with the drawing of the three thousand six hundred dollar-draft there was drawn a draft of two thousand and thirty-five dollars and the records of the bank show that five thousand six hundred thirty-six dollars cash was drawn by Foster from the appellee bank; the currency of appellee bank decreased about that amount on the very day. Foster was unable to make any satisfactory explanation of it. The drafts left appellee bank, were drawn on the Boyle bank, the currency left appellee bank. Appellee had no funds in the Boyle bank, yet the record shows the draft for three thousand six hundred dollars was paid by the Boyle bank. The court will note also that Foster did not know how (Tr., p. 135) the two thousand and thirty-five dollar item was paid, but the record shows (Tr., pp. 135-137) that the two thousand and thirty-five dollars which left with the three thousand six hundred dollar-draft came back not paid, but was sent by Foster some forty days later to the bank of Commerce Trust Company at Memphis, and was paid. All of these checks and transactions are shown to be a fraudulent and unauthorized misuse of the appellee's funds. They are so closely connected with the item of three thousand six hundred seventy-nine dollars and eighty cents here sued on in time and in circumstances as to shed light on the fraudulent intent of Foster when he placed appellee's money in the Boyle bank, causing it to sustain a pecuniary loss. When Foster was asked about it and the court instructed the defendant he did not have to testify if it would tend to incriminate him, he refused to testify. Admission of testimony with reference to the proof of fraudulent intent is an exception to the general rule of evidence in that, "similar fraudulent acts are admissible in cases of this description, if committed at or about the same time, and when the same motive may reasonably be supposed to exist, with a view to establish the intent of the defendant in respect to the matters charged against him in the declaration." 1 Jones on Evidence, pages 717, 718 and 719; 20 Corpus Juris, sec. 81, page 485; 9 R.C.L., sec. 41, page 1295; 35 Miss. 201-203; Berhein v. Debrell, 66 Miss. 199, 5 So. 693.

Ratification. If we had made no effort to recover the property diverted, knowing that it went to the Bank of Commerce, the bonding company would have pleaded that as an estoppel or other defense. We were under the duty of taking "all reasonable precautions to prevent loss or default" and of trying to lessen the amount of the pecuniary loss, if possible. The bonding company is not a surety. They do not promise to pay if the cashier cannot or will not pay. Their obligation is an original undertaking, is an insurance contract and "such a contract is subject to the rules applicable to insurance contracts generally and not to the rules of or applied to ordinary sureties for accommodation." 25 C.J., page 1089. Their contract of indemnity is based on a good consideration, while that of a surety is not necessarily so. "When liability has once accrued on a contract of indemnity the indemnator is responsible to the indemnitee to the full extent of the loss suffered." 14 R.C.L., page 58, sec. 17. Being an original contract "the obligation under a contract of indemnity will not, any more than other legal obligation, be discharged by the mere expression of an intention to abandon it, or by conduct implying such intention, although an expectation raised by such conduct may have been acted on. This is only an application of the principle that representation of an intention in the future, as distinguished from representation of a fact, is a mere promise, and if without consideration, is nudum pactum enforceable neither in law or in equity." 14 R.C.L., page 60. A contract of indemnity is clearly distinguished from an obligation of suretyship. 31 C.J. 420. By attempting to collect on the cashier's checks, by seeking to preserve whatever right was had in the diverted funds, we have not increased the liability of the company; we have not deprived them of any defense; we have not prejudiced them in any way; we have not deprived them of the right of subrogation or ratable contribution; we have not deprived them of the right to collect from the employee, Foster. 31 C.J. 444; U.S. Fidelity Guaranty Co. v. Bank of Hattiesburg, 128 Miss. 605, 91 So. 344.

In Meyer v. Blakemore, 54 Miss. 570, our court decided that the obligation of an indemnitor is not discharged by the taking of a mortgage on property supposed to be sufficient to pay the amount, without consent. He is not discharged by failing to probate his claim in bankruptcy of the principal. The doctrine of ratification, therefore has no place as a defense on the part of the bonding company, unless the acts charged as effecting ratification has destroyed something of value or deprived it of some benefit or right.

