Lieberman v. First National Bank , 8 Del. Ch. 519 ( 1900 )

Lore, C. J.,

delivering the opinion of the Court:

Nathan Lieberman, the appellant, one of the sureties on two official bonds of Peter T. E. Smith, late paying teller of the First National Bank of Wilmington, has appealed in this case from the decree of the Chancellor, made December 3, 1898, which dissolved a preliminary injunction granted by the late Chancellor Wolcott, November 6, 1893, restraining the bank from collecting the amount of certain defalcations of Smith, made by him while acting as teller of the said bank.

The bonds bore date, respectively, November 1, 1879, and July 6, 1885. Each bond was in the penal sum of $15,000, and set forth that said Smith had been duly elected and chosen teller of the bank, during the pleasure of the Board of Directors, and each was conditioned for the faithful discharge of the duties of his office as teller of the said bank. Annexed to each bond was a joint and several warrant of attorney to enter judgment thereon.

During the life of the first bond, between November 1, 1879, and July 6, 1885, Smith fraudulently abstracted funds of the bank to the amount of $11,650. During the life of the second bond, between July 6, 1885, and July 5, 1891, he so abstracted $27,750. These defalcations were fraudulently concealed by false entries made by Smith on the books of the bank. The defalcations were discovered about February 18, 1893, and a full confession was made by Smith.

Upon the twenty-fourth day of February, 1893, judgment was entered in the Superior Court of the State of Delaware on each of said bonds. Said judgments being Number 299 to February Term, 1893, on the bond of November 1, 1879; and Number 301 to the said Term on bond of July 6, 1885. On the latter judgment, execution was issued October 19, 1893, and thereunder the goods and chattels of Lieberman were taken in execution, and were about to be advertised and sold, when further proceedings were restrained by the preliminary injunction of November 6, 1893.

The chief assignments of error, relied on and urged in the brief and argument in behalf of the appellant, were:

1. That the bonds were void as to Lieberman, because he was induced to become surety thereon by fraudulent representations of the respondent.

2. That at the time of the entry of the judgments, action on the bonds was barred by the statue of limitations.

First. The appellant contends that, under the evidence in this case, there is clear proof that, immediately before complainant became surety on the bond of November 1, 1879, he had a conversation with George D. Armstrong, cashier of said bank; that Armstrong then told him that he would run no risk in becoming surety for Smith, as he was “a good, reliable, honest man, and his accounts are all straight, and as paying teller he cannot take anything;” and that he had read the published statements of the bank showing its then resources and liabilities. That immediately before complainant became surety on the bond of July 6, 1885, he had a further conversation with George D. Armstrong, cashier of the bank; that Armstrong then told him that Smith’s books and everything were straight, and that “there was no risk whatever in going on his bond again,” and that he had read the statements of the bank giving its then resources.

Complainant avers that he was induced to become surety for Smith, because of such statements made to him by the cashier, and by the published reports of the bank, showing its resources and liabilities immediately before he became surety. That these reports were made and published pursuant to an act of Congress, and the cashier who made oath thereto, and the directors who certified to the correctness thereof, did so under the authority conferred upon them, and in discharge of a duty imposed upon them by law.

That from the facts thus proved, the bonds signed by the complainant are void as to him, because he became surety thereon by reason of such fraudulent representations of the respondent.

It nowhere appears in the testimony that Armstrong, the cashier, was authorized by the bank in any way to make representations in this matter of surety on Smith’s bonds, or that it was in the line of his duty as cashier to do so. Any statements made by him to Lieberman, as to Smith’s honesty, the condition of his books and accounts and the probable risk to his surety, could, therefore, in nowise bind the bank. Lieberman took them at his own risk as the individual judgment of Armstrong.

The Supreme Court of Kentucky, in Graves vs. Lebanon National Bank, 10 Bush, 23, held that published reports of the assets and liabilities of a national bank, under the acts of Congress, which were false, but which, under the proof, induced a person to become surety on the official bond of the cashier of the bank, made the bond void as to such surety, and relieved him from liability thereon.

