NATIONAL BANK OF ASHEVILLE v. FIDELITY & CASUALTY CO. OF NEW YORK, 89 F. 819

MORRIS, District Judge (after stating the facts as above).

The plaintiff in error (also the plaintiff below), excepted to the issues submitted to the jury, and in lieu thereof tendered the following: “Did the plaintiff, knowing that Pulliam had defaulted and absconded, carrying off for his own use large amounts of its money, fraudulently make tiio defendant to enter into the contract of guaranty for said Pulliam from Hie 1st day of October, it,93, to tlie 1st day of October, 1891, which the defendant was under no promise or obligation to enter into, to the defendant’s injury?” Upon the testimony in the case there arose an issue collateral to the two issues submitted, which both sides conceded, if found by tlie jury in favor of the plaintiff, entitled tlie plaintiff to the verdict.

This issue was whether or not in November, 1893, the defendant company, through its agents, had agreed to renew the bond. The facts with regard to the renewal receipts were that Rulliam himself, when the policy was issued, acted as an agent in Asheville for the defendant company in the bond department of its business: and (hereafter the renewal receipts, botli the renewal receipts for the policy in sui t and also for a bond for the paying teller in the same hank, were sent to Pulliam. The receipts offered in evidenee were sent to Pulliam prior to October 1, 1893, but he did not remit for them.

There was a firm of Aston, Bawls & Co., in Asheville, in the insurance business, who were agents for the defendant in other departments of insurance, and in November the defendant company wrote Aston, Bawls & Co. to look after the bond department also. The bonds for the cashier and teller of the plaintiff bank were the only bonds the defendant had issued in Asheville, and the company requested Aston, Bawls & Co. to collect the premium on those two renewal receipts.

Bawls went to see Pulliam, who said he would let Bawls know about the renewal receipts in a few days, and in a few days Bawls went back to him, and Pulliam said he would not take the receipts, and handed them to Bawls, saying he was going to get the agency of another company, and would have no use for them. Bawls took them to his own office, and discussed with his partner, Stikeleather, whether they should at once mail them to the company in New •York. They concluded they would see Mr. Barnard, the president of the bank, and see if he knew that the bonds had not been renewed.

Stikeleather testified that he saw Barnard, who said he knew the bonds of the cashier and teller had not been renewed, that those officers were refusing to pay the premiums, and that he could do nothing about it until there was a meeting of the directors. Bawls testified that he never had any conversation with Barnard about the renewals, and that on January 4th, about noon, Waddell, the paying teller, came to his office, and asked for the renewal receipts, and paid the premiums, and took them away.

Barnard testified that a few days after the interview with Stikeleather in November he met Bawls on the street, and said to him that he had decided to continue the insurance in the defendant company, and that the bank would pay for the renewals, and he would either send the money over or that Bawls could send and get it, and he testified that Bawls said, “All right.” It was conceded in the trial of the case that if this conversation to which Barnard testified, but which Bawls denied, took place, it constituted a contract for renewal, which bound both the bank and the defendant company; and that, as it was before any suspicion of Pulliam’s dishonesty arose, his bond was in force, whether the premium had actually been paid or not, as the alleged conversation amounted to an agreement to keep the bond in force, and give further credit for the renewal premium.

This is the question referred to in the issue proposed by the plaintiff submitting to the jury to say whether the plaintiff had fraudulently caused the defendant to enter into a contract “which the defendant was under no obligation to enter into.” It does, however, appear that this issue was fairly put to the jury, and it appears to us that the court’s instructions on that point were at least as favorable to the plaintiff as it was entitled to.

The judge, in his charge, said: “If such a contract was made; if be [Rawls] agreed to waive payment of the premium, and entered into a bona fide contract with the president of the bank that the receipts would he returned to the bank, and he would send for the money, or it would be sent to his office, and paid, — then that was a binding contract upon his company.” The judge, in another part of his charge, repeated this instruction, and commented upon the contradiction in the testimony of the two parties as to whether such a contract was made, and directed the attention of the jury to the requirement that the parties to it must have agreed together, the two minds coming to an agreement; and in the end he left the issue to be determined by tbe jury upon the testimony.

It appears to us that this issue was fairly left to the jury, and in a more understandable form than that proposed by the issue tendered by the plaintiff and refused by the court. Were the two issues submitted proper ones? By the terms of tbe bond, as renewed and in force before this disputed renewal, the defendant company was liable only for acts of dishonesty committed by Pulliam during tlie term ending at noon on the 1st day of October, 1893. The acts proved were committed on the 28th, 29th, and 30th of December, 1893.

