NATIONAL SURETY CO. v. WESTERN PAC. RY. CO., 200 F. 675

GIRBERT, Circuit Judge (after stating the facts as above). Error is assigned to the ruling of the court below in sustaining a demurrer to one of the defenses pleaded in the amended answer.

That defense was that in 1903, two years prior to the issuance of the bond which is sued upon, the defendant issued a bond insuring the plaintiff against loss through the personal dishonesty of Brown, which bond was procured upon an application or “employer’s statement” made by the plaintiff, in which it was represented that Brown would sign checks or drafts on bank accounts only with the countersignature of the secretary of the plaintiff; that during the entire month of October, 1907, and for many months prior thereto, Brown, as treasurer of the plaintiff, had signed checks and drafts on its account with the bank without such countersignature of the secretary of the plaintiff, or any other person; that in said employer’s statement it was said that the same was to be taken as a condition precedent to and the basis of the bond applied for, “or any other bond that may be executed by the National Surety Company to the undersigned upon applicant above named in said position, or any renewal or continuation of such surety-ship.” Now the facts as they were stipulated are that in 1904 there was a renewal of the bond of 1903 and a continuation of such surety-ship for another year, but that before the expiration of the term of that bond so renewed it was canceled, and in lieu thereof a new bond was issued by the defendant, which is the bond now sued upon, and that such bond is not the same kind of a bond as that which was issued upon the “employer’s statement” of 1903.

The bond that was issued upon that statement was a bond insuring the plaintiff against loss through Brown alone in the sum of $250,000, and the liability of the defendant was limited to loss occurring through Brown’s personal dishonesty. The bond which is sued upon here is a

schedule bond, issued, so far as the record shows, upon no employer’s statement, covering indemnity against losses through a large number of the employes of the plaintiff in its various offices and stations in California, Nevada, and Utah, specifying the liability assumed as to Brown to be $50,000, and specifying the liability assumed as to each of the other employes named in the schedule, in sums ranging from $500 to $25,-000, and as to Brown it insures against loss through his culpable negligence, as well as his personal dishonesty.

There is no reference in the bond to any employer’s statement or application, and it is admitted that at the time of the issuance of that bond the employer’s statement of November 14, 1903, was in no way mentioned or referred to between the plaintiff and the defendant, and no other employer’s statement or representations relative to Brown or the risk covered by the defendant in assuming such insurance as to him was given or required of the plaintiff. In view of these facts, we think there was no error in the ruling of the court below.

The statements contained in the application of 1903 were the conditions of the bond which was issued 'hereupon, and of any renewal of such bond. The bond of 1905 cannot: in any proper sense be said to be a renewal of the bond of 1903. It insured against loss through Brown, as treasurer of the plaintiff, it is true, but at a greatly reduced liability, and upon different: conditions, and as one of a large number of eruployés.

Section ¿005 of the Civil Code of California provides that any statement which is to be incorporated in a policy of insurance must be referred to in the policy. The parties to the original bond of 1903 were not prevented by the terms of the contract then made from entering into any contract of insurance thereafter upon different terms, as they have done in this case as we read the record.

Error is assigned to the following portion of the instructions of the court to the jury: “The evidence in this ease shows without conflict that approximately all of t.he $250,000 so deposited by Brown on the 24th and 20th of October, 1007, remained in the bank when it closed. The credit balance which the Railway Company had in the hank from previous deposits was on the morning of October 24, 1907, approximately $384,000. Between that date and the time (he bank failed there was paid out on tlie plaintiff’s account approximately the sum of $387.000.

By law this sum so paid out is to be charged against the balance which the Railway Company had on hand on the morning of October 24th, and not against the subsequent deposits.” It is not denied that the general rule is that where there is a running account, such as that between a depositor and a bank, consisting of debits and credits occurring at different times, the debits will be applied to the credits according to their priority in time.

But it is said that an exception should be made in the present case, for the reason that subsequently to the dates of the two deposits referred to in the instruction large withdrawals of funds of the Railway Company were made by the payment of its checks, which had been drawn before, but not presented for payment until after, those dates, and that these withdrawals should be charged against the last deposits, and that, if so charged, nothing remained of those two deposits, and the plaintiff suffered no loss on account thereof.

