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Du Bois Nat. Bank v. Hartford Accident & Indemnity Co.

decided.: April 21, 1947.


Author: Stephens



This action of assumpsit was brought in the Court of Common Pleas of Clearfield County, Pennsylvania, in July, 1943. A statement of claim was filed in July, 1944, and the case was thereafter removed to the United States District Court for the Western District of Pennsylvania because of the diversity of citizenship of defendant. The case was tried to a jury, and a judgment was entered for the plaintiff. Judge F. P. Schoonmaker, who presided at the trial, died soon after the conclusion of the trial, and Judge R. M. Gibson heard and decided the "Motion to Set Aside the Judgment and for Judgment." The defendant appeals from the judgment. We shall occasionally refer to plaintiff-appellee as the bank and to defendant-appellant as the insurer.

On July 1, 1940, the insurer issued two insurance bonds to the bank, one entitled a "Primary Bankers Blanket Bond", in the amount of $25,000, and the other was called "Excess Bond, Form No. 2". The court is concerned only with the Primary Bankers Blanket Bond, by which the insurer obligated itself to protect the bank for "Any loss through any dishonest, fraudulent or criminal act of any of the employees, including loss of property through any such act of any of the employees, whether any such act may be committed and whether committed directly or by collusion with others."

W. G. Brown became connected with the plaintiff-bank in 1905 as an ordinary clerk, and through successive steps became its president, officiating in that office until he resigned August 20, 1942. Sometime prior to 1942, the bank began doing business with the Producers Economy Coal Company, operated by C. E. Lovejoy. During the month of January, 1942, the coal company's account with the bank showed an indebtedness of a few dollars less than $39,000 - the legal limit permissible being $40,000. The indebtedness was secured on its face by notes, which were purported to be secured by assigned accounts for coal purchased by third parties. These accounts were largely fictitious. In addition, however, to the indebtedness evidenced by the notes, President Brown permitted the coal company to overdraw its open checking account by many thousands of dollars and caused the overdrafts to be carried on the bank books as "cash items".

On July 30, 1942, a bank examiner discovered the overdrafts, which on that date amounted to $27,192.35. The cashier and two assistant cashiers were aware of these "cash items", and they had spoken of them to Brown, who assured them that they would be "taken care of." The members of the Board of Directors, other than Brown, denied any knowledge of them prior to the time the bank examiners discovered them. However, W. J. Schoch, having learned something of the situation, wrote to the insurer under date of August 16, 1942, informally suggesting that there were some irregularities at the bank, and on the same date the bank directors discussed the overdrafts, which then totaled the sum of $39,040.43. It may be noted that Schoch had acted as the insurers sales agent in the sales of the insurance bonds to the bank.

Prior to the July 30, 1942, meeting, the president of the bank had secured a bill of sale of the assets of the coal company, which he held for the use of the bank, and the Board of Directors on August 7, 1942, decided to take over the coal company, to sell part of its assets, and continue the business to salvage some or all of the loss. While operating the coal company, additional overdrafts were honored after July 30, 1942. The bank, in August, 1942, sold certain coal company equipment, and out of the proceeds paid equipment lien holders, and also paid off the overdrafts honored after July 30, 1942, in the sum of $14,480.93, together with a portion of the overdrafts of a prior date.

On August 18, 1942 the Chief National Bank Examiner requested Brown's resignation, and two days later Brown resigned to the Board of Directors. J. W. Schoch, then Vice-president, became the bank's executive head, and acted in that capacity until George W. Yohe qualified as President, November 1, 1942.

It was not until October, 1942, that Mr. Waddell, the Chief Claims Attorney for the insurer, sent Mr. Hannon to the bank in response to Mr. Schoch's communication. Mr. Hannon was a regular employee of the insurer, and aided Mr. Waddell in this manner when the latter could not himself attend to matters demanding attention.

Mr. Hannon was fully informed as to the indebtedness, the assumption of the coal properties, and the sales and distribution of funds received. Mr. Hannon's visit occurred within the ninety-day period provided in the insurance contract for proof of loss after its discovery.

There is testimony to the effect that Mr. Hannon agreed that the bank should continue with the liquidation of the coal company, and that the bank could not file a detailed proof of loss because the amount was yet undetermined. Mr. John S. Horner, assistant cashier of the bank, testified:

"Q. Did you show that [audit of coal company] to Mr. Hannon? A. I don't recall that I showed it to him. I discussed it with him. I had it there.

"Q. Did you tell him what the report was? A. Yes, sir.

"Q. What?A. The auditor's report we had showed that based on the information given to the engineers of the Freeport Corporation, the engineers estimated there was at least 50,000 tons of coal there ...

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