company shall consent to receive said premi- | hereunder for any acts committed or discovums, it is hereby agreed that the company ered previous to such cancelation during the shall, within three months after proof satis- currency of this bond, and within three factory to the directors, make good and re- months after said cancelation. imburse to the employer such pecuniary loss as the employer shall have sustained by the The statement referred to was signed by [405] fraudulent acts of the employee, in connec- the then cashier, and delivered to the comtion with the duties of his said office or po-pany before the bond was issued. It comsition, or with any other duties assigned to him, by the employer in the said service, committed by him, and discovered during the continuance of the currency of this bond, and within six months from the employee's ceasing to be in the said service. menced with a communication from the managing director of the guarantee company, desiring answers to certain accompanying questions. These answers were given by the cashier, who also declared his answers and representations to be true, and that he was "not aware of any matter or thing affecting the character or reputation of the applicant which should create any doubt as to his reliability or trustworthiness." This bond was renewed each year "The following provisions are also to be observed and binding as a part of this bond: "The actual payment of the premium and its acceptance by this company, either for the issue or renewal of this bond, is essential to its currency, and a condition prece-up to January, 1893, and, in each year, bedent to the right or claim hereunder. "That this bond is issued and renewed on the express understanding that the employee has not within the knowledge of the said employer at any former period, either in this or other employment, been guilty of any default or serious dereliction of duty. fore the bond was renewed, the company furnished the bank with a blank form to be filled out, and stating: "It is necessary before the bond can be renewed that you obtain the certificate on the back hereof by your president or cashier, and on its return with remittance of the premium the renewal can be immediately effected." The certificate on the back was filled up and signed by the cashier, and among other things stated that the accounts of said teller Schardt had been examined and verified by the finance committee of said bank; and the bond was not renewed in any year until this certificate had been made out and deliv "That the employer shall observe or cause "That the employer shall at once notify Before the cashier's bond was issued, the company "submitted for reply on behalf of the bank" certain questions, addressed to the [407] president, which, and the answers thereto by the president as such, are referred to in the bond as "employers' guarantee proposal No. 154,806." Among these questions and answers were the following: Q. 2. If a new employee, by whom was "That there shall be an inspection or aud- the applicant introduced, or how did he beit of the accounts or books of the employee come known to you? If hitherto in continon behalf of the employer at least once inuous service, for how long, in what capacievery twelve months from the date of this bond. "That the company shall be notified in writing of any act on the part of said employee which may involve a loss for which the company is responsible hereunder to the employer immediately or without unreasonable delay, after the occurrence of such act shall have come to the knowledge of the [406 Jemployer; and *upon the making of such a claim, this bond shall wholly cease and determine as regards any liability for any act of the employee committed subsequent to the making of such claim, and shall be surrendered to the company on the payment of all claims due hereunder. "That the company may cancel this bond at any time by notifying the employer and refunding the premium paid less a pro rata part thereof for the time said bond shall have been in force; but said cancelation shall not affect or impair the company's liability ties, and has he uniformly performed his Q. 3. Has he ever been in arrears or default in the bank's service, or, as far as you have heard, in any previous employment? -A. No. Q. 4. Have you known or heard anything unfavorable as to his habits or associations, past or present?-A. No. Q. Or of any matters concerning him about which you deem it advisable for the company to make inquiry?-A. No. Q. 5. Is he to your knowledge pecuniarily embarrassed or insolvent? Or is he in any way indebted to the bank?— Q. 6. Is he now or about to be engaged in any other business or employment than in the bank's services?-A. No. Q. 7. Applicant's position or capacity for | which this bond is required?-A. Cashier. Q. 8. Amount of his salary or other emoluments, if any?-A. $2,000 per annum. Q. 9. Amount or bond hereby required, from what date to commence, and by whom premium will be paid?-4. $20,000 to date from Jan. 1, 1893. Premium payable by bank. Q. 10. What further security, if any, will be held or required from applicant?-A. None. 9. 11. Have you hitherto held other security from applicant? If so, why discontinued or changed to this?-A. Formerly teller and general bookkeeper in this bank; elected cashier at annual meeting January 1, 1893. Q. 12. Has there been any fault in the bank by any employee in applicant's position?