Peurifoy, Rec'r v. Loyal

[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] *Page 269 January 24, 1930. The opinion of the Court was delivered by This action was commenced on November 24, 1926, by James E. Peurifoy, Receiver of the American Bank Trust Company, against I.M. Mauldin, the former president of the bank, and the American Surety Company of New York. The complaint alleges that the American Surety Company of New York executed and delivered its bond, whereby it insured the American Bank Trust Company in the sum of $25,000.00, against any loss of moneys, securities, or property through any dishonest act committed by any of its salaried officers or employees; that on November 21, 1925, the defendant American Surety Company of New York executed and delivered a similar bond for an additional sum of $25,000. It is further alleged that, while these bonds were in force, the defendant, I.M. Mauldin, a salaried officer of the bank, secretly took, embezzled, and converted to his own use certain First Carolinas Joint Stock Land Bank bonds of the value of $30,907.20, and that the taking of these securities by Mauldin was in breach of trust with fraudulent intention and was such a dishonest act as was insured against by the defendant American Surety Company of New York. *Page 278

The American Surety Company, by its amended answer, set up among other things that the defendant National Surety Company had come into possession of the bonds alleged to have been dishonestly taken with knowledge of such defalcation and asked that the National Surety Company be joined as a party defendant, which was ordered by the Supreme Court in the case of Peurifoy v. Mauldin, 142 S.C. 7,140 S.E., 253. The American Surety Company further answered that the conduct of Mauldin did not constitute a breach of trust with fraudulent intention, that his actions had been ratified by the authorized officers of the bank, and that the bank had forfeited its right to recover by not notifying the surety within 10 days after the discovery of the alleged loss.

The National Surety Company filed a reply to the charges made by the American Surety Company denying the material allegations thereof.

Before the trial of the case I.M. Mauldin, former president of the bank, died, and O.P. Loyal, administrator of his estate, was substituted as defendant in his stead.

Upon the trial of the case before Judge Mann, the jury rendered a verdict in favor of the plaintiff against O.P. Loyal, administrator of the estate of I.M. Mauldin, deceased, and against the American Surety Company of New York for the value of the bonds and interest. The verdict was in favor of the defendant National Surety Company. A motion for a new trial was made on behalf of the American Surety Company, and a similar motion on behalf of the administrator, Loyal. Both motions were refused. The defendant American Surety Company has appealed from the judgment entered upon the verdict. In the agreed statement of the case it appears that O.P. Loyal, administrator of the estate of I.M. Mauldin, appeals, but there are no exceptions in the record in behalf of the estate, and there is therefore nothing before the Court upon which an appeal by the estate could be considered. *Page 279

After the rendition of the verdict and the refusal of the motions for a new trial, his Honor, Judge Mann, signed a consent order dated March 7, 1928, as follows:

"In the above-entitled cause, since the trial and rendition of the verdict, it appears that a number of questions have arisen as to certain collaterals and securities which were placed with the Receiver of American Bank Trust Company, and also some question as to the amount in the hands of National Surety Company and to whom it should be paid; and that it is necessary to make additional parties.

"It is, therefore, by consent of all counsel present in open Court, ordered:

"1. That Miss Ivy Mauldin, Southern Motor Company and J.B. Bostick be made additional parties to this action, and that the supplemental complaint be forthwith served upon them; and that they and all other parties to this action be authorized and empowered to serve and file within twenty days from this date such additional pleadings as they may be advised are proper.

"2. That all issues arising herein be referred to the Master of Richland County to take and hear all evidence offered in regard thereto and to make and report his findings and conclusions of law and fact to this Court with all convenient speed.

"Let a copy of this order be served with the supplemental complaint on the additional parties provided for therein."

In accordance with this order the Receiver filed a supplemental complaint making Miss Ivy Mauldin, Southern Motor Company and J.B. Bostick party defendants and they duly answered the supplemental complaint. The Master made his report, and the plaintiff and the American Surety Company filed exceptions. Upon these exceptions the matter came on to be heard before his Honor, Judge Townsend, who signed a decree dated July 17, 1928, to which the American Surety Company and the National Surety Company have filed exceptions. *Page 280

There are, therefore, two separate appeals in this case:

(1) The appeal of the American Surety Company from the verdict in the jury trial against it, and (2) the appeal of the two surety companies from the decree of his Honor, Judge Townsend in the matter which was referred to the Master.

The appeal of the American Surety Company from the judgment in favor of the Receiver against it for $35,252.23 will be considered first.