Even if there could be a valid ratification, the record shows there was none. Both knowledge and intent were lacking. It was a question of fact for the jury to decide, based on disputed testimony fairly submitted to the jury on instructions and the jury's verdict shows that it found as a fact that the Citizens' State Bank was not acquainted with the essential and material facts concerning the illegal conduct of Foster at the time of filing said suit. There is much evidence in this record disclosing that the Citizens' State Bank was not acquainted with the records of the New Orleans banks, the Jackson banks, the Memphis banks, the Bank of Commerce records, or even all of its own records. The records showing beyond dispute that some of the material evidence showing the motives of Foster from the records of the appellee itself were accidentally discovered just a day or two before the trial of this case. The acts and conduct of Foster were fraudulent and dishonest and amounted to violation of the laws of Mississippi. C.M. Davis, President, or any other official of the bank, was powerless to authorize such an illegal transaction. It is elemental that ratification of an unauthorized act after it is done is based upon the fact that the principal had the right to authorize it before it is done. A principal cannot authorize his agent to commit a crime. 2 C.J., sec. 84, page 470; Sec. 85, page 471. A principal cannot ratify something it cannot lawfully do.

But if we are wrong in all of the above it must be admitted that the Citizens' State Bank could pursue the actual diverted funds. If the Bank of Commerce had not failed and it had been possible to identify the actual money it could have been replevied. The failure of the Bank of Commerce closed the door by statute to all other remedies, except that of asking for guaranty certificate. That was the only practical and possible remedy. The bank, being under a duty in good faith to the bonding company to take all reasonable means to salvage or lessen the loss, took the only practical action. The cashier's checks, whether void or valid, were the only evidence from the Bank of Commerce of our diverted funds. The court will take judicial notice that guaranty certificates from a failed banking institution constitute the only practical asset and the only reasonable way of recovering on losses.

If an act done or a contract made by an agent in behalf of a principal is by positive law or public policy illegal and void it cannot be ratified. 31 Cyc. 1248; 19 L.Ed. (U.S.) 627; Jefferson v. Arrighi, 54 Miss. 668; Memphis v. Scruggs, 50 Miss. 284; 40 Century Digest Principal Agent, sec. 624. There are certain acts which cannot be legally delegated to an agent to perform, such as acts to be done in violation of law or which would contravene public policy and which would amount to crimes against the state, therefore such acts cannot be lawfully delegated. It necessarily and logically follows that they cannot as such illegal acts be ratified. 21 R.C.L., page 925, secs. 104-105; 5 A.S.R. 613, 48 A.S.R. 629, 59 A.S.R. 636, 13 L.R.A. 219. Corporations cannot ratify a contract which is ultra vires and which it could not lawfully make in the first instance. 21 R.C.L., sec. 104, page 926; 7 R.C.L., sec. 664, page 663; 51 L.R.A. (N.S.) 112.

The Bond. Where it is reasonably capable of two or more constructions or two meanings, then it is the duty of the court to construe it most strongly against the company. All reasonable inference from all of the wording of the bond in favor of liability will be adhered to in its construction. Walker on Fidelity Bonds, page 12. Why use the words "fraud" or "dishonesty" if only embezzlement or larceny were intended? Of course it covers statutory embezzlement and larceny but also fraudulent and dishonest diversions. Their own bond says so. In lines forty-six and forty-seven (Tr., page 73) it explains exactly what is covered, wherein appellant says: "It being the true intent and meaning of this bond that the company shall be responsible as aforesaid for moneys, securities or property diverted from the employer within the period specified in this bond." The words "responsible as aforesaid" refers to the indemnity responsibility, the promise of payment. These lines were evidently intended for some purpose and that is to explain that it covers all fraudulent and dishonest diversions. A diversion does not necessarily mean that the agent puts the money in his own pocket. It means placing it beyond the reach of the principal, and out of his control. The instructions for the appellee make it necessary for the jury to find from the evidence that there had been a fraudulent and dishonest diversion. What is a fraudulent and dishonest diversion of the funds of the banks? What that lacks of including embezzlement is merely the width of a hair. Evidently this skilfully drawn bond was intended to leave banks in the belief that it covered all fraudulent and dishonest diversions of its funds, to whomsoever delivered and howsoever accomplished, for the ways of the dishonest are devious and fraud is so varied that it cannot successfully be defined. Neither our statutes on embezzlement nor the general law on the subject exclude diversions to third parties. The loss to the bank is no less if a third party gets the funds than if Foster gets them. We have in Mississippi seven or eight statutes covering embezzlement, including sections 864 to 873 of Hemingway's Code (section 1136 to 1145 of Code of 1906). Only one of these statutes could possibly be construed to limit this crime to converting to own use. Even this one includes the act of "making away with" the goods of a principal by an agent. If the words in section 864 of Hemingway's Code "to his own use" mean anything they refer only "to convert" used immediately before. They do not necessarily refer back to "embezzle," "fraudulently secrete," or "make away with." Moreover section 867 of Hemingway's Code, says: "If any person shall fraudulently appropriate personal property or money which has been delivered to him on deposit . . . or on any other contract or trust by which he was bound to deliver or return the thing received . . . "is guilty of embezzlement." Does that statute say that he must appropriate it to his own use? Does it not cover any breach of trust by which the personal property or money is appropriated? Of course it covers any appropriation either to his own benefit or for the benefit of any friend. All other sections of the Code in defining embezzlement include, besides conversion to his own use, diversions "disposing of" or failure to deliver to his successor in office trust funds by officers and the like.

