Warren Deposit Bank v. Fidelity & Deposit Co.

Opinion of the court by JUDGE O’REAR Affirming. This action was brought in the .Warren circuit court by the Warren Deposit Bank against Luther R. Porter and the appellee, the Fidelity & Deposit Company of Maryland, -upon a bond given .to the bank by Luther R. Porter as principal and the surety company as hi-s surety, conditioned that the surety company should, within three months after the receipt of satisfactory proof, rmmburse the bank to an .amount no,t exceeding $20,000 for such pecuniary loss -of money, securities, or .other personal property belonging to the bank, as the bank might sustain by any fraudulent act or acts committed by Porter in the performance of the duties of cashier of the bank during the term beginning May 1, 1900. Upon the trial, on motion of the surety company, the court, at the conclusion of the evidence for the plaintiff, peremptorily instructed the jury to find for45 the defendant. Accordingly the jury so found, and a judgment was entered dismissing the petition as to the surety company, and from that judgment this appeal is prosecuted. The petition avers the fact that Porter was cashier of the hank, the execution of the bond and its terms, and then avers the breach of the bond as follows: “That while the said bond was in full force and effect, and within the term beginning May 1, 1900, and ending May 1, 1901, the plaintiff suffered pecuniary loss by reason of the fact that the defendant Luther R. Porter fraudulently and unlawfully, while acting as cashier aforesaid, and in violation of his duties as such cashier, embezzled, appropriated, and used twenty thousand ($20,000) dollars of the money of the plaintiff, and fraudulently failed and refused, upon demand, to pay the same, or any part thereof, to plaintiff, or, in whole or in part, to reimburse the plaintiff for said loss,, or to any one for its use and benefit.” The answer of the surety company, besides traversing the allegations of the-embezzlement charge in the petition within the period covered by the -bond, pleaded a number of matters in avoidance of its liability. The only -one of them that we have found it necessary to determine in this case is contained in the fdurth paragraph -of the answer, which avers -that before making the bond the defendant required the bank to an.■swer certain questions in writing relating to the duties and accounts of Porter, cashier; that the bank, through and by its president, C. G. Smallho-use, did make and deliver to the company written answers to such'questions; that the bond sued on was made upon the faith of such answers, and that the company believed them to be true; that the written paper upon which the questions were propounded and answers made, and the bond itself, provided that the — 46 — answers to the questions should be conditions precedent and the basis oí the bond; that certain stated answers which ' were material were untrue, and that, therefore, the bond is void. The reply, by its third paragraph, denies that the bank made the answers to- the questions propounded by the company, but admits that its president did so, and .that the answers'were false in fact, although, as it avers, the president did not know the answers were false at the time he made them. The effect of the reply in this respect is to deny tb/ei authority of the president to make the answers, and to contend that his act did not hind the hank. The written questions and answers delivered by Smallhouse, the president of the hank, to the surety company, and alluded io in the pleadings above mentioned, are set out at length by the pleading. Although the special judge who tried this case refused to permit this evidence to go to the jury, .and predicated his peremptory instruction upon other facts, we are of opinion that this matter is sufficiently pleaded to have justified its consideration by the court in determining whether the case should have gone to the jury; for it is not material what was the basis of the trial court’s action in granting the peremptory instruction if it should have done so for any reason apparent upon the state of the record. At the tima the bond sued on was made, G. G. Smallhouse was the president of the hank, and had been for many years. Before the bond was made, the surety company required the bank to answer in writing certain questions relative to the duties and accounts' of Porter as ✓nashier, in order that it might determine whether it would or would not make the bond which had been applied for. For -this purpose the .surety -company sent to the hank, or to its president on its behalf, a printed form containing the questions which it wished the hank to answer. This printed form was returned to the surety company with — 47 — the answers to the several questions written thereon, and signed, “Warren Deposit Bank, by C. G. Smallbouse, President, Official Capacity.” The printed form was .appended to the following communication: “Baltimore, April 13, 1900. To the President of the Warren Deposit Bank, Bowling Green, Ky.: Application has been made to this company to issue .a bond of security for Mr. Luther R. Porter, cashier, in your service, to the amount of $20,000. The company desires to have answers to the following questions, and