-A. No. Q. 13. When were applicant's books and [408] accounts (including cash, securities, and Vouchers, if any) last examined, and by whom?--d. December 31, 1892, by finance committee (were they found correct) of bank, and found correct. Q. 14. In case of applicant handling cash or securities, how often will the same be examined and compared with the books, accounts, and vouchers, and by whom?-A. Not less than quarterly, and often monthly, by finance committee. 9. 15. In case of applicant acting as teller: (a) Will he be required to balance his cash daily, and report same to president or cashier? (b) And will a record of same be kept?-A. Q. 16. Will applicant handle funds or securities not subject to a routine check or periodical examination? If so, please describe their nature?-A. No. The above answers and representations are true to the best of my knowledge and belief. behalf and the said company, fully relying on the truth of the statement and declar tion contained in a certain document distinguished as employer's guarantee proposal No. 154, 806, dated the 10th day of Jan., 1893, and signed Lewis T. Baxter, president on behalf of the said employer, and *lodged [409] with the said company at its office in Montreal, and on the strict performance and observance hereafter, by the said employer, of the contract thereby created. do hereby, respectively, severally, and jointly covenant with the said employer to reimburse unto the said employer or his or their representatives or assigns the amount of any loss not exceeding in the whole sum of $20.000, which, during the currency of this bond, shall be sustained by the said employer by reason of any act of fraud committed by the said employee in connection with the duties of said appointment, and constituting embezzlement or larceny,-such reimbursement to be made within three calendar months next after proof shall have been given to the satisfaction of the directors of the said company of the occurrence of such loss, and the proof thereof to include, if the company shall so require, an affidavit to be made or taken by the person for the time being entitled to the benefit of this guarantee, to the effect that he hath been actually defrauded by the said employee, and that he suffers absolute and ultimate loss thereby to the full amount claimed hereunder, and that the contract created as aforesaid hath been fully performed and observed on the part of the said employer. "Provided always, that this bond and guarantee hereby granted or undertaken shall be subject and liable to the terms and conditions hereupon indorsed. Among the terms and conditions referred to were these: "This bond is granted upon the following express conditions: "1. Any misstatement of a material fact, The cashier's bond was then executed and in the declaration within mentioned, or in delivered to the bank, and provided: any claim made under this bond, will render "Whereas, the said employee has been appointed cashier at Nashville, Tennessee, in "2. That the said employer shall use all the service of the said employer, and has due and customary diligence in the supervibeen required to furnish security that he sion of said employee, for the prevention of shall not be guilty of any fraudulent act in default, and to that end shall cause an inthe performance of his duties in the said spection or audit of his accounts to be made capacity, by which the said employer shall at least once within twelve months, and if suffer pecuniary loss, and whereas the said the said employer shall at any time during company, in consideration of the sum of the currency of this bond become aware of $100, now therefor paid for the term expir- any act or default on the part of said eming January 1, 1894, and for the purposes ployee which would constitute a claim hereof the renewal of this contract the sum or under, and shall continue said employee in premiums of $100, hereafter to be therefor his service without notification to the said paid to the said company, on or before the company, the said company will not be re1st day of January, 1894, and a like pay-sponsible hereunder for any loss or default[410] ment for each and every succeeding term of which may occur subsequent to said act or one year, so long as the said company shall default of said employee. consent to receive it,-hath agreed upon the "3. That any written answers or stateterms, and subject to the provisos and condiments made by or on behalf of said employer tions hereinafter contained and indorsed thereon, hereby to become such security to the said employer: "Now, therefore, this bond witnesseth that the said employee, for and on his own in regard to or in connection with the con- time during its currency, shall be held to be | Schardt, as teller, abstracted the funds of a warranty thereof, and form a basis of this guarantee or of its continuance. "4. That the said employee has not, to the knowledge or belief of said employer, been guilty of any serious dereliction of duty, or default in this or any other service, or that his habits have been such as to incur said employer's censure, previous to the issue of this bond. 5. The said employer shall, immediately, upon it becoming known to him or them that the said employee has been guilty of any act entitling the said employer to claim under this bond, notify the said company at its head