Bank of Peachland v. Fairley, 202 N.C. 136 (1932)

Jan. 27, 1932 · Supreme Court of North Carolina

202 N.C. 136

BANK OF PEACHLAND v. J. M. FAIRLEY and F. H. FAIRLEY, Partners Under the Firm Name of FAIRLEY BROTHERS, CHARLES RAYMOND STOREY, and UNITED STATES FIDELITY AND GUARANTY COMPANY.

(Filed 27 January, 1932.)

1. Appeal and Error A f — Rights of appealing party only will he considered, hut Iris rights are not affected by failure of another party to appeal.

Where in an action by a bank against a depositor, the cashier, and the surety on the cashier’s bond to recover the amount of an overdraft of the depositor’s account caused by reason of the nonpayment of the depositor’s draft against which' he had been allowed to check, the bank alleges that the draft was immediately credited to the customer’s account by reason of false and fraudulent representations made by the depositor in respect thereto, and the jury finds the issue of fraud in favor of the plaintiff, and judgment is entered thereon against the depositor and the surety, providing for execution against the person of the depositor in the event execution was returned unsatisfied, and only the surety appeals therefrom: Held, the Supreme Court cannot change the issues in so far as they affect the defendants who had not appealed, but their failure to appeal does not affect the rights of the appealing surety.

2. Principal and Surety B d — Held: evidence failed to disclose acts of cashier for which bank could recover against surety on his bond.

Where in an action by a bank against the surety on the cashier’s bond the evidence tends only to show that the cashier, acting in good faith and in his judgment for the benefit of the bank, had credited the account of a depositor with drafts drawn by the depositor on others, and permitted the depositor to'check against the drafts before they were collected and paid, causing an overdraft of the depositor’s account when the drafts were returned, there is not sufficient evidence to support an allegation of fraud and collusion between the depositor and the cashier who had credited the depositor’s account, and a recovery may not be had by the bank against the surety on the cashier’s bond which provided for liability only in the event of fraud, dishonesty, larceny, theft, etc., or some dishonest or criminal act on the part of the cashier, and the defendant’s surety’s motion as of nonsuit should have been allowed.

Staoy, C. J., not sitting.

Appjsal by tlie defendant, United States Fidelity and Guaranty Company, from ütadc, J., at March Term, 1931, of ANSON.

Eeversed.

On 1 December, 1927, the defendants, Fairley Brothers, deposited with the plaintiffs two drafts, one in the sum of $3,792.11, and the other in the sum of $2,607.89. Both these drafts, were payable to the order of the plaintiff, and were drawn by Fairley Brothers — one on Aragon Baldwin Cotton Mills, and the other on Autz and Company. The account of defendants, who were customers of the plaintiff, was credited with the amount of said deposit, to wit: $6,400. Both drafts were duly forwarded by plaintiff for collection. The draft on Autz and .Company for $2,607.89, ivas paid on its presentation to the drawee. The draft on Aragon Baldwin Cotton Mills for $3,792.11, was duly presented for payment to the drawee and dishonored by nonpayment. This draft was promptly returned to plaintiff, and was charged to the account of Fairley Brothers on 10 December, 1927, with the result that said account was overdrawn on said day, as shown by the books of the plaintiff. The defendants, Fairley Brothers, did not have sufficient funds to their credit with the plaintiff on 10 December, 1927, for the payment of the dishonored draft. They subsequently made payments from time to time on the overdraft shown on the' books of the plaintiff, reducing the amount thereof to $2,181.42. Fairley Brothers are now indebted to the plaintiff by reason of said overdraft in the sum of $2,181.42, with interest thereon from 1 December, 1927. There was no evidence at the trial tending to show that the defendants, Fairley Brothers, made any false and fraudulent representations to the plaintiff at the time they deposited the said drafts, and thereby induced plaintiff to give them credit' for the amount of their deposit. There was evidence tending to show that Fairley Brothers represented to plaintiff that the drafts were good and would be paid upon presentation.