It is true that the general rule is one which is implied by law, and does not stand in the way of the performance of any agreement between the parties as to the application of payments, nor does it preclude a different application when justice so requires, and it is held that justice so requires in cases where there are successive bonds of different sureties, and where the rights and equities of third persons are involved. Nashville First Nat. Bank v. National Surety Co., 130 Fed. 401, 64 C. C. A. 601, 66 L. R. A. 777; Andrews v. Macon Fxch. Bank, 108 Ga. 802, 34 S. E. 183.

But we are unable to see that there are any rights and equities vested in the defendant which required a departure from the rule, or that justice demanded that the withdrawals actually made after thé time of the last payment should be charged against those deposits, so that the plaintiff should go out' of court for error made in its proof of loss and in its complaint, and the defendant should be discharged from liability on the bond; for, however the account of the plaintiff with the bank may be adjusted, there will remain a loss for which the defendant is liable on its bond, since the bank had been insolvent for many months prior to October, 1907, and Brown was aware of that fact.

Equity does not require that an exception to the general rule shall be made in order to permit the defendant to present a defense which otherwise it could not make to a just cause of action. The court, in charging the jury, after having referred to the fact that it appeared without conflict from the evidence that the only relation between the plaintiff and the bank was that of depositor and banker, said that such relation did not require the plaintiff, under the conditions of the bond, to make examination into the books of the bank to ascertain its condition.

It is contended that this instruction was error, for the reason that the bond by its terms required the plaintiff to take and use all reasonable steps and precautions to detect and prevent any act or omission on the part of any employé which would tend to make the company liable for any loss, and that the court should have submitted to the jury the question whether such examination of the condition of the bank was a reasonable precaution to have been taken by the plaintiff. We find no merit in the contention. No authority is cited to support it, and it is probable that none can be found.

It is not pointed out how or by what authority the plaintiff could have procured inspection of the books of the bank or could have ascertained its condition. The right of inspection of a bank’s books belongs to' the directors and stockholders only, and the latter may not exercise the right upon mandamus without showing that a useful purpose is to be accomplished thereby.

We take it that the provision of the bond so relied upon imposes upon the plaintiff the obligation of exercising the supervision and observing the precautions of a reasonably prudent employer, and exercising such diligence as he would exercise if there were no insurance.

But it is said that the express terms of the bond required such examination in providing that: “When, any employé for whom the company is surety hereunder is acting in the position of joint agent for the employer and any other person, company, or corporation, joint audits of his books and accounts shall be made by the employer and such other person, company, or corporation.” This provision very clearly refers to books and accounts kept by the employé.

The books of the bank were not such books, and they cannot be said to be within the contemplation of .the provision of the contract so quoted. , The principal question in the case is whether the trial court erred in its instructions whereby it submitted to the jury the question whether under the terms of the bond the plaintiff gave the defendant timely notice of its loss.

The contingency upon which by the terms of the bond the insured was required to give “immediate notice” to the surety company was “the discovery by the employer that a loss has been sustained, or of facts indicating that a loss has probably been sustained.” It is not contended that the plaintiff had actual knowledge prior to the time when the notice of November 20th was given that a loss had been sustained; but it is urged that when the bank closed its doors on October 30th, or very soon thereafter, the plaintiff discovered facts which indicated that a loss had probably been sustained.

The mere fact that the bank closed its doors imported notice to the plaintiff that it might sustain a loss as a depositor; but it did not of itself convey notice that probably the plaintiff had sustained a loss for which it might have recourse against the defendant. To sustain a loss for which the defendant was liable on the bond involved, not only the insolvency of the bank and a resulting loss of deposits, but (

a) that such insolvency existed at the time when the plaintiff’s last deposits were made, and (

b) that Brown knew that the bank was insolvent when he made them. In Fidelity & Deposit Co. v. Courtney, 186 U. S. 342, 22 Sup. Ct. 833, 46 L. Ed. 1193, it was held that immediate notice means no more than that degree of promptitude which is reasonable under the circumstances, and such is the rule of all the decisions. Ordinarily the question whether the notice is given with due diligence under all the circumstances of a particular case is for the jury to answer. 2 May on Insurance, § 462 ; 4 Joyce on Insurance, § 3292.

