Case Name: SALLEY GROCER COMPANY, Inc., Plaintiff-Appellee, v. HARTFORD ACCIDENT AND INDEMNITY COMPANY, Defendant-Appellant
Court: Louisiana Court of Appeal
Jurisdiction: Louisiana
Decision Date: 1968-12-03
Citations: 223 So. 2d 5
Docket Number: No. 11120
Parties: SALLEY GROCER COMPANY, Inc., Plaintiff-Appellee, v. HARTFORD ACCIDENT AND INDEMNITY COMPANY, Defendant-Appellant.
Judges: Before AYRES, BOLIN and PRICE, JJ-
Reporter: Southern Reporter, Second Series
Volume: 223
Pages: 5–14

Head Matter:
SALLEY GROCER COMPANY, Inc., Plaintiff-Appellee, v. HARTFORD ACCIDENT AND INDEMNITY COMPANY, Defendant-Appellant.
No. 11120.
Court of Appeal of Louisiana. Second Circuit.
Dec. 3, 1968.
On Rehearing April 1, 1969.
Writ Refused June 9, 1969.
Mayer & Smith, Shreveport, for appellant.
Lunn, Irion, Switzer, Johnson & Salley, Shreveport, for appellee.
Before AYRES, BOLIN and PRICE, JJ-

Opinion:
AYRES, Judge.
This is an action upon a fidelity bond denominated a "blanket crime policy" where in defendant bound itself, subject to certain specified terms, conditions, and limitations, to pay plaintiff, as the assured, for the loss of money, securities, or other property "which the Insured shall sustain through any fraudulent or dishonest act or acts committed by any of the Employees, acting alone or in collusion with others."
Through the defalcation in 1966 of one of its employees, H. Drew Hearne, plaintiff allegedly sustained a loss of $16,106.24, reimbursement of which plaintiff seeks from defendant, as well as the recovery of penalties and attorneys' fees, for the alleged arbitrary refusal of defendant to pay the claim.
From a judgment in favor of plaintiff for the principal sum, defendant appealed. By answer to the appeal plaintiff prays that the judgment be amended by the allowance of penalties and attorneys' fees.
Alleging a prior defalcation of Hearne in 1958, defendant contends the bond no longer afforded coverage for this employee. The defense is based upon the language of the policy which provides:
"The coverage of this Policy shall not apply to any Employee from and after the time that the Insured or any partner or officer thereof not in collusion with such Employee