The second exception charges that the Court erred in not directing a verdict in favor of the American Surety Company, and, since that will necessitate a brief discussion of the facts in the case, it will be considered first. That exception is as follows:

"II. Because his Honor, the trial Judge, erred in refusing to direct a verdict in favor of the defendant, American Surety Company of New York, upon the grounds of such motion as made, namely:

"(a) On the ground that there was no evidence that I. M. Mauldin took and used the Land Bank bonds with a criminal intent or intended to commit a breach of trust, as alleged, but on the contrary the only reasonable inference to be drawn from the testimony shows that Mauldin in using the bonds did so in good faith with the intention and purpose of holding the bank harmless and free from loss in the transaction.

"(b) On the ground that the undisputed evidence showed that the insured, American Bank Trust Company, failed to give notice of the taking and loss of the bonds to the American Surety Company of New York within ten days after its discovery of such loss as required by the express provision of the surety bonds, or to furnish proof of such loss within ninety days after such discovery, as required."

In the latter part of February, 1926, about four months before the American Bank Trust Company closed its doors, the defendant, I.M. Mauldin, then president of the *Page 281 bank, and J. Pope Matthews, then chairman of the board of directors, were each separately engaged in controversy with the federal government in reference to their personal income taxes, involving in each instance the sum of $25,000. The department had ruled against them, and they desired to have the decision reversed on appeal. An appeal bond was required of each, and, before the surety company would sign the bonds, it required these two men to deposit with the surety company certain collateral or indemnity. The bonds had to be filed on February 20, 1926. On that day Mauldin and Matthews purchased from the First Carolinas Joint Stock Land Bank bonds of the par value of $61,000. These bonds were paid for by the American Bank Trust Company, and on the same afternoon the bonds were delivered to the National Surety Company by Mauldin and Matthews to indemnify it against loss on account of signing the tax appeal bonds. The National Surety Company then executed the appeal bonds for Mauldin and Matthews. Nothing was said about this transaction by Mauldin or Matthews until March 1, 1926, at which time they were holding a meeting of the finance committee of the bank. This committee was composed of five members: Byrd, DuPre, Miller, Mauldin, and Matthews. Miller was not present. So, the committee at this time was composed of the other four.

Byrd testified that, after completing all business coming before the committee, as the members started to leave, Mr. Matthews or Mr. Mauldin stated: "We have used some of the bank's bonds and we want to bring it before the Finance Committee. * * * It was that they had used the bonds * * * just wanted them temporarily * * * not over a week or ten days and we will return them. * * * They didn't tell when they took the bonds, said they had used them."

Mr. M.B. DuPre, the remaining member of the finance committee, described what occurred at that time as follows: "Mr. Mauldin was sitting on my right, or my left and he *Page 282 started to clear his throat, you know how he did, and said: * * * `You know Matthews has been sick in the hospital and the time has come when we have got to do something, so temporarily we had to put up a bond for the government * * * for these revenue taxes due the government.' And I don't know the exact words now he said but Mr. Mauldin then said, we took, borrowed or exchanged. I don't know what he used — I want to be perfectly frank about it, but he conveyed the idea that they had taken some bonds from the bank and used them to put up for a surety bond for the government. * * * `Yes, but it is only a temporary proposition — just a matter of a few days' (using his hands just like I am using mine). `We took these things from here (indicating) and we will put them back and in the meantime we will put up security to secure the bank if any loss occurs.' * * * The impression I got was that it was a temporary taking or borrowing, but it didn't appear to me to be regular. I thought the original would be put back. I talked to Matthews several times, don't think I talked to Mauldin. Matthews told me several times that everything was all right."

Mr. Byrd prepared a resolution, which was then adopted by the committee composed of the two members who had used the bonds, and the two others. The resolution is as follows: "Permission granted to J. Pope Matthews and I.M. Mauldin to borrow from Bond Department of bank $30,000, and $31,000 respectively. The said J. Pope Matthews and I. M. Mauldin to place with the Bond Department of bank their personal obligations, such as shall be acceptable to State Bank Examiner in place of said bonds so borrowed, the said bonds borrowed to be used temporarily as collateral against bond furnished by the National Surety Company on behalf of the said J. Pope Matthews and I.M. Mauldin and in favor of Jno. F. Jones, Collector of Internal Revenue."

Mr. Earle, who was cashier of the bank, testified that he was not a director, had no knowledge of the bank acquiring the bonds in question or of Mr. Matthews or Mr. Mauldin *Page 283 using them. He had no knowledge of the entries in the books. The entries seem to have been made under the instruction of Mr. Mauldin and without conference with the cashier. Several weeks after the bonds had been used, Mr. Byrd, a member of the finance committee, asked the cashier if he ever examined the minutes of the finance committee, and after they were written up Mr. Earle looked at the minutes and found the resolution which had been adopted by the finance committee composed of Mauldin, Matthews, DuPre, and Byrd. Earle testified that it was not his duty to put it down in the books; that it was not customary to turn the bonds over to the cashier, and further:

"When I saw it (the Minutes) I saw where the Finance Committee had approved the loan conditioned upon them putting up collateral satisfactory to the Bank Examiner in lieu of these bonds. I passed that up — did not consider it anything wrong. I felt that as the Finance Committee was part of the board it was up to them. Q. And it was entirely — so you consider that the transaction was all right and you continued on in your capacity as cashier of the bank? A. Yes, sir. * * *

"The Bond Department was actively in the hands of Mr. A.C. Heyward and not directly in my charge. * * * It not infrequently happens in banking matters that temporary arrangements are made lasting over a few hours or a few days. I had known Mr. Mauldin ten or twelve years He was a brother of Judge Mauldin and Col. Mauldin. Prior to this transaction I had not found him engaged in questionable dealings. I had absolute confidence in Mr. Mauldin."

The American Surety Company contends that there was no evidence in the case that I.M. Mauldin took and used the land bank bonds with criminal intent or intended to commit a breach of trust, but on the contrary the only reasonable inference to be drawn from the testimony was that Mauldin used the bonds in good faith with the intention and purpose of holding the bank harmless and free from loss in the transaction. *Page 284 The testimony above related, as given by the cashier and two directors of the bank, tends to sustain the surety company's contention that Mauldin did not intend to defraud the bank of the bonds, and, if this were all the testimony relative to the transaction, the motion made by the surety would present a very serious question for decision by this Court, but there is other testimony given by Mr. A. F. Lever, Mr. H.E. Way, Mr. W.W. Bradley, and other witnesses, showing the manner in which the bonds were procured and the way in which they were handled which made it a question of fact as to whether or not the bonds were taken with fraudulent intention. These facts were properly submitted to a jury and have been decided against the surety company and the Mauldin estate; and the motion for a directed verdict upon this ground was properly overruled.

It is next contended by the surety company that the American Bank Trust Company failed to give notice of the loss sustained within ten days after discovery of the loss. Section 1 of each bond reads as follows:

"The American Surety Company of New York, a corporation of the State of New York, with its Home Office in the City of New York, New York, hereinafter called the Underwriter, in consideration of an annual premium agrees to indemnify American Bank Trust Company of Columbia, Columbia, S.C. hereinafter called the Insured, against the direct loss sustained while this bond is in force and discovered, as hereinafter provided, of any money or securities, or both, as defined in Section 5 hereof, in which the insured has a pecuniary interest, or held by the insured as collateral, or as bailee, trustee or agent, and whether or not the Insured is liable therefor (such money and securities being hereafter called Property), in an amount not exceeding Twenty-five Thousand Dollars ($25,000.00), as follows:

"A. Through any dishonest act, wherever committed, of any of the employees, as defined in Section 6 hereof, whether acting alone or in collusion with others." *Page 285

Section 6 of the bond reads as follows: "The word `employees' as used herein shall be deemed to mean the officers, clerks, and other persons in the immediate employ of the insured during the currency of this bond, at its office or offices covered hereunder, but not to mean any person or persons employed by any other banking institution which the insured shall have taken over, unless the underwriter shall have given its written consent thereto, nor to mean any persons, firms or corporations furnishing transportation, trucking, messenger service or the like, or any person or persons employed thereby."

Section 16 reads, in part, as follows:

"This bond is subject to the following express conditions:

"At the earliest practicable moment, and at all events not later than ten days, after the insured shall discover any loss hereunder, the insured shall give the underwriter notice thereof by registered letter or telegram addressed to it at its home office and shall also, within three months after such discovery, furnish to the underwriter at its home office affirmative proof of loss with full particulars. Legal proceedings for recovery of loss hereunder shall not be brought prior to the expiration of three months from the furnishing of such proof, nor after the expiration of twelve months from the discovery of such loss."

It is claimed by the surety company: First, that the finance committee representing the board of directors, under the bylaws of the bank, had discovered the loss at the time the resolution prepared by Mr. Byrd was adopted; second, that the two directors, Byrd and DuPre, at the time the committee met, discovered the loss, and that their discovery was imputable to the bank; and, third, that Earle, the cashier, had discovered the loss and his discovery can be imputed to the bank.

The by-laws of the bank, by Article 3, provides for a board of directors of not less than 12 nor more than 30. In this case there were 22. By Section 9 it was provided that *Page 286 the board of directors should appoint a finance committee "consisting of the chairman of the board, president of the bank, and not less than three nor more than five other members, which committee shall be a part of the permanent organization of the bank and shall, in the interim between meetings of the board of directors, exercise powers of the board in accordance with the general policy of the bank and the board of directors." The finance committee was composed of Matthews, Mauldin, Byrd, DuPre and Miller, 5 in number. Meetings of the finance committee were to be held at least three times per week and a majority of the members was necessary to constitute a quorum for the transaction of business. At the meeting on March 1, 1926, there were present I.M. Mauldin, the president of the bank, J.P. Matthews, chairman of the board, with two other directors, M.B. DuPre and J.A. Byrd, and it was this committee as thus constituted, as a committee exercising the powers of the board of directors, which the American Surety Company contends discovered the loss and became duty-bound to notify the surety of its discovery, and which is relied upon in a large measure by the surety company.