The defendant, Charles Raymond Storey, was the cashier of plaintiff on 1 December, 1927. As such cashier he credited the account of Fairley Brothers with the amount of the two drafts deposited with plaintiff by them on said day. Between the 1st and the 10th of December, 1927, the said defendant, as cashier of the plaintiff, -paid checks drawn on plaintiff by Fairley Brothers and charged same to their account. The books of the plaintiff showed that by reason of the deposit of $6,400, made on 1 December, 1927, Fairley Brothers had sufficient funds to their credit with plaintiff for the payment of said checks. When the draft for $3,792.11 was returned unpaid, the defendant, Charles Raymond Store}1, charged the same to the account of Fairley Brothers, because of their liability as drawers of the dishonored draft, with the result that said account was overdrawn on 10 December, 1927. The defendant immediately notified Fairley Brothers that their draft on Aragon Baldwin 'Cotton Mills had not been paid, and demanded that they pay the same to the plaintiff, as holder of the draft. Fairley Brothers have made payments on their overdraft from time to time, thus reducing the amount thereof to $2,181.42.

Charles Raymond Storey, as a witness for the plaintiff, testified as follows: “I was cashier of the Bank of Peaehland in December, 1927. Fairley Brothers presented for deposit to their credit a draft for $3,792.11 on Aragon Baldwin Cotton Mills of Whitmire, S. C. There was no bill of lading attached to the draft. They brought it in as a regular deposit, and I gave them credit for it. I permitted them to check against it immediately. This was on 1 December, 1927, and the draff came back on 10 December, 1927. I charged the draft to their account. On 28 December, 1927, Fairley Brothers gave me two drafts aggregating the sum of $1,000. Both these drafts were paid and the proceeds credited on the draft which had been returned. They gave me other drafts from time to time which were not paid. On 9 February, 1928, I drew on Fairley Brothers for $2,792.11. This draft was not paid. At their meeting on 12 January, 1928, I made up a financial statement for the directors. I did not tell them about the $2,792.11, then owing by Fairley Brothers on their unpaid draft dated 1 December, 1927. They asked me about overdrafts, and I showed them the overdrafts: I did not mention the Fairley matter as I did not consider the amount due by them on their unpaid draft as an overdraft of their account. I did not try to keep anything from the directors. I kept on the books of the bank a complete record of the Fairley transaction. The bank made good money out of tbe account with. Fairley Brothers. They bought and sold cotton. I charged them interest at the rate of 8 per cent, and 1/8 of one per cent for collecting their drafts. I did not make anything for myself out of their account. I did not fraudulently conspire with Fairley Brothers. They were customers of the bank when I became cashier. I continued to do business with them, just as its books showed the bank had done. My recollection is that Fairley Brothers told me when they deposited the drafts on 1 December, 1927, that they were good and would be paid. I had no reason to doubt that both drafts would be paid on presentation.”

J. Y. Britt, as a witness for the plaintiff, testified that he succeeded Charles Eaymond Storey as cashier of the Bank of Peachland. He said: “When I became cashier,. Mr. Storey owed nothing to the bank, except $90.00 which he has paid. He had not tried to destroy any of the records. Not a single one of them was mutilated. I have not found anything wrong; no moral turpitude whatever. All the records kept by Mr. Storey were in good order. These records show that Fairley Brothers did a large business with the bank while Mr. Storey was cashier. This business was profitable for the bank. The entire transaction involving their draft for $3,792.11 and the payments made on the draft by them, is shown on the records made by Mr. Storey as cashier.”

The defendant, United States Fidelity and Guaranty Company, executed and filed with the plaintiff a bond as surety for Charles Eaymond Storey, its cashier. This bond was dated 21 December, 1927, and super- • seded a bond executed by the Atlantic Surety Company of Ealeigh, N. C., and filed with the plaintiff on 12 January, 1927. The pertinent provisions of the bond executed by the defendant are as follows:

“United States Fidelity and Guaranty Company Baltimore, Maryland.

No. 48-01-1001-28. $10,000.00.

Know all men by these presents :

That the United States Fidelity and Guaranty Company, as surety (hereinafter called the surety) does hereby agree to pay into Bank of Peachland, N. O. (hereinafter called employer), within ninety days after presentation of proof of loss, as hereinafter provided, the amount of any loss, not exceeding $10,000, which the employer may sustain in respect to any moneys, funds, securities, or other personal property of the employer, or for which the employer may be responsible, through any act of fraud, dishonesty, larceny, theft, embezzlement, forgery, misappropriation, wrongful abstraction, or misapplication, or any other dishonest or criminal act or omission committed by Charles Eaymond Storey (hereinafter called the employee) acting- alone or in collusion with others, while in any position in the continuous employ of the employer, after 12 o’clock noon of the 10th day of January, 1928, but before the employer shall become aware of any default on the part of the employee, and discovered before the expiration of three years from the termination of such employment or cancellation of this bond, whichever may first happen.”