office; and this bond shall become absolutely void, both as to existing and future liability, if the said employer shall neglect or omit to so notify the said company. the bank, and understated on the general ledger the amount due to depositors by the amount he abstracted. The difference in the balances represented the shortage at the respective dates. The individual and general ledgers were out of balance January 16, 1891, $2,098: January 1, 1892, $19,600; and January 1, 1893, $69,700. The leading expert accountant testified that he was employed to examine the books on April 15, 1893, and went to the bank on the morning of that day between 8 and 8:30 o'clock, and that by 4 o'clock that afternoon he had discovered that, while the daily balance book kept by Schardt showed less than $18,000 due depositors, the individual ledger from "A" to "L" (leaving "M" to "Z" to be examined) showed an indebtedness due de positors of in the neighborhood of $55,000. He reported at once that something was radically wrong, although it required considerable time subsequently to ascertain the exact condition of the bank. "8. That in addition to the supervision to be exercised by the said employer as mentioned in the statement and declaration within referred to, the said company shall be afforded every reasonable facility to ex- Quarterly examinations of the bank's conamine from time to time, as they may desire, dition were made by the finance committee, [412] for the purposes of this bond, the books, pa- but the individual bookkeeper was not repers, and affairs of the said employer in-quested to furnish the total amount shown trusted to the keeping and charge of the said employee." It appeared from the evidence that Schardt defaulted as teller and collector from September 12, 1890, to January 1, 1893, in the sum of $78,819.24, subdivided as follows: From September 1, 1890, to January 16, 1891, $5,879.34; from January 16, 1891, to January 1, 1892, $22.290; from January 1, 1892, to January, 1893, $50,649.90; and as cashier, from January 16, 1893, to April 15, $22,964.17. on the individual ledger to be due depositors. The committee "examined no book except the daily balance sheet, with which we compared the reports as made out by Schardt." "Q. In what way could you tell that the amounts reported by Schardt were correct? A. We only had his word for it and the reports that he made to us and the exhibit on the daily balance book." "Q. In what way did you verify the statement on the book kept by Schardt, which would have shown and purported to show the amount due individual depositors? A. We made no verification of it only in the manner in which I have stated. Q. Have you stated any manner in which you verified this particular account? 4. We took his word for it, which we had to do or go into an examination of all the books." Schardt also abstracted proceeds of notes paid to him as teller. This shortage was not concealed on the books. The amount of notes in the bank did not equal the amount called for by the books by the amount abstracted. The principal books of the bank were: A general ledger, showing generally the ac{411] counts of the bank, including the account *in totals of the deposits made and checked out daily; a cash book, giving each day's business; a daily balance book, which was a summary of the general ledger; these three books were kept by Schardt; and an individual ledger, which showed in detail the deposit account of each individual depositor, and was kept by a clerk, who had no other duties, and was known as individual bookkeeper. The aggregate of the amounts due each depositor shown on the individual ledger and the totals due depositors on the general ledger and daily balance book should have agreed, but this they did not do, because, after the latter part of 1890, the general ledger and daily balance book did not correctly show the amount due to all depositors, although the individual ledger correctly gave the amount due to each depositor. Up to the latter part of 1890 trial bal-duced: ances were taken from the individual ledger Charles Sykes, who was the cashier of the every two weeks, or once a month, and en-bank from January, 1890, to January, 1893, tered in a trial balance book, and these bal-testified: ances were compared with the balances on the general ledger, and any differences settled and corrected, but at that time Schardt told the individual bookkeeper that it was not necessary to take off trial balances any longer, and thereafter none were taken off. 183 U. S. U. S., Book 46. January 1, 1892, the books showed a defalcation of $28,169.34, of which $19,600 was abstracted deposits, and $3,765.44 proceeds of notes collected and not accounted for. January 1, 1893, the books showed a defalcation of $78,819.24, of which $69,700 was abstracted deposits and $4,015.44 proceeds of notes collected. The following evidence was also intro Q. 6. Did you at any time during that year receive information that John Schardt was speculating; if so, state when, how, and all the circumstances?-A. Yes, sir; I did receive such information. Some time in the 17 257 summer or fall of 1892 a gentleman by the name of Kyle came here from New York, representing Myers & Co. of New York. Kyle wanted me to become interested in the brokerage business, and represent Myers & Co. at this point. I told him that I did not like the idea because it would be purely a [413] speculative business, and he *then said that that made no difference; that John Schardt, our teller, was a part owner in a similar concern. Q. 7. Did you impart this knowledge to any one; if so, whom?