FIDELITY & DEPOSIT CO. OF MARYLAND v. COURTNEY, 103 F. 599

DAY, Circuit Judge, after thus stating the case, delivered the opinion of the court. 1. It is unnecessary to enter into a detailed account of the various defaults, or comment upon the knowledge thereof of the bank directors, as there was a conflict of testimony upon that subject, upon which the court charged the jury as follows: “There was also evidence tending to show that J. M.

McKnight was president of the bank, and the other officers of the bank, including the directory, had entire confidence in his honesty and integrity up to the time the bank was closed; that none of them had any knowledge that any act of his in the management of said bank was fraudulent or dishonest, until after the closing of the bank; that said bank had a discount committee, who regularly examined and passed on the papers of the bank, as required of such committee, and the directory of said bank undertook to make a monthly investigation— sometimes twice a month — of the affairs of said bank, and required the president to go through the same with them, and make a full report thereon: that some of the directors were in the bank almost daily, inspecting its affairs, and that they did at all times observe due and customary supervision over said president for the prevention of default; that none of the officers of said bank, including the directory, had any knowledge of the various checks set up in the petition as fraudulent, and that were charged 1o the account of other parties than those drawing them, or on whom they were drawn, except the clerks who charged them up to said account as stated, and there was evidence tending (o show that they charged them up to such accounts by thé direction of McKnight, the president, and except, further, It.

B. Reutlinger, the cashier and teller of said bank, knew of said checks when they came Into said bank, and was instructed to hold them as cash items by McKnight, but further than this he had no knowledge. As to the $2,000 Britt and Reeder note, there was also evidence tending to show that R. E. Reutlinger was required to stay at the bank until after banking hours, and was directed by McKnight to and did lay out the $2,000 on said note to said parties, but that further than this he had no knowledge thereof. There was also evidence tending further to show that said R. E.

Reutlinger informed his father, Adolph Reutlinger, vice president, of the payment of tills $2,000 that night, and that said Adolpli Reutlinger made inquiry of McKnight to explain the transaction; that thereupon McKnight told him that said parties were good and solvent, and the note was regularly discounted, and all right, and that, if required, Oaulbert or Whallen would sign same with them, and that he (McKnight) would guaranty the payment thereof; that the parlies were obliged to have the money that night, and he so kept the bonk open to let them have it.

There was evidence tending further to show that said Adolph Reutlinger then went before the directory, and told them what McKnight had said in regard to this note, and said to them that he had made some investigation, and could not find that these parties had any property; that he was unable to say whether or not they wore good, and that thereupon McKnight came before said directory, and made the same statement to them that he had made to Adolph Reutlinger, assuring them that the note was good, and that said directors believed him, and relied on his statement, and so passed the note; that there was no other evidence tending to show any further knowledge of said note, or its true character, by the officers or any of the directors of the bank, than is herein stated,, except in (lie testimony of Jacob Reisch, one of the directors, that some short time after the execution of said note Adolph Reutlinger told him what he had learned thereof as herein stated, and further he says that said Reutlinger told him that the money was used in the mayor’s race.

This latter statement Adolpli Reutlinger denied in his evidence.” Upon the subject of the duty of the bank, under these circumstances, to notify the company of these transactions, that it might end its obligations under the bond, if it saw fit to do so, the court charged the jury: “Now, T suppose in this ease, if the bank had known that McKnight, was making these drafts for these various fraudulent purposes, such as buying up eouncilmen, buying up aldermen, paying his own personal debts; If the bank had known that, and consented to it, — there would not have been a fraudulent act by McKnight for which the bank could recover against this company.

But if you believe, from the evidence, that the bank did not know of the fraudulent purposes for which the overdrafts were made, if the overdrafts were made in connection with this matter, — if you believe the bank did not know the fraudulent purposes, — then that changes the result; because, if the bank did not know, and still consented to it, it would not relieve the act of McKnight from the character of being a fraudulent act.

So that, as I view the ease (you must remember, however, that you are the sole judges of the evidence in this case ancl its credibility), as I view this case, however, there would be no fraudulent acts upon McKnight’s part (limiting my observations now to the overdrafts), there would be no fraudulent acts upon his part merely in an overdraft, if' there were no fraudulent intent behind it, which was coet cealed from the bank.” We think this instruction as favorable as the company was entitled to, and under it, if the jury found that the bank had knowledge that McKnight was doing the acts in question for fraudulent purposes, there could be no recovery upon the bond.

We must remember that this obligation was intended to secure the bank against the fraudulent conduct of McKnight in the performance of the duties of his office or position; that McKnight’s action, in order to require notice to the company, must have been “of the discovery of a default or loss under the bond.” While McKnight might have been guilty of reprehensible conduct, it would not require notice unless such as might result in the loss of security or money or personal property of the bank by fraudulent conduct in the performance of his duties to the bank.