Attached to the said bond is a rider, executed by the defendant, the pertinent provisions of which are as follows:

“To be attached to Fidelity Bond No. 48-01-1001-28 executed by the United States Fidelity and Guaranty Company (hereinafter called surety) dated 10 January, 1928, in favor of Bank of Beachland (hereinafter called employer) and covering Charles Raymond Storey, Beach-land, N. C.

Whereas, the employer has been carrying fidelity suretyship as follows : Charles Raymond Storey, amount $10,000; surety, Atlantic Surety Company, dated 16 November, 1926.

Whereas, said fidelity suretyship, as of the effective date of the attached bond, has been canceled, or allowed to expire, or has been terminated by agreement, as is evidenced by the issuance and acceptance of the attached bond and this rider; and,

Whereas, said fidelity suretyship may provide that any loss thereunder shall be discovered, or claims therefor shall be filed, within a certain period after the final expiration, cancellation or termination thereof,

Now, therefore, it is hereby understood and agreed as follows:

(1) That the attached bond shall be construed to cover, subject to its terms, conditions and limitations, any loss or losses under said fidelity suretyship which shall be discovered after the expiration of any such period, or of no such period, after the bar of the statute of limitations, and before the expiration of the time limited in the attached bond for the discovery of loss thereunder, and which would have been recoverable under said fidelity suretyship had it continued in force, and also under the attached bond had such loss or losses occurred during the currency thereof.”

There was evidence tending to show that plaintiff first received information of the loss sustained by it by reason of the nonpayment of the draft drawn by Fairley Brothers on Aragon Baldwin Cotton Mills, dated 1 December, 1927, on 7 March, 1928, and that the defendant, United States Fidelity and Guaranty Company had notice of plaintiff’s claim for such loss prior to 11 April, 1928. The said defendant denied liability under the .bond for such loss.

Tbe issues submitted to tbe jury were answered as follows:

“1. Did tbe defendants, J. M. Fairley and F. H. Fairley, trading as Fairley Brothers, obtain credit at tbe Bank of Peacbland on 1 December, 1927, for tbe draft of $3,792.11, drawn on Aragon Baldwin Cotton Mills, by false and fraudulent representations, as alleged in tbe complaint? Answer: Yes.

2. Did tbe defendant, Charles Eaymond Storey, while acting as cashier of tbe plaintiff bank, and in collusion with Fairley Brothers, fraudulently permit tbe said Fairley Brothers to check against tbe draft for $3,792.11, before tbe same bad been cleared and paid, in violation of tbe rules and instructions which bad theretofore been given him by tbe board of directors of said bank, as alleged in tbe complaint ? Answer: Yes.

3. Did tbe said Charles Eaymond Storey falsely and fraudulently conceal tbe overdraft and indebtedness of Fairley Brothers from tbe board of directors of tbe Bank of Peacbland at their meeting held on 12 January, 1928, as alleged in tbe complaint? Answer: Yes.

4. Did tbe plaintiff comply with tbe terms of its bonds with respect to tbe manner of filing its claim with tbe United States Fidelity and Guaranty Company, and, if not, did tbe United States Fidelity and Guaranty Company waive strict compliance therewith by disclaiming liability upon said bonds, as alleged in tbe complaint? Answer: Yes.

5. What amount, if any, is tbe plaintiff entitled to recover of tbe defendant, J. M. Fairley and F. H. Fairley, trading as Fairley Brothers? Answer: $2,181.42, with interest from 1 December, 1927.

6. What amount of damages, if any, is tbe plaintiff entitled to recover of tbe United States Fidelity and Guaranty Company on account of tbe bonds sued on in this action by reason of tbe wrongful conduct of Charles Eaymond Storey ? Answer: $2,181.42, with interest from 1 December, 1927.”

