Village of Herkimer v. American Surety Co.

Per Curiam. This action was brought to recover upon a series of public officer’s bonds, issued by the defendant surety company, covering the Clerk Treasurer of the village, for the period from April 1,1946 to April 1, 1956. Defalcations on the part of the Clerk Treasurer occurred throughout this period, but they were not discovered until 1958, after her retirement from office. This action was commenced on March 20, 1961. The defendant moved for partial summary judgment on the ground that recovery for any defalcations which occurred more than six years before the commencement of the action was barred by the Statute of Limitations. Special Term denied the motion. [95] We agree with the appellant that the action is solely one in contract and that it is governed by the six-year Statute of Limitations, running from the time of the accrual of the cause of action. The crucial question is: When did the cause" of action accrue! In our opinion, it accrued when the village discovered or should have discovered the defalcations. One of the risks against which the defendant’s bonds were designed to protect the village was the risk that the officer might appropriate funds of the village and keep the misappropriation concealed for many years. It therefore must have been contemplated by the parties that the cause of action upon the bonds would not accrue until the village had discovered, or in the exercise of reasonable diligence should have discovered, the misappropriation. This is the only construction of the bonds which gives effect to the intent of the parties and to the purpose which the bonds were meant to serve. "Any other construction, would make the very frauds against which the sureties covenanted the means for relief from liability.” (Lieberman v. First Nat. Bank of Wilmington, 18 Del. 416, 426.) The motion for summary judgment was therefore correctly denied. The same result may be reached in another way. It is clear beyond question that the Statute of Limitations has not run in favor of the officer. An action for fraud is not barred until six years after the discovery of the fraud (Civ. Prac. Act, § 48, subd. 5). Furthermore, the officer bore a fiduciary relationship to the village and, as we recently held, a fiduciary who fraudulently conceals a breach of his fiduciary obligation is estopped from invoking the Statute of Limitations as a defense in an action brought to enforce the fiduciary obligation. (Erbe v. Lincoln Rochester Trust Co., 13 A D 2d 211, appeal dismissed 11 N Y 2d 754.) In this situation, the surety on the fiduciary’s bond also continues to be liable, under settled principles of suretyship. “ Where the principal’s concealment of his default prevents the running of the Statute of Limitations until the discovery of the default, the statute does not begin to run in favor of the surety until the creditor may reasonably be expected to discover the default.” (Restatement, Security, § 121.) The rationale of the rule is given in Comment a to section 121 as follows: “ [A] choice must be made between two innocent persons, the creditor and the surety. The choice is made in favor of the creditor so long as he cannot reasonably be expected to discover the principal’s default, because unless limited by the surety’s contract, the surety’s obligation is co-extensive with that of the principal. So long as the original duty of the principal continues, the liability of the surety persists,” [96] See, citing and following the Restatement, Chisholm v, House (183 F. 2d 698, 707). The Restatement section reflects the rule generally prevailing throughout the country. (See cases collected in 37 C. J., Limitations of Actions, § 365, p. 980; 54 C. J. S., Limitations of Actions, § 208, p. 229; 50 Am. Jur., Suretyship, § 184, p. 1024.) The order appealed from should therefore be affirmed.