Opinion
No. 4606.
November 22, 1932. Rehearing Denied December 19, 1932.
Appeal from the District Court of the United States for the Northern District of Illinois, Eastern Division; George A. Carpenter, Judge.
Action by the Underwriters' Finance Corporation against the Union Indemnity Company. Judgment for defendant, and plaintiff appeals.
Reversed, with directions.
Appellant brought this action to recover $30,425.07 and interest on a fidelity insurance bond. The loss, for which recovery was sought, arose out of the defalcations of one Turckel, a bookkeeper in appellant's employ. The amount of appellant's loss is not controverted.
During the first year the policy was in force, and shortly before December 31, 1926, appellant made written application to "continue for the period beginning the 31st day of December 1926, and ending the 31st day of December 1927, the Guarantees Included in Schedule Bond No. 61954 heretofore issued in favor of Undersigned Employer on behalf of the following persons hereon listed: (No. 2. Hill Turckel, Accountant, amount $30,000, premium $90.00)." It certified "that since the issuance of the above schedule bond, the employees named in the accompanying list have faithfully, honestly and punctually accounted to him for all money and property in their control or custody as his employees, and have always had proper securities and funds on hand, and are not now in default."
The policy also provided:
"The Surety shall not be liable for any loss unless both discovered and claim therefor filed with the surety within twelve months after each and every anniversary date of this Bond, or within twelve months after the cancellation date of the Surety's liability, or within twelve months after the date of death, resignation or removal of an Employee, as to the acts or defaults of any Employee committed during any period of twelve months preceding such anniversary date, or date of cancellation, death, resignation, removal or otherwise."
$7,494 of the defalcations occurred between July 1, 1926, and December 31, 1926. The balance of the loss, $22,931.07, occurred between January 1, 1927, and May 7, 1928. Discovery of the shortage occurred May 8, 1928. Promptly thereafter, appellant gave a written notice to appellee of the employee's defalcations and made demand for the payment of $30,425.07.
At the close of the trial, appellee moved the court to direct a verdict in its favor, which motion was denied. The case was then argued before the jury, and at the close of the argument, appellant submitted certain proposed instructions, including a peremptory one in its favor. Thereupon the court directed the jury to find for appellee.
The questions argued are: The effect of appellee's motion for a directed verdict, which was denied, and appellant's subsequent request to give submitted instructions, including one direction the jury to find for it; appellee's right to a direction of a verdict; appellant's asserted right to recover upon any view of the evidence; the effect of appellant's failure to notify appellee until May, 1928, of the shortage which occurred in 1926; and the effect of the statement in the application for renewal that appellant's employees were honest and not in default, etc.
Lawrence A. Cole, Samuel E. Hirsch, J. Robert Cohler, and Albert K. Orschel, all of Chicago, Ill., for appellant.
Church, Haft, Robertson, Crowe Spence, of Chicago, Ill. (Burt A. Crowe, of Chicago, Ill., of counsel), for appellee.
Before EVANS and SPARKS, Circuit Judges, and WILKERSON, District Judge.
Passing directly to the merits of the appeal — the sufficiency of the evidence to require a directed verdict in appellant's favor — we find it necessary to divide appellant's claim. The $7,494 loss which occurred prior to December 31, 1926, is subject to a defense not existent as to the balance of the claim.
The above-quoted provision of the policy which negatived liability unless the loss be "both discovered and claim therefor filed with the Surety within twelve months after each and every anniversary date of this Bond * * *" should, of course, be strictly construed against appellee. We have attempted to follow appellant's construction of the language of this clause and to find uncertainty or ambiguity in it, but we are forced to the conclusion that the District Court was right in directing the verdict in appellee's favor for this amount. It is too plain for argument that the parties by their contract agreed that the surety's liability was dependent upon the employer's discovery of the shortage and upon its making claim therefor within a designated time. In the instant case, that time expired before appellant discovered the shortage or made claim therefor.
As to the remainder of the loss, appellee's defense turns upon the effect of statements made by appellant when it applied for an extension of the bond. One statement was as follows:
"The Employer certifies that since the issuance of the above schedule bond, the employees named in the accompanying list have faithfully, honestly and punctually accounted to him for all money and property in their control or custody as his employees, and have always had proper securities and funds on hand, and are not now in default."
This statement was not true as to Turckel who had been unfaithful and had embezzled $7,494. It is true, however, that appellant did not know of such shortage but believed, and had every reason to believe, that Turckel was an honest, faithful, and dependable bookkeeper. In making this statement respecting Turckel's honesty, appellant acted upon the information it possessed. Its statement was made in good faith, and it believed the same to be true. Likewise, the evidence rather conclusively showed that appellant had exercised ordinary care to acquaint itself with the facts. Upon such showing, under the authorities, of which there are many, appellant was not barred from recovering on the policy. The statement respecting Turckel's honesty was not a warranty but a representation. The insured fully meets the most drastic test which the law may impose on it because of any such representations, when it shows that it made them in good faith and in the honest belief that they were true, after exercising ordinary precautions to ascertain their accuracy.