Of course where the indictment charges that he converted the money to his own use and benefit, it must be proved. That was the situation in the case of Bell v. State, 70 So. 456, cited by opposing counsel, and this case is therefore of no value. In the other case referred to by appellant ( Clark v. State, 69 So. 497) the state set out to prove, as alleged, that the proceeds of certain notes "went to Clark" and the court intimates in the last part of the opinion that if the evidence had shown that the proceeds of the notes, which went to Clark's wife were from worthless notes when discounted a different situation would have resulted. 20 C.J., page 429, sec. 16, and many cases in notes 25 and 26; Rullell v. State (Ark.), S.W. 540. Record shows fraudulent and dishonest diversion. There is abundant testimony in the records disclosing that there was a fraudulent and dishonest diversion of the bank's funds and that the cashier's checks on the failed institution issued just before it was wrecked was merely a blind to give an impression of respectability to the dishonest transaction.

While there is a distinction between fraud and dishonesty and fraud and dishonesty amounting to embezzlement, it must be borne in mind as pointed out by the court of appeals of Kentucky ( Champion v. American B. T. Company, 115 Ky. 863), that such strict proof as would be required in a prosecution for embezzlement is not required in a civil suit to recover on a bond. Thus a bond prepared by a surety company guaranteeing an employer against "loss by reason of the dishonesty or fraud amounting to larceny or embezzlement," of an employee, has been held by the supreme court of Illinois ( City Trust, etc., v. Lee, 204 Ill. 69) to be a guaranty against dishonesty or fraud of the employee whether such as would render him liable to indictment for larceny or embezzlement, or not. It was held, however, in Champion v. American B. T. Co., 115 Ky. 863, that the terms "larceny" and "embezzlement" in such a bond are used as generic terms to indicate the dishonest and fraudulent breach of any duty or obligation upon the part of an employee to pay over to his employer, or account to him for any money, securities or other personal property the title to which is in the employer, that may in any manner come into the possession of the employee; and, further, that in order to recover, it was not necessary for the plaintiff to introduce such evidence as would convict the employee of the crime of larceny or embezzlement, as defined by the laws of the state. The acts of a bank cashier in lending the funds of the bank upon unsecured notes against the will and without the authority of the bank may constitute embezzlement. U.S. Fidelity Guaranty Co. v. Muir, 115 Fed. 264. In McElroy v. People, 202 Ill. 473, 66 N.E. 1058, 14 Am. Crim. Rep. 331, which is quoted approvingly in City, etc., v. Lee (Ill.), 68 N.E. 485, it is pointed out that the phrase "amounting to larceny or embezzlement," does not qualify the word "dishonesty," and that the appellant is liable upon the bond for any financial loss sustained by the appellee through the dishonesty of Morrow, even though the conversion of the rents collected by him to his own use would not subject him to an indictment and conviction for larceny or embezzlement. And see London Guarantee Acci. Co. v. Rochelaga Bank (Rap. Ind. Quebec), 3 B.R. 25; Bell v. Clinton Oil Mill (1924), 129 S.C. 242 — S.E. 7; Massachusetts Bonding Ins. Co. v. Texas Finance Corp. (1924) — Tex. Civ. App. —, 258 S.W. 250; Chapman v. Nieman (Texas), 276 S.W. 302; Fidelity C. Co. v. Blount Plow Works (1922), 78 Ind. App. 529, 136 N.E. 559; National Surety Co. v. Williams (1917), 74 Fla. 446, 77 So. 212; Federal Surety Co. v. State (1926), — Okla. 243, Pac. 936. The case of Maryland Casualty Company v. Hall, 125 Miss. 792, 88 So. 407, cited by opposing counsel, is clearly distinguished from our case because the bond in that case covered nothing but larceny and embezzlement with no reference to either fraud, dishonesty or diversions. What the court said was in explanation of why notice of loss need not be given on mere suspicion. The case cited by opposing counsel of Guarantee, etc., v. Mechanics, etc., 100 Fed. 559, 40 C.C.A. 542, was merely one where it was sought to hold liable because of the acts of a cashier in permitting overdrafts and there was no evidence that these overdrafts were fraudulent.