The jury has found by its verdict that Matthews and Mauldin were both engaged in the alleged unlawful acts constituting a breach of the bond, and, so far as any matter relative to the taking of the bonds was concerned, this was not a lawful meeting of the finance committee as would bind the bank, and there could be no discovery of a loss by it as a committee.

The powers of the board of directors during the interim between their meetings is conferred only on the finance committee, as a committee, and this committee can only act when a quorum is present. The same rule governs the meeting of the committee as governs the board of directors. 3 Fletcher on Corps., p. 3179, § 2003, p. 3180, § 2005, p. 3073, § 1887; 3 Cook on Corps. (7th Ed.), § 712, pp. 2435, 2436, § 713a, pp. 2456-2458, 7 R. *Page 287 C.L., pp. 439, 440, § 427, p. 449, § 435; Star Mills v.Bailey, 140 Ky., 194, 130 S.W. 1077, 140 Am. St. Rep., 372 (1910); 1 Morse on Banks Banking (6th Ed.), § 124; Traders' Truckers' Bank v. Black, 108 Va., 59,60 S.E., 744, 745.

Mr. Cook thus puts it: "Moreover, the directors can contract and act only as a board duly qualified and assembled. The members of the board cannot agree separately and outside of the meeting and thereby bind the corporation. Nor can a minority of the board meet and bind the board. A majority must be present and then a majority of that majority binds the corporation."

7 R.C.L. thus puts it at page 439: "The authority of the directors or trustees is conferred upon them as a board, and they can bind the corporation only by acting together as a board; a majority of them in their individual names cannot act for the board itself and bind the corporation. In order to exercise their powers they must meet and act as a board so that they may hear each other's views, deliberate and then decide. * * * An individual director has no general authority to make contracts for the corporation. * * *"

And the same author at page 449, § 435, under the head, "General Authority of Committee" says: "A majority of the committee when duly assembled, may act in the absence of the other members. * * * But it is essential that a majority of the committee join in any action to bind the corporation."

Mr. Morse, at Section 124, says:

"The bank is bound by the action of the majority of the board, taken in the manner usually adopted by the board, no matter how informal or peculiar that manner may be. An expression of the will of the majority is what the law looks for and recognizes. It seems, however, that it is indispensable to the validity of any action that it should be the vote of a majority of a quorum at a regular and legal meeting of *Page 288 the board. Thus, it has been held that the assent of a majority of the directors, expressed by them individually, and not at a regular stated meeting of the board, is not sufficient to confer upon the cashier authority to do any act which he would not have authority to do unless it were conferred upon him by the directors.

"The only powers conferred by statute upon the directors of a national bank are vested in them as a board, and when acting as a unit, and therefore the assent of a majority of the individual members of the board, acting separately and singly, is not the assent of the bank, and is not binding upon it."

Mr. Fletcher, Vol. 3, p. 3180, § 2005, thus states it: "The Executive Committee can act only as a whole. * * * A majority constitute a quorum, unless it is otherwise provided, the same as in case of meetings of the full board."

And again at pages 3069, 3070, § 1882, reaffirmed in the Supplement of 1921, p. 327: "Less than a majority cannot meet and bind the corporation by an act or resolution unless expressly authorized."

A quorum is not present in passing upon a matter in which one of the directors is personally interested, where only a bare quorum is present when he is counted. And likewise an interested director or committeeman cannot be counted in order to make up a quorum to pass upon any matter in which such director or committeeman is interested. 3 Cook on Corps. (7th Ed.), p. 2464, § 713-a; 7 R. C.L., 445, 446, 480, §§ 431, 461; Hotaling v. Hotaling,193 Cal., 368, 224 P., 455, 458, 56 A.L.R., 740 (1924);Curtin v. Salmon River, etc., Co., 130 Cal., 345,62 P., 552, 80 Am. St. Rep., 135, 136; 4 Fletcher on Corps., pp. 3607, 3608, 3610, §§ 2352, 2354; note and cases 17 Am. St. Rep., 300, etc.

7 R.C.L. thus states it: "The general rule of agency which prohibits an agent from representing both himself and his principal in a transaction in which their interests *Page 289 are adverse and antagonistic, applies where a corporate officer attempts to represent both himself as an individual and the corporation in a transaction in which his and the corporate interests are adverse and antagonistic. * * * A director cannot, according to the better view, form a part of a quorum to act on a proposition in which his individual interest is adverse to the corporation, though he does not vote upon the matter."