They were committed, therefore, when the bond was not in force, unless by the payment of the premium ou the 2d or 1th of January, 1891, the bond was rightfully renewed for the year from October 1, 1893, to October 1, 1891, according to the tenor of the renewal receipts. If, therefore, at a time when the company was not bound, and was not, as the jury must have found, under any obligation to reinstate the bond, a state of tilings existed to the knowledge of the president of the bank which made it a fraud to procure the reinstating of the bond without disclosing them, then the bond must be held void.

It is obvious if the issues had read, “Did the officers of the bank, wheu tbe renewal receipts were obtained, know that Pulliam was a defaulter, and did they suppress that knowledge to deceive and defraud the defendant by inducing it to issue the renewal receipts?” there could be no recovery if the jury answered “Yes.” The only qualification inserted was the words, “or could they by reasonable care have known.” It is the addition of this qualification which is the ground of exception and is the alleged error.

The second issue, “Did the officers of the plaintiff bank suppress the knowledge of such default, with intent to deceive and defraud,” we think of necessity implies that they had knowledge. As the second issue; was worded, it would be impossible to And that the officers suppressed the; knowledge of a default with intent to defraud if in fae;t they did not have the knowledge, even although with reasonable care they might have hael it.

The right meaning of the issues Was, did fhe officers of Bio bank know facts which, with reasonable ¿are, would have lead them to the knowledge of Pulliam’s dishonesty, and .did they suppress such facts with intent to defraud the defendant for the purpose of obtaining the renewal receipt? Looking to the proof in the ease which the jury was called upon to consider, this seems to he the fair

interpretation of the issues.

It was not a case such as may frequently arise where, through carelessness, the officers of a bank have failed to discover the facts which would exhibit the dishonesty of an employé, but the effort of the defendant was to show that the president, when about to obtain a renewal, knew facts which pointed directly to the default, and if he could truthfully say he did not know of the default, it was because he did not draw from those facts the conclusion which a reasonable man would, and did not attempt, as a reasonable man would, to verify the import of the facts by looking at the entries in the bank’s accounts; in fact, that he willfully refrained from any investigation or reasoning, in order that he might avoid knowledge.

The facts proved were that the president was in ill health during November and December, 1893, and was but little at the bank, and that Pulliam was in charge, although he, too, had been unwell. About noon on Saturday, December 30th,' Pulliam left the bank, saying he would go home, and would not be back that day. After he had gone, Waddell, the teller, discovered that $5,000 in currency had disappeared, and that Pulliam had entered it as if sent to the Southern National Bank of New York City by express. Waddell then discovered that it had not been shipped by express, and that Pulliam had left Asheville.

He was so disturbed that he went that afternoon to the dwelling of Barnard, the president, and told him these facts, and they talked over the propriety of telegraphing to have Pulliam arrested, but they concluded not to do so. The next day was Sunday, and Monday was the 1st of January, a legal holiday. Tuesday, January 2d, was the first business day, and on that morning Barnard testified he directed Waddell to go and pay for the renewal receipts, and get them from defendant’s agents, Aston, Rawls & Co.

Rawls, the agent of the defendant company, testified that Waddell came and got the receipts on Thursday, January 4th, and not on the 2d. If Rawls was right, — and several circumstances corroborated him, — it was very clear from the testimony that by Thursday, January 4th, many additional facts had come to light, showing conclusively that Pulliam had absconded with the $5,000.

Looking, therefore, at the testimony which the jury had from which to determine the issues, it is clear that the words, “Did the officers of the plaintiff know, or could they by reasonable care have known, that Pulliam was a defaulter when they obtained the renewal receipts ?” did not mean a reasonably careful supervision of Pulliam’s accounts, or a careful watchfulness of his actions, or an examination of the bank account books, or anything of that sort, but meant a reasonable care applied by the president to the facts made known to him by the teller on Saturday afternoon.

It would appear that, although the fact that the cashier, whose home was in Asheville, had left Asheville merely saying to those in the bank that he was going home for the day, and had entered the $5,000 as shipped by express, but had not so shipped it, excited in the mind of the teller the belief that there was something wrong, which he immediately communicated to the president, he (the president) made no inquiry of the cashier’s family, or of any one, as to the circumstances of his going, but indulged the hope that possibly Pulliam had taken the $5,000 to New York himself, to deliver it to the Southern National Bank in person, and then, according to his own testimony, at the earliest moment, told the teller to go, and pay for and get the renewal receipts.

There was nothing before the jury with regard to the knowledge of the president, except the testimony as to the facts of Pulliam’s flight and the disappearance of the money, and the jury must have understood “reasonable care” as meaning reasonable attention to those facts. This is demonstrated to have been so by the second issue, which required the jury to answer whether or not the officers of the bank fraudulently suppressed the knowledge which they had, which could not have meant knowledge which by reasonable care they might have had.

