#### SOUTHERN SURETY COMPANY *v.*BAGLIN.

Bonds; Principal and Surety; Fraud.

In an action by the obligee against the surety on a bond under seal which recited that the obligee had loaned to the principal obligor bonds which were to be returned within a specified time, and conditioned upon the return of the bonds within that time, evidence on behalf of the defendant is admissible which tends to show that the plaintiftnever in fact loaned the bonds to the principal obligor, and that the defendant was induced to execute the bond by means of a fraudulent conspiracy between the plaintiff and the principal obligor, whereby the former was to pretend to loan the bonds to the latter. (Citing *Lyons*v. *Allen,*11 App. D. C. 543, and distinguishing *United States*v. *Boyd,*8 App. D. C. 440.)

No. 2193.

Submitted December 6, 1910.

Decided April 3, 1911.

Hearing on an appeal by the defendant from a judgment <of the Supreme Court of the District of Columbia, on a verdict ■directed by the court, in an action on a bond against the surety.

*Reversed.*

the Court in the opinion stated the facts as follows:

This is an appeal from the judgment of the supreme court ■of the District of Columbia in a suit upon a bond. the declaration alleged that the appellant, the Southern Surety Company, •defendant below, was indebted to the appellee, George Baglin, plaintiff, on a certain bond executed and delivered by defendant to plaintiff on July 10, 1907, conditioned that one Garrett JB. Linderman should return to plaintiff on or before Septem*17ber 25th, following, certain government bonds, known as “Old 4’s,” of the par value of $45,000. The declaration was in two counts, the first declaring upon the obligatory part of the bond only, and the second setting out also the condition.

To the declaration defendant interposed the pleas that it was not indebted to plaintiff; that plaintiff never loaned the government bonds to Linderman; that the bond was obtained by means of a fraudulent conspiracy between plaintiff and Linderman, whereby plaintiff was to pretend that he was to lend, or about to lend, the government bonds, with a secret agreement -between them, unknown to defendant, that the bonds should not in fact be loaned; that plaintiff, instead of lending the government bonds to Linderman, sold them within six hours after his purchase thereof, and appropriated the money to his own use, with the purpose of defrauding defendant; that by the action of plaintiff in furtherance of said conspiracy in altering and abandoning the agreement between himself and Linderman for the performance of which the bond in suit was given, Linderman was unable to fulfil his obligation to defendant ; that after the execution of the bond, and without the knowledge of defendant, plaintiff and Linderman entered into an agreement whereby plaintiff released Linderman from the obligation of returning the bonds, agreeing to take the value thereof instead; that the entire transaction on the part of plaintiff was to secure by this means sufficient money to satisfy an outstanding obligation from Linderman to plaintiff; that a portion of the money received by plaintiff from the sale of the bonds was used to pay Linderman’s indebtedness to plaintiff, and that, by reason of the fraud so practised by plaintiff, defendant is released from any obligation on its bond.

The transaction out of which this suit arose is in fact between Linderman and one Augustus Heinze, plaintiff being an employee of Heinze, and apparently used as a figurehead to keep Heinze’s name out of the transaction. It was originally intended to obtain a loan of $200,000 from the Metropolitan Trust Company, of New York, to be secured by 6,700 shares of Hnited Copper Company’s stock belonging to Heinze. It *18was agreed that $75,000 of this loan should *go*to Linderman, to be repaid on September 26, 1907, its return to be secured by a bond of the People’s Surety Company. This arrangement was embodied in an agreement between plaintiff and Linderman, dated June 19, 1907. In addition to the above condition, the agreement provided that plaintiff, on securing the loan from the trust company, should forthwith lend to Linderman, out of the proceeds, the sum of $15,000, to be secured by Linderman’s one-day note, and that, as soon as Linderman should obtain a bond from the surety company to secure the repayment of the entire $75,000, the remaining $60,000 should be paid to him by plaintiff, and the one-day note canceled.

It appears that, after the $15,000 loan was made, it was ascertained that the surety company would not enter into a bond to secure the return of money; whereupon, in Heinze’s office in New York, another method of procuring a security bond was suggested. Pursuant to the suggestion, Linderman secured a bond from the Title Guaranty & Surety Company to secure the return to plaintiff of “Old 4” government bonds of the par value of $30,000, and secured the bond in question from defendant company to secure the return to plaintiff, on or before September 25, 1907, of United States government bonds of the denomination of “Old 4’s” of the par value of $45,000. The condition of the bond is as follows:

“That the Southern Surety Company * * * is held and firmly bound unto George Baglin, in the city of New York, in the sum of Forty-five thousand dollars ($45,000), to be paid to the said George Baglin, his heirs and assigns, at its office in the city of New York, the payment whereof well and truly to be made and done, the said company binds itself, its successors and assigns firmly by these presents. Sealed with its seal and dated this 10th day of July, 1907.

“Whereas, the said George Baglin has loaned, or is about to loan, to Garrett R. Linderman, of South Bethlehem, Pennsylvania, United States government bonds known as “Old 4’s” of the par value of forty-five thousand dollars ($45,000), redeemable after July 1, 1907; and

*19“Whereas, the said Linderman has promised that he will return to the said Baglin the aforementioned securities, on or before September 25, 1907.