The Missouri case of Farmers State Bank v. Title, etc., 113 S.W. 1147, which is relied on so strongly as the principal case supporting appellant's position, is not in point. In that case the third party presented to the bank drafts which were credited to his account. These drafts were never paid. The drafts may have been perfectly valid in payment of a valid obligation. The Pennsylvania case, cited by appellant (42 A. 294) represents that small minority of decisions which do hold that the crime of embezzlement must be proven, but the great weight of authority is against that position. Moreover, it is not shown in that case that the bond there expressed an intention to cover only fraudulent and dishonest diversions. The Maryland case, cited by appellant ( 66 A. 495) is not in point for in that case the bond apparently not only does not express an intention to cover merely diversions, but expressly says that it is intended only to cover such dishonest acts as amount to embezzlement.

We, therefore, respectfully submit that the record discloses by competent evidence, as the jury found, that Foster fraudulently diverted of our money three thousand six hundred seventy-nine dollars and eighty cents and that the bank has sustained a loss in that sum.

PACK, J.

Appellee, the Citizens' State Bank of Moorhead, brought suit in the circuit court against E.H. Foster and the United States Fidelity Guaranty Company, appellants, on a fidelity bond executed by the appellant company to indemnify appellee against loss by reason of fraud or dishonesty, amounting to embezzlement or larceny, of Foster, cashier of appellee bank.

Foster was cashier of the Citizens' State Bank of Moorhead, and C.E. Young, cashier of the Bank of Commerce of Boyle, both being small town banks. For brevity, these banks will be referred to as Moorhead bank and Boyle bank.

The declaration was in three counts; each being predicated upon separate items of loss claimed to have been sustained. The first count alleged a fraudulent diversion by Foster of one thousand five dollars of the money of the Moorhead bank; it being alleged that Foster, as cashier, accepted, on June 15, 1926, from a Corinth bank, said sum for deposit, issued deposit slip therefor, but made no record entry thereof. The second count was based upon an alleged diversion of three hundred dollars, deposited by the Corinth bank on June 22, 1926, and was handled by Foster in the same manner. The third count alleged that on June 25, 1926, the Boyle bank, through Young, drew a draft on the Moorhead bank for the sum of three thousand six hundred seventy-nine dollars and eighty cents which was paid, by Foster, with funds of the Moorhead bank; that the Moorhead bank was not indebted to the Boyle bank, neither having an account with the other, and that the Moorhead bank was under no obligation whatever to the Boyle bank; that Foster had positive instructions from his directors not to deposit any money of the Moorhead bank in the Boyle bank, and was prohibited from making loans in excess of three hundred dollars; that, at the time of the said transaction, the Boyle bank was insolvent, which condition was known to Foster; that, at the time of the said diversion, Foster was under personal and secret obligations to Young; and that, in furtherance of said fraudulent scheme, the said Foster concealed said transaction and made no entry thereof on the records of appellee bank. The Boyle bank failed in July, 1926, and was taken over by the state banking department for liquidation; and it was further alleged that Foster fraudulently diverted said last-mentioned sum by wrongfully cashing said draft.

Pleas of payment were filed by both defendants to the first and second counts. Defendants plead the general issue to the third count, and also filed three special pleas raising the point that the act of Foster in said transaction had been ratified by the Moorhead bank.