Such, conduct as amounts to a default under the bond the employer is bound to report, and if he condones or continues the employé in his service, without written notice to the company, the latter would be discharged from responsibility. Misconduct which would not amount to a fraudulent act affecting the duties of the officer of the bank would not require notice unless it came within that clause of the bond which requires the employer to notify the company when the employé engages in gambling or speculation, or indulges in disreputable or unlawful habits or, pursuits.

Whether McKnight’s conduct was of this character the court left to the jury to determine. They must have found that there was no such misconduct as would avoid the bond while the bank was in operation, and which it was the duty of the bank to report to the company. In this connection it is averred that the court erred in saying that this knowledge must be the knowledge of the bank, intending thereby'to exclude the knowledge of individual directors^ In the charge above quoted, as to the knowledge of the bank directors,. we have already said we find no error.

We have carefully examined the record, and find no knowledge brought home to the directors individually, or the cashier in his individual capacity, which was not brought to the attention of the board, which would amount to a default under this bond. Such knowledge, in order to be binding upon the bank, must have been acquired in the course of business of the bank transacted by such officer or director. It is not necessary to examine the numerous authorities cited upon this proposition.

They are well summed up in Boone, Banking, § 132: “Notice to the directors of a hank when assembled as a board is notice to the bank'; nor can any subsequent change of directors require a new notice. * * * And notice to one or more of the directors, when engaged in the business of the bank, will be deemed notice to the bank.” The testimony shows no such knowledge of McKnight’s conduct, acquired in the bank’s business by individual directors or officers of the bank, and not known to the board, as would entitle the company to notice. As was said in Surety Co. v. Pauly, 170 U. S. 147, 18 Sup. Ct 558, 42 L.

Ed. 982: “It may well he held that the surety company did not intend to require written notice of any act upon the part of the cashier that might involve loss, unless the hank had knowledge, not simply suspicion, of the existence of such facts as would justify a careful and prudent man in charging another with fraud or dishonesty. If the company intended that the bank should Inform it of mere rumors or suspicions affecting the integrity of O’Brien, such intention ought to have been clearly expressed in the bond.” 2.

Upon the question of notice of McKnight’s default it is strenuously argued that the notice given by the receiver after he took possession of the bank is not such notice as is required, and for that reason there can he no recovery upon the bond. The hank was closed on the 37th of January, 1897. The receiver was appointed on the 22d of January, 1897.

On the 18th of February the receiver gave the following notice: “Louisville, Ky., February 18, 1897. “To the Fidelity & Deposit Company of Maryland, Baltimore, Md. — Gentlemen: Referring to the certificate No. 4,043, issued from your security department, guarantying the fidelity of Jacob M. McKnight, president of the German National Bank, under your bond to him, No. 5,002, issued June 3, 1894, in favor of such hank, we hereby notify you that said Jacob M.

McKnight, as president, has been found in default to this bank, and that you will be required to make indemnity to me as receiver to Hie exlent of said bond. “Yours truly, R. H.

Courtney, Receiver German National Bank.” "When this notice was offered in evidence, it was objected to, the attorney for the defendant stating: “We have no doubt he sent it [the notice], and make no point on that, but we desire to object to the admission of it, as not being the notice required 3n the contract, and therefore we received no notice whatever.” Exception was taken to the portion of the charge relating thereto on the same ground that the introduction of the notice in testimony was (aken, viz. that it was not such notice as was required by the contract. and was, therefore, misleading.

Neither in this exception, nor when the notice was offered in testimony, was it objected that the notice wás not early enough in point of time, but in the assignments of error (his averment is added. It may well be doubted if this is not extending the assignment of error beyond the exception taken. Assignments of error cannot broaden an exception, and will not be considered unless called to the attention of the court by proper exceptions. We are of opinion, however, that the court fairly left this question to the jury.

It is testified by Mr. 'Courtney that immediately after the bank passed into his hands as receiver: “I bogan to ascertain the defalcations. The exports — Mr. Hays, a government expert, and Mr. Escott, a national bank examiner — were at work immediately after Mr. McKnight’s arrest. I kept pact' with their Investigation. It was almost immediately after the bank closed that these defalcations became known: not all of them, but enough to ground the claim upon. I had that notice of February 18, 1897, mailed to the office at Baltimore. It is my impression that I mailed a like notice to the agent here.” The expert Mr.

Escott testifies: “We began to get these shortages about 1wo or three weeks after the bank was closed. They were discovered from time to time. I began to discover them in two weeks.” If, as Escott: says, they began to discover the shortages two or three weeks after the bank was closed, that would mean the discovery was first made between the 2d and 9th. of February,' 1897.

