Massilon Mortgage Co. v. Independence Indemnity Co.

The plaintiff in error in this case was plaintiff in the court below and will be referred to as plaintiff, and the defendant in error referred to as defendant.

At the January term of the court of common pleas of Stark county, Ohio, a judgment was returned in favor of defendant.

The plaintiff in its petition in substance claimed that, among other things, it was engaged in the business of loaning money on land contracts, real estate mortgages, etc.; that one Patrick E. McAllister was the duly elected, qualified, and acting secretary and treasurer of plaintiff company; that on or about the 1st day of March, 1926, the defendant, being a corporation engaged in the business of issuing surety and fidelity bonds, issued to plaintiff as principal and employer a fidelity bond in the sum of $10,000, wherein defendant agreed with plaintiff that it would make good to plaintiff such pecuniary loss of funds or other personal property as plaintiff might sustain by reason of any act or acts of fraud or dishonesty, including forgery, theft, embezzlement, wrongful abstraction, or misapplication, directly or through connivance with others, on the part of Patrick E. McAllister; that plaintiff has performed all the terms and conditions of said bond by it to be performed by reason of acts of fraud and dishonesty and other acts covered by said bond, directly and in connivance with others, of the said Patrick E. McAllister, employee, and that the conditions of said bond have been breached and broken and defendant has become liable to the plaintiff by reason thereof; and that under its regulations, rules, and by-laws, the money of the plaintiff company can only be used or loaned for the purpose of purchasing securities or making loans upon the authority of its board of directors, or, in certain cases, where the amount is under $2,500, by the authority of an executive committee, composed of members of the board of directors.

The claim is further made that while said bond was in full force and effect, the said Patrick E. McAllister fraudulently and dishonestly made certain unauthorized loans and paid to himself, without any authority, for his own use and benefit, and withdrew and used for his own use and benefit, from the funds of said plaintiff company, to its loss, the sum of $3,412.07, and without any authority and in violation of his duties paid over to one John E. Haecker and Thelma Haecker from the funds of plaintiff the sum of $517.50, and that there remains unpaid on this claim the sum of $314.48; that he paid to himself the sum of $2,000, of which $1,766.37 remains unpaid; and, further, that he loaned to one Eugene G. Wilhelm and Anna E. Wilhelm the sum of $510.

The defendant, the Independence Indemnity Company, filed an amended answer, making certain formal admissions and denials, and, further, admitted that said Patrick E. McAllister was elected and qualified as director and treasurer of the company, that the company entered into a contract with said Patrick E. McAllister, authorizing him to sell stock of the company at a compensation of $5 per share, that by reason thereof he was entitled to the sum of $715, and, further, that he did from time to time purchase mortgages and other evidences of indebtedness. Defendant asserted that as soon as said purchases were made, they were reported to the office of said plaintiff company, acted upon, approved, and ratified by said plaintiff company.

Defendant further answered that the plaintiff neglected to give proper notice of any claimed defalcation on the part of the said Patrick E. McAllister.

Plaintiff filed a reply in which it denied generally the allegations made in the answer.

The first thing for consideration is the bond of indemnification given in this case. We find that, among other things, it contains the following language:

"In consideration of the premium computed at an agreed rate, the Independence Indemnity Company hereby agrees to make good to The Massillon Mortgage Company (hereinafter called the employer) such pecuniary loss of money, funds or other personal property, including that for which the employer is responsible, as the employer shall sustain by any act or acts of fraud, or dishonesty, including forgery, theft, embezzlement, wrongful abstraction or mis-application, directly or through connivance with others on the part of Patrick E. McAllister (hereinafter called the employee), but not exceeding $10,000, while in the services of the employer."

We find from the record that the rules and regulations provide that the secretary shall keep the minutes of all the proceedings at the meetings of stockholders and directors of the company, and make a proper record of the same; that he shall keep such books as might be required by the board of directors, shall issue and attest all certificates of stock, and generally perform such duties as might be required of a secretary. The record is undisputed that the said McAllister was secretary and treasurer of the company during the period involved in this lawsuit, and that as such he had possession of all the books of the company and kept the record of its proceedings.

Now it is contended in this case on the part of the plaintiff therein that there is error in this case in the following particulars:

1. That the verdict of the jury is against the manifest weight of the evidence.

2. That the court erred in giving the written requests on behalf of the defendant before argument.

3. That the general charge of the court was erroneous.

It is the contention of the defendant, as spoken through Mr. McAllister, that all these matters had the approval of the board of directors. While it is true that the appraisal committee did look at some of these properties as evidenced by the record, a careful examination of the record reveals that the only evidence that the board of directors knew anything about any of these transactions is to be gathered and deduced from the testimony of Mr. McAllister alone.

