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Muncie Banking Co. v. American Surety Co.

December 1, 1952


Author: Swaim

Before MAJOR, Chief Judge, and LINDLEY and SWAIM, Circuit Judges.

SWAIM, Circuit Judge.

The plaintiff, Muncie Banking Company, brought this action on a banker's blanket bond issued to it by the defendant, American Surety Company of New York, claiming that by cashing two checks on September 7, 1948, and September 13, 1948, respectively, the plaintiff had sustained a loss in the amount of $19,650.00 on account of "false pretenses" within the meaning of the bond. The complaint also alleged that: "Plaintiff has done and performed all the conditions and requirements of said contract on its part to be performed." A copy of the bond was filed as an exhibit to and made a part of the complaint.

This bond insuring the plaintiff against loss was expressly made subject to the following condition and limitation:

"The Insured shall give to the Underwriter written notice of any loss hereunder within a reasonable time after the Insured shall learn of such loss, and within one hundred and twenty days after learning of such loss shall file with the Underwriter an itemized proof of claim duly sworn to."

The defendant answered that it did not receive notice of the alleged loss until June 28, 1949, and that the proof of claim was not filed until August 26, 1949. The answer said that the notice of loss was not given with a reasonable time after the plaintiff learned of the loss and that the verified itemized proof of claim was not filed with the defendant within 120 days after knowledge of the loss had come to the plaintiff.

The plaintiff is a private bank, wholly owned by Oliver W. Storer, with its principal office and banking house in Muncie, Indiana, and with a branch office and bank in Eaton, a small town located a few miles north of Muncie. At the time of the transactions here involved J. M. Hendricks was, and had been for several years, a resident of Eaton. Hendricks was engaged in the business of buying at auction automobiles which he then sold in his places of business at Muncie and also at Eaton. Vernon Taylor was a resident of Eaton and was engaged in the used car business with Hendricks. To secure the necessary cash to buy cars at auction these two men conceived and operated a scheme of kiting their personal worthless checks. To carry out their scheme Taylor opened an individual checking account in the Yorktown State Bank which was located a short distance west of Muncie. On this account Taylor drew checks to Hendricks for more than the balance in the account. Hendricks would then endorse the checks back to Taylor who would take the checks to plaintiff's Eaton branch, where Hendricks was a depositor and customer, and would then exchange them for cashier's checks payable to Hendricks. Hendricks then endorsed the cashier's checks to Taylor who finally took them to the plaintiff's bank in Muncie to which he endorsed them and exchanged them for currency. In the meantime, plaintiff's Eaton branch would send Taylor's checks through the Merchants National Bank of Muncie or through the Continental Illinois National Bank and Trust Company of Chicago for collection. It would be from three to six days before these checks drawn by Taylor would finally be returned to the Yorktown State Bank for collection.

In this interval of time Taylor and Hendricks were able to procure cash, by the sale of the automobiles or otherwise, in sufficient amounts to cover the checks. They were able to do this until the check dated september 7, 1948, was returned to the Yorktown State Bank. From December 5, 1947, to September 7, 1948, they handled and procured cash in this manner on 206 checks which totaled in amount $1,228,946.51. Between September 7, 1948, and September 13, 1948, Taylor and Hendricks, by such manipulation of checks, received from the plaintiff a total sum of $19,650.00 on the two above mentioned checks drawn by Taylor on his Yorktown State Bank account. There were insufficient funds in said account to cover these checks when they were drawn and also insufficient funds to pay the checks when they were returned for collection.

Plaintiff was informed on September 11, 1948, by telegram from the Continental Bank in Chicago, through which the first of these two checks had been sent for collection, that the check had not been paid. Plaintiff's Eaton branch advised Taylor that the check had been dishonored but was induced by Taylor, on his representation that the check was "all right," to send it through again for collection. On September 16, 1948, when the check reached the Yorktown Bank the second time, Taylor's account showed a balance of only $8.93. The second check was never presented to the Yorktown Bank because the plaintiff learned from that bank that there were insufficient funds in taylor's account to cover it.

Storer, the owner of the plaintiff bank, had personal knowledge of the non-payment of these two checks not later than September 16, 1948. Shortly after this time Storer demanded payment of the checks from Hendricks and Taylor and they agreed to repay the amount in full.On September 26, 1948, Hendricks and Taylor started to make instalment payments and continued to make payments until January 19, 1949. During that period they had repaid the sum of $1,970.00. After January 19th they made no further payments. On May 17, 1949, the plaintiff filed an action on these checks against Taylor and Hendricks in the Delaware Superior Court of Delaware County, Indiana.

The first notice of this loss to the defendant was by a letter from the plaintiff's attorneys dated June 27, 1949, more than nine months after Storer had learned of the loss. Approximately two months after the notice of loss the plaintiff filed its verified itemized proof of claim. No reason was assigned by the plaintiff for the long delay in giving the notice and in filing the proof of loss.

The District Court found that the first notice of loss, given to the defendant on June 28, 1949, was not given "within a reasonable time" after the plaintiff learned of the loss and the court also held that the giving of notice within a reasonable time was a condition precedent to the liability of the defendant.

The plaintiff alleged in its complaint that it had "done and performed all of the conditions and requirements of said contract on its part to be performed." In its brief plaintiff admits that it had the burden of proving this. In its brief plaintiff also admits that the "giving of notice within a reasonable time is a condition precedent to recovery." But the plaintiff says "the only real question here is whether a reasonable notice was given."

We find some assistance in interpreting the words "reasonable notice," as used in this policy, in the paragraph of the policy entitled "Loss - Notice - Proof." It is there first provided that the insured shall give notice of any loss within a reasonable time and, second, that the insured shall file the verified itemized proof of claim within 120 days after the loss. It seems logical to assume that the parties here intended that the notice should be given prior to the time the proof of claim was filed and that the "reasonable time" within which the notice ...

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