Outlook Farmers' Elevator Co. v. American Surety Co.

MR. JUSTICE HOLLOWAY

delivered the opinion of the court.

From November, 1913, until August, 1917, the Farmers’ Elevator Company of Outlook employed Oscar J. Brown as its manager in the business of buying, selling and storing seed and grain. To secure the faithful performance of his duties, Brown gave to the elevator company a fidelity bond in the sum of $3,000, with the American Surety Company as surety. By the terms of the bond Brown as principal, and the surety company as surety, promised to reimburse the elevator company for such losses of money or other personal property, not exceeding $3,000, as it might suffer by reason of any acts of fraud, dishonesty, forgery, theft, embezzlement, wrongful abstraction or misapplication on the part of Brown during his employment. This action was instituted to recover for losses alleged to have been suffered by the elevator company through the wrongful acts of Brown in his capacity as manager. Specifically, the charge is made that from October 1, 1916, to February 15, 1917, in violation of Ms duties and the by-laws of the elevator company, Brown engaged in purchasing and selling options and futures under such circumstances- as constituted the transactions gambling in grain; that the transactions were conducted in the name and upon the credit of the elevator company, with the result that funds of the elevator company to the extent of $6,973.88 were lost.

The defendants answered separately, but each answer contains the admission that Brown did engage in buying and selling options and futures in violation of the by-laws of the elevator company, and that losses resulted from some of these transactions. An affirmative defense was interposed which will receive consideration later. Issues were joined by reply. Upon the trial of the cause plaintiff prevailed. Defendants have appealed from the judgments, and have attempted to appeal from the order denying their motion for a new trial. Likewise they seek to bring before this court for some sort of review the action of the trial court in failing to pass upon the motion for a new trial.

Section 9400, Revised Codes of 1921, provides that, if the court shall fail to pass upon a motion for a new trial within fifteen days after the same is submitted, it is deemed denied. The statute declares the consequences of the court’s inaction, but the failure of the court to act is not subject to review.

By section 9745, Revised Codes of 1921, appeals from orders denying new trials are abolished, but all questions formerly reviewable on an appeal from an order denying a new trial are now subject to review in appeal from the judgment.

While the complaint contains superfluous matter, it is not open to the attacks made upon it by special demurrer. The sufficiency of the complaint to state a cause of action has not been and is not now challenged.

Defendants make eighty assignments of error, but these are grouped for the purpose of discussion, and three principal contentions are advanced:

1. It is insisted that plaintiff could recover only upon the theory that the losses resulted from acts of fraud perpetrated by Brown, and that the evidence fails to make out a case of fraud. It is sought to justify this theory of limited liability by reference to a memorandum filed by the trial court, Judge Hurley presiding, when the separate demurrers to the complaint were overruled. In that memorandum Judge Hurley expressed the opinion that the complaint would admit of recovery only upon the theory that plaintiff’s losses resulted from “the fraudulent dealings of the defendant Oscar J. Brown as alleged in paragraph 10 of plaintiff’s complaint.” When the demurrers were submitted, the court was called upon to sustain or overrule them, and, if the order overruling them was correct, it is altogether immaterial what reason may have prompted it. (Brown v. Daly, 33 Mont. 523, 84 Pac. 883; City of Butte v. Goodwin, 47 Mont. 155, Ann. Cas. 1914C, 1012, 134 Pac. 670.) Judge Hurley’s memorandum is not properly a part of the record, and cannot be considered for any purpose. (Phillips v. Coburn, 28 Mont. 45, 72 Pac. 291.) Assuming that the complaint states a cause of action upon any theory, it will be sustained (Grover v. Hines, 66 Mont. 230, 213 Pac. 250), and the trial court was authorized to grant to plaintiff any relief consistent with it and fairly embraced within the issues (sec. 9316, Rev. Codes 1921). The statute just cited does not impinge in the least upon the general rule which prevails in this jurisdiction, and elsewhere, that a plaintiff may not adopt one theory of the case in his complaint and recover upon another, or adopt one theory in the trial court and insist upon another in the appellate court. However, the memorandum filed by Judge Hurley did not establish a theory binding upon the plaintiff or fix the law of the case. Judge Felt, who presided at the trial of the cause, was free to put his own construction upon the pleadings, notwithstanding Judge Hurley’s previously expressed opinion. (15 C. J. 963, sec. 359.)