-A. Yes, sir; I once told Mr. L. T. Baxter, the president of the bank, of the conversation. Q. 8. Did you say anything to Schardt about the matter?-4. Yes, sir; on the next day, I think I told Mr. Schardt of what Kyle had said. Q. 9. What did Schardt say to you in reply?-A. He admitted that he had at one time been interested in such a concern, but had sold his interest; and that he had speculated to some extent, but had made money on every transaction, and had seen the error of his way, and had ceased to do so any more. Q. 10. Did you impart this information received from Schardt to any one connected with the bank; if so, whom?-A. Yes, sir; I immediately told Mr. Baxter, the president of the bank, what Schardt had said. Q. 11. Did you receive any other information at any other time with reference to Schardt's speculating? A. Yes, sir; some time thereafter I received an anonymous letter telling me that Schardt had been speculating. Q. 12. What did you do with it, and what became of it?-A. I showed it to Mr. L. T. Baxter, the president, and he said not to pay any attention to an anonymous letter; and I spoke to Schardt about it, and he said he thought he knew the author, and asked me to let him have the letter, and he would bring the party before me and make him acknowledge it was false. Q. 13. Did you give him the letter, and did he bring the party before you?-A. I gave him the letter, and asked him about it more than once, and he always replied that he was working on it. Q. 14. Did you tell Mr. Baxter of this conversation?-A. I think I did. On cross-examination the witness said there was litigation pending between him and the bank's assignee; that he signed several applications for the renewal of [414] Schradt's bond as teller, *relying on the fact that the finance committee said his accounts were correct; that he did not remember that he recommended Schardt as his successor to Porter or Duncan, though he might have, and if Mr. Porter said that he did, he supposed he did. Mr. Porter testified that he asked Sykes about Schardt's ability; "there was no question as to his integrity." J. M. Eatherly testified that he had been a director of the bank from its organization until its assignment; a member of the finance committee for several years prior to being elected president, and president from March 28 to April 17, 1893. In answer to questions from complainant's counsel in respect of an interview with Schardt on the evening of April 15, 1893, he said: "I told him that we had come out for the purpose of getting an explanation as to the discrepancies mentioned above. I told him we had found errors in his books. He said, Mr. Eatherly, my books are correct.' I told him that I did not see how he could reconcile the two things that we had found, the daily balance sheet showing something less than $18,000 due depositors, while the individual ledger, as far as had been examined by Mr. McEwan and Mr. Richardson, showed about $55,000 due depositors. He reiterated that his books were absolutely correct. I said, 'John, I cannot understand it that way.' I was satisfied there was an error somewhere. I asked Mr. Richardson if he wanted to ask him any question. Ile was silent a moment or two, and said, 'I don't know that I do.' He then turned to Mr. Schardt, and said: 'John, I am bound to say to you that you are a defaulter.' Mr. Schardt broke out into a cry, putting his hands over his face, and said: 'My God! it is true-too true.' I said: 'John, compose yourself; we have come here for facts, and want facts.' I then asked him how much was his default, and he said about $40,000. I told him if the other individual ledger showed the same proportion of discrepancy that this one did that he was a defaulter to a much larger amount,-I would say to not less than $60,000 or $70,000. He said 'Mr. Eatherly, you are mistaken. It cannot be that much.' I then asked him how he had lost it, and he said, 'Speculating in New York, and you can get it all back.' He said 'you,' *meaning the bank. I said,[415] 'No, John, we can do no such thing; the laws of New York legalize this sort of trading, and we cannot recover it in that way.'" On cross-examination he testified: Q. 98. Did you ever hear of Schardt's speculating before January, 1893 ?—A. I think I did. Q. 99. Did you see the anonymous letter written with respect to his speculating?— A. I saw a letter directed to Judge John Woodward. Judge Woodward brought that letter to the bank and showed it to me, and I asked permission to call Mr. Schardt up and show it to him, and he said that he was perfectly willing that I should do so. I at once called Mr. Schardt to where we were, and told him there was a communication I wanted him to read. He did so, and his remarks were: "It is a lie and I can prove it." In this letter it was stated that Mr. Schardt was a partner in a bucket shop. I told Mr. Schardt that it devolved on him to prove it false. I at once reported the contents of this letter to the president of the bank, Mr. Baxter. Mr. Schardt asked that I and Judge Woodward remain there for a few minutes. He went out and got Frank Searight and Dr. Barry. Judge The representations of the president and cashier as to the