In the Hotaling case, the Court says: "The board of directors, as provided for in the by-laws, consisted of five members. Under the by-laws and under the state law a majority of the board of directors, or three or more, was necessary to form a quorum or to perform a valid corporate act (Civ. Code, § 308), even though there was a vacancy in the board (Porter v. Lassen County Land Cattle Co.,,127 Cal., 261, 269, 59 P., 563; Pennington v. George W. PenningtonSons, 27 Cal. App. 57, 148 P., 947; 3 Cook on Corp. [7th Ed.], § 713-a, p. 2462). At the meeting at which the resolution was adopted which purported to authorize the execution of this deed there were but three directors present, including Richard, who was named therein as grantee. Being personally interested in this transaction adversely to the corporation he was disqualified thereby to vote the authorization, and his presence could not be counted to make a quorum for that purpose."

And Mr. Fletcher, Vol. 4, p. 3610, § 2354, says: "The same rules which preclude an interested director from uniting with other directors in the creation of an obligation in favor of himself by his vote, forbid him from uniting with them in creating such obligation by an act or exercise of his official position; and a meeting at which there is not a majority of the directors, exclusive of such interested director, is not a competent board for the transaction of any corporate business."

And the same author, Volume 3, § 3075, and in the Supplement of 1921, p. 327, says: "A director who is disqualified *Page 290 by reason of personal interest in the matter before a director's meeting, loses, pro hac vice, his character as a director and he cannot be counted for the purpose of making out a quorum."

And the same author, Volume 4, pp. 3607, 3608, § 2352, says: "The vote of an interested director cannot be counted to make up a majority vote necessary to pass a resolution of the Board of Directors."

There being no evidence in the case that the finance committee, as a duly and legally constituted committee, representing the board of directors, had discovered the loss, this contention of the surety company cannot be sustained.

It is further argued that the cashier of the bank and the two directors who were present at the committee meeting, personally, had discovered the loss, and their knowledge should be imputed to the bank. This case does not fall within the general rule applicable to banks in their dealings with the general public. Much of a bank's business is necessarily intrusted to its subordinate officers or servants, and in many cases it will, upon the doctrine of constructive notice, be held to know what comes to their knowledge. This rule is founded upon necessity and has for its object the protection of those who deal with and trust the bank. The transaction out of which this bond grew was an altogether different kind from those usually occurring between a bank and its customers. The contract was not made for the purpose of protecting the surety company in any dealings it might have with the bank, but, on the contrary, the surety company undertook to protect the bank in the matter of delegating to Mauldin, its president, some of the duties it owed to others. The surety company contracted to save the bank from loss on account of any dishonest act wherever committed by reason of its trusting the president with his duties. The bank did not undertake nor agree that the other officers and employees of the bank would be faithful to their trust. Notice to or knowledge of the cashier or individual *Page 291 director in case of fidelity bond of employees is not imputable to the bank, and his laches or failure to communicate it to the board of directors or to the surety company does not release a fidelity surety bond. The fact that there were other unfaithful officers and agents of the corporation who knew or connived at the infidelity of the president of the bank ought not, in reason, and does not, in law or equity, relieve the surety company from responsibility for his alleged dishonest act. The very bond itself recognizes this principle of law when it agrees to insure the bank against "loss through any dishonest act, whether acting alone or in collusion with others."

The general rule that knowledge or information communicated to an agent or officer of a corporation is notice to the corporation, which is announced by this Court in Equitable Trust Co. v. Columbia NationalBank, 145 S.C. 91, 142 S.E., 818, is not applicable to fidelity and surety bonds. Fidelity Deposit Co. v. Courtney,186 U.S. 361, 363, 22 S.Ct., 833, 46 L.Ed., 1201, 1202; 4 Fletcher on Corporations, page 3472, § 2242; 1 Morse on Banks Banking (6th Ed.), § 33, and note and cases thereunder, page 116, § 37, pages 119-121, § 38, page 122, § 42, pages 131, 132; Wait v. Homestead Building Association,76 W. Va., 431, 85 S.E., 643, 644 (1915); Fidelity Casualty Co. v. Gate City National Bank, 97 Ga. 634,25 S.E., 393, 394, 33 L.R.A., 821, 54 Am. St. Rep., 440;American Bonding Co. v. Spokane Building Loan Society, 65 C.C.A. (Wash.), 124, 130 F., 737.

In the note to Section 33, of Mr. Morse, the author says: "The surety does not agree to indemnify, provided the other officers conduct themselves properly, but if O. conducts himself improperly."