The appellee, Moorhead bank, joined issue on these special pleas, averring, in substance, that it did not have full knowledge of the fraudulent acts of Foster at the time of the alleged ratification, and there could be no ratification without full knowledge and intent to do so, and, further, that the alleged acts of ratification were merely efforts to pursue the stolen funds, not only to preserve its rights, but also to preserve the rights of the appellant bond company. The jury found in favor of the Moorhead bank on the third count, and judgment was entered accordingly.

Three points are argued as grounds for reversal: First. It is contended the court admitted incompetent testimony. Appellee did not deny that Foster had refunded the items of one thousand five hundred dollars and three hundred dollars to the bank, but insisted that said payments should be applied to the item set out in the third count. In the development of this issue, it was shown that Foster received these items for deposit from the Corinth bank, and made no record entry thereof; but, when his acts were under investigation, he borrowed from one Smith and paid this money to appellee bank. Defendants having pleaded payment of the two items sued for in the first and second counts, and the plaintiff having joined issue thereon, any testimony pertinent to that issue was competent.

During April, 1926, the Moorhead bank, through Foster, drew two drafts on the Boyle bank, aggregating five thousand six hundred and thirty-five dollars. The proof showed that cash in the Moorhead bank was reduced contemporaneously with the drawing of these drafts. Foster declined to state who received this money on the ground that it might incriminate him. The Moorhead bank sustained no loss, however, by this transaction, as the drafts were later paid by the Boyle bank. This testimony was admitted over objection, as well as other acts of irregularity and alleged fraudulent dealings between Foster and Young. These transactions took place during the months of April, May, and June, prior to the date of the alleged diversion of the said sum of three thousand six hundred and seventy-nine dollars and eighty cents, which is alleged to have occurred on July 10th. A young lady employee of the Moorhead bank was permitted to testify, over objection, that some three or four months prior to the alleged diversion Foster instructed her to add one thousand five hundred dollars to her cash at the close of the day's business, in order to force a balance. It is urged that none of this testimony was material to the main issue and was prejudicial to the appellants.

The theory of appellee was based upon the alleged fraud of the cashier, Foster, and that its loss was due to the fraudulent manipulation of its funds by Foster. In Bernheim et al. v. Dibrell et al., 66 Miss. 199, 5 So. 693, this court held:

"The fraud of the debtor was an independent fact, and any evidence relevant to that fact was competent. Whatever she did at or about the time of the transaction under investigation calculated in its nature to throw light upon the intent with which she made that transfer, was competent whether it preceded or succeeded the transfer itself. It is not essential to the competency of such evidence that it should relate to transactions contemporaneous with the one investigated. If they are so closely related in time that the intent that governed in the one may fairly and reasonably be inferred to be the intent that controlled the other, then the one sheds light upon the other, and is therefore a relevant subject of investigation."

Since fraud was the gist of the inquiry, this testimony was competent. Intent is incapable of direct proof, and necessarily great latitude is allowed in establishing this element of the offense. 20 C.J. 485; Jones on Evidence, vol. 1, 717; 9 R.C.L. 1295.

Appellant's second contention is that the acts of Foster were ratified, and that this should bar recovery. The Boyle bank, acting through Young, drew the draft in question on June 25, 1926, at which time the solvency of this bank was in question. The draft was handled in the following manner: It was signed "Bank of Commerce by C.E. Young," payable to "ourselves," and forwarded to the Capital National Bank of Jackson; by it, on June 28th, indorsed, and sent to its correspondent Canal Bank Trust Company, New Orleans, which indorsed same on June 29th, and forwarded to Moorhead, where it was received by Foster about July 1st, but held until July 10, 1926, when he issued exchange on the Bank of Commerce Trust Company, of Memphis, Tenn., payable to the Canal Bank Trust Company, of New Orleans, which, of course, paid the proceeds to Boyle bank. As stated, the Boyle bank had no account with the Moorhead bank, and the latter was under no obligation to pay the draft. Foster carried this item in bank as cash from July 10th to July 16th, when he received two cashier's checks from Boyle in the sums of one thousand and eight hundred dollars and one thousand eight hundred seventy-six dollars and nineteen cents, respectively. Foster drew his personal draft on the Boyle bank for the difference of two dollars and ninety cents, and sent all three items to the Bank of Commerce Trust Company, of Memphis, Tenn. On July 21st thereafter, this bank returned these items to the Moorhead bank unpaid. Foster then sent the three items to the Boyle bank, which failed about this time.

