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Mortgage Corp. v. Aetna Casualty & Surety Co.

Decided: June 20, 1955.


For reversal and entry of judgment -- Chief Justice Vanderbilt, and Justices Burling, Jacobs and Brennan. For reversal -- Justices Heher, Oliphant and Wachenfeld. The opinion of the court was delivered by Jacobs, J. Heher, J. (dissenting). Mr. Justice Oliphant and Mr. Justice Wachenfeld join in this opinion.


The defendant Surety Company issued a "Brokers Blanket Bond" which undertook to indemnify and hold harmless the plaintiff Mortgage Corporation against losses described as follows: " Fidelity (A) Any loss through any dishonest, fraudulent or criminal act of any of the Employees, committed anywhere and whether committed alone or in collusion with others, including loss of property through any such act of any of the Employees." The plaintiff's complaint in the Law Division alleged that it had suffered substantial losses through the dishonesty of its employee Harrison and sought recovery on the bond. After two trials, resulting in jury verdicts for the defendant, Judge Colie entered judgment for the plaintiff which is before us for review.

The plaintiff is in the construction loan business and agreed to lend money to Closter Village, Inc. which was engaged

in building dwelling houses. The arrangement between them was that partial payments would be made by the plaintiff as work on the houses proceeded, to wit: 20% when "the slab was completed"; 15% when the building was "rough enclosed"; 20% when the building was enclosed with complete roof and "protected against the weather" with "wiring in rough form"; 25% when the "white coat of plaster was completed"; 10% when the building was "substantially completed"; and the balance of 10% when the house was sold and the "purchaser took title." Harrison was employed by the plaintiff to inspect the progress of the work and to make certifications on the basis of which his employer would make the disbursements to the borrower, Closter Village, Inc. There was no dispute as to the terms of his employment. He testified that when he was employed as inspector for the plaintiff he was given instructions as to his duties and that his responsibility was to "personally inspect" the houses and certify to his employer at each of the stages of construction so that his employer, in reliance thereon, could make the payments then called for by its arrangement with the borrower. The formal certifications were on check requisitions and disbursement memoranda supplied by the plaintiff and filled in and signed by Harrison; there can be no dispute that these were intended to, and in effect were taken to, embody Harrison's representations that he had made the personal inspections required and that on the basis thereof he was certifying that the work or stage of construction described as completed had in fact been completed.

Until early in 1951 Harrison did his work faithfully; he made his personal inspections in regular course and his certifications on the basis thereof were presumably accurate. However, between January and May 1951 he made 92 false certifications; in all of these instances he made his certifications without any personal inspections whatever; in some he certified that the houses were complete when only the foundation slab had been laid; in others he certified that the houses were complete though there had been no construction whatever. None of the foregoing is in dispute and

Harrison's own testimony conceded his derelictions. He stated, however, that he made no profit and intended no harm thereby. His testimony was that a severe storm in February 1951 increased his work and made his personal visits to the houses exceedingly difficult and that he, accordingly, relied in good faith upon Mr. Sands, an employee of Closter Village, Inc., for his information in lieu of personal inspections. Harrison's certifications were accompanied by Veterans Administration inspection certificates relating to the early stages of construction, though Harrison's reliance was not on these but on Sands who was then reputedly trustworthy. Harrison admitted that he never asked permission to eliminate his personal inspections and never reported to any of his superiors that he had done so. When he was asked by Judge Colie whether he thought the personal inspections to be of no importance he said "far from it" and that, to the contrary, he realized their importance because his employer was "paying out money." He reiterated his position that he trusted Sands "and worked with him so long and felt that the houses" were proceeding smoothly. In response to Judge Colie's final inquiry as to whether he did not consider it his obligation to report to his employer that he was not making personal inspections he said, "No, sir. I was afraid I would lose my job." That the plaintiff actually relied on Harrison's certifications and incurred substantial losses because of their admitted falsity is not disputed.

At the first trial the jury returned a verdict of no cause for action. In setting it aside, Judge Ewart stated that he could not escape the conclusion that "Harrison was guilty of dishonest acts knowing them to be dishonest and extending over a period from three to four months, and that as the direct result of his derelictions his employer was caused to suffer the loss of a large sum of money"; he expressed the view that reasonable minds could reach no other conclusion. At the second trial the plaintiff's motion for direction of judgment was denied and the jury again returned a verdict of no cause for action. The plaintiff then moved for judgment notwithstanding the verdict or a new trial. Judge

Colie granted the motion for final judgment in the plaintiff's favor and in his oral conclusions pointed out that the evidence was "uncontradicted and unchallenged in any way" and established that Harrison was "dishonest" within the contemplation of the bond coverage; he expressed the view "that the law in New Jersey is that where an employee, as in this case, is employed to perform a series of acts and to certify a set of facts on physical inspections, and that employee certifies to those facts, without having made the physical inspection, that then, intent to harm his employer becomes an irresistible inference, from that course of conduct having been pursued over a long period of time with the employee's full knowledge, that he is unfaithful to his employer; that he further lacks integrity and that brings him squarely within the definition of 'dishonest,' as it is stated in all of the standard dictionaries that I have examined and I have examined a number."