If upon the undisputed facts the minds of reasonable men would not differ, the question is one of law for the court; but, where reasonable minds may differ upon the proven facts, the question is for the jury. The trial court instructed the jury that the plaintiff was not required to give notice to the defendant until it had discovered that Brown was guilty of culpable negligence in making the deposits when he knew the bank was insolvent, or had discovered facts indicating a probability of such fraud by Brown, and had discovered that it had suffered loss by reason thereof.

The court said that the closing of the bank doors and the discovery by the plaintiff therefrom that a loss had been suffered by defendant was not necessarily conclusive that the plaintiff should at once have given notice to the defendant, and directed the jury to take into consideration all the circumstances and conditions then existing as known to the plaintiff, and therefrom to determine the time when the plaintiff discovered or had information of facts, indicating that Brown had probably been guilty of fraud or culpable negligence resulting in loss to the plaintiff, and the court added that the plaintiff was not required to give the surety company notice upon discovery of facts that would merely raise a suspicion of fraud or culpable negligence on the part of Brown; that it had the right to wait until it discovered facts that would reasonably do more than raise a mere suspicion; that it had a right to delay giving notice until it discovered facts that would have justified a careful and prudent man in charging another with fraud or culpable negligence.

Said the court: “The words •immediate notice,’ as employed in the bond, are to be given a reasonable and practical construction, and are to be taken as requiring the plaintiff only to give notice as soon as was under all the circumstances of the ease reasonably practical.” Involved in the determination of the question whether the notice of November 20th was given within a reasonable time are the two questions: First, were the facts which were discovered such as to show that a loss had probably been sustained? and, second, at what time were they discovered?

If the provision of the bond is fairly susceptible of two constructions, one favorable and the other unfavorable to the insured, the former should be adopted, for the reason that the instrument was prepared by the insurer.

If it had been the intention of the contracting parties that notice should be given upon the discovery of facts creating a suspicion that a loss under the contract had probably been sustained, the defendant should have so stipulated in the bond. “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.” American Surety Co. v. Pauly, 170 U. S. 133, 18 Sup. Ct. 552, 42 L. Ed. 977.

In that case the court below had charged : “It is not sufficient to defeat the' plaintiff’s right of action upon the policy that it he shown that the plaintiff may have had suspicions of dishonest conduct of the cashier; but it was plaintiff’s duty under the policy, when it came to his knowledge, when he was satisfied that the cashier had committed acts of dishonesty or fraud likely to involve loss to the defendant under the bond, as soon as was practicable thereafter to give written notice to the defendant.” The Supreme Court approved those instructions and said: “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 bank 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.” Of similar import are Ætna Indemnity Co. v.

J. R. Crowe Coal & Mining Co., 154 Fed. 545, 83 C. C. A. 431; Ætna Indemnity Co. v. Farmers’ Nat. Bank, 169 Fed. 737, 745, 95 C. C. A. 169; Perpetual Building & Loan Ass’n v. U. S. Fidelity & Guaranty Co., 118 Iowa, 729, 92 N. W. 686; Fidelity & Guaranty Co. v. Western Bank (Ky.) 94 S. W. 3; Remington v. Maryland Fidelity, etc., Co., 27 Wash. 429, 67 Pac. 989; Fidelity & Casualty Co. v. Bank of Timmonsville, 139 Fed. 101, 71 C. C. A. 299.

In'view of these principles we think it is the fair construction of the words of the bond that they do not mean that notice shall be given upon the mere discovery of facts sufficient to create a suspicion of a loss, but that they mean that the notice is to be given only upon obtaining definite knowledge or receiving credible information sufficient to justify the plaintiff in preferring charges of culpable negligence against its employe.' The evidence is undisputed that immediately upon the closing of the bank’s doors the bank commissioners took charge of the bank and refused to give information concerning its condition, and that they gave out no statement until after November 20th, and that in the meantime the officers of the bank were assuring the attorneys and officers of the plaintiff that the bank was solvent and would soon reopen its doors.