“Now the condition of this obligation is such that if the said Garrett R. Linderman, his heirs, executors, and administrators shall and do return to the said George Baglin, his executors, administrators, and assigns, the said above-mentioned securities, on or before said 25th day of September, 1907, then this obligation shall be void; otherwise to remain in full force and effect.”

On July 17th, after the bond in suit had been given, and shortly before the government bonds were delivered, a further agreement was entered into between plaintiff and Linderman, providing that plaintiff, instead of lending $75,000 in cash, as provided in the previous agreement, should invest that sum in “Old 4” government bonds, Linderman to furnish whatever money was necessary over and above $75,000 to purchase the bonds up to that par value. It was agreed that the bonds should thereupon be loaned by plaintiff to Linderman upon repayment of the $15,000 previously loaned to Linderman. It was also provided that Linderman should return to plaintiff the “Old 4’s” or other bonds of the description and par value above referred to on September 26, 1907, Linderman to furnish surety company bonds conditioned for such return on that date, and to pay contemporaneously with the execution of the •agreement the $15,000 loaned to him pursuant to the terms of the agreement of June 19th. At the time of the execution of this new agreement, the bond in suit had been executed by the defendant company for seven days, and had been examined by plaintiff and his counsel, and was there present and ready for delivery.

It appears to have been the plan of the parties to convert the bonds into money to pay the $15,000 loaned by plaintiff to Linderman, and to permit Linderman to get the remaining $60,000. Linderman seems to have been unwilling to sell the bonds without some authority from plaintiff, whereupon it was further stipulated by another contract executed by plaintiff *20and Linderman, among other things, as follows: “Mr. Baglin also represents hereby to Mr. Linderman that it is his desire and intention at the time when said bonds would be returnable pursuant to the aforementioned agreements to accept from Mr. Linderman the face value of said bonds in cash, with interest at (6%) per cent, in lieu of the return of the bonds themselves.”

It further appears that immediately upon receipt of the government bonds, which were sent to Heinze’s office, where the parties were, plaintiff and Linderman went to the cashier of the Mercantile National Bank, of New York, of which Heinze was president. Plaintiff introduced Linderman to the cashier, who was requested by them to collect the government bonds, but they were told that it was too late to make the collection that day. The cashier was then asked to advance $30,-000 to Linderman, and to account to plaintiff for the residue of the proceeds of the bonds. Whereupon the cashier gave Linderman a check for $30,000, and the following day gave plaintiff a check for the balance received on the bonds, which was applied toward the payment of the $15,000 loan originally made by plaintiff to Linderman.

On September 26th, the parties and their counsel had an interview at the Mercantile National Bank at which a demand was made upon Linderman to either pay the loan of $75,000, with accrued interest, or to return the bonds, when Linderman admitted his inability to comply with either demand. Papers indicating what occurred at this meeting were prepared and signed, and at the same time notice was given the defendant company of the default of its principal.

On trial below, when the evidence had been submitted, counsel for plaintiff moved the court to strike out all evidence of fraud, misrepresentation, and deception practised upon defendant to induce it to execute and deliver the undertaking in suit. This motion was granted by the court. Counsel for plaintiff then moved the court to instruct the jury to return a verdict for plaintiff. This motion was likewise granted, and a *21verdict instructed accordingly. From the judgment entered thereon the case was brought here on appeal.

*Messrs. McNamara & Hüderhoper*and *Mr. J. J. Darlington*for the appellant.

*Mr. Dean Emery*and *Mr. Henry P. Blair*for the appellee.

Mr. Justice Yan Orsdel

delivered the opinion of the Court:

The sole question necessary to the determination of this appeal is involved in the granting of the motion to strike out the evidence of fraud. This motion was granted in response to the general rule of law that evidence of fraud affecting the execution of a contract under seal is inadmissible as a defense in an action at law upon the contract.

It is well settled that by the execution of a bond, and its return to the principal, for delivery to the obligee, the surety becomes estopped from setting up any condition not known to-the obligee, upon which the surety’s signature was obtained. *United States*v. *Boyd,*8 App. D. C. 440; *Dair*v. *United States,*16 Wall. 1, 21 L. ed. 491. But that is not this ease. The defense here relied upon is that plaintiff, the obligee, knew of the misrepresentations made to defendant by Linderman, and was a co-conspirator in securing the bond under such false representations. Plaintiff’s guilty knowledge of the methods employed by Linderman to induce defendant to execute the bond is the basis of the defense interposed by defendant. It matters not that the bond was not in fact formally delivered to-plaintiff until after all his contracts had been made with Linderman. There is evidence that plaintiff and his attorney examined the bond before the last agreement was made, whereby he waived the return of the government bonds, and, pursuant to' which, he looked after the negotiation of the government bonds,, placing them beyond the power of Linderman to return.