As we interpret the language of the complaint, plaintiff proceeded upon the theory that the transactions carried on by Brown in dealing, in options and futures were of sueb cliar•acter as to constitute them gambling transactions prohibited by his employment and by the express provisions of the elevator company’s by-laws; that the use of the elevator company’s money or other personal property to carry on such transactions constituted a misapplication of such property; and that the resulting losses are recoverable under the terms of the bond. It appears to us from the record that the theory thus adopted has been adhered to consistently, and that under that theory the right of the plaintiff to recover cannot be questioned.

2. As an affirmative defense each of the defendants alleged in effect that during 1915 and 1916, and until the termination of his employment, Brown engaged in dealing in options and futures in violation of the by-laws; that in such transactions large profits were realized from time to time; that with full knowledge of the character of such transactions and the source of the profits plaintiff accepted and distributed them to its stockholders as dividends, and thereby ratified Brown’s acts and ought not now to be heard to repudiate such of the transactions as resulted in losses. It is insisted that there is some evidence in the record tending to support this defense, but, notwithstanding the fact, the court refused to submit the matter to the jury. The principal contention upon this branch of the case, however, is that the court erred in refusing to admit evidence which it is claimed would have established: the defense.

The principle for which defendants contend is expressed in section 7910, Revised Codes of 1921, as follows: “A ratification can be made only in the manner that would have been necessary to confer an original authority for the act ratified, or where an oral authorization would suffice, by accepting or restraining [retaining] the benefit of the act, with notice thereof.” In referring to the provisions of the section just quoted, this court, in Koerner v. Northern Pac. Ry. Co., 56 Mont. 511, 186 Pac. 337, said: “To constitute a ratification there must be an acceptance of the results of the act with an intent to ratify and with, full knowledge of all the material circumstances. ’5

The record discloses that the alleged gambling transactions which resulted in the losses sought to be recovered in this action were conducted by Brown through a commission house in Minneapolis, many of them in purely fictitious names, and that the commission house rendered monthly reports to the elevator company. It is insisted that, since the reports for 1916 and 1917 were received by the elevator company, became a part of its office records, were open to the inspection of its officers and directors, and disclosed the character of Brown’s transactions, they impute knowledge of théir contents to the plaintiff, whether they were ever actually inspected or not.

Assuming, as we may, that Plaintiff’s Exhibits 1 to 12 are copies of the monthly reports submitted by the commission house, we observe that, while it may be true that to one familiar with grain gambling transactions these reports disclosed Brown’s illegal operations, to the members of this court they have no such effect, and the record discloses that the officers and directors of the elevator company could not understand them, when they were received after Brown’s employment terminated. They appear to have been drawn artfully" to conceal the fact that any of the transactions were of the prohibited character. But, aside from this consideration, the evidence discloses further that Brown, as manager of the elevator company, had charge of the books and records, and it is not pretended that there is any evidence in the record tending to prove that he ever called the attention of the officers or directors of the company to these reports or to any of them ,* on the contrary, it appears that they did not know of the existence of the reports until after the termination of Brown’s employment; that they depended upon Brown for information concerning the records, and that Brown had told them that he “wasn’t gambling.”

In this connection defendants sought to show that in diseuss ing the business of the elevator company during the last year of Brown’s employment, Brown had said to Stoner, the president of the elevator company: “I don’t think we will make much money this year. I closed out a few options the other day on a loss, but I have shipped in ears after that that brought good profits, and we may come out a little ahead at the end of the year.” Just what Brown meant by the use of the term “options” was not explained or sought to be explained; but under the by-laws of the elevator company dealings in options and futures, as such, were not prohibited altogether. Article 6 of the by-laws provides: “The buying and selling of options or futures shall be limited to the hedging of grain actually on hand or contracted for at a definite price. No grain shall be sold to arrive, except such as is actually purchased or contracted for at a definite price at the time such sale to arrive is made.” In the absence of anything to indicate that Brown employed the term “options” otherwise than as indicated by the by-laws, his information conveyed to the president of the elevator company cannot be held to impute knowledge that he was engaged in gambling transactions or in transactions prohibited by the by-laws.