The evidence which is relied upon as showing that the officers of the plaintiff were in the possession of knowledge which under the terms of the bond required them to give immediate notice is, in brief, the following: That tlie plaintiff discovered almost immediately after the closing of the bank that Crown had been holding up its checks, and that it had required Brown to resign his office as its treasurer. That on November 1st plaintiff’s attorney, Mr. Cutcheon, in New York, telegraphed to Mr. Olney, its attorney in San Francisco, requesting him to send by wire a list of the stockholders of the bank.

That the plaintiff’s officers knew that the clearing house committee of San Francisco would not come to the assistance of the bank. That on November 1st Mr. Olney telegraphed to Mr. Cutcheon to stop payment of certain drafts for $100,000 of October 26th, and said, “Do not like the look of things,” and that later on the same day he wired that his telegram advising stoppage of drafts until further advice was based upon the reluctance of the bank to show books and give the exact facts, adding: “Subsequently, however, they gave us full access and all information requested.

Advice in telegram is accordingly withdrawn.” That in his second dispatch of November 1st Mr. Olney referred to some of the large loans that had been made by the hank and said: “The report is, and I think correct, that Brown has been spending money personally in a very lavish manner. * * * I suspect that the bank people have loaned, considerable sums to speculative schemes in which they were interested. Further than this, have no information that would result in scandal.” That Mr. Olney testified that he had heard before the failure of the bank some suggestions that it was not a first-class bank..

That somewhere between 1900 and 1903 he had heard that the hank had put more money into the Tesla proposition than it had any business to put into one scheme, and that the scheme was not a success, but that he had been informed that by the deal which the bank later made with the Gould interests it had retrieved itself.

That he had no real information on these subjects, but heard rumors merely. “I felt that it was not one of the strong banks of the country, but it was a second-rate bank.” As tending to controvert the inferences that might be drawn from this evidence, there is the testimony of the officers and attorneys of the hank, each of whom testified that up to November 20th he had no information of a definite character concerning any dishonest or fraudulent act on the part of Brown. Mr.

Jeffery, the president, testified: “I wrote the letter which Is in evidence as the letter of November 201 h as soon as I felt what seemed to me a reasonable suspicion that the acts of ,T. Dalzcll Brown were not what they ought, to have been. At the time that letter was written I had no definite information as to the character of his acts, or as to the real financial condition of the California Safe Deposit & Trust Company.” Mr. Olney testified: “The statement was constantly given out that the hank commissioners and Mr.

Dunsnmir Liheir custodian in charge of the bank] were preparing a report that would show the condition of the hank. I sought to-get information, and sought to know when this report would he out, and was constantly informed that it would be out shortly.

In the meantime the bank commissioners were apparently giving every assistance to the bank officials, so that they might resume, and the bank officials were constantly giving out statements that they were going to resume within a short length of time.” He also testified that prior to December 1st he had— “no information at any time, by rumor or otherwise, of any improper or 'dishonest conduct on the part of the officials or persons connected with the Oalifornia Safe Deposit & Trust Company.” The important fact is to be borne in mind that the bank suspended during a time of general financial panic, when many solvent banks were forced temporarily to close their doors, and that therefore the closing of this bank did not have the significance that otherwise would ' attend such an incident, and did not of itself necessarily import insolvency.

We are of the opinion that there is nothing in the evidence to indicate with any degree of definiteness that the officers of the plaintiff knew prior to November 20th Brown had been guilty of culpable negligence. The most that can be said in favor of the defendant’s contention is that upon all the evidence minds of reasonable men might differ as to whether the officers of plaintiff had discovered facts that would probably indicate a loss to it under the provisions of the bond. Such being the case, there was no error in submitting the question to the jury.

We find no error for which the judgment should be reversed. It is accordingly affirmed.