Deitrick v. Standard Surety & Casualty Co.

1938-03-28

Headline: Ruling blocks a bank receiver from recovering on surety bonds obtained by fraud when the bank president’s fraud is imputed to the bank, limiting recovery for depositors and creditors against the surety.

Holding: The Court held that the receiver may not recover on the surety bonds because the receiver sued as the bank and is charged with the bank president’s knowledge, so defenses that barred the bank also bar the receiver.

Real World Impact:

Prevents receivers from recovering on contracts tainted by a bank officer's fraud when sued as the bank.
Allows surety companies to avoid liability where a bank officer’s knowledge is imputed to the bank.
Requires receivers to plead creditor-based claims if seeking recovery for injured depositors.

Topics: bank fraud, receivership claims, surety bonds, creditor recovery

Summary

Background

A Boston bank formed in 1930 became insolvent and a federal receiver took charge in December 1931. The bank held several note-guaranty bonds issued in the names of a principal and a surety. The receiver sued to collect on some of those bonds after the principal defaulted. The surety had already gone to court asking the bonds be cancelled, saying they were fraudulently obtained by the bank and its officers.

Reasoning

A master found that the bank’s president and the surety’s agent had obtained and used the bonds to deceive bank examiners, and that the agent had a power of attorney attached to the bonds. The District Court held the bonds void and dismissed the receiver’s counterclaim. The Court of Appeals affirmed, and this Court agreed. The majority reasoned the receiver sued as the bank and therefore “stands no better than the bank”; because the president’s knowledge is imputed to the bank, defenses that barred the bank also bar the receiver. The pleadings did not assert a separate trust or creditor-based claim that would let the receiver recover on behalf of injured depositors.

Real world impact

The decision confirms that a receiver cannot recover on contracts when the receiver’s suit merely asserts the bank’s contract rights and those contracts are invalid for fraud charged to the bank. To pursue recovery for depositors or creditors, a receiver must plead and prove a distinct creditor-based or trust claim.

Dissents or concurrances

Justice Black (joined by Justice Reed) dissented, arguing the receiver represents creditors too and should be allowed to recover against both conspirators, including the surety, to protect depositors from fraud.