The testimony of the plaintiff is plain and convincing, and is to the effect that none of the transactions were ever brought before the executive committee or the board of directors.

In weighing the evidence in this case it should be borne in mind that it was the duty of McAllister to keep a record of all proceedings, and his own testimony discloses the fact that he did not keep such a record.

In the briefs submitted, as well as in the oral arguments in this case, the question of intent or good faith was stressed to a certain extent. From an examination of the record before us, and a consideration of the facts as shown by the record, it is not, after all, so difficult to determine whether or not McAllister acted in good faith.

The company was organized by McAllister, and there was a paid-in capital of some $61,000. The company was organized late in 1926, and was in operation less than two years when it was discovered that during that period McAllister had loaned to himself, his company, and some project in which he was interested, a sum in excess of $20,000 — a sum equivalent to about one-third of the entire paid-in capital of the company. The fact that this money was loaned by McAllister to himself excludes any possible implication of good faith.

In United States Fidelity Guaranty Co. v. Egg Shippers'Strawboard Filler Co., (C.C.A.), 148 F., 353, 355, it was held in an action to recover on a fidelity bond insuring a corporation against loss from fraud or dishonesty on the part of an officer that the testimony characterizing such acts necessarily takes a wide range, and that evidence of his general course of conduct in business affairs, although not directly relating to the transactions in issue, is properly admissible "to show the spirit and intent that moved him."

So that we find on the first proposition of claimed error that the evidence, as disclosed from the record in this case, shows that the verdict of the jury was against the manifest weight of the evidence.

Now as to the second proposition of error, that the court erred in giving defendant's requests to charge before argument, the disputed requests being as follows:

"No. 2. If you find from the evidence that Patrick E. McAllister loaned any money of said plaintiff, or purchased any securities in good faith, and that such transaction was not authorized by the directors of said plaintiff company, such transaction would not be covered by the terms of the bond sued upon in this case, and your verdict must be for the defendant.

"No. 3. I further charge you, as a matter of law, that under the bond sued upon in this case the defendant Bonding Company would not be liable for any mere error of judgment, or bona fide mistake, or for any injudicious exercise of judgment or discretion on the part of P.E. McAllister, even though he violated the instructions of the directors of said company or the rules and regulations of said plaintiff company."

We find and hold that these two separate requests were erroneous; not only erroneous, but that they were highly prejudicial, bearing in mind that the bond provided that the defendant company would make good to plaintiff company such pecuniary loss of money, funds, or other personal property as the employer might sustain by any act or acts of fraud or dishonesty (including forgery, theft, embezzlement, wrongful abstraction, or misapplication), directly or through connivance with others, on the part of P.E. McAllister. We believe that when the court told the jury that Mr. McAllister could loan money to himself or others, in violation of his authority, or when not authorized by the board of directors, such charge was error, for the reason that when Mr. McAllister, without the authority of the board of directors, loaned money to himself or others, he did an act constituting wrongful abstraction or misapplication of the funds of the plaintiff company, within the terms of the bond, and we do not believe that the question of good faith entered into the transaction.

It may be that a surety could not be held liable for a mere error of judgment, or bona fide mistake, or an injudicious exercise of discretion, when standing alone as an abstract proposition of law, and if pertinent to the case it would not be erroneous to give such charge; but when such proposition is coupled with the thought that there could be no liability even though the person bonded violated his positive instructions, the proposition embodied in request No. 3 contains the same absurdity as contained in request No. 2. Further, we consider both these propositions erroneous for the reason that when Mr. McAllister knowingly engaged in an act or series of acts not authorized by the directors, or when he violated their instructions or the rules and regulations of said company by loaning to himself or others money of the plaintiff company, within the meaning of the terms of the bond, he committed a wrongful abstraction or misapplication of its funds. Chapman, Commr. of Banking, v. Nieman, (Tex.Civ.App.), 276 S.W. 302; Fidelity Casualty Co. of New York v.Blount Plow Works, 78 Ind. App. 529, 136 N.E. 559.

On the third proposition of error, that the general charge of the court was erroneous, we have carefully looked over and considered this charge as a whole, and we do not agree with the contention of counsel for plaintiff in error in that regard. We do find and hold, however, upon a careful examination of the entire record, that error has intervened in this case, to wit, upon proposition I, that the verdict of the jury was against the manifest weight of the evidence, and upon proposition II, that the court erred in giving the written requests on behalf of the defendant before argument.

Therefore it follows that this case will be, and the same hereby is, reversed and remanded to the court of common pleas for further proceedings according to law.

Judgment reversed and cause remanded.

SHERICK, J., and JUSTICE, J. (of the Third Appellate District), concur.