
    SOUTHERN SURETY CO. v. FIRST STATE BANK OF MONTGOMERY.
    (No. 5295.)
    (Court of Civil Appeals of Texas. San Antonio.
    May 27, 1914.
    Rehearing Denied June 17, 1914.)
    Insurance (§ 654) —Action on Fidelity Bond — Sufficiency of Evidence — Compliance with Warranties — “Once a Month.”
    Evidence, in a bank’s action on the fidelity bond of its cashier, held to show that the bank had complied with its warranties as to when his accounts were last examined, that there was then no shortage or indebtedness to the hank, and as to monthly examinations and reports as to his accounts; the warranty of an examination “once a month” not requiring an examination exactly every 30 days, but once during each month.
    [Ed. Note. — For other cases, see Insurance, Cent. Dig. §§ 1677, 1680, 1681, 1683-1685; Dec. Dig. § 654.]
    Appeal from District Court, Montgomery County; L. B. Hightower, Judge.
    Action by the First State Bank of Montgomery against the Southern Surety Company. Judgment for plaintiff, and defendant appeals.
    Affirmed.
    Arthur G. Moseley, of St. Louis, Mo., and William N. Foster, of Conroe, for appellant. C. W. Nugent and C. A. Toler, both of Con-roe, Dean, Humphrey & Powell, of Huntsville, and Jas. T. Rucks, of Conroe, for ap-pellee.
    
      
       For other casés see same topic and section NUMBER in Dec. Dig. & Am. Dig. Key-No. Series & Rep’r Indexes
    
   CARL, J.

The First State Bank of Montgomery sued the Southern Surety Company, an Oklahoma surety corporation doing business in Texas under a permit, and alleged, substantially: That on August 3, 1908, the defendant executed a fidelity bond to the bank wherein and whereby it undertook to make good and reimburse to the bank any pecuniary loss which the' bank might sustain during the period of one year, beginning July 31, 1908, and ending July 31, 1909, by any act of N. O. Lauve, as cashier of the bank, not to exceed $5,000, the amount of the bond; that during the life of the bond .N. O. Lauve converted and misapplied $5,489 of the funds of the bank; and that the bank did not discover the defalcation until on or about February 15, 1910, and that immediately upon said discovery the bank notified the surety company of the loss and demanded payment in the sum of $5,000.

The surety company alleged that the bond was based upon warranties therein contained which constituted conditions precedent to the accrual of any obligation thereon against the company, and pleaded specially this clause in the bond:

“Whereas, the employer has heretofore delivered to the company certain representations and promises relative to the duties and accounts of the employé and other matters, it is hereby understood and agreed that those representations and such promises and any subsequent representation or promise of the employer herein required by or lodged with the company are hereby expressly warranted to be true.”

•It is- claimed that- the contract was breached by the bank, in that question No. 5 was incorrectly answered. That question was:

“Q. To whom and how frequently will he account for his handling of funds and securities?”

And the answer was:

“A. Once a month to board of directors, and to commissioner of banking of the state of Texas, whenever called upon as required by law.”

It is alleged that Lauve did not so account to the board of directors during the period covered by the bond. Question 6 was:

“What means will you use to ascertain whether his accounts are correct? How frequently will they be examined? By whom will they be examined?”

And the answers were:

“Monthly reports and state examinations; not less than six times a year; committee of directors — state examination.”

It is claimed that these requirements were not met, and that they were warranties with which the bank was bound to comply. Questions 7 and 8 and the answers given to samo were:

“(7) When were his accounts last examined? June 30, 1908. (8) Were they reported correct? Yes.”

It is claimed that the answers to these questions were not true, and that no examination was made on June 30, 1908, and reported correct, and that by reason of such false answer's these warranties were breached.

In a trial amendment the surety company alleged that, in answer to questions 9 and 10 made by the bank, it was stated that Lauve was not indebted to the bank, when in fact he'Owed the bank $400, and that said false statements were material to the risk assumed, and, by making such false answers, the bank breached its agreement and warranty and thereby rendered the bond void.

The bank denied these allegations, and alleged that if Lauve was short with the bank at the time the answers were made, or owed it, the bank did not know it, and that all of the answers were made in good faith; that the answers made were true, but, if not, they did not increase 'the risk; but, if 'not true, then defendant cannot insist upon same as a bar of the right of action, because it did not accompany the bond with a written or photographic copy of the application made for the bond and a copy of all questions asked and answers given thereto, as required by statute.

The trial was before the court, without a jury, and judgment was rendered for $6,025, same being principal of $5,000, and interest to that date, and for costs, in favor of the bank.

There is one assignment of error briefed which is to the effect that the court erred in rendering judgment for the plaintiff, for the reason, it is claimed, the defaulting cashier’s accounts were not examined by the directors of the bank as they should have been under the alleged warranties shown by the answers to the questions propounded in securing the bond sued upon; that such examinations as were made were not such as were contemplated by the alleged warranties, and were not reasonably'calculated to disclose the defalcations of the cashier; and that no verification of the amounts with depositories was made.