The relation of principal and agent is essentially one of trust and confidence, and the officers and directors of the elevator company had the right to rely upon Brown’s fidelity until knowledge of the fact that he was unworthy of confidence was brought home to them. They were not to assume that he would violate the by-laws in the face of his declaration that he was not going to do so; and they cannot be charged with negligence in failing to search the records for evidence of his duplicity. (Haswell v. Standring, 152 Iowa, 291, Ann. Cas. 1913B, 1326, 132 N. W. 417.)

Under these circumstances it cannot be said that the officers and directors of the elevator company had such knowledge of Brown’s peculations as would constitute the acceptance of the benefits derived from such transactions a ratification of the acts, and the court did not err in refusing to submit the question of ratification to the jury.

As further evidence that the elevator company had ratified Brown’s unauthorized dealings, the defendants sought to show that during the year commencing July 1, 1915, and ending June 30, 1916, the elevator company made large profits; that at the annual meeting of the stockholders held in July, 1916, one Eckerly was present and addressed the stockholders, and informed them of the manner in which Brown had conducted the business in order to realize the profits; that he (Brown) had speculated in grain and had taken “awful chances”; that, if Brown should thereafter speculate for them and again gamble in their name and lose, he (Eckerly) hoped that they would not criticise Brown, but would be men enough to accept their losses as well as their profits. Eckerly was from Minnesota, and so far as disclosed in the record knew nothing of Brown’s method of conducting the. business, except so far as disclosed to him by Brown. Brown testified: “I informed him [E'ckerly] that the company had made this last year $14,000; * # * that the market was going up a little right along, and that I didn’t sell the grain just, as I bought it, and I could see no risk in holding the grain, because it was going up all the time, and I sold it as it was shipped in, on a profit. # * # After I had informed Mr. Eckerly as I have stated, Eckerly referred to what I had told him at the stockholders ’ meeting. ’ ’

The offer of proof does not assume to give the language employed by Eckerly in describing the manner in which Brown had conducted the business, but, if he used the language which Brown had used to him, it is perfectly apparent that the stockholders must have understood that the profits were realized from buying grain, holding it for a time, and shipping and selling it at an advance in price; and the fact that Eckerly may have characterized such transactions as speculating or gambling could not change their legitimate character or charge the stockholders with knowledge that Brown was violating the by-laws.

In this connection it is interesting to observe that defendants offered to prove by Brown that, “if an elevator company buys grain, and holds the same without hedging at their elevator for some time before selling the same, that this is out of the ordinary way of doing business, and constitutes speculating in grain”; and again they offered to prove by the same witness that between July 1, 1915, and June 30, 1916, he bought grain for the elevator company and held the same for a rising market without hedging, and that such transaction “constitutes speculating and gambling in grain”; that these transactions were known to the stockholders of the elevator company; that they accepted the profits derived from them, ordered the balance due to the commission house paid, and the remaining profits distributed as dividends, gave a vote of thanks to Brown, and employed him for another year. We think it would be safe to say that every transaction in grain by an elevator company is speculative. The word “speculate” means “the act or practice of buying land, goods, shares, etc., in expectation of selling at a higher price.” (Webster’s International Dictionary.) The elements which distinguish hedging, option and future transactions, as such, from gambling transactions are set forth fully in Benson-Stabeck Co. v. Reservation Farmers’ Grain Co., 62 Mont. 254, 205 Pac. 651, and need not be repeated here. It would impeach the intelligence of any sane person to insist that the transaction described by Brown constituted gambling as that term is ordinarily understood.