We are far from saying that the first issue was framed with the most apt wording, but we do hold that in a case in which the testimony itself on both sides pointed out the real controversy, and it was fully covered by the second issue, and in a case in which the verdict was so fully supported by the testimony, and the chance of the jury being misled by the first issue so slight, we do not think we should direct a new trial.

It is true that under this class of bonds the surety is not discharged because the employer might, by (.he exercise of diligence, have known the state of his accounts, or might, with more care, have sooner discovered the dishonesty, and prevented the loss. Guarantee Co. of North America v. Mechanics’ Sav. Bank & Trust Co., 26 C. C. A. 146, 80 Fed. 766-774. But that was not the matter in controversy in this case. There were, in this case, very few material conflicts of testimony.

There was — First, the dispute as to whether there had been an agreement in November to renew the bond; second, whether the premium was paid on January 2d or January 4th; third, whether the facts known to the hank’s officers showed to a person bestowing reasonable care upon the matter that Pulliam was a defaulter; and, fourth, whether these facts were withheld from defendant’s agents with a fraudulent purpose.

It was possible for the president to say that he did not know that Pulliam was a defaulter, no (withstanding he knew the facts connected with his unaccounted for disappearance with the ?5,0G0, with no statement of where he was going.

It was possible for the president to choose to retain his faith in him, and to believe there would be some explanation of Pulliam’s conduct; but, if the jury found under the first issue that a man, exercising reasonable care, could not, in the face of the known facts, in good faith conclude that there was no defalcation, while at the same time he was so influenced in his conduct by the same facts that he sent in haste to pay for and obtain the renewal receipts, then the jury properly answered the first issue “Yes.” The trial judge instructed the jury that the burden was upon the defendant company to prove that the plaintiff’s officers had knowledge of the defalcation, and, in substance, told the jury that if they found that the bank’s officers were in possession of facts with regard to the defalcation, which, if made known to the agents of defendant, would have stopped them from issuing the renewal receipts, and suppressed those facts with the fraudulent intent to induce the agents of the company to bind their principal by a contract which they would not have made if the facts were disclosed, then they should answer the second issue “Yes.” The judge several times reiterated to the jury that the question was whether, with the intent to deceive and defraud the defendant, the plaintiff’s officer suppressed the knowledge which they had of facts which should have led a reasonable man to know that Pulliam was a defaulter.

It is to be observed in this case that the evidence discloses that Pulliam himself had refused to have his honesty any longer guarantied by the defendant. He was a party to the contract, signed the original agreement, which recited that he had applied to the defendant for the grant by it of the bond, but he declined the offer to renew it.

The jury must have found that there was no agreement for renewal until January, 1894, and it is apparent that, as Pulliam had then absconded, the renewal in January was at the solicitation of the bank at a time when there was no obligation of any kind resting upon the defendant, and the case became one in which the party to be indemnified solicited the surety to become bound.

Under this state of case it cannot be gainsaid that concealment of facts known to the employer which would lead a reasonable man to the conclusion that the employed was a defaulter, or strongly suspicious facts which would lead a reasonable man to make inquiries or look at entries which would at once disclose the defalcation, would discharge the surety, if the concealment was made with the fraudulent intent to induce the surety to enter the suretyship. Railton v. Mathews, 10 Clark & F. 934; Warren v. Branch, 15 W. Va. 21, 25, 36; Bank v. Cooper, 36 Me. 179, 194, 197; Bank v. Stevens, 39 Me. 532-539.

The fraudulent intent was inferable in this case from the urgent haste of the bank’s president to obtain the renewal receipts as soon as the fact that Pulliam had gone off with the $5,000, and the feller’s suspicions, became known to him, whereas he had before been indifferent about the renewal, although the fact that the bond had not been renewed had been pressed upon his attention two months before.

Many of the plaintiff’s exceptions to the court’s charge are apparently based upon the theory that the defense rested upon the neglect of the officers of the bank to use reasonable care in watching the cashier, in order to prevent defalcations by him; but that was not at all a question in this case. The question here was, could the bank officers, by suppressing facts which they did know, get a surety to renew a guaranty so as to cover a defalcation which they had reason to know had already occurred? We think that under the instructions of the court as a whole this issue was fairly placed before the jury.

All instructions which the plaintiff asked and were refused were substantially covered by the charge of the judge. The plaintiff reserved several exceptions to the rulings upon the admissibility of testimony. The first is to the sustaining by the court of defendant’s objection to a question put to the witness Bawls as follows: “Q.