these answers will be taken as. the basis of the bond, if issued. Yery respectfully yours, Edwin Warfield, President.” The printed form closed with this statement and signature: “It is agreed (that the above answers are .to be ■taken as conditions .precedent .and as the basis of the said bond applied for, or any renewal or continuation of the same that may he issued by the Fidelity & Deposit Company of Maryland to the undersigned upon the person above named. Dated at Bowling Green, this 14th day of April, 1900. Warren Deposit Bunk, by O. G. Smallbouse, President, Official Capacity.” Among the questions 'which were required to be and which were answered by -the president of the hank on its behalf, were 'the following: “Has the, applicant uniformly given .satisfaction in his personal conduct and habits? Yes.” “Has he kept his accounts correctly, and made proper'settlements of all cash and securities entrusted to his care? Yes.” “At what date and by whom were applicant’s hooks and accounts (including cash, .securities aud vouchers, if any) last inspected and examined? Board of Directors. Sept. 6, ÍS99, by-“Were they at that time in every respect -correct and proper-securities and funds on hand to balance ? Yes.’” It is; admitted that these answers were false; that in feet mtt the time .they were made Porter had not kept his accounts — 48 — correctly, or made proper settlements of all cash and securities intrusted to his care, and at the date, -of the last inspection of the hooks on September 6, 1899, they were not correct in every particular, nor were proper securities and funds on hand to balance,. On the contrary, at that time Porter had abstracted from the bank, and had used without its consent, or the knowledge of its1 board of directors, about $30,000 of its cash. This fact was apparent at that time from even a casual inspection of the books of the bank and the counting of its cash on. hand and inspection of its securities. The evidence did not show, nor was it pleaded, that any one acted for the bank in the matter of contracting for this bond other than its president, Small-house. The only person who- is shown to have acted for the bank at all in this transaction was its president. It is pleaded and most earnestly argued on behalf -of appellant that the president had not the inherent power, by virtue of his office, to represent the bank in this matter, and that it was not a duty pertaining to his office, either by the powers conferred by the charter or by-laws of the bank, or by its usage or custom, or by vote or resolution of its board of directors. It is claimed that, on the contrary, the board of directors alone had the power and authority, under appellant’s charter and under the law, to represent the, bank in the transaction of contracting bond for its cashier, and of making statements and representations to the surety on behalf of -the bank regarding same. While it may be true that, as a matter of law, answering 'questions such as tho-se propounded to the president in this ■case, and making the representations' therein -contained,, were not within either the actual or the apparent scope <of the duties of that office, and that the president was not authorized expressly either by the charter or by anything — 49 — appearing upon the minutes of the proceedings of the board of directors to make such representations on behalf of the bank, yet it does not follow from these premises that the president did not act in the bank’s behalf in making them. There is no principle of the law of agency truer or more familiar than that, although an agent may act in fact without authority, express or implied from his principal, his act may become binding upon the latter by its ratification. The contracting parties in 'this matter were three, to-wit, the bank, Porter, its cashier, and appellee, his surety. Each' of these contracting parties, by the terms of the bond sued upon, engaged to one or both of the others to do or not to do certain things. To have been binding upon any of them, it must have been executed, or its execution must have been ratified, in. .a manner binding upon each. Appellant asserts, by seeking to recover upon the bond, that the contract was made on its behalf, and that it was authorized. It is not claimed, nor is it attempted to be shown, that the board of directors acted at all in that matter, SO' far as any proceeding by their body is concerned. The action of Smiallhouse, then, was that which represented the bank in that transaction. If the bank would avail itself of the benefit of his actions, it must tato them subject to his representations and statements that induced the execution of the contract by the .surety. Furthermore, the bond itseíf recites: “Whereas, the employer has delivered to the company certain .statements' .and declarations relative to the duties and accounts of the employe, which, togethei with any statements or declarations hereafter required by or lodged with the company, do and shall constitute an essential part, ’and form the basis of this contract.” If the board examined :the bond at all, they are bound to have — 50 — taken notice» of these statements, which is enough to have reasonably put them upon inquiry as to the character of the statements