American Surety Co. v. Greek Catholic Union

Background

The corporation bought a $100,000 bond to protect itself against losses if its treasurer, Kondor, failed in his duties. Kondor, who was also president of a local bank, deposited far more than allowed at that bank. The bank became troubled with over $241,000 credited to the corporation and $89,000 in checks about to be presented. Fearing collapse, the corporation arranged for another bank to take over and agreed to leave $200,000 on deposit for four years without interest so the transfer would go through. The new trust company paid about $41,000 immediately and returned the $200,000 after four years.

Reasoning

The core question was whether that voluntary agreement to lock up $200,000 changed the nature of the loss so the bond issuer could be held liable. The Court said the corporation’s agreement was a new bargain it entered without consulting the bond issuer. Because the bank was not allowed to fail and the corporation’s deal prevented what might have been a different outcome, it is impossible to prove how much worse the loss would have been without the corporation’s action. The Court concluded the loss resulted from the corporation’s new agreement, not from the treasurer’s breaches covered by the bond, and that substituting this new obligation discharged the bond issuer.

Real world impact

This decision means companies cannot recover from a bond issuer for losses caused by a voluntary post-breach agreement that changes the original obligations or prevents the issuer’s subrogation rights. Corporations should involve bond issuers before making rescue deals to avoid losing coverage.

Dissents or concurrances

Justice McReynolds would have affirmed the lower court’s judgment, disagreeing with the majority’s view that the corporation’s actions discharged the bond issuer.