Again, defendants sought to show that during the year commencing July 1, 1915, and ending June 30, 1916, the profits derived from Brown’s transactions and the character of the transactions were disclosed in monthly reports received from the commission house, and copies of these reports were offered in evidence but excluded. The exhibits are not in the record, were not certified to this court, and are not before us; but we are not left in doubt as to their contents. Defendants offered to prove “that such monthly statements contain full notations and full records of all grain transactions, including ordinary grain transactions of buying grain and hedging, as well as transactions of buying grain and holding the same for a while without hedging, and without immediately selling, for a rise in the market price.”

Again, defendants offered to prove that about the 1st of July, 1916, the secretary of the elevator company under the order of the directors made an examination of the records and books of the company, and made a financial statement, which apparently had been lost; that a typewritten memorandum found pasted in the elevator company’s ledger “is a full, true, and correct copy of the letters and figures made out by him in making up such financial statement, and that such notations and statements as found on page 48 of Plaintiff’s Exhibit 20 [the ledger] are identical with the notations 'and statements made by this witness [the secretary] in making out such financial statement for the previous year’s business of the corporation.” We confess our inability to understand the purpose of the offer. The memorandum may have concealed in it somewhere the evidence of gambling transactions, but, if so, we are unable to detect it. It follows:

Advanced on grain............................. $ 1,416 70

Coal on hand........................ 296 80

Wheat on hand................................ 571 60

Flour on hand................................. 1,351 00

Building ..................................... 7,738 83

Bills receivable ............................... 5,711 40

Twine account ................................ 11 00

Accounts recoverable, coal, flour................. 357 00

Wagnild account .............................. 176 00

Fanning mill ................................. 44 90

Oats on hand.................................. 579 60

Flax on hand.................................. 58 50

Grain in transit............................... 8,397 89

Balance due Winter-Ames...................... 2,444 57

General expense ............................... 3,612 96

Expenses hedging charges....................... 876 25

$33,645 00

Capital stock ................................. $ 8,400 00

Balance carried in P. & L...................... 376 30

Stored wheat ................................. 5,487 30

Stored flax ................................... 966 00

Oats .................................. 797 00

Cheeks outstanding ............................ 1,234 90

Due Security State Bank....................... 351 53

Gross profits (statement)....................... 16,031 97

$33,645 00

The attempt now made to justify the offer and to predicate reversible error upon the court’s ruling in excluding it seems puerile in the extreme.

Complaint is made of the ruling of the trial court in excluding defendants’ offer of proof numbered 10; but the record fails to show that it was ever passed upon. "When the offer was made, the presiding judge said: “I am going to reserve ruling on this offer until after I have used the holiday tomorrow to look up authorities. If either of you gentlemen have anything to submit on that, I will consider that.”

A somewhat diligent search of the record fails to disclose that anything further was ever done respecting the offer, and counsel for defendants do not point to any adverse ruling upon it.

The court did not err in rejecting the several offers of proof.

3. It is urged that plaintiff failed to give notice of its losses within the time limited by the bond. The bond provides that recoverable losses must be discovered within fifteen months at most after the termination of Brown’s employment, and that notice of such losses must be given to the surety company within ten days after discovery.

A bond of this character is a voluntary contract, and the surety company may prescribe the terms upon which it is willing to assume the risk. A provision requiring notice of loss within a specified period after discovery is recognized as valid, and, unless waived, must be complied with as a condition precedent to recovery upon the bond. (California Savings Bank v. American Surety Co., 87 Fed. 118.) That plaintiff: gave notice to the surety company is established beyond controversy, but whether the notice was given within ten days after the losses were discovered is the question upon which counsel for the respective parties fail to agree. The testimony introduced by plaintiff tends to prove that the losses were not discovered until after the books of the commission house were audited and the audit received by the plaintiff on March 2 or 3, 1918, and it is uncontroverted that the notice was given on March 9 following.