The contrary doctrine is maintained in Ashuelot Savings Bank vs. Albee, 63 N. H., 152; where, after reviewing the Graves case, the Court says: “Such report was not due to persons considering the question of becoming sureties of the treasurer. It was a duty imposed by statute for the benefit of depositors and not to enable a reader of the public reports to determine whether the treasurer was a man whose official bond he could safely sign.”

This reason applies with equal force to the case now before us. It is difficult to perceive upon what principle of law or equity such published reports of the bank can be held as an inducement to Lieberman to become surety on Smith’s bond. They were not made by the bank for that purpose. Their publication from time to time had no relation to such suretyship; nor did they disclose upon their face whether Smith was honest or dishonest. If Lieberman saw fit to draw from such reports the conclusion that he could safely become surety on Smith’s official bond, it was unquestionably his own volition and without participation of the bank, and for which the bank should not be held responsible.

There seems to be, therefore, nothing, either in the statements of the cashier, Armstrong, or in the published reports of the bank, that would relieve Lieberman of his liability as surety on the bonds.

Second. The main and most important question in this case is raised by the statute of limitations.

The statue relating to bonds of this character is as follows:

“Ho action shall be brought upon any bond given to the president, directors and company of any bank, or to any corporation, by any officer of such bank or corporation, with condition for his good behavior or for the faithful discharge of the duties of his station, or touching the execution of his office, against either principal or sureties, after the expiration of two years from the accuring of the cause of such action; and no action shall be brought, and no proceeding shall be had upon any such bond or upon any judgment thereon, against either principal or sureties, for any cause of action accruing after the expiration of six years from the date of such bond.”

No question in this case arises under the last clause of the law, as the evidence shows that all the defalcations occurred within six years from the date of the bond under which they are claimed in each case. We have, therefore, only to deal with the two years’ limitation in the first clause.

Judgment was entered February 24, 1893. Three items of defalcation under the bond of July 6, 1885, viz., April 11, 1891, $500; July 2, 1891, $500; July 3, 1891, $1,500; amounting to $2,500, are within the two years, and would not be affected by the statute in any event. The residue of the defalcations are without the two years.

Does the statute of limitations bar recovery as claimed by the appellant?

It was shown in the evidence that Smith had fraudulently abstracted $4,600 of bank funds at the date of the first bond, November 1, 1879; that under that bond he so abstracted $11,650, and under the bond of July 6, 1885, $27,750. That all of these peculations were fraudulently concealed, by entries and alterations so skilfully made by him on the books of the bank, as to escape detection until he made disclosure of the same about February 18,1893; that during all that time he was a capable and trusted officer of the bank, enjoying the confidence of his employers and of the community.

The respondent contends that the bar of the statute is removed by the concealed fraud of Smith.

The question whether the fraudulent concealment of the existence of the cause of action will hinder the operation of the statute of limitations, is one which has been much discussed and upon which there has been a radical difference of opinion. On one side it is said the statute, in plain terms, fixes the time when action shall be brought after the cause of action accrues; that the cause of action accrues when the act is done and the fraud is consummated; and from that time, and not from the time the plaintiff discovered it, the statute interposes as a protection; that while courts of equity may make an exception in cases of fraud, because they are not strictly bound by the statute, yet for courts of law to do the same is to except from the law eases which are plainly within its terms.

On the other side, it is said, the statute must be expounded reasonably, so as to suppress and not to extend the mischiefs it was intended to cure; that it was intended to suppress fraud by preventing unjust claims from starting up, after a great lapse of time, when evidence by which they might be repelled was forgotten or had ceased to exist; that it should not, therefore, be so construed as to encourage fraud by enabling those who, through falsehood or deceit, have managed to keep one in ignorance of the fact that he had a cause of action, to take advantage of their own wrong doing under a plea of the statute.