Isn’t 'it the custom in all your business to trust people for their premiums ?” Bawls had testified that Pulliam had been defendant’s agent at Asheville in the bond department of the business, find that he (Bawls) had succeeded him, but had no experience in collecting premiums on surety bonds except this particular instance of the bonds of Pulliam and Waddell. There was no question raised as to his authority to give credit for these premiums.

The only controversy in this connection was as to whether Barnard had definitely said to Bawls that the bank would take the renewal receipts, and would pay for them when payment was demanded. The question asked was immaterial, and rightly excluded for that, if for no other, reason.

Barnard, the plaintiff’s president, having testified that he had a conversation on the street in No vember with Rawls, in which it was agreed that the bank would take the renewal receipts, and pay for them, was asked upon cross-examination if lie had not before said that the conversation was with Stikeleather, Rawls’ partner, and not with Rawls; and Barnard denied having so stated.

When Stikeleather was examined by the defendant he was asked if, after the defalcation was generally known, about January 11th, Barnard had not had a conversation with the witness, in which Barnard claimed that: such an agreement was made, and was asked to state what the conversation was, and lie answered Unit on January 11th, which was the first day he had heard of Pulliam’s defalcation, he met Barnard on the street, and Barnard said, ‘“Stikeleather, did I not tell you that if Pulliam and Waddell did not pay the premium receipts the bank would?’ and I said, ‘No,’ and he said, ‘Then I told Rawls.’” This question and answer were excepted to by the plaintiff.

We think the testimony was admissible. It had direct bearing upon the weight to be given to Barnard’s testimony that he remembered having the conversation with Rawls, who denied having had such a conversation. It tended to show that on January 11th Barnard was uncertain with whom it was that he liad the conversation. It was admissible for tliis purpose, and could not have been misapplied to any other purpose.

The plaintiff requested a,n instruction that, in order to avail itself of any alleged fraudulent procurement of the renewal receipt, the jury must tirar find that when the defendant obtained knowledge of the alleged fraud it immediately and promptly repudiated the transaction, otherwise it could be held to have waived any defense based upon tlie alleged fraud; and if the defendant, after obtaining such knowledge, so conducted itself as to reasonably lead the plaintiff to understand that the defendant recognized itself as responsible for Pulliam's defalcation, and thereby induced the plaintiff to allow the defendant’s agent, with the assistance of its clerks, to examine its books of account, and otherwise assisted defendant’s agent in making investigations, that this conduct on defendant’s part was an affirmance of the renewal of the contract of suretyship, and no facts attending its procurement by the plaintiff wliich it had so learned would avail as a defense.

The bond provided that the defendant might call at plaintiff’s expense for such particulars and proofs of the claim as defendant’s officers might require, and that the plaintiff should afford and render every information, evidence, aid, and assistance for the purpose of bringing “the employed” to justice. On January Cth the bank sent its attorney to New York, and (here, on the 8th, he formally notified the defendant- of the loss. The defendant promptly sen t an agent to Asheville to examine into the case.

In the examination made of the hank’s accounts to determine the liability of the defendant, he discovered, on January 11th, that the premium had not been paid until after the defalcation; and on January 20th the defendant tendered a return of the premium, and disavowed the bond. We can see nothing in these facts upon which to hold that the defendant had estopped itself from the defense of fraud in obtaining the renewals. An estoppel may arise when a party with knowledge of facts constituting a defense misleads the other party to his injury into believing that the defense will be waived.

In insurance cases the doctrine has been liberally extended, particularly with respect to formal proofs and technical forfeitures; but to say, in a case of suretyship for a cashier, that an examination of the bank’s books, in order to see if there was really a loss from dishonesty, and a full examination of the circumstances attending the defalcation, are a waiver of all defenses against the validity of the bond, would be reversing the maxim that a surety is entitled to be treated at least with good faith and fairness.

There was no evidence that, because of the efforts of defendant’s agent to ascertain the exact loss, and his efforts to capture and arrest Pulliam, or to get a settlement from Pulliam’s friends, the bank was put to any worse position, or lost any legal rights, or had any ground to say that it was induced to do anything or to refrain from doing anything by the conduct of the defendant’s agents to its injury. Upon an examination of the whole case we do not find any reversible error.

It may be said that some of the trial judge’s comments upon the testimony exhibited his impressions as to the weight of the evidence, and the leaning of his opinion on the questions of fact, and that he discussed rather freely to the jury the duties of the officers of a bank in the management of its affairs. These remarks were such as to invite criticism from the party against whom they bore, but they do not amount to legal error, as, in the end, the facts were fairly left to the jury to decide. Affirmed.