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Hack v. American Surety Co.

April 26, 1938

HACK
v.
AMERICAN SURETY CO. OF NEW YORK.



Appeal from the District Court of the United States for the Southern District of Indiana, Indianapolis Division; Robert C. Baltzell, Judge.

Author: Evans

Before EVANS, SPARKS, and MAJOR, Circuit Judges.

EVANS, Circuit Judge.

Judgment was entered in the District Court for 120,917.94, upon two "Bankers' Blanket Bonds" issued by defendant surety company to cover losses through fraud and misfeasance perpetrated by the bank's officers.

The defendant surety company, in October, 1922, issued two bonds to the bank, each for the face amount of $25,000, one primary, and one to cover excess loss. They were thereafter renewed annually, and expired in October, 1926. The bank, of which plaintiff was appointed successor receiver on March 1, 1933, closed in October, 1930. The losses arose by reason of various fraudulent and irregular practices of the bank's president and secretary. This action on the bonds was begun, June 12, 1933, in the Indiana Circuit Court and removed to the Federal court. A jury trial was waived, and the court, because of the complexity of the issues, on its own motion referred the cause to a common law auditor, who, after hearing the evidence, made findings in favor of the plaintiff. The District Court also made special findings of fact and conclusions of law, upon which it predicated its judgment. The judgment was determined on the theory that the liability under the bonds was cumulative, that is, a new liability arose, for each successive year. It may be itemized as follows:

Primary Excess

Bond Bond

1922-23

1 923-24 $24,480

1924-25 25,000 $25,000

1925-26 25,000

$99,480

6% interest 21,437.94

$120,917.94

An Indiana statute, section 3948, Burns' Ann. St. 1926, requires bank officers to be bonded, and it is over the interpretation of this section and especially its proviso, that the sharply-controverted issue on this appeal arises. The section reads:

"No president, vice-president, treasurer, or secretary, or other active officer of such company, shall enter upon the discharge of his duties until he shall have executed a bond to the company, conditioned for the honest and faithful discharge of his duties, in such sum and with such surety or sureties as may be approved by the board of directors, nor until such bond, so approved, has been filed in the office of and approved by the bank commissioner of the State of Indiana; Provided, however, such individual bond shall not be required of any such officer if a blanket bond covering all the active officers and employees of such company, in an amount and with a surety or sureties approved by the board of directors, shall have been filed in the office of and approved by said bank commissioner * * * ."

The bond is set forth in the margin.*fn1

The Facts: This controversy primarily concerns legal issues, and it is unnecessary to describe in detail the many intricate fraudulent manipulations of the bank's officers, J. Edward Morris and Mark Rinehart, which resulted in the losses for which plaintiff seeks to hold defendant. An understanding of the situation may be had if we first chronologically state the more important facts:

Bank organized March 8, 1912.

J. Edward Morris, President

and director from 1918-1930

Bonds Nos. 799398-A and '9-A

executed October 26, 1922 and

renewed in 1923, 1924, and 1925, expiring October, 1926.

Mark V. Rinehart, secretary and director ...


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