Title Guaranty Surety Co. v. Nichols, 224 U.S. 346, 32 S. Ct. 475, 56 L. Ed. 795; Fidelity Deposit Co. v. Guthrie Nat. Bk., 17 Okla. 397, 87 P. 300; Hunter v. U.S. Fidelity Guaranty Co., 129 Tenn. 572, 167 S.W. 692; Farmers' Union Grain Co. v. U.S. Fidelity Guaranty Co., 109 Neb. 142, 190 N.W. 221; Moulor v. Amer. Life Ins. Co., 111 U.S. 335, 342, 4 S. Ct. 466, 28 L. Ed. 447; Amer. Bonding Co. v. Spokane Bldg. Loan Soc., 130, F. 737 (C.C.A. 9); Remington v. Fidelity Deposit Co., 27 Wn. 429, 67 P. 989 (Wash.); U.S. Fidelity Guaranty Co. v. Citizens' Nat. Bank, 147 Ky. 285, 143 S.W. 997; Commercial Bank v. American Bonding Co., 194 Mo. App. 224, 187 S.W. 99; St. Louis Police Relief Ass'n v. Amer. Bonding Co., 197 Mo. App. 430, 196 S.W. 1148; Grand Lodge, U.B. of F. v. Mass. B. Ins. Co., 324 Mo. 938, 25 S.W.2d 783.
See above-cited cases.
Respecting the other statement made by appellant when seeking an extension of the policy, different questions are presented. Appellant was asked, and answered, two questions:
"At what intervals will applicant's accounts, books and records be audited and checked with cash actually on hand and in bank and with securities, merchandise, samples, etc. actually on hand? Answer: At least once every six months.
"Who will make these audits and checks? Answer: David Himmelblau, CPA."
Appellant was engaged in purchasing accounts receivable and real estate paper. It dealt with five banks and required a revolving fund of about one million dollars. The nature of its business lent itself to the easy manipulation of checks by Turckel. The money was abstracted by Turckel through manipulation of checks signed by the president of the company. The defalcations were concealed at the time of the audit through Turckel's borrowing money on bonds obtained from the president on the pretext that they were needed in the regular course of business. Audits were made semiannually by the accountant Himmelblau, but he failed to detect the shortage until after Turckel had fled the country.
We are satisfied that the statements made by appellant were representations rather than warranties. Moreover, the evidence tending to show appellee's reliance upon these statements was meagre, almost to the point of barrenness. Finally, the proof respecting the audits was such as to well-nigh compel a finding that they were made in good faith and in an honest effort to ascertain the state of appellant's business, which latter fact necessarily included the detection of shortage and defalcation.
It is, however, unnecessary for us to determine whether appellant was entitled to a directed verdict for the sum of $22,931.07 ($30,425.07 less the $7,494) and interest, because the most this court may do is to reverse the judgment and direct a new trial. On such new trial, appellee may introduce different and more persuasive evidence than on the previous trial in support of its various defenses arising out of appellant's representations made prior to December 31, 1926.
If we assume that the court directed the verdict in appellee's favor, as counsel for appellee suggests, on the assumption that the filing of the motions for a directed verdict by both sides constituted a waiver of either's right to have the case submitted to a jury, then the court erred in so holding. The record before us does not justify the application of the rule announced in Beuttell v. Magone, 157 U.S. 154, 15 S. Ct. 566, 39 L. Ed. 654 to the effect that unconditional motions for directed verdicts by both parties are equivalent to a request that the court find the facts and that further trial by the jury is waived.
Appellant's motion at the close of the argument to the jury was not unconditional. It was submitted along with numerous proposed instructions. In arguing the matter at the same time, counsel for appellant stated:
"I feel that whatever the Court may feel about the statement as a matter of law, it is a matter of fact for the jury to determine whether this statement was false in fact, whether it was delivered to them prior to the continuation date named in here, and whether it was relied upon."
It was only after this statement was made and the numerous proposed instructions had been submitted by appellant's counsel that the court prepared the verdict and instructed the jury to find: "We, the jury find the issues for the defendant." We think it apparent from this record that while appellant's counsel was desirous of having the court direct a verdict in its favor, he requested, in the alternative, that if such motion were denied, then the case should be submitted to the jury for its determination of the issues arising out of the alleged representations made by the insured. Upon such a record, the court was not justified in taking the case from the jury, much less in directing the jury to render a verdict in appellee's favor. Empire State Cattle Company v. A., T. S.F. Ry. Co., 210 U.S. 1, 8, 28 S. Ct. 607, 52 L. Ed. 931, 15 Ann. Cas. 70; Sampliner v. Motion Picture Patents Co., 254 U.S. 233, 238, 41 S. Ct. 79, 65 L. Ed. 240; Hover Co. v. Denver R.G.W.R. Co. (C.C.A.) 17 F.2d 881, 883.
The judgment is reversed, with directions to grant a new trial.