The court left this question to the jury under the following instructions: “The defendant insists upon this clause of the contract between it and the bank that ‘the employer shall immediately give the company notice in writing of the discovery of any default or loss hereunder, and shall file its or their claims hereunder, with full particulars thereof as soon as practicable thereafter, and no claim which shall not be so filed by the employer with the company within six months after the expiration or cancellation of its bond, or within six months after the employs shall have ceased to be in the employer’s service, shall be payable hereunder.’ In considering that clause of the contract between these parties, I do not think the word ‘immediately’ should be given such construction as that it would mean instantly, but I believe it conforms with the views of the supreme court and the authorities generally to tell you that it means that it was the duty of plaintiff in this ease to give, as soon as reasonably practicable, and with promptness, notice of the discovery of any default.

It did not mean that as soon as one was suspected that notice should be given; but if you believe, from the evidence, that within a reasonable time after the receiver in this case (and you must remember that he is the receiver merely, and that he knew nothing about the management of the bank, nothing of its affairs, until he was appointed), if you believe that, within a reasonable time after he discovered — actually discovered — a default, he gave the notice of the 18th day of February, 1897, you are at liberty to infer that that part of the obligation of this bond has been performed.” We think there was not such a lapse of time from the time the receiver began to discover these defaults until he gave the notice of February 18, 1897, as would require the question to be taken from the jury.

We have already said no notice is required until the bank had knowledge of facts which would justify it in charging dishonesty. In the Pauly Case, supra, while it is true the bond says that notice must be given as soon as practicable, instead of immediately, Mr. Justice Harlan says: “It was left to the jury to determine when the receiver first acquired knowledge of acts indicating fraud or dishonesty on O’Brien’s part, and they found, in effect, that he had no knowledge of any such act until after the report by the expert bookkeepers, made about or a few days before May- 23, 1892.

The trial court went far enough when it said, in response to an inquiry by a juror, that notice given May 23, 1892, of a fraud by the cashier discovered as early as March 2d, — the day on which O’Brien left the receiver, — was not as soon as practicable after the receiver acquired knowledge of the facts.” Unless the lapse of time is so long as to be obviously a noncompliance with the contract, the question is one for the jury.

In May, Ins. (3d Ed.) § 462, it is said: “If the notice be required to be ‘forthwith,’ or ‘as soon as possible,’ or ‘immediately,’ it will meet the requirement, if given with due diligence under the circumstances of the ease, and without unnecessary and unreasonable delay, of which the jury are ordinarily to be the judges. To give the word a literal

interpretation would, in most cases, strip the insured of all hope of indemnity, and policies of insurance would become practically engines of fraud. Thus, notice within eight days after the fire, and within five days after it came to the knowledge of the insured, has been held to be reasonable. So, where the fire happened on the 10th, and notice of loss, dated the 11th, reached the insurers on the 15th of the same month.

But a delay of four months in one case, of thirty-eight days in another, of twenty days in another, and of eleven days in another, there being no sufficient excuse therefor, has been held to be unreasonable. Yet where the insurers had, contrary to their agreement, refused to issue a. policy, they were held to have waived their right to object to a notice sent eleven months after the loss. Whether due diligence has been used in giving the notice is a question which is ordinarily left to the jury,, to be found from all the circumstances in the case.

But, where the facts and circumstances bearing upon the question of due diligence are not in dispute, it becomes a question of law for the court.” In Donahue v. Insurance Co., 56 Vt. 374, notice of a fire was required to be given forthwith. It was held that such notice must be given with due diligence, and within a reasonable time; and, although notice was given 22 days after the fire, it was held a question for the jury as to whether it was given forthwith. It was said by the supreme court in the Pauly Case, supra, that an indemnity contract is to be construed most favorably to the insured.

In speaking of fire insurance policies, under consideration in the Vermont Case, supra, the judge said (page 380): “The condition that the insured should give the company notice forthwith should be construed liberally in favor of the insured.” In Association v. Smith, 126 Pa.

St. 317, 17 Atl. 605, Chief Justice Paxson, in delivering the opinion of the court, — this being a case in wdiich an injury was received by one holding an accident policy on September 4, 1887, notice being given to the company October 19th, the policy requiring immediate notice of the injury, — said: “The word ‘immediate,’ in the contract, must be construed to mean within a reasonable time thereafter, under all the facts and circumstances of the case; and what is a reasonable iirne must be decided by the jury, unless, as before observed, the delay has been so great that the court may rule it as a question of law.” In Bennett v.

Insurance Co., 67 N. Y. 277, speaking of a case where the notice was required to be given forthwith, and it had not been given until 26 days after, Judge Earl said: “The word ‘forthwith’ does not here mean immediately or instantaneously after the Are. It means, and has been held to mean, within a reasonable time or with reasonable diligence after the Are. New York Cent. Ins. Co. v. National Protection Ins. Co., 20 Barb. 468; Inman v. Insurance Co., 12 Wend. 452.” The word “immediate” is certainly no stronger than the word “forthwith,” or the expression “as soon as possible.” In Insurance Co. v. Flynn, 98 Pa.