The trial court filed conclusions of fact. We will not here set out the substance of the same, except that which bears upon this assignment of error. Some of the questions asked and answered by L. A. Peel, vice president of the bank, in the application for the bond for N. O. Lauve, are as follows:

The bond executed contained this clause:

“Whereas, the employer has heretofore delivered to the company certain representations and promises relative to the duties and accounts of the employé and other matters, it is hereby understood and agreed that these representations and such promises and any subsequent representation or promise of the employer herein required by or lodged with the company are hereby expressly warranted to be true.”

The application upon which the bond was based was not attached to the bond, nor was any written or photographic copy of the said application attached, or delivered to the bank, accompanying the bond or otherwise. On June 30, 1908, there was no shortage due the bank from N. O. Lauve, and he was not indebted to the bank in any amount on July 1b, 1908, when said application was signed by L. A. Peel, vice president of the bank. The accounts of -Lauve with the bank were examined as of date June 30, 1908, and reported correct. During the period covered by the bond the said Lauve made his reports accounting for the handling of the funds i and securities of the bank once every month to the board of directors, and also during said time accounted to the commissioner of banking of the state of Texas whenever called upon as required by law. The bank required and obtained monthly reports from Lauve showing the condition of the bank in order to ascertain that they were correct, and examinations were made ~by the commissioner of banking when required. These reports were examined much oftener than six times a year by the auditing committee of the directors of the bank, and the usual state bank examinations were made. The monthly reports were checked over by a committee of the board of directors at each monthly meeting, and in addition thereto W. B. Wood, president of the bank, during the entire time of the bond, assisted by other directors as an auditing committee, made frequent and thorough examinations of the books of the bank, and of the accounts of the said Lauve, and of the accounts of the bank as kept by Lauve, and of the securities of the bank. Wood, with other directors, counted the cash and securities at frequent intervals, and more than six times a year, and as an auditing committee aforesaid took every precaution required by the terms of the questions and answers contained in the application for said bond.

During the life of the bond, between September, 1908, and the 24th day of June, 1909, N. O. Lauve abstracted and converted from the funds of the bank $5,589.20, and covered and concealed such abstractions of funds by false and fraudulent entries made in the bank books. He concealed $5,458.15 of said abstractions by false and fraudulent entries in the T: J. Peel account on the bank books, and $131.05 of the defalcation was in the E. C: Wise account. The said N. O. Lauve made all the entries in these two accounts, and so completely concealed such defalcations in said accounts in the bank as to make it impossible to detect the same, except by calling in the passbooks of the individual depositors and checks and vouchers, which Was impractical, and is never done in examinations made under order of the state banking commissioner or by the hoard of directors of the' bank. Lauve personally made the entries in the Peel and Wise accounts and in their passbooks and was assisted therein by no one else. These passbooks showed the true status of the T. J. Peel and E. O. Wise accounts; but the general and individual ledgers of the bank did not. On the general and individual ledgers, these accounts were so kept that the shortages and defalcations' were effectually concealed.

The bank bad no notice oí any of these defalcations until about the 11th or 12th of February, 1910, and, as soon as the bank officials discovered the same, the surety company was notified, and it sent F. A. Ungles to Montgomery to examine the bank, and the bank officials afforded him every facility to make an effective and thorough examination of the books of the bank and its affairs, and furnished the surety- company* an itemized bill of particulars of the defalcations.. The surety company, in response to said bill, denied liability.

AVe have carefully reviewed the evidence and conclude that it justifies the findings of fact made by the trial court. And the finding of the court that the representations as to existing and past facts made in said warranties were true is in consonance with the facts given in evidence. The minutes of the board of directors of the bank were introduced and showed a meeting of that body each month beginning July 9, 1908, and ending August 81, 1909; and it was testified by the directors that at each of these meetings statements were submitted by Lauve, the cashier, and examined and compared with the books of the bank. Mr. AVood, the president, w.as' active in looking after the bank’s affairs, and made frequent examinations, and says that he, with' the committee, went over the accounts, books, and cash, and compared them with the various monthly statements submitted by Lauve. More than six examinations by the state banking department are shown during the life of the bond.

The shortage occurred in the two accounts of Peel and AVise, and it was shown beyond question that the defalcations exceeded the face of the bond. Ungles, the surety company’s representative, was afforded every opportunity to examine the bank and its affairs, and the depository accounts were reconciled to the bank balances as entered by Lauve. It is not within the usual duties of the directors of a bank, or a committee representing them, to examine each month into the depository accounts, and to call in passbooks and vouchers and verify the same each month. In the very nature of things, they cannot be expected to do this. But, even if that had been done in this instance, it would have accomplished nothing, because the depository accounts were shown to be correct, and the places where the losses occurred were fixed at the Peel and AVise accounts. The facts showed that the board of directors did comply with the warranties; that Lauve did not owe the bank July 15, 1908; that his accounts were examined June 30, 1908; that monthly reports were made thereafter by Lauve and during the life of-the contract; and that these reports were examined and compared with the bank books by a committee of the directors. Further, the state banking department made the necessary examinations.

AVhen the surety company wrote that bond, based upon the application, it must be held to have known the usual and customary method of conducting a bank by a board of directors. The fact that it is stated an examination will be made once a month does not mean exactly every 30 days, but just what the answer says, “once a month.” That means once during each month. There was no dereliction on the part of the bank directors, and we hold that they did comply with these warranties.

The judgment is affirmed.  