therein referred to. But, whether they actually examined the bond or not, (they must in all fairness, and reason, be held to have assented to its statements, when, appellant elects to claim a recovery upon it. It manifestly would not do to impos.e upon one party to a contract an obligation in favor of another, which was made to depend upon .a condition stated in the contract, and yet relieve the latter from the condition because he had not noticed it. Having accepted the result of its president’s action in procuring the bond for it, and being required to take notice of all material statements and conditions contained in the bond, appellant is as much bound by these statements and the concurrent representation's made by its president and referred to in the bond as if his action and statements had been expressly authorized by the most solemn and specific entry .of record upon the minutes of the board of directors’ book of proceedings. We can not regard the. case of American Surety Co. v. Pauley, 170 U. S., 133, 18. Sup. Ct., 552, 42 L. Ed., 977, as announcing a different rule from the above. In that case it was shown that the-president of the bank, who made the representations as, to the .character, etc., of its cashier, was' in collusion with the cashier to loot the bank, and that these statements ware but a step made toward ’ consummating that end. It would scarcely need such eminent authority to sustain the con-, elusion that, when an agent steps asida from the duty enjoined by his position to commit a fraud upon his principal,, his representations and acts in that affair are not those .of’ the principal. Guaranty Co. of North America v. Mechanics’ Savings Bank & Trust Co., 183 U. S., 402, 22 Sup. Ct., 124, 46 L. Ed., 253. In Rice et al. v. Fidelity and Deposit; — 51 — Co., 103 Fed., 427, 43 C. C. A., 270, .as to the effect of the representations contained in a similar statement to that now being considered, the United States Circuit Court of Appeals, upon a very full consideration and treatment of. the .subject, thus fairly stated the law: “The parties expressly agreed in writing that the statement of the employers was a part of their contract; that it should be not only, the basis .of the bond, but a condition precedent, without compliance with "which there could be no recovery upon the obligation. The conclusion is irresistible that under this agreement the declaration in this case was of the nature of a warranty, and not of a representation, and our conclusion is: A written statement, made by employers to the obligor in a bond of indemnity against the dishonest acts of their employe, to the effect that they will invariably apply certain checks to his action, which .the parties expressly agree, by the statement itself and by the bond, shall be the basis of the latter, and a condition precedent to a recovery upon it is of the nature of a warranty, and not of a representation, and a failure to comply with the promise it contains is fatal to an .action upon the bond. Indemnity Co. v. Wood, 19 C. C. A., 264, 73 Fed., 81, 84; American Credit Indemnity Co. v. Carrollton Furniture Mfg. Co., 36 C. C. A., 671, 95 Fed., 111, 113.” Appellant contends that the provisions of section 639, Kentucky Statutes, 1899, as follows: “All statements, or descriptions' in any application for a pol'icy of insurance shall be deemed .and held representations and not warranties ; nor shall any misrepresentations, unless fraudulent or material, prevent .a recovery on. the policy” — should apply, and that the representations contained in the statements made by Smallhouse can not, under that section, be treated as warranties. Previous to the enactment of that — 52 — section of the statute, and in those jurisdictions where similar statutory provisions do not exist, such representations were held to he warranties, and, consequently, if untrue to any extent, whether or not material, the policy or contract was invalidated. T'h© cáse of Rice v. Fidelity, etc., Co., supra, proceeds upon that theory, and its citation is subject to the statutory modification obtaining in this State. The provisions of the section just quoted ought to be applied to this "class of contracts. It is found in the chapter of the statutes relating to insurance. Thu nature of the contract besides is so clearly akin to, if, indeed, it is not a species of, insurance, that its classification with other matters of insurance was likely enough purposely done by the Legislature. It is not material, ‘though, whether the statute does or does not apply to bonds made for sureties, as the statute, properly construed, in no way affects the result and ultimate effect of a materially false representation. Farmers’ & Drovers’ Ins. Co. v. Curry, 13 Bush, 312, 26 Am. Rep., 191, modified in its extent by Germania Ins. Co. of New York v. Rudwig, 80 Ky., 223, 3 R., 712. That these misrepresentations were material to the risk in this case there can be noi manner of doubt. That they were indisputably false is equally clear. Whether they were fraudulent or not is not, therefore, particularly material. We are of opinion that the effect of these material misrepresentations was to invalidate the bond. The judgment is therefore affirmed. Whole court sitting, except Judge Settle.