Title Guaranty & Surety Co. v. Nichols
Headline: Court affirms judgment against a surety company, ruling banks need not prove monthly account checks; the surety must prove the employer failed agreed examinations before avoiding liability for cashier embezzlement.
Holding:
- Places burden on sureties to prove employer failed required account checks.
- Allows banks to recover if they prove bond, embezzlement, and no surety proof of missed exams.
- Renewal statements that accounts were examined are not absolute warranties.
Summary
Background
A bank bought a bond from a surety company to protect itself against theft by its cashier. The cashier embezzled funds while the bond was active. After the bank’s right to sue arose, the bond was assigned to another party who brought the lawsuit. The surety defended by saying the bank had agreed to make monthly examinations of the cashier’s accounts and failed to do so, and that failure caused the loss.
Reasoning
The central question was whether the bank had to prove that it actually made the monthly examinations before recovering on the bond, or whether the surety had to plead and prove the bank’s failure to make them. The Court explained the difference between a condition precedent (something that must happen before a contract takes effect) and a condition subsequent (something that can defeat an already effective contract). The Court held the examination requirement was a condition subsequent. That means once the bank proved the bond, the embezzlement, and a refusal to indemnify, the surety bore the burden of proving the bank breached its duty to examine.
Real world impact
On the facts, there was evidence that monthly reports were made and officers examined cash and securities, so the jury could find reasonable diligence. The Court also said renewal certificates stating accounts were examined and found correct are not absolute warranties that avoid the bond if a competent exam would not have revealed cunning falsifications. The judgment for the bank was therefore affirmed.
Dissents or concurrances
Justice McKenna dissented; the opinion does not describe his reasoning in detail.
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