It is true that Stoner, the president of the elevator company, indicated that he was suspicious soon after Brown’s employment ceased that recoverable losses had occurred, but he explained the' difficulties encountered in the attempts made to ascertain the facts. The bond did not call upon plaintiff to act upon suspicion but upon discovery of recoverable losses; that is to say, when it was reasonably satisfied that Brown had committed acts resulting in losses to plaintiff which were recoverable; or, stating the principle differently, when it had knowledge of the existence of such facts as would justify a careful and prudent man in charging Brown with the acts of which complaint is now made. (American Surety Co. v. Pauly, 170 U. S. 133, 42 L. Ed. 977, 18 Sup. Ct. Rep. 552 [see, also, Rose’s U. S. Notes].) Under proper instructions the jury were left free to determine when the losses were first discovered, and with the general verdict supporting plaintiff’s theory that the discovery was not made until March 2 or 3, 1918, we are not disposed to interfere.

Aside from these principal contentions, other errors are assigned which require notice. Complaint is made of the ruling of the trial court in admitting certain evidence. For the purpose of illustrating the character of Brown’s transactions which resulted in the losses, plaintiff introduced in evidence declarations and admissions made by Brown after the termination of his employment, to the general effect that the losses had resulted from his gambling in grain, as those terms are commonly understood. It is insisted that the surety company could not be bound by these statements; that the court erred in admitting the evidence; and that without this objectionable evidence plaintiff failed to make out a ease against the surety company.

Whether declarations of the principal made after his default and after the termination of the employment covered by the bond are admissible as against the surety is a question upon which the authorities are not agreed, and one which we need not stop to consider, since defendants are not in a position to raise it.

It is elementary that evidence may be admissible for a spe cial purpose, but not admissible generally; or it may be admissible for one purpose but not for another; or it may be admissible against one joint defendant but not against another. If, however, offered evidence is properly admissible for any purpose, it may not be excluded. (Hester v. Western L. & A. Co., 67 Mont. 286, 215 Pac. 508; Town of Meeker v. Fairfield, 25 Colo. App. 187, 136 Pac. 471; Flint v. Farwell Co. (Ind. Sup.), 134 N. E. 664; Chicago L. Co. v. Cox, 94 Kan. 563, 147 Pac. 67; Murray v. Frick, 277 Pa. 190, 121 Atl. 47.) In this action Brown and the surety company are sued jointly. The record discloses that, when the witness Onstad was asked to repeat the statements made to him by Brown, the defendants objected jointly and not otherwise. Later the separate objection of each defendant was interposed upon the same grounds. It is a general rule that a joint objection to evidence in order to be available must be well taken as to all who join in it (Fowler v. Newsom, 174 Ind. 104, 90 N. E. 9); and if the evidence is admissible against one defendant, though not against another, their joint objection should be overruled. (Langdon v. Ahrends, 166 Iowa, 636, 147 N. W. 940; O’Reilly v. Adams, 163 App. Div. 60, 148 N. Y. Supp. 441; affirmed, 218 N. Y. 723, 113 N. E. 1062; Sullivan v. Fant (Tex. Civ. App.), 160 S. W. 612.) Under all of the authorities the declarations were admissible against Brown, but they could not be introduced and excluded at the same time. If the surety company had desired to have such evidence limited in its application to Brown alone, the obligation was imposed upon it to request the court for an appropriate instruction which would accomplish that end (Sweet v. Savings Bank, 73 Kan. 47, 84 Pac. 542; 8 Wigmore on Evidence, 2d ed., sec. 13, p. 159; 38 Cyc. 1340), and, failing to make such request, it cannot now be heard to complain of the court’s ruling admitting the evidence.

In order that a wrong inference may not be drawn from our conclusion on this appeal in its entirety, we express our disapproval of instruction No. 6 given by the court; however, it is not open to the objections made by defendants’ counsel at the time the instructions were settled, and by express statute (sec. 9349, Rev. Codes 1921), our review is limited to those objections.

To discuss the assignments of error more in detail would extend this opinion to an unreasonable length. We have examined every contention advanced by defendants, and fail to find sufficient ground for reversing the judgment.

The pretended appeal from the order refusing a new trial is dismissed and the judgment is affirmed.

Affirmed.

Mr. Chief 'Justice Callaway and Associate Justices Cooper, Galen and Stark concur.