First National Bank v. Iowa Bonding & Casualty Co.

Diberl, J. This is an action to recover on the guaranty by the defendant of the payment of a bank certificate of deposit. There were findings for the plaintiff. Afterwards a new trial was granted upon the ground of error in receiving in evidence the written application for the bond of guaranty by the bank issuing the certificate. The plaintiff appeals from the order granting a new trial. 1. On October 26, 1918, the Merchants & Miners State Bank of Tower, Minnesota, issued to the Mortgage Security Company of Minnesota, Incorporated, a certificate of deposit for $2,500 due in 10 months. The mortgage security company indorsed the certificate in blank without recourse. It was purchased by Kelsey S. Chase, A. L. Mellenthán and A. Hirsehman. On November 15, 1918, the certificate was purchased of them by the plaintiff bank in due course for value. It bore their unrestricted indorsements. Soon afterwards Chase and his associates procured a bond of guaranty through the St. Paul agency of the defendant and paid the premium. It was issued on November 22, 1918, from the company’s office in Minneapolis. The original application was over the telephone. It was understood that the bank would make a written application. It did so. It was dated December 2, 1918, and was apparently received at the office of the company in Des Moines not later than January 2, 1919, and it was retained. The bond was received by the plaintiff bank on November 30, 1918. It then wrote Chase, stating that the bond covering the certificate of deposit was received and said: "In consideration of the above mentioned bond being given to secure the holder of said certificate of deposit from loss, we hereby release the indorsers of said certificate.” The bonding company did not know of this release. So far as appears it did not know [281] what had become of the certificate. The three indorsers were solvent. The written application of the bank was for a bond of guaranty for $2,500 in favor of the mortgage security company for moneys placed on deposit and was “to take effect on Oct. 26, 1918, and to end on Aug. 26, 1919.” It was on a printed form of the defendant. At the top right hand corner was the notation: “Amount of bond $2500. Premium $10.42. Bond to be in force from 10-26, 1918 to 8-26, 1919.” The premium paid was for this period on the basis of five dollars per thousand for a year. The company by the bond guaranteed the prompt payment at maturity of “a certificate of deposit, dated the 26th day of October, 1918,” issued by the Tower bank to the Mortgage Security Company and “endorsed in blank.” The bond contained this further provision:' “The obligation and liability of the guarantor shall extend and inure to each and every subsequent holder and transferee of said certificate for value.” 2. The facts are as stated and are not in dispute. The contention of the defendant is that the plaintiff discharged the bond when it released Chase and his .associates, its solvent indorsers. The foundation of the claim is that the plaintiff had recourse against them on the certificate of deposit, and that the defendant, if it paid, was entitled to follow them, therefore it was damaged, and was discharged by their release. The bond guaranteed the payment of the certificate of deposit at maturity in the hands of whomsoever it might be. It was intended to run with the certificate. It took that form. When Chase and his associates orally applied for the bond, it was contemplated that the usual written application by the bank would be made. It was made. The parties interested were thinking of a bond which would guarantee Chase and his associates against the failure of the Tower bank to pay. The fact that the bond was executed after the negotiation of the certificate of deposit to the plaintiff is not under the circumstances important. The language of the bond indicated insurance from the date of the certificate. The written application was for such insurance. The guaranty was directly to the payee or holder of the certificate. The extension of liability “to each and every subsequent holder or transferee” was to holders and transferees subsequent to the payee, not merely those sub [282] sequent in time to the actual delivery of the bond. Unless that was the effect, Chase and his associates got no protection for the premium which they paid, for they had at the time parted with the certificate. With the construction given to the contract the case presents no difficulty. The bonding company was not in the position of an indorsee under the law merchant. Upon default of the Tower bank it would be required to pay the then holder of the certificate. It would have no recourse against any indorser. Such is not the plan of these guaranty bonds. Pome confusion has come from assuming the bonding company to be a subsequent surety for the plaintiff bank, which had as prior security the prior indorsements of its indorsers, to which the defendant should •have recourse when compelled to pay, and by the release of whom it was damaged. The parties might have made such a contract. They did not. The terms of the policy are at war with such a claim. The bond protected the payee of the certificate and subsequent purchasers of it and against them the bonding company had no recourse in the event that it paid the certificate. 3. The guaranty was by a corporation authorized to guarantee deposits. It received pay for its risk. It undertook absolutely that the bank should pay. The bond was in the nature of 'an insurance contract and should be construed favorably to those for whose protection it was given. See Lakeside Land Co. v. Empire State Surety Co. 105 Minn. 213, 117 N. W. 431; Brandrup v. Empire State Surety Co. 111 Minn. 376, 127 N. W. 424; George A. Hormel & Co. v. American Bonding Co. of Baltimore, 112 Minn. 288, 128 N. W. 12, 33 L.R.A.(N.S.) 513; American Credit Indemnity Co. v. Wood, 73 Fed. 81, 19 C. C. A. 264; Tebbets v. Mercantile Credit Guaranty Co. of N. Y. 73 Fed. 95, 19 C. C. A. 281; Dunnell, Minn. Dig. and 1916 Supp. §§ 9104-9107, and cases; 1 Joyce, Ins. § 339c; notes 33 L.R.A.(N.S.) 513; 47 L.R.A. (N.S.) 295. We have noted the claim of the defendant relative to the admission in the plaintiff’s reply that it accepted the bond. We do not give to it the effect urged, and a discussion is unnecessary. We hold -that the plaintiff bank did not discharge the bond by re [283] leasing its indorsers. The trial court was right upon its first consideration of the case, and a new trial should not have been granted. Order reversed.