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September 10, 1937


Appeal from the District Court of the United States for the Eastern District of Pennsylvania; Oliver B. Dickinson, Judge.

Author: Davis

Before BUFFINGTON, DAVIS, and THOMPSON, Circuit Judges.

DAVIS, Circuit Judge.

This is an appeal from a judgment of the District Court entered for the defendant on a point of law reserved, notwithstanding a verdict for the plaintiff.

This was a suit on an indemnity bond to recover from the defendant, surety company, for losses sustained by the Penn General Casualty Company, hereinafter called the Casualty Company, throughtthe embezzlement of C. B. Love, its president, and H. C. O'Brien, its secretary and treasurer. The jury found that the Casualty Company had not suffered any loss through the conduct of O'Brien, but that it had suffered a loss through the embezzlement of Love. The District Court, however, decided as a matter of law that the Casualty Company had not given notice of the embezzlement of Love to the defendant within the time required by the indemnity bond and that, therefore, the plaintiff could not recover.

The issue here is whether or not the giving of notice under the facts in this case was a question of law for the court or a question of fact for the jury under proper instruction of the court.

The defendant issued to the Casualty Company a "fidelity schedule" bond wherein it agreed to indemnify that company against all direct losses sustained by it through "larceny, embezzlement, theft, forgery, misappropriation, wrongful abstraction, wilful misapplication, or any other act of fraud or dishonesty" of its employees named in the bond. Love and O'Brien were included in the coverage to the extent of $10,000 each.

The bond provided, as to the notice to be given in case of default or other dishonest act of any person covered by it, as follows: "First: The Employer shall notify the Surety by letter or telegram addressed and sent to it at its home office in the City of Baltimore, Maryland, of any default as aforesaid or of any other dishonest act on the part of any person filling any position covered hereunder, as soon as reasonably possible and in any event within ten days after discovery thereof by the Employer, or, if the Employer be a corporation, by any officer thereof not in collusion with such person. Such notice shall set forth the name and address of the person causing such loss and the position filled by such person."

As bearing upon the discovery of the embezzlement and notice thereof to the defendant, the evidence shows that in the first week in September, 1933, J. V. Gosline, vice president of the company, received word from Love, who was then being held in Baltimore, in connection with attachment proceedings on his yacht, requesting him to obtain a bond in the sum of $55,000 for the release of the boat, to be secured by the company's collateral. Gosline refused to do this. Love then telephoned to E. J. Doyle, assistant treasurer of the company, and requested him to draw a check for $11,392.50 in the name of the company, countersign it, have it certified and sent to him, but Doyle, on the advice of Gosline, also refused.

The boat incident was the first thing that really aroused the suspicions of Gosline. On September 5, or 6, 1933, he was present at the semiannual audit of the company. At this audit Gosline learned that Love had sold securities belonging to the company and had used $225,000, received for them to purchase 5,000 shares of the preferred stock of the General International Corporation which is alleged to be worthless. He did not deliver this stock to the company until he was investigated in September. It was also discovered that Love had withdrawn $17,500 from the company on the representation that he was using it to settle for some securities which he had purchased for the company, but it was not so used and has not yet been returned. Gosline, however, knew before that Love had withdrawn the $17,500 but thought he was using it honestly for the company under the broad powers which had been given him. On September 9, 1933, he wrote and personally delivered a letter to the commissioner of insurance of the commonwealth, informing him of the boat incident and of all the above facts.

On the same day, September 9, 1933, he swore to an affidavit charging Love with embezzlement. A warrant was issued, but, upon obtaining legal advice that he did not have sufficient proof to substantiate his allegations, he withdrew the warrant.

As a result of his letter to the commissioner, an investigation into the activities of Love was commenced on September 11, 1933. At the investigation Love testified that the stock of the General International Corporation (of which he was president) was worth $225,000; that he was not aware that its purchase was not a legal investment; that he would substitute other securities; and that he still had the $17,500, for which he would account in a few days. He was thereupon given time to substitute other securities and to return or account for the $17,500. He continued as president of the company until November 9, 1933, when he was removed from office and a resolution was passed demanding that he return the $17,500. Love did not comply with the demand, and on November 14, 1933, proof of loss was filed with the defendant and a demand for the payment of $20,000, with interest, $10,000 each for Love and O'Brien.

On June 5, 1934, the Casualty Company began suit on the bond to recover the $20,000, with interest of $2,770, on the ground that Love and O'Brien had embezzled $242,500, but $20,000, with interest, was the most that could be recovered on the bond. The surety company defended on the ground that it had not been notified within the time required by the bond.

Owen B. Hunt was substituted as party plaintiff after the Casualty Company had been dissolved by order of the court of ...

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