It was further shown that Foster issued exchange for the draft five days prior to the receipt of said cashier's checks, and the manipulation of this transaction caused a loss to the Moorhead bank in the total amount of the draft. The appellee, the Moorhead bank was not permitted by the court to show what ultimately became of the proceeds of the said draft, aside from showing that it went to the Boyle bank controlled by the said Young, its cashier.

Subsequent to the failure of the Boyle bank, the directors of the Moorhead bank began an investigation. They pressed Foster to make good this loss. The original draft was not among the records of the Moorhead bank; Foster having retained possession thereof. However, he finally delivered it to the directors. Upon discovery of the loss, and that the said two cashier's checks had been returned to the Boyle bank and were then in possession of the state banking department, application was made to this department for issuance, to the Moorhead bank, of guaranty certificates to the amount of the said cashier's checks, and, upon the refusal of this department to issue same, suit was instituted by the Moorhead bank in chancery court seeking to compel the issuance of said certificates. This suit seemed to be pending at the time of trial of this case.

Did these acts constitute ratification of the alleged unlawful diversion or embezzlement of the bank's money by Foster? The obligation of the bond contract is in the nature of an indemnity. It is what is generally termed a fidelity bond. For a valid consideration, it obligates to indemnify appellate bank against such "loss as may be sustained by the employer (the bank) by reason of the fraud or dishonesty of said employee (Foster) in connection with the duties of his . . . position amounting to embezzlement or larceny." The bank, believing its money had wrongfully gone into the Boyle bank, then being liquidated, sought to pursue the funds. If this effort had been successful, and all or part of the lost money recovered, it would have inured to the benefit of the bond company. Its liability had been in nowise increased nor its rights prejudiced by such action.

In United States Fidelity Guaranty Co. v. Bank of Hattiesburg, 128 Miss. 605, 91 So. 344, this court held in part:

"The question is, As such surety, what did appellant do which under the law had the effect to discharge its indemnitor, Herren? We think nothing. There is nothing in the record in this case tending in the least to show that appellant was not from beginning to end, in the utmost good faith, seeking to save itself and thereby save the appellee from loss as such indemnitor."

We think this statement is applicable to the point now under consideration. 31 C.J. 444; 14 R.C.L. 60.

Another principle of law against the contention of appellants is that knowledge of all the material facts must be present before ratification can be successfully relied upon as a defense. There was an issue of fact raised by the pleadings as to whether the directors of the Moorhead bank were advised of all the material facts touching the alleged wrongful diversion of the funds. The testimony was in conflict on this point. The trial court submitted this issue to the jury, and there was a finding in favor of appellee.

Knowledge of the material facts is essential before the principal will be held to a ratification of the agent's unauthorized acts. In 2 C.J., section 93, p. 476, the rule is stated as follows:

"As a general rule, in order that a ratification of an unauthorized act or transaction of an agent may be valid and binding, it is essential that the principal have full knowledge, at the time of the ratification, of all material facts and circumstances relative to the unauthorized act or transaction."

The acts of Foster being of a tortious nature and committed contrary to express order of appellee, the alleged ratification must be explicit and made with full knowledge of the facts. 2 C.J. 479.

The proof showed that many of the facts were acquired subsequent to the application for guaranty certificates, and subsequent to the filing of the chancery suit. We do not think appellant's contention can be upheld.

This brings us to the third point: Was the loss covered by the bond? We understand appellant's contention to be that, before liability can be established, it must be shown that Foster actually appropriated the diverted funds to his own use, and that the proof must be sufficient to convict of the crime of embezzlement. The bond obligates:

To "make good and reimburse to the said employer such pecuniary loss as may be sustained by the employer by reason of the fraud or dishonesty of said employee in connection with the duties of his office or position, amounting to embezzlement or larceny."

Line 46 of the bond reads: "It being the true intent and meaning of this bond that the company shall be responsible as aforesaid for moneys, securities, or property, diverted from the employer within the period specified in this bond."