And in the same note, quoted from Chief Justice Shaw of Massachusetts in an opinion [Amherst Bank v. Root, 2 Metc. (Mass.), 522] says: "`The idea that the cashier is excused by the act or negligence of the directors arises from *Page 292 considering the board of directors as the corporation, and then applying the very equitable principle, that one ought not to recover of a surety damages caused by himself. We think the principle does not apply.' The board is not the corporation in such matters. To hold it so would defeat the very object of the bond. * * * No negligence of those with whom rests the duty of supervision, short of a virtual connivance at the official delinquency, or a willful shutting of the eyes to the fraud about to be committed can release a surety. * * * The weight of authority and reason seems heavily against releasing the surety because of the directors' fault, unless it is so expressed in the bond, or the organic law contains some provisions touching such matters, which may therefore be considered as contemplated in the contract of suretyship."

And the same author opens Section 37 with the following statement supported by the authorities in the footnote: "No act of the president or directors in violation of their duty to the stockholders can discharge the surety on the bond of a bank officer."

And in the same Section, page 120, it is said: "The fact that the cashier consented to the bookkeeper's application to his own use of money not due him constitutes no defense to an action on the bookkeeper's bond." Citing in support thereof Phillips v. Bossard (D.C.), 35 F., 99, 100.

And further in the same paragraph, pages 120, 121:

"The negligence of one agent, or set of agents, cannot deprive the corporation of its remedy for the default of another agent.

"Indeed, no act or vote of the directors of a bank, contrary to their duties, and in fraud of stockholders' rights and interests, will excuse the cashier or his sureties from a violation of the stipulation in his bond, well and truly to execute the duties of his office."

And in Section 38, p. 122: "The object of the bond is to guarantee to the bank the faithful performance by the *Page 293 cashier of his duties. His duties and obligations are not affected by the negligence of the other officers or agents of the bank, and such negligence does not discharge his sureties."

In § 42, pages 141, 142, the author announces the same principles which are set forth in Fidelity Casualty Co. v.Gate City Nat. Bank, and in American Surety Co. v. Pauly,170 U.S. 133, 18 S.Ct., 552, 42 L.Ed., 977, and Fidelity Deposit Co. v. Courtney, and cites them respectively in support thereof.

In Fidelity, etc., Co. v. Bank, 97 Ga. 634, 25 S.E., 392,393, 33 L.R.A., 821, 54 Am. St. Rep., 440, the question was whether a stipulation in a surety bond requiring the bank upon discovery of fraud or dishonesty on the part of the guaranteed employee, to give notice to the surety, and also immediately after knowledge by the bank of any act on the part of the employee involving a loss to the surety of more than $100, to notify the surety of the same. In disposing of it, Justice Lumpkin said:

"As naturally incident to a contract of this nature, the company stipulated that the bank should gain no benefit thereunder if it continued in its service an employee known to be unworthy of trust, without prompt notice to the company after he had been discovered by the bank to be untrustworthy. There is not a syllable in the contract, however, bearing the construction that the bank should exercise any degree of diligence in inquiring into or supervising the conduct of Redwine, in order that the company might be saved from loss through his misconduct. The bank did not undertake to exercise reasonable care and diligence to find out if Redwine had become untrustworthy, but as to this matter the company, in effect, invited the bank to repose in peace, for it guaranteed that Redwine would remain honest and faithful. Only after knowledge had actually come to the bank that he was, or had become, otherwise, was it under any duty to the company; and then it was * * * required to *Page 294 immediately notify the company of what it had ascertained. * * * The `knowledge' referred to meant actual knowledge. * * *

"In the absence of any guaranty on the part of the bank that its other employees would be honest and faithful, and in view of the purpose of the condition inserted in the bond, it would seem that the better construction of it would be that the bank only obligated itself to act in good faith, and impart only actual knowledge on its part. The bond would, indeed, be of no practical protection, if, in order to realize its benefits, the bank had to insure, not only the honesty and fidelity, but the faithful and conscientious attention to duty, of a dozen others of its employees."

Likewise the Supreme Court of the United States denies any duty on the part of the employer to exercise diligence to ascertain whether the employee has defaulted or done any act indicative of untrustworthiness, to the end that the sureties may be protected, and repudiates the view that the doctrine of constructive notice applies to the subject. InFidelity, etc., Co. v. Courtney, 186 U.S. 342, 22 S.Ct., 833,841, 46 L.Ed., 1193, the trial Court instructed the jury that the cashier's knowledge of the infidelity and fraud of the president of the bank was not notice to the bank of which the sureties could avail themselves as a ground of discharge. The Court says:

"It is well settled that, in the absence of express agreement, the surety on a bond given to a corporation, conditioned for the faithful performance by an employee of his duties, is not relieved from liability for a loss within the condition of the bond by reason of the laches or neglect of the board of directors, not amounting to fraud or bad faith, and that the acts of ordinary agents or employees of the indemnified corporation, conniving at or co-operating with the wrongful act of the bonded employee, will not be imputed to the corporation. United States v. Kirkpatrick (1824), 9 Wheat., 720, 736, 6 L.Ed., 199, 203; Minor v. Mechanics' *Page 295 Bank v. Root (1841), 2 Metc. [Mass.], 522; Louisiana StateKentucky (1829), 2 J.J. Marsh. [Ky.], 564; AmherstBank v. Root (1841), 2 Metc. [Mass.], 522; LouisianaBank v. Ledoux (1848), 3 La. Ann., 674, Pittsburgh, Ft.W. C.P. Co. v. Shaeffer (1868), 59 Pa., 350, 356; AtlasBank v. Brownell (1869), 9 R.I. 168, 11 Am. Rep., 231. The doctrine of these cases is thus epitomized in 59 Pa., 357:

"Corporations can act only by officers and agents. They do not guarantee to the sureties of one officer the fidelity of the others. The rules and regulations which they may establish in regard to periodical returns and payments are for their own security, and not for the benefit of the sureties. The sureties, by executing the bond, became responsible for the fidelity of their principal. It is no collateral engagement into which they enter, dependent on some contingency or condition different from the engagement of their principal. They become joint obligors with him in the same bond, and with the same condition underwritten. The fact that there were other unfaithful officers and agents of the corporation, who knew and connived at his infidelity, ought not in reason, and does not in law or equity, relieve them from their responsibility for him. They undertake that he shall be honest, though all around him are rogues. Were the rule different, by a conspiracy between the officers of a bank or other moneyed institution, all their sureties might be discharged. It is impossible that a doctrine leading to such consequences can be sound. In a suit by a bank against a surety on the cashier's bond, a plea that the cashier's defalcation was known to and connived at by the officers of the bank, was held to be no defense. Taylor v. Bank of Kentucky, 2 J.J. Marsh. [Ky.], 564."

And further, quoting with approval from a Louisiana case, Louisiana State Bank v. Ledoux, 3 La. Ann., 674, 684: "It cannot be said that if one servant of a bank neglects his duty, and by his carelessness permits another servant *Page 296 of the bank to commit a fraud, the surety of the fraudulent servant shall be thereby discharged."

And after citing and approving American Surety Co. v.Pauly, 170 U.S. 133, 18 S.Ct., 552, 42 L.Ed., 977, the Court says: "In the very nature of things, such a principle does not obtain in favor of a surety who has bonded one officer of a corporation, so as to relieve him from the obligations of his bond, by imputing to the corporation knowledge acquired by another employee subsequent to the execution of the bond (and from negligence or wrongful motives, not disclosed to the corporation), of a wrong committed by the official whose faithful performance of duty was guaranteed by the bond. As the rule of imputation to the principal of the knowledge of an agent does not apply to such a case, it must follow that it can only obtain as a consequence of an express provision of the contract of suretyship."

Further the Court says:

"Manifestly, this stipulation is not fairly subject to the construction that it was the intention that the neglect or omission of a minority in number of the board of directors or the neglect or omission of subordinate officers or agents of the bank should be treated as the neglect or omission of the bank. The provision is not that a minority in number of the board of directors or that subordinate officers or agents would exercise due and customary supervision, and would not condone a default of the bonded employee or retain him in his employment after the commission of a default, but the agreement is that the bank would do or not do these things. This in reason imports that the things forbidden to be done or agreed to be done were to be either done or left undone by the bank in its corporate capacity, speaking and acting through the representative agents empowered by the charter to do or not to do the things pointed out. * * * That is to say, the stipulation in all its aspects undoubtedly related to the bank, acting through its board *Page 297 of directors or through an official who, from the nature of his duties, was in effect the vice principal of the bank."

"Now, applying the principles previously expounded to the case in hand, it is evident that the Court rightly refused to instruct the jury that the mere knowledge of one or more directors, less than a majority of the board, and of the vice-president of the bank, of the default of the president, was imputable to the bank."

It is therefore evident that the alleged failure of the cashier and the two directors to notify the bank and the surety does not in any wise release the surety on the ground that notice was not given within 10 days after discovery of the loss. Even though such were not the law, it is clear that neither the cashier nor either of the two directors ever discovered any loss within the meaning of the bond. The evidence is that, so far as their knowledge or belief was concerned, they did not think there had been or would be any loss. They believed the matter to be an irregularity, but not a dishonest act. They had implicit faith in Mr. Mauldin, the president of the bank, and at no times does it appear that any one of them felt that he had discovereda loss to the bank. To hold that the cashier and these two directors became duty bound to give notice to the surety company that they had discovered a loss under the terms of the bond would be to require them to give notice of something they neither knew nor believed.

The motion to direct a verdict in favor of the surety company was properly refused.

What has been said in discussing exception II disposes of exception III. The undisputed evidence shows that so far as this case is concerned there was never a meeting of a legally constituted finance committee upon which could be imputed any knowledge or discovery of a loss sufficient to bind the bank. His Honor was therefore correct in charging the jury that notice or knowledge of the loss of the bonds *Page 298 could be brought home to the bank only by making the same known to the directors of the bank as a body.

Exception IV complains of error in submitting to the jury the issue of waiver. This exception is as follows: "Because his Honor erred in submitting to the jury the issue as to whether or not the American Surety Company of New York had waived the provision of the bonds requiring that notice be given within ten days after discovery of any loss thereunder; whereas, it is respectfully submitted, that there was no evidence of any such waiver, and his Honor should have so instructed the jury, as requested by the defendant, American Surety Company of New York." There was ample evidence in the case upon which to submit this question to the jury and this exception is without merit.

The fifth exception charges that the Court erred in reference to its charge as to the degree of proof required to establish the breach of trust with fraudulent intention alleged. The exception is as follows: "Because his Honor erred in holding and charging the jury that the degree of proof required to establish the breach of trust with criminal intent on the part of I.M. Mauldin, which was the basis of the action, was the preponderance of the evidence merely; whereas, the complaint having charged and his Honor having held that the action was based upon the charge of a breach of trust with fraudulent intent amounting to a crime, that the correct rule in establishing such charge required the proof of such crime beyond a reasonable doubt and not merely by the greater weight of the evidence." This exception is overruled upon authority of Salley v. GlobeIndemnity Co., 133 S.C. 342, 131 S.E., 616. 43 A.L.R., 971, decided February 15, 1926.

The sixth exception complains of error in charging the law in reference to loans to an officer of the bank. The exception is as follows: "Because his Honor charged plaintiff's requests 11 and 11-A to the effect that *Page 299 an officer of a bank is forbidden by statute of this State to borrow from the bank without first obtaining the approval and consent, in writing, of two-thirds of the whole board of directors, and that the jury might consider the failure to first obtain such consent and authority in determining whether or not I.M. Mauldin had committed a breach of trust with fraudulent intent as alleged in the complaint; whereas, it is respectfully submitted that such charge was erroneous for the reason that the only offense alleged was the taking of the bonds in breach of trust and any evidence of an independent or different breach of statute law was irrelevant for the consideration of the jury, was liable to mislead them, and was highly prejudicial to the defendants."

There was evidence in the case which tended to show that Mauldin had borrowed from the bank money or bonds in violation of the statute relating to loans to officers of banks, and this was some evidence tending to show criminal intent, which was a circumstance to be considered by the jury upon the question of whether or not the bonds were appropriated by Mauldin with fraudulent intent.

The seventh exception is as follows:

"Because his Honor charged the plaintiff's 14th request as follows:

"`The jury are instructed that neither the finance committee, nor Mr. Mauldin nor Mr. Matthews, nor even the State Bank Examiner, while he had charge, nor the board of directors after the corporation became insolvent, could waive or discharge any rights which the bank had under any of the bonds sued on in this case.'"

A careful reading of the charge given by the Court shows that this instruction was made clear to the jury to mean to apply after the corporation became insolvent. It is clear that after the bank became insolvent no one could waive or discharge any rights which the bank had under either of the bonds sued upon. This exception *Page 300 is therefore without merit. This also applies to exception VIII.

The ninth exception is disposed of by the discussion of the law under exceptions II and III and is, for the reasons therein stated, overruled.

The first exception is as follows: "Because his Honor, Judge Mann, erred in admitting evidence of the negotiations for a compromise of the controversy between James E. Peurifoy, as Receiver of the American Bank Trust Company, and the attorneys for the estate of I.M. Mauldin and the American Surety Company, over the objection of the attorneys for the American Surety Company; it being respectfully submitted that the admission of such evidence was erroneous and contrary to the policy of the law, and prejudicial to the said defendant, and his Honor should have held that said testimony was irrelevant and incompetent as relating to a compromise and settlement of the issues in controversy."

The letters complained of were evidence directed against the National Surety Company, a party defendant in whose favor the verdict of the jury was rendered. The letters had no connection with the defendant, American Surety Company, and there is no merit in this exception.

The exceptions of the National Surety Company and the American Surety Company to the decree of his Honor, Judge Townsend, upon the matters which were referred to the master and which compose the second part of the appeal in this case, are overruled for the reasons stated by Judge Townsend in his decree. Let his decree be reported.

The judgments appealed from are affirmed.

MR. CHIEF JUSTICE WATTS and MESSRS. JUSTICES STABLER and CARTER concur.

MR. JUSTICE BLEASE did not participate.