examination of the employee's books and accounts, and with respect to the previous conduct of the employee, were made for the bank, and are binding upon it. The teller's bond was breached by the bank in not reporting the speculation and disreputable habits of the bonded employee. Woodward, Mr. Baxter, and myself went in- | U. S. 452, 38 L. ed. 231, 14 Sup. Ct. Rep. to the rear of the bank building. Mr. 379. Schardt and the other gentlemen came back, and Mr. Schardt says: "Here are men who can tell you whether that is so or not." I asked them if they knew why we had sent for them, and they said that Mr. Schardt had told them. Mr. Searight said some time before that Mr. Schardt, Dr. Barry, and himself had agreed to open a brokerage association. They objected very much to the term bucket shop. Each one was to put in a small amount-$200, I think. Mr. Schardt, in a short time, became dissatisfied, and sold his interest to Frank Searight at a small loss. Subsequent to that I went to Mr. Schardt's house to see him, having heard again that he was speculating. I told him what I had heard, and he said it was not so, that he did not own any stocks at all. I told him if he was he ought to quit that or quit the bank, and he said he had sold everything he had. I again heard that he was speculating, but from sources that I did not attach any importance to, as it all emanated from the same source as the [416] anonymous letter. I again approached him and he denied it. Q. 100. Was this just prior to the resignation of Judge Woodward as a member of the board?-A. I think it was. Q. 101. Do you know when he resigned?— 4. His resignation bears date Feb. 17, 1893. Was placed before the board of directors and accepted March 25, 1893. Q. 102. Did Mr. Baxter, the president, ever say anything to you about Schardt speculating?-A. I don't think he ever did. The general agent of the company at Nashville testified that Schardt's bond as cashier was canceled through him on April 15, he having ascertained that Schardt had been speculating in futures; that he had not heard of any defalcation or wrongdoing on the part of any employee of the bank other than this; and that the company did not bond persons holding a fiduciary position, who speculated in futures, as they had found from experience that the risk was not safe. There was evidence that Schardt had borne a good reputation for honesty, integrity, and industry; and of experts that, without trial balances from the individual ledger, the true condition of the bank could not be known; and that to verify accounts meant to apply some other test than the statements of those who kept them. Mr. William L. Granbery argued the cause and filed a brief for petitioner: There is no room for the application of canons of construction, where there is no ambiguity in the policy and no inconsistent or conflicting provisions and nothing requiring construction or interpretation. Holmes v. Phenix Ins. Co. 47 L. R. A. 308, 39 C. C. A. 45, 98 Fed. 240. Whatever conditions are contained in the contract will be upheld and enforced by the court. Imperial F. Ins. Co. v. Coos County, 151 Preston v. Prather, 137 U. S. 604, 34 L. ed. 788, 11 Sup. Ct. Rep. 162, 29 Fed. 502; Scott v. National Bank, 72 Pa. 479, 13 Am. Rep. 711; Gray v. Merriam, 148 Ill. 179, 32 L. R. A. 769, 35 N. E. 810; Merchants Nat. Bank v. Guilmartin, 93 Ga. 503, 21 S. E. 55; Allen v. Dunham, 92 Tenn. 257, 21 S. W. 898. When an employer knows the employee has been guilty of dishonest conduct, and conceals the information from the contemplated surety, the bond is void, whether inquiry be made by the intended surety or not. Smith v. Bank of Scotland, 1 Dow. P. C. 294; Phillips v. Foxall, L. R. 7 Q. B. 666; Franklin Bank v. Cooper, 36 Me. 179; Franklin Bank v. Stevens, 39 Me. 532; Wayne v. Commercial Nat. Bank, 52 Pa. 343; Bostwick v. Van Voorhis, 91 N. Y. 353: Clark v. Manufacturers' Ins. Co. 8 How. 335, 12 L. ed. 1061. When this teller's bond was renewed in January, 1892, it was, in legal effect, the making of a new contract of insurance. Biddle, Ins. § 341; May, Ins. § 70a. Directors must exercise ordinary care and prudence in the administration of the affairs of a bank, and this includes something more than officiating as figureheads. They are entitled under the law to commit the banking business as defined, to their duly authorized officers, but this does not absolve them from the duty of reasonable supervision. Briggs v. Spaulding, 141 U. S. 132, 35 L. ed. 662, 11 Sup. Ct. Rep. 924; Wallace v. Lincoln Sav. Bank, 89 Tenn. 652, 15 S. W. 448. The information sought by the company, and the representations made by the bank with respect to these examinations, were matters peculiarly and exclusively within the knowledge of the bank. The company had the right to rely upon its representations, and for that reason the duty of knowing and telling the truth was imperative. Pom. Eq. Jur. § 888; Morse, Banks & Banking, § 21; Biddle, Ins. § 462; Cooley, Torts, § 499; Trimble v. Reid, 97 Ky. 713, 31 S. W. 861; Franklin Bank v. Cooper, 36 Me. 179; Graves v. Lebanon Nat. Bank, 10 Bush, 23, 19 Am. Rep. 50; Deposit Bank v. Hearne, 20 Ky. L. Rep. 1019, 48 S. W. 160. The neglect of the officers of the bank to examine the books and accounts of the employees is equivalent to bad faith, where the slightest examination would have shown the default. Knapp v. Bailey, 79 Me. 195, 9 Atl. 122. |