“We think,” says the Court, in Reynolds vs. Hennesy, 23 Atl., 639 (R. I.), “the latter position is best sustained by reason and authority. It certainly is in the line of justice and morality. The only objection to it is that it introduces an exception into the statute.” The same objection lies to claims in favor of the Government and to cases of new promise. The statute does not take away the debt, but simply affects the remedy. Hence, if one by fraud conceals the fact of a right of action, it is not engrafting an exception on the statute to say that he is not protected thereby, but it is simply saying that he never was within the statute, since its protection was never designed for such as he. By fraud he has put himself outside of its pale. Whether this be taken as an exception or only a limitation of the statute, it rests upon sound reason and just policy.

Reynolds vs. Hennesy, 23 Atl., 639; Bree vs. Holbeck, 2 Doug., 655 (Lord Mansfield); South Sea Co. vs. Wymonsdell, 3 P. Wms. R., 143.

Such a construction has been so frequently applied to the statute, that it is now said to have the weight of authority in its favor. Massachusetts, Maine, Hew Hampshire, Pennsylvania, Illinois, Indiana and Texas are among the states supporting this view; while the contrary has been held in Hew York, Virginia, Horth Carolina, South Carolina and Hew Jersey.

In Turnpike Co. vs. Field, 3 Mass., 201, Chief Justice Parsons uses this language: “That where the delay in bringing the suit is owing to the fraud of the defendant, the cause of action ought not to be considered as having accrued until the plaintiff could obtain knowledge that he had a cause of action; and if this knowledge was concealed from him by the defendant fraudulently, the Court would violate a sacred rule of law if they permitted the defendant to avail himself of his own fraud.”

The reason given by Lord Redesdale, in Hovenden vs. Lord Annesly, 2 Sch. and Lef. R., 634., why the statute should not operate as a bar, where fraud has been concealed by one party until it has been discovered by the other, is “that the statute ought not in conscience to run; the conscience of the party being so affected that he ought not to avail himself of the length of time.”

Whatever may be the conflict in courts of law upon this point* it is, without controversy, the settled doctrine in courts of equity.

Angell on Limitations, Sec. 183; Carter vs. Murray, 5 Johnson, Ch. Rep., 522.

But it is insisted, that while this rule prevails against the person who committed the fraud, that a different rule exists in favor of innocent sureties, who had no knowledge of, and did not participate in such fraud. That while Smith, who fraudulently concealed his peculations, would not be suffered to shield himself behind the statute, that Lieberman, his surety, who is innocent of fraud, has a right to set up the statute as his protection.

In cases like this, is there any such distinction between the liability of principal and surety ?

In Charles vs. Haskins, 14 Iowa, 473, which was an action against sheriff’s sureties, for wrongful seizure of goods under an execution, the Court says: “ The governing principle is, that the liability of the surety is dependent upon that of the principal.”

In Zent's Exr. vs. Hart, 8 Pa. St., 337, which was an action against a surety on a promissory note barred by the statute, where the principal had paid interest within six years; Chief Justice Gibson held, that “ The decisions at length have settled that the payment of one is the acknowledgment of both whenever it has been made during their joint responsibility; in other words before it has been severed by the death of one of them.”

In Boehmer vs. the County of Schuykill, 46 Pa. St., 452, which was an action against sureties on a county treasurer’s bond, where the defense was that the county commissioners had exceeded their power in borrowing the money which came into the treasurer’s hands, that the money so received was not within the bond; the Court, Chief Justice Woodward, says: “In so far as the principal is liable by the mere force and terms of the bond, the surety is bound with him.”

In Patterson’s Appeal, 48 Pa. St., 242, the sureties of an absconding assignee who was trustee for the benefit of creditors, were held not entitled to credit on account, which their principal could not claim by reason of fraud. Story, Justice, says : “ The sureties stand in no better position than their principal. The measure of his responsibility is the measure of theirs.”

In Bradford vs McCormick, et al., 32 N. W., 94, which was an action against the sureties of a justice of the peace for money collected and fradulently concealed until the statute had run, the Court says: “ The statute in this case is pleaded by the sureties, and they have not been guilty of any fraud; but they, without doubt, we think are bound by the fraudulent conduct of their principal. The liability of the surety is dependent upon the liability of the principal. The ordinary rule is that if the principal is bound, so is the surety.”