St. 628, it was held that 30 days’ delay will not prevent the submission of the question to a jury in a policy which required proofs to be submitted as soon as possible. In McFarland v. Association, 124 Mo. 204, 27 S. W. 436, the supreme court of Missouri held: “Where an accident policy requires ‘immediate’ notice of the death of the insured to be given, and provides that the same shall be given by letter, notice given within ten days after the death is sufficient. The word, ‘immediate’ will, in such cases, be construed to mean ‘within a reasonable time.’ ” See, also, Insurance Co. v.

Lippold, 3 Neb. 391; Harnden v. Insurance Co., 164 Mass. 382, 41 N. E. 658; Insurance Co. v. Scammon, 100 Ill. 645. Assuming that the defalcations were becoming apparent to the experts so that they began to discover them two or three weeks after the bank was closed, we cannot say, as a question of law, that such facts had been discovered as would justify a prudent man in charging another with dishonesty so as to require notice, and we think the question was properly left to the jury under the instructions given.

Some cases have been cited in which it seems a more restricted view of this requirement is taken, but we think the opinion here expressed is more consonant with the intention of the parties and the purposes of indemnity contracts. • In Bouv. Law Diet, it is said of the word “immediate”: . “Strictly it implies not deferred by any lapse of time, but as usually employed it is rather within reasonable time, having due regard to the nature and circumstances of the case.” 3. Nor do we think there is any reasonable objection to the form of the notice given.

The purpose of the notice was to enable the indemnity company to terminate its liability, and to obtain such remedies as it'might see fit to adopt against the defaulter. The notice sent was general in its character. It advised the company -of the default, claimed the full amount of indemnity, and no objection was taken to it. , 4. It was further objected at the trial that the proof of claims, which was required by the bond to be made out as soon as practicable after the default, was not furnished in time. This claim was filed in July, 1897.

During all that time the investigation was going on, and the books of the bank were being examined. So far as the testimony discloses, the full particulars of the claim'were not developed until July so as to be capable of proof. 5. It is claimed the court erred in excluding a certain letter signed by Beutlinger, cashier, concerning McKnight’s performance of his duties as president.

The president of the Fidelity & Deposit Company, on the 15th of May, 1896, wrote the bank as follows: “Baltimore, Md., May 15, 1896. “To German National Bank, Louisville, Ky. — Dear Sir: We hereby notify you that bond No. 5,002 for $10,000, issued by this company on behalf of Jacob M. McKnight, in your employ as president, will expire on the 1st day of June next. The premium, forty dollars, should be paid on or before the date of expiration, otherwise the bond will lapse. Kindly have the certificate below filled in and signed, and forward with remittance for premium to Jos. O.

Odiorne, general agent, when the renewal receipt will be sent to you. “Yours, respectfully, Edwin Warfield, President.” The certificate referred to was filled in by the cashier, having been inclosed in blank form in the letter from the company, and was returned, of date May 29, 1896, to the fidelity company, and is’ in the following language:, “The Fidelity & Deposit Company of Maryland: This is to certify that on the-day of-, 189-, the books and accounts of Mr. J. M.

McKnight, is president, in our employ, as has no books and accounts were examined by us, and we found them correct in every respect, and all moneys handled by him accounted for. He has performed his duties in an acceptable and satisfactory manner, and we know of no reason why the guaranty bond should not be continued. His salary is now $4,500, and he is employed as president. “Signature: . B. E.

Beutlinger, Cashier, Employer. ‘Dated at Louisville, Ky., May 29, 1896.” This certificate, signed by the cashier, was excluded, because there was no showing that there had been special authority from the board of directors authorizing or directing the cashier to fill out and send it. It is earnestly argued that the cashier, by virtue of his office, and having charge of the correspondence of the bank, had full authority to answer this communication in the way which he did; and, being in the apparent scope of his authority, the bank is bound by it.

A majority of the court are of opinion that the case is ruled by Surety Co. v. Pauly, supra, in which the president wrote a similar letter for the cashier, and it was held that the president of the bank, in the absence of express authority, could not bind the bank. There is no showing that the bank authorized the cashier to fill out the certificate and return it. It is not a case of answering a usual letter of the bank in the course of its business. A certificate as to the prior conduct of McKnight was inclosed, and an answer required.

Nothing is shown in this case showing express authority, and we do not think such inheres in the duties of the office of cashier without special authority. . Other errors are assigned, which either fall within the principles already laid down, or are not of sufficient weight to require further attention. Finding no error in the record of the proceedings in the court below, the judgment is affirmed.