It is contended by counsel for plaintiff that the false representations alleged to have been made by Linderman only affected *22the consideration for the giving of the bond, and that the defense is not available as a defense in an action at law on the bond, since the bond was executed under seal, which, at law, imports a good and valid consideration. On the facts disclosed, we are not impressed with this contention. The fraud disclosed by the answer, and of which there is evidence, does not go to the consideration alone, but more directly to the instrument itself. If the evidence is to be believed, the instrument in suit is one upon which the minds of the parties never met. Linderman, by his conspiracy with plaintiff, was in fact procuring a bond to secure the payment of money by Linderman to plaintiff, while defendant executed a bond to secure the return of certain described government bonds. The deceit of Linderman, with the full knowledge and consent of plaintiff, did not involve the consideration for the execution of a valid contract, but it extended to the fraudulent securing of a contract which defendant had refused to make.

The court below based its holding upon the decisions of the Supreme Court in *Hartshorn*v. *Day,*19 How. 211, 15 L. ed. 605, and *George*v. *Tate,*102 U. S. 364, 26 L. ed. 232. In those cases the defense of fraud related solely to the consideration, and not, as in this case, to the thing to he done. In *George*v. *Tate,*the instrument was a bond for the release of property about to be attached. The defense was the fraudulent misrepresentation that the property had been attached, and that, by reason of the false representation, the surety had signed the bond.

It is uot difficult to distinguish that case from the one at bar. The alleged fraud there amounted only to misrepresentation to induce the surety to sign a bond which in fact recited the truth, not that the property had been attached, but “was .about to be attached.” The following rule announced in that ■case, we think, clearly distinguishes it: “It is well settled that ■the only fraud permissible to be proved at law in these cases Is ■fraud touching the execution of the instrument, such as misreading, the surreptitious substitution of one paper for another, or ¡obtaining by some other trick or device an instrument which the *23party did not intend to give. *Hartshorn*v. *Day,*19 How. 211, 15 L. ed. 605; *Osterhout*v. *Shoemaker,*8 Hill, 513; *Belden*v. *Davies,*2 Hall, 433; *Franchot*v. *Leach,*5 Cow. 506. The remedy is by a direct proceeding to avoid the instrument. *Irving*v. *Humphrey,*Hopk. Ch. 284.”

In *Pacific Mut. L. Ins. Co.*v. *Webb,*84 C. C. A. 603, 157 Fed. 155, 13 A. & E. Ann. Cas. 752, the distinction is stated as follows: “The conclusion from all the cases in the Supreme Court is that the only fraud which may be availed of in an action at law to avoid a formally executed release of the claim sued on is misrepresentation, deceit, or trickery practised to induce the execution of a release which the signer never intended to execute, and upon which the minds of the contracting parties never met, and does not include any of those misrepresentations of fact which may be resorted to in order to persuade the claimant to agree to the release as actually made.”

In the present case, the alleged fraud consisted in inducing defendant to become a surety on a bond for the return of certain government bonds which it was stated in the instrument plaintiff had delivered, or was about to deliver, to Linderman, when, in fact, if certain of the evidence is’to be believed, the bonds had not been delivered, and never were to be delivered. In other words, defendant was induced by these alleged misrepresentations to secure the performance of an act which plaintiff had, as the logical result of the alleged conspiracy, rendered impossible. By this alleged misrepresentation and trickery, defendant was induced to guarantee the return, not of the bonds, but of the money. It therefore gave a contract which it did not intend to give.

This is not a ease where the alleged false representations are *dehors*the record, and might be treated as a consideration for securing a bond valid on its face. But here the false representations appear on the face of the instrument, and constitute the thing to be done. It has been held by this court that where a release executed under seal had been procured by fraud and deception, the facts might be shown in evidence to avoid the effect of the instrument in an action at law. *Lyons*v. *Allen,**2411 App. D. C. 513. In that case Chief Justice Alvey, speaking for the court, said: “But if the release was, as contended by the plaintiff, procured from him by any fraudulent device or deception, and he has not subsequently ratified it, he may show the facts in evidence, and avoid the release in an action at law, when set up as a bar to the action. Formerly, this right of avoiding a release under seal, on the ground of fraud, in an action at law, when set up as a defense to the action, was generally denied, and the party was referred to a court of equity, in jurisdictions where the remedies at common law and equity are separate. But it is now generally held, by a great preponderance of the authority, that a release so set up as a defense may be avoided at law.”

The condition here sought to be imposed upon defendant is one to which it never agreed to be bound, and which was not within its contemplation when the bond was executed. That it was never intended by plaintiff and Linderman that the bonds-should be returned by Linderman to plaintiff, that the bonds-in fact never passed into the possession of Linderman; and that it was not intended by them at the time that the bonds, should pass into the hands of Linderman, are facts supported-by evidence in the record, which should have been submitted to' the jury to determine, as a matter of fact, whether or not the alleged fraud was committed. If the alleged fraud is found by the jury to have been perpetrated upon’ defendant, with the knowledge of plaintiff, it forms a complete defense to this action.

The judgment is reversed, with costs, and the cause remanded; for a new trial. *Reversed.*