On tbe foregoing verdict, 'it was ordered, considered and adjudged by tbe court:

“1. That tbe plaintiff, Bank of Peacbland, recover of tbe defendants, J. M. Fairley and F. EL Fairley, partners trading under the firm name of Fairley Brothers, tbe sum of $2,181.42, with interest on said amount from 1 December, 1927, until paid, together with tbe costs of this action; and tbe jury having found by their verdict that tbe indebtedness of tbe defendants, J. M. Fairley and F. H. Fairley, was incurred by false and fraudulent representations, it is ordered and adjudged by this court that if an execution against tbe property of tbe defendants, J. M. Fairley and F. EL Fairley, is returned unsatisfied, then and in that event, tbe said Bank of Peacbland shall be entitled to an execution against tbe persons of tbe said J. M. Fairley and F. EL Fairley.

2. That the Bank of Peackland recover of the defendant, the United States Fidelity and Guaranty Company, the sum of $10,000, to be discharged upon the payment of the sum of $2,181.42, with interest on said amount from 1 December, 1927, until paid, together with the costs of this action to be taxed by the clerk.”

From this judgment, the defendant, the United States Eidelity and Guaranty Company, appealed to the Supreme Court.

Robinson, PrueLte & Caudle for plaintiff.

John C. Silces for defendant.

CoNNon, J.

The defendants, Fairley Brothers, did not appeal to this Court from the judgment rendered against them in the Superior Court. In their answer to the complaint, they denied the allegations therein that they induced the plaintiff by false and fraudulent representations to credit their account with the amount of their draft, dated 1 December, 1927, for $3,792.11, or to pay their checks drawn on plaintiff before their said draft was collected by the plaintiff. They admit that the draft was dishonored by nonpayment upon its presentation to the drawee, and that by reason, of such dishonor, they were liable as drawers of the draft to the plaintiff for its amount. They did not resist the demand of the plaintiff for judgment against them in this action for the balance due on the draft. We fail to find in the record any evidence tending to sustain the allegations of the complaint involved in the first issue. The answer in the affirmative to this issue supports the order in the judgment for the issuance of an execution against the persons of these defendants. It does not, however, affect the right of the plaintiff to recover of the defendant, United States Fidelity and Guaranty Company, in this action.

There was no judgment at the trial of this action in the Superior Court against the defendant, Charles Raymond Storey. No issue involving his liability to plaintiff for any specific sum of money was submitted to the jury. For this reason, this defendant did not appeal to this Court. We fail to find in the record any evidence tending to sustain the allegations in the complaint involved in the second and third issues. We cannot, however, disturb the affirmative answers to these issues insofar as they affect the defendant, Charles Raymond Storey. They do not, however, affect the right of the plaintiff to recover of the defendant, United States Fidelity and Guaranty Company in this action.

In the absence of any evidence at the trial of this action, tending to show that the plaintiff has sustained a loss of its money or other personal property, through an act of fraud, dishonesty, larceny, theft, embezzlement, forgery, misappropriation, wrongful abstraction or misapplication or other dishonest or criminal act or omission committed by its cashier, Charles Eaymond Storey, during the period covered by its bond, the defendant, the United States Fidelity and Guaranty Company, is not liable to plaintiff in this action as surety for said cashier. The bond executed by the defendant as surety for the cashier of the plaintiff does not cover a loss sustained by it solely by reason of an overdraft permitted by its cashier, although without authority of its board of directors. The cashier is civilly but not criminally liable for such loss. N. C. Code of 1931, sec. 221(1).

In First National Bank of Edgewater v. National Surety Company, 243 N. Y., 34, 152 N. E., 456, 46 A. L. R., 967, it was held that the act of a bank cashier in permitting an overdraft by a customer through an honest mistake of judgment, or to help the bank, or in the ordinary course of the bank’s business, without any dishonest intent or purpose, is not within a fidelity policy insuring against loss through the fraud, dishonesty, forgery, theft, embezzlement, wrongful abstraction, misapplication or misappropriation, or other dishonest or criminal act or omission of the cashier. ¥e think the cit.ed case was well decided.

There was error in the refusal of the trial court to allow defendant’s motion for judgment as of nonsuit at the close of the evidence. For this reason, the judgment against the appealing defendant is

Eeversed.

Stacy, C. J., not sitting.