Town of Scotland Neck v. Western Surety Co. , 46 N.C. App. 124 ( 1980 )

HILL, Judge.

The plaintiff contends the court committed prejudicial error by failing to allow testimony before the jury by plaintiff’s witnesses concerning the term of office of the town clerk of Scotland Neck who was bonded by defendant, and thereafter allowing the defendant’s motion for a directed verdict.

By stipulation of the parties, it was agreed that an annual premium was paid on the bond from 1971 through 1977, and that the defendant was promptly and properly notified of the loss. The plaintiff tendered Boyd, who would have testified that he was appointed as town clerk for a yearly term, and that no other person served as clerk from 1964 until the fall of 1977. However, such testimony was excluded by the trial judge. Likewise, the trial court excluded testimony of the present town clerk who would have testified that he was custodian of the town minute books; that he had gone through them and found the following records concerning the appointment of James Boyd as town clerk:

(a) That James E. Boyd, Jr. be sworn in as the new clerk effective September 11, 1964.

(b) That Town Clerk be appointed Town Treasurer on August 17, 1966.

(c) For the years 1965, 1967, 1968, 1969, 1970, and 1971 — no record.

(d) That Clerk James E. Boyd, Jr. be appointed Tax Collector for one year, from July 1, 1972 through June 30, 1973.

(e) That Clerk James E. Boyd, Jr. be retained for the year 1973-74, and be appointed budget officer.

(f) That James E. Boyd, Jr. be appointed tax collector and town clerk for the fiscal year 1974-75.

(g) That James E. Boyd, Jr. be appointed town clerk and tax collector the next fiscal year (1975-76). (Meeting held 6 June 1975).

(h) That James E. Boyd, Jr. be appointed tax collector and finance officer for the year 1976-77.

(i) That James E. Boyd, Jr. be appointed clerk and tax collector for 1977-78.

We must face the question of whether the actual term (or terms) of the office of clerk as principal on the bond is relevant. The plaintiff contends such evidence is relevant, in that it would show that payment of the annual premium was for the purpose of paying for a bond covering an annual term. The defendant contends that such evidence is irrelevant and should be excluded.

As a general rule, the liability of a surety on an official bond is to be determined by the language of the contract and cannot be enlarged beyond the scope of its definite terms. Henry v. Wall, 217 N.C. 365, 8 S.E. 2d 223 (1940). However, it is well settled that the statutory bond of a public officer must be written in accordance with the provisions of the applicable statute, Washington v. Trust Co., 205 N.C. 382, 171 S.E. 438 (1933); and “. . . that general laws of a State in force at [the] time of execution and performance of a contract become a part thereof . . . .” Hood, Comr. of Banks v. Simpson, 206 N.C. 748, 757, 175 S.E. 193 (1934).

Recognizing that the duties of clerks to municipal corporations and the services rendered by the town to its citizens and the complexity of its government vary from town to town, our legislature as far back as 1917 provided:

C.S. § 2826. City Clerk elected; powers and duties. The governing body shall, by a majority vote, elect a city clerk to hold office for a term of two years and until his successor is elected and qualified. He shall have such powers and perform such duties as the governing body may from time to time prescribe in addition to such duties as may be prescribed by law. He shall keep the records of the meetings. The person holding the office of the city clerk at the time when any of the plans set forth in this act shall be adopted by such city shall continue to hold office for the term for which he was elected, and until his successor is elected and qualified.

This section was expanded by G.S. 160-273.

Currently, G.S. 160A-171 provides:

There shall be a city clerk who shall give notice of meetings of the council, keep a journal of the proceedings of the council, and be the custodian of all city records, and shall perform any other duties that may be required by law or the council.

Recognizing .further the need to protect the public from wrongful acts of public officials and employees, the legislature in 1917 enacted the following statute:

C.S. § 2828. Bonds required. Every official, employee, or agent of any city who handles or has custody of more than one hundred dollars of such city’s funds at any time shall, before assuming his duties as such, be required to enter into bond with good sureties, in an amount sufficient to protect such city, payable to such city, and conditioned upon the faithful performance of his duties, and a true accounting for all of the funds of the city which may come into his hands, custody or control, which bond shall be approved by the mayor and board of aldermen or other governing body and deposited with the city.

This statute was re-codified in 1943 as G.S. 160-277. In 1971 the section was renumbered as G.S. 159-29, and in 1975 the limits of the bond were raised to $250,000. Previous amendments provided the bond premium be paid by the municipal authority. Hence, it is apparent that since 1917, our statutes have continuously required officials such as Boyd to be bonded as an employee of the town handling money, even though no bond is required to cover wrongdoing in his clerical duties.

It is well recognized that a municipality is a political subdivision of the state. Its ordinances are laws within its jurisdiction, and those living therein or doing business therein are presumed to know such laws and are bound thereby.

“This Court has consistently held that our courts of general jurisdiction and the Supreme Court will not take judicial notice of a municipal ordinance.” (Citations omitted.) Surplus Co. v. Pleasants, 263 N.C. 587, 591, 139 S.E. 2d 892 (1965). Although there is no record of any local ordinance requiring Boyd to be bonded, nevertheless, it is of no consequence. A review of the offices to which Boyd was appointed indicates not only that he served as town clerk, but also upon different occasions as tax collector, finance officer and town treasurer. Furthermore, G.S. 160A-171 provides that the clerk shall perform such other duties as may be required by law or the council. It is clear from the offices Boyd held that he was required to be bonded, and also that he had many opportunities to embezzle large amounts of town money.

By annually appointing Boyd to the position of clerk and tax collector, or finance officer, or treasurer, the governing body of the town acknowledged that the term of office expired annually. Boyd was not holding over. His term was not continuous. Otherwise, there would have been no need to go through the formalities of such reappointment. The clerk under the law in effect when the bond was initially written (1971) served a term of “two years and until a successor [was] qualified and elected.” But the Home Rule Bill, G.S. 160A, which became effective 1 January 1972, granted town commissioners the right to elect clerks to serve at the pleasure of the board, and it is evident that the town commissioners appointed Boyd to serve annual terms after 1 January 1972. Evidence of Boyd’s term of office and the position held were relevant and should have been admitted.

Having established that the terms of office for Boyd were severable and successive, we now address the issue of whether a separate obligation was created under the bond with each new appointment and upon payment of the annual premium. We hold there was.

If the defendant had written a new bond with each reappointment, the bond so written certainly would have been cumulative; and the defendant would have been liable to the limits of the bond for defalcations occurring during the terms of each respective bond. See generally, Fidelity Co. v. Fleming, 132 N.C. 332, 43 S.E. 899 (1903); Pickens v. Miller, 83 N.C. 543 (1880); Hughes v. Boone, 81 N.C. 204 (1878).

In the case of Lee v. Martin, 186 N.C. 127 (1923), reh. granted 188 N.C. 119 (1924), the defendant gave bond as clerk of court and subsequently was elected to another four-year term. No new bond was written for this additional four-year term by the surety, but premiums on the bond were continually paid into the second term, when the clerk was forced to resign because of misappropriation of funds. The Supreme Court held the surety liable for the face amount of the policy for each term, based upon the surety’s written acknowledgment that the bond had been renewed and was in force at the commencement of the second term, and its acceptance of the premium therefor.

The case of Hood, Comr. of Banks v. Simpson, supra, is remarkably similar to the case before us and is controlling. In that case the cashier of a bank was elected annually by the bank’s board of directors and required to give bond in accordance with the by-laws. The cashier was reelected annually and required to give bond, but the penal sum was not altered. Upon taking office, the cashier gave the required bond, the period of the bond being indeterminate, and each year the bond was renewed. The cashier embezzled $20,000. A unanimous Court stated at page 753-4:

The question involved: When a bond which guarantees the fidelity of a bank cashier and guarantees the bank against loss by reason of embezzlement, etc., of said cashier, is executed for an indefinite term and thereafter is kept in force by the payment of annual premiums, does the fact that said cashier was elected at the time said bond was executed for a term of one year, and was thereafter reelected each year for a like term, and was required at each reelection to give bond, all of which was expressly directed by the by-laws of said bank and in conformity with the statutes requiring the officer to give bond, constitute said bond one continuous transaction or is each and every renewal thereof a separate and distinct bond? We think under the facts and circumstances of this case, that each and every renewal thereof is a separate and distinct bond or independent contract. (Emphasis added.)

In explaining the reason for their decision, the Court stated at page 759 that,

We desire to set forth what was said in Aetna CASUALTY & Surety Co. v. Commercial state bank of Rantoul, Ill., 13 Fed (2d Series), 474 (475-6): ‘Contracts of insurance guaranteeing honesty and fidelity are made for the purpose of furnishing, for an adequate compensation, indemnity to the insured, and should therefore be liberally construed. . . . Here defendant paid an annual premium for insurance. Under plaintiff’s theory, if there were a loss of $10,000, the first year, not discovered until the end of the three years’ period, then, though defendant had paid premiums for the second and third years, it would have no protection for those years, no insurance, for the reason that the penalty of the bond would be completely exhausted by the first year’s losses and nothing would remain to cover losses in the second and third years. In such case, the second and third years’ premiums would be paid by defendant for nothing whatever. No sane man would say that this was the intention of defendant, and the court is most loathe to believe that it was the intent of plaintiff, a widely known insurance company, dependent upon the good will and esteem of the public and its customers for its commercial welfare, so to frame its contract of indemnity as to extract premiums from the insured without giving anything in return. Brief indeed would be its life of business prosperity and public esteem, were it known that it would be guilty of such a game of ‘heads I win, tails you lose.’

The case of United States Fidelity & Guaranty Company v. Crown Cork and Seal Co., 145 Md. 513, 125 A. 818 (1924), although not on point with the type of bond sub judice, addresses the extent of liability on a bond during different periods. In U.S.F.&G., supra, the policy provided that the insurer does not assume liability for any default or defaults in the aggregate exceeding the amount of its suretyship as determined by the original obligation of suretyship. The employee was originally covered in the sum of $20,000, which amount was changed from time to time as provided in the policy. Prior to 1 March 1922, coverage totaled $25,000. After 1 March 1922, coverage was reduced to $10,000. On 14 December 1922, it was discovered that the employee had embezzled $13,079.82 between 4 May 1921 and 1 March 1922; and $14,459.47 between 1 March 1922 and 14 December 1922. The insurer paid the $13,979.82 and denied liability as to the $14,459.47.

The annual notice of premium from USF&G to the insured contained the following language: “[Insurer] does not assume liability during any year or years, or for any default or defaults in the aggregate exceeding the amount of its suretyship as determined by the original obligation of suretyship.” The insurer contended there was but one bond, originally in the sum of $25,000, and subsequently reduced to $10,000; and that it had paid its obligations arising out of defalcations while the $25,000 coverage was in effect.

The Maryland Court held that when losses occurred in separate periods, USF&G would be liable up to the amount in force in each period respectively. The premium was paid annually. At the end of any year the insured could have terminated the current contract of insurance and could have procured a new bond from the insurer. In that event it could not well be said that the insurer would not have been liable on each bond for losses during each period respectively. To hold that no further liability existed after payment of $13,079.82 to cover losses incurred prior to 1 March 1922, when the amount of the bond was $25,000 and to hold that no liability existed for losses occurring after 1 March 1922, when the bond was $10,000, would be to hold that the insured was paying for what it did not receive. A single premium, buying a $25,000 policy had been paid. The Maryland Court held that such construction as contended by the insurer would be forced, unsubstantial, and unreasonable, for if the insured believed that under the policy he was receiving no protection for losses occurring after 1 March 1922, it is unlikely it would have continued to pay the same premiums it had paid when it did receive such protection. Nor can it be assumed that the insurer so understood it because it must have known that it could not readily sell insurance on such terms.

It is common sense to apply such reasoning to the case before us. This case is one of first impression covering the exact facts in question, and we are aware of the decisions in other jurisdictions which may reach a different result under similar circumstances. See United States v. American Surety Co. of New York, 172 F. 2d 135 (2d Cir. 1949), 7 A.L.R. 2d 940, cert. denied 337 U.S. 930 (1949), and annotations covering each side of the problem. Nevertheless, we hold that acceptance of the equal annual premiums by the defendant, together with Boyd’s annual reappointments and the statutory requirement that he be bonded, acts as a renewal of the bond by the parties and estops defendant from denying coverage on an annual term basis. To hold otherwise would be to hold that Western Surety, “One of America’s Oldest Bonding Companies,” would be guilty of framing its contract of indemnity so as to “. . . extract premiums . . . without giving anything in return.” Simpson, supra, at p. 759. We make the finding, fully cognizant of Indemnity Co. v. Hood, 226 N.C. 706, 40 S.E. 2d 198 (1946). We believe the facts in that case are not so distinguishable from the facts in Simpson and believe further that Simpson is the better reasoned opinion of the two and governs the result in the immediate case. It should be noted that in Simpson, Chapter 4, § 61 of the Public Laws of 1921, required the bank clerk to be bonded and enabled the board of directors to vary annually the amount of indemnity the bond would provide. Similarly, in our case, G.S. 159-29(a) requiring certain town officials to be bonded, coupled with G.S. 105-349 and G.S. 105-350 dealing with tax collection, gives the town commissioners the power to vary the extent of coverage the bond indemnifying the town clerk would provide. The Court in Simpson found the requirement that the clerk be bonded and the ability to vary the coverage each year important in reaching the conclusion that there were several distinct contracts. We find the ability of the commissioners to demand and vary coverage in our case to be analagous and to mandate the result we have reached.

In the face of the General Statutes and the actions taken by the governing board of the town, we conclude the acceptance of premiums constituted part of a bilateral action and created several contracts — not one continuing agreement with one maximum sum to be recovered.

Defendant further contends that the Town of Scotland Neck had made an agreement with Boyd whereby Boyd had agreed to make restitution to the town in the following amounts:

(a) $15,000 cash paid on December 14, 1977;

(b) $10,000 cash placed in escrow;

(c) $15,000 note secured by mortgage on Boyd home;

(d) $22,000 unsecured demand note.

The above amounts cover sums misappropriated by Boyd during the six-year statutory period. (G.S. 1-50) Except for the $15,000 paid in cash by Boyd, the assets are being held in escrow until the amount owed to the town by the bonding company is resolved and the final costs of auditing fees determined. Boyd was given a suspended sentence in the criminal action related to this cause, with the suspension being conditioned upon his making the payments set out above. Defendant contends such agreement extinguishes its liability to the extent of $62,000.

“The liability of the surety is extinguished by a payment of the obligation by the principal, which makes the injured party whole.” 67 C.J.S., Officers § 294, p. 838.

It is well settled that if the creditor enters into any valid contract with the principal debtor, without the assent of the surety, by which the rights or liabilities of the surety are injuriously affected, such contract discharges the surety. Deal v. Cochran, 66 N.C. 269, 270 (1859).

Certainly, $15,000 of the total amount misappropriated by Boyd must be deducted from the amount due under the bond. However, the fact that the other payments are being held in escrow means that there has been no final payment of the obligation and that the possible liability of the surety has not been extinguished.

For the reasons set out above, the judgment entered by the trial court is vacated, and the plaintiff is granted a new trial.

New trial.

Chief Judge MORRIS concurs. Judge Parker dissents.