A construction of that part of the bond quoted becomes necessary. This being a fidelity bond, it is now well settled that such contracts are to be construed by the same principles of law applicable to contracts of insurance. The language of the bond contract is that selected by the company issuing it for a consideration. If ambiguous, it must be construed most strongly in favor of the one indemnified. Green v. United States Fidelity Guaranty Co., 135 Tenn. 117, 185 S.W. 726; 25 C.J. 1091; case note in 100 Am. St. Rep. 775; American Surety Co. v. Pauly, 170 U.S. 133, 18 S.Ct. 552, 42 L.Ed. 977; 14 R.C.L. 47. In the Green case, supra, the supreme court of Tennessee was construing a bond written by the same bonding company appearing herein, which bond employed practically the same language as above quoted. The bond company made the same contention as made here. The court held:

"The decided weight of authority is to the effect that it is not necessary in order to his relief that the employer introduce such proof as would convict the delinquent employee of the crime of larceny or embezzlement as defined in the criminal law" — citing Champion Ice Mfg. Co. v. American Bonding Co., 115 Ky. 863, 75 S.W. 197, 103 Am. St. Rep. 356; City Trust, etc., Co. v. Lee, 204 Ill. 69, 68 N.E. 485; Rankin v. U.S. Fidelity G. Co., 86 Ohio St. 267, 99 N.E. 314; 19 Cyc. 518.

In Champion Ice Mfg. Co. v. American Bonding Trust Co., 115 Ky. 863, 75 S.W. 197, 103 Am. St. Rep. 356, the court held in part:

"It was not necessary, in order to fix the liability of appellee upon the bond, that appellant should produce, in support of any claim that it might have arising thereunder, such proof as would convict Weitkamp of the crime of larceny or embezzlement as defined by the laws of Kentucky. Such a narrow construction of the provisions of the contract is not required by the law, and was never contemplated by the parties to it."

The same rule is stated in 25 C.J. 1094, section 5, as follows:

"Where, however, such a contract insures against loss through fraud or dishonesty, amounting to embezzlement or larceny, according to some of the authorities the words 'fraud or dishonesty' are to be taken in their ordinary sense, and it is not necessary that the acts of the employee should have been such as to subject him to an indictment and conviction for larceny or embezzlement."

In City Trust Co. v. Lee, 204 Ill. 69, 68 N.E. 485, the court responding to the contention that the proof must be sufficient to convict of embezzlement, held:

"We do not agree with such contention, as we think it clear the phrase, 'amounting to larceny or embezzlement,' does not qualify the word 'dishonesty,' and that the appellant is liable upon the bond for any financial loss sustained by the appellee through the dishonesty of Morrow, even though the conversion of the rents collected by him to his own use would not subject him to an indictment and conviction for larceny or embezzlement."

See, also, National Surety Co. v. Williams, 74 Fla. 446, 77 So. 212.

In order to establish liability on the bond, it was not necessary to show that Foster had appropriated the money to his own use. This would be true even under one or more of our statutory definitions of embezzlement. In Hemingway v. State, 68 Miss. 371, 8 So. 317, this court employed this language, "There was no evidence showing that the defendant had actually converted or used any of the money;" yet his conviction was upheld. It would be different if an indictment should charge defendant with appropriation to his own use. The same principle is stated in 20 C.J. 427, section 16, as follows:

"To constitute a conversion of money or property so as to make out a case of embezzlement, accused need not appropriate the property to his own use, but is guilty if he fraudulently appropriates it to the use of another."

Appellants rely on Maryland Casualty Co. v. Hall, 125 Miss. 792, 88 So. 407. The court there did not have under consideration the question now before us. The contention was made that notice, as required by the bond, had not been given. Partial, but not complete, notice had been given of the alleged loss. On completion of the audit, the employer gave the required notice. The particular language of the opinion, which is cited as authority, was not necessary to a decision of that case, and is not controlling in the instant case. The basis upon which the parties contracted was not upon the enforcement of the criminal laws of the state; if so, that purpose could have been more clearly expressed and with fewer words. There are authorities holding to the contrary, but we prefer to follow what appears to be the weight of, and the best reasoned, authorities.

It is clear to us that the bond was breached, subjecting the maker to liability thereon. The judgment of the court below will be affirmed.

Affirmed.