This point has been directly adjudged in this State. In Sparks vs. Farmers Bank, 3 Del. Ch., 275, a case against the sureties of a defaulting cashier of the bank, the precise question was determined. The Chancellor there held that the bank was entitled to collect of the sureties, so much of the defalcations as occurred more than two years previous to the entering of the judgment on the bond, for the reason that “ their equity to do so arises out of the fact that the defalcation was a fraud, concealed from the bank, with respect to which a court of equity will not permit the statutory bar to be set up until the lapse of the prescribed term after the discovery of the fraud.”

This case was argued by some of the ablest lawyers of the State. While it is true that the distinction between the liability of surety and principal in cases like this where there is concealed fraud, does not seem to have been raised and dwelt upon by counsel for the sureties, still it is only fair to assume that the failure to do so did not arise from any lack of knowledge or research, but rather from lack of material for, and confidence in such a defense.

The case of Grimshaw vs. Mayor and Council of Wilmington, 3 Del. Ch., 183, which was against the sureties of a defaulting Treasurer of the City of Wilmington, has been urged as countervailing this doctrine. The Chancellor in his opinion expressly excepts cases like the present out of his consideration, in the following language: “ I shall not enter into a general discussion of the principle applicable to a case where a concealed fraud has been proved to exist on the part of the defendant in a suit brought against him after the discovery of the fraud has been made, but not within the period mentioned in the statute in that respect, to make him account for the amount of said fraud, because I am of the opinion that the principles adjudged in cases of that kind, where the statutory limitation has been pleaded as a bar to the cause of action, are not applicable to the case before me. It is true that where one person defrauds another of his just rights, and the fraud is concealed at the time of its commission and not discovered within the period embraced by the statute of limitations, the party defrauded has a right to bring his action for the recovery of the amount of which he has been defrauded, at any time within the proper legal period for bringing actions.”

The cases of Hudson vs. Bishop, 32 Fed. R., 519; U. S. vs. Marks’ Sureties, 3 Wallace, Jr., 358; and of Pratt, et al., vs. Northan, et al.,5 Mason, 95, relied upon by counsel for the appellant, do not seem to modify this principle relating to sureties.

It therefore seems to be established, that in cases on official bonds, concealed fraud on the part of the principal, will deprive both principal and surety of the benefit of the statute of limitations; that the statute does not begin to run until the fraud is discovered.

The reason seems to be, that in such bonds the sureties guarantee the good conduct and faithfulness of the principal in the discharge of the duties of his office, and that in equity and good conscience, they should not be exempt from liability for his misconduct and peculations, when by fradulent concealment he has prevented discovery until the time limited by the statute to bring action has expired.

Any other construction, would make the very frauds against which the sureties covenanted the means of relief from liability.

The bond in such case, instead of securing the faithfulness of the officer, would tend to promote on his part, skilfully and fraudulently concealed peculations and would be an inducement to fraud.

If concealed fraud, which the principal undertakes not to perpetrate, deprives such principal of the protection of the statute, is it not equally reasonable that the undertaking of the surety that such fraud should not be perpetrated should exclude the surety also. The principal undertakes not to commit fraud; the surety guarantees that he shall not commit fraud. There would seem to be no substantial reason why their respective liabilities for such fraud should be different.

It may seem hard, that by reason of the fraud of a principal, the liability of an innocent surety should be continued for many years after the expiration of the time named in the statute of limitations. The hardship would be greater, if another equally innocent person should be made to suffer by such fraud, in cases where the surety undertakes that the principal shall be faithful and honest in that very matter. The equities being equal as to innocence, the added burden of his obligation rests upon the surety.

“ It is true that equity will not relieve against the bar of the statute, in favor of the party who has been in loches in not using means within his power to discover the fraud.”

3 Del. Ch., 302.

It must be remembered that in these bonds, Lieberman undertook for the fidelity of Smith absolutely, and at all events, and engaged unconditionally to make good his defaults. True it is he contracted in view of the statute of limitations. It is equally true that he contracted in view of the law contained in adjudged cases in this State controlling the application of the statute.

The rule is that “ It is good faith and not diligence which is required of the creditor as a condition of his right to hold the surety; but the creditor or obligee in a bond is not obliged, for the benefit of sureties, to watch the principal. It is because it is really impracticable for this to be done effectively and at all times, on the part of large corporations, that official bonds are required. To subject the responsibility of such sureties to so indefinite a question, as whether due diligence has been exercised by directors, would render these securities worthless.

Sparks vs. Farmers Bank, 3 Del. Ch., 302.

Judge Thompson, in Wayne vs. Commercial National Bank, 2 Pa. St., 349, thus defines the diligence required in the officers of a bank: “ I know of no positive duty resting on the officers of the bank, to investigate with a view to inform a surety in the absence of any inquiry or request of him to do so. Had such a request been made, and it had been denied or evaded, a different question might have been presented. Neither the bank nor its officers knew or had reason to suspect, so far as we can learn, the defalcation afterwards discovered.”

Chief Justice Shaw tersely says, in Amherst Bank vs. Root, et al., 2 Met., 540, that “ negligence of directors and their agents is no excuse.”

In a case cited by the appellants, Braves vs. Lebanon National Bank, 10 Bush, 38, the measure of diligence is thus defined: “ The directors may have been negligent in the discharge of their duties, and this negligence may have enabled Mitchell for the time to misappropriate the funds of the bank, and to conceal its true condition by the false reports made to the controller of the currency and by false entries upon the books of the association, but this negligence cannot avail the sureties who covenanted that their principal should well and truly perform the duties of his position. Their covenant is unconditional, and no failure of duty on the part of the directors of the association, short of actual fraud or bad faith, can be deemed sufficient to exonerate them from its performance.”

The testimony in this case discloses no such loches as would discharge the surety.

It shows that Smith was generally esteemed as an honest and capable officer. That the usual examinations of the condition of the bank from time to time, were had, both by the officers of the bank and by a government examiner; that no suspicion of the defalcations of Smith existed in the mind of anyone, at any time prior to February, 1893; that Lieberman made no request for an examination of Smith’s accounts; that the defalcations were therefore concealed by Smith, who was a skilled accountant. There is no claim that the bank did not exercise good faith toward the surety at all times.

A careful examination of this case, discloses no ground for the relief of the surety. The decree of the Chancellor in that respect is therefore affirmed. Inasmuch, however, as it appears from the entire record, that certain errors have been inadvertantly incorporated into the decree of the Chancellor, in respect to the date of the first bond, the duration of the defalcation under the second bond, and the allowance of interest on the penal sum of each bond; it is the judgment of this Court, that said surety is liable for the defalcations of said Smith, with interest from the date of these defalcations, to the third day of December, 1898, the date of the decree of the Chancellor in this case; provided the aggregate sum of the principal and interest ascertained to said date on each bond, shall not exceed the penalty thereof. And the said surety is also further liable for interest on such aggregate sum, so ascertained, from the said third day of December, 1898, the date of said decree.

And now to wit, this the nineteenth day of January, 1900, it appearing to the Court, that on the third day of December, 1898, it was ascertained by the decree of the Chancellor in this State, that there was due on each of the said bonds a sum in excess of fifteen thousand dollars, the penalty thereof; now therefore it is ordered, adjudged and decreed, that the said, the First National Bank of Wilmington, the respondent, have liberty to collect on each of its judgments entered on each of the said bonds, in the Superior Court of the State of Delaware, in and for New Castle County, against Nathan Lieberman, the apellant, the sum of fifteen thousand dollars, with interest thereon from the third day of December, 1898, the date of the said decree and the date of the authoritative and legal ascertainment of the amount due on each of the said bonds. And it is furthered ordered that the appellant pay the costs in this case within three months or attachment.