It is generally recognized that fidelity bonds indemnifying employers against dishonest acts of their employees are to be broadly construed. 9 Appleman, Insurance Law and Practice, 566 (1943); 5 Couch, Cyclopedia of Insurance Law, 4353 (1929). Cf. Schneider v. New Amsterdam Cas. Co., 22 N.J. Super. 238, 242 (App. Div. 1952). Here its comprehensive title, "Brokers Blanket Bond," and its wide coverage of "Fidelity" losses through "dishonest, fraudulent or criminal" acts of employees, evidence the clear intent to protect the employer against employees' wrongful acts which, though not criminal, nevertheless display significant lack of probity, integrity or trustworthiness. See Exeter Banking Co. v. Taylor, 85 N.H. 458, 160 A. 733, 735 (Sup. Ct. 1932), where the court aptly remarked that the words fraud and dishonesty as used in indemnity bonds "are broadly interpreted to include any acts which show a want of integrity or a breach of trust," and Citizens' Trust & Guaranty Co. of West Virginia v. Globe & Rutgers Fire Ins. Co., 229 F. 326, 330 (4 th Cir. 1915), where Judge Woods noted that these terms extend beyond acts which would be criminal (cf. Report of the Committee on the Revision of the Law of Evidence

to the Supreme Court of New Jersey, 44 (1955)) and are "to be given a broad signification and taken most strongly against the surety company." See also Note, Act or Default of Employee Covered by Fidelity Bond or Insurance, 77 A.L.R. 861, 863 (1932), 98 A.L.R. 1264, 1266 (1935). The absence of any motive of personal profit or gain does not establish that the wrongful act of the employee was not dishonest; see United States Fidelity & Guaranty Co. v. Egg Shippers' S. & F. Co., 148 F. 353, 355 (8 th Cir. 1906), where the court, in characterizing an employee's conduct as dishonest within the meaning of a fidelity bond, said:

"The test is not whether he intended to personally profit by his course, though that he did is perhaps a permissible inference from the facts shown. He occupied a position of trust and confidence which he secretly betrayed. He received compensation for guarding the interests of his employer and he was willfully, intentionally, and grossly faithless."

But it is true that evidence of mere neglect or incompetence would not bring the matter within the coverage of a bond indemnifying against dishonest acts of employees; see Irvin Jacobs & Co. v. Fidelity & Deposit Co. of Md., 202 F.2d 794, 798, 37 A.L.R. 2 d 889 (7 th Cir. 1953), where the court, after reaffirming the doctrines that indemnity bonds are to be liberally construed and that there need be no showing that the "employee personally profited by his acts," said:

"However, mere negligence, mistake, or error in judgment would not ordinarily be considered a dishonest act. Acts resulting from incompetence cannot be characterized as dishonest."

In the oft-cited case of World Exchange Bank v. Commercial Casualty Ins. Co., 255 N.Y. 1, 173 N.E. 902, 903 (1930), a bank teller cashed checks which he believed to be good; he knew that they were drawn against uncollected items and there was a bank rule prohibiting such payments without the approval of the president or other officer. Chief Judge Cardozo, in an opinion delivered for the New York Court of Appeals, held that the quality of

the teller's act was "not so obvious and determinate as to exclude opposing inferences" and that the question as to whether the teller's conduct was dishonest within the meaning of an indemnity bond was a proper one for jury determination. Many other cases may readily be found in which courts have held that under the particular evidence there presented the issue of whether the employee's act was dishonest within the bond coverage was for the jury to decide. See e.g., Irvin Jacobs & Co. v. Fidelity & Deposit Co. of Md., supra; Exeter Banking Co. v. Taylor, supra; Hansen v. American Bonding Co. of Baltimore, 183 Wash. 390, 48 P. 2 d 653 (Sup. Ct. 1935); Universal Credit Co. v. United States Guarantee Co., 321 Pa. 209, 183 A. 806 (Sup. Ct. 1936). However, these cases do not question the well settled principle that where the court finds that the facts are uncontroverted and reasonably permit of but a single conclusion it becomes its duty to direct a judgment in accordance with its own interpretation of the bond coverage. See Brandon v. Holman, 41 F.2d 586 (4 th Cir. 1930); Hall v. Aetna Casualty & Surety Co., 89 F.2d 885 (2 d Cir. 1937), certiorari denied 302 U.S. 725, 58 S. Ct. 47, 82 L. Ed. 560 (1937). Cf. Cleary v. Meyer Bros., 114 N.J.L. 120, 124 (E. & A. 1935); I. Hausman & Sons, Inc. v. Central Home Trust Co., 118 N.J.L. 104, 109 (E. & A. 1937); Esposito v. G.O.K. Enterprises, Inc., 137 N.J.L. 400, 401 (Sup. Ct. 1948). In the Brandon case, supra [41 F.2d 588], a very aged cashier of a bank permitted the misuse of bank funds to help a glass company in which he and his family were interested; in sustaining a judgment for the bank against the American Surety Company which had indemnified it against dishonest acts of its employees, the court said:

"It was the duty of the judge below, under the circumstances, to direct a verdict for the plaintiff. The rule laid down by the Supreme Court of the United States is that a verdict should be directed when the evidence given at the trial, with all inferences that the jury could justifiably draw from it, leads to but one conclusion. Delk v. St. Louis & S.F.R. Co., 220 U.S. [580] 587, 31 S. Ct. 617, 55 L. Ed. 590; A.B. Small Co. v. Lamborn & Co., 267 U.S. 248, 45 S. Ct. 300, 69 L. Ed. 597. This court has repeatedly held

to the same effect. Anderson v. Southern Ry. Co. (C.C.A.) 20 F. (2 d) 71; Lamborn v. Woodard (C.C.A.) 20 F. (2 d) 635; Flannagan v. Provident Life & Accident Ins. Co. (C.C.A.) 22 F. (2 d) 136; Lyon v. Travelers' Protective Ass'n of America (C.C.A.) 25 F. (2 d) 596; Livingston v. Atlantic Coast Line R. Co. (C.C.A.) 28 F. (2 d) 563; Standard Oil Co. v. Cates (C.C.A.) 28 F. (2 d) 718.

The court below properly directed a verdict for the plaintiff. and the judgment is accordingly


See also the Hausman case, supra, where the Court of Errors and Appeals in sustaining a judgment entered for the defendant in the plaintiff's action for recovery under a lease, said:

"The rule of law is firmly settled in this court by a long line of cases that the construction and effect of written instruments is a matter of law to be determined by the court and not by the jury, unless construction depends upon extrinsic facts which are in dispute. Grueber Engineering Co. v. Waldron, 71 N.J.L. 597; Sommer Faucet Co. v. Commercial Casualty Insurance Co., 89 N.J.L. 693; Downs v. New Jersey Fidelity and Plate Glass Insurance Co., 91 N.J.L. 523; McLaren v. Marmon-Oldsmobile Co., 95 N.J.L. 520, 524; John S. Geiger Sons, Inc., v. [Edward M.] Waldron, Inc., 100 N.J.L. 93. Tested by that rule, the court was justified in controlling the jury by a binding instruction directing a verdict in favor of the defendant. Coyle v. Griffing Iron Co., 63 N.J.L. 609; Vandergrift Construction Co. v. Camden, etc., Railway Co., 74 N.J.L. 669; Cleary v. Meyer Bros., 114 N.J.L. 120. We are of the opinion that the proofs would not have supported any other verdict."

Admitted or established thefts by an employee would be considered by all courts to be dishonest within indemnity bond coverage regardless of any heart-rending circumstances which may have induced them; and acknowledgment that the stolen funds were not intended for the employee's personal gain or profit and were intended to be restored without harm to the employer would not be pertinent. The decent administration of justice could not tolerate the spectacle of a jury finding that such thefts were to be deemed not dishonest within indemnity bond provisions; it seems to us that in the instant matter we likewise could not properly stand by and permit the jury finding that the

admitted derelictions of Harrison were not dishonest within the bond coverage. We are not dealing with an instance of neglect, mistake or incompetence; nor are we dealing with an isolated inadvertent or insignificant delinquency by an employee. What Harrison did was done willfully and was continued over a period of four months. On 92 occasions he certified that he had made personal inspections when he knew that such certifications were false and that his employer, being unaware of their falsity, would disburse large sums in reliance thereon. He deliberately failed to tell his employer that he was not making personal inspections because he was afraid he would lose his job; and this though he knew that the very purpose for which he was hired as inspector was to make personal inspections and to issue his certifications on the basis thereof. Under the admitted facts he palpably was faithless to his trust and deceived his employer; it matters not that his conscious deceptions may not have been accompanied by intent to cause actual monetary loss to his employer and may have been induced by motives of personal comfort or convenience rather than personal profit or gain for, in any event, his conduct was morally as well as legally wrongful. In the light of all of the foregoing we are convinced that Harrison's misconduct must fairly be held to be the type of action which fell within the reasonable and proper coverage expectations of the parties to the fidelity bond issued by the defendant to the plaintiff.

No useful purpose would be served by further discussion of the out-of-state cases relied upon by the Surety Company where the courts viewed the particular facts presented to them as permitting differing inferences as to the employee's honesty; as we view the entire record in the instant matter, all of the material evidence was uncontroverted and permitted of but one reasonable conclusion, namely, that Harrison's acts were dishonest within the wide contemplation of the defendant's indemnity agreement. Accordingly, the trial court should have ...

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