
    S. C. Bennett et al. v. S. A. R. E. B. & L. Association.
    (Case No. 4373.)
    1. Bond—Principad and surety.—The securities on.the bond of an officer of an incorporated company, for the faithful performance of his duties as such, are not relieved from liability on account of the fact that the officer was already a defaulter when the bond was given, provided the officers of the corporation had no knowledge of the defalcation. Mere negligence in the officers of the corporation in failing to detect the fraud will not relieve the securities.
    2. Case distinguished.— This case distinguished from Graves v. Lebanon National Bank, 10 Bush, overruled.
    
      Error from. Bexar. Tried below before the Hon. G. H. Noonan.
    
      Thomas J. Devine and Tarleton & Boone, for plaintiffs in error.
    I. The court erred in giving any judgment against the defendants, Sam C. Bennett and J. B. Lacoste, because at the time and date of their suretyship for plaintiff’s secretary, R. H. Neal, he was a defaulter to plaintiff, which is admitted in the record; and notwithstanding such existing defalcation, the accounts of said secretary had been duly examined and approved by plaintiff, and because such approval was due to the negligence of plaintiff. The sureties are discharged by the culpable negligence of the plaintiff. The People v. Janson, 7 Johns., 331; Rathbone v. Warren, 10 Johns., 587.
    II. In an action on a bond, defendant .may plead that plaintiff was cause of the damage of which he complains. Theobald on Principal and Surety, sec. 183; Harleston on Bonds, p. 199; Montague v. Tidcombe, 2 Vern., 518; 7 Johns., 332; 10 Johns., 587; Pidcocke v. Bishop, 3 Barn. & Cres., 505; Whitmore v. Wilkes, 3 Car. & P., 364; Manhattan Co. v. Lydiz, 4 Johns., 377; 3 Wheat., 154, 155, note; Payne v. Ives, 3 Dowl. & Ryl., 664; Holland v. Malken, 2 Wils., 126; Bacon’s Abridgment, Obligations, F; Story on Agency, 313; 4 Pick., 339, 340.
    III. Where the sureties were misled as to the condition of the accounts of plaintiff’s secretary by the approval of the secretary’s accounts, while, in fact, defalcations existed at the date of such approval, and the bond was entered into subsequent to such defalcation and approval, they are not liable. Graves v. Lebanon National Bank, Court of Appeals of Kentucky, Reported in American Law Times Reports, 1874, p. 59.
    
      Simpson & James, for defendants in error.
   Gould, Chief Justice.

This judgment was rendered against appellants as sureties on the bond of R. H. Heal for the faithful performance of his duties as secretary of the defendant corporation during his continuance in office, the bond bearing date September 30, 1878, and being in the sum of §3,000. The by-laws of the association required the secretary, at each monthly meeting of the board of directors, to furnish a statement of the affairs of the company. On the trial it was developed that Heal was actually a defaulter at the time Bennett and Lacoste signed his bond, and that the association, through its proper officials, had approved his accounts at that time. After the bond was given, subsequent defalcations occurred from time to time largely in excess of the amount of the bond, and which a witness says might have been detected at any time by any competent book-keeper within twelve hours after undertaking the examination of the books. Rone of the finance committee had made an examination of Real’s accounts after the bond was given. There was no evidence of actual knowledge of Real’s defalcation on the part of any of the officers of the association, at the time the bond was given, or at the time any of the subsequent defalcations occurred. The claim is that the officers of the association were grossly negligent in approving the accounts of Real, when a proper examination would have exposed his default; that the appellants were misled by this approval, and relying thereon executed the bond, and that by reason of these facts they were not liable thereon.

The authorities are conclusive that mere negligence in the officers of a corporation in failing to examine the books and detect frauds committed by an official will not discharge a surety on that official’s bond given thereafter, if such frauds were unknown to and unsuspected by those officers. Tapley v. Martin, 116 Mass., 275; Wayne v. Commercial Nat. Bank, 52 Pa. St., 343. See especially the latter case for a review of the earlier cases on the subject.

Appellant cites the case of Graves v. Lebanon Nat. Bank, Sup. Court of Ky., 1874 (10 Bush). That case was made to turn on the publication by the directors of an official report, required of them by law for the information of the public, and on the presumption that those thereafter becoming sureties of the cashier relied on the truth of this published report. In this case there is no evidence that the approval ofj Real’s accounts was an act in anywise intended for the information of the public, or that there was any publication thereof. Without examining this case further, it is evident that as an authority it does not go far enough to support the position of appellants. Had there been fraudulent representation or fraudulent concealment on the part of the directors, the sureties would have been discharged because of the fraud. The case presented is not one of fraud. The negligence of the directors in examining the accounts which they approved was a failure of duty to the corporation, but not of a duty which they owed to parties about to become sureties of the secretary. Such negligence, not accompanied or followed by some affirmative act or representation on which they had a right to rely, did not operate a fraud on the sureties, nor discharge them from liability on their bond.

The case was tried by the court, a jury being waived, and the court having rendered judgment for the amount of the bond, we see no reason why that judgment should be disturbed.

Whilst various other questions were presented in the original brief of counsel, the brief last filed fails to notice any save those based on the negligence of the directors. So also we understand the errors assigned by appellee not to be insisted on in the event the judgment on the bond is not disturbed. We regard the question which we have disposed of as the only one requiring discussion, and content ourselves with saying that we find no error in the judgment of which either party has any right to complain.

The judgment is affirmed.

Affirmed.

[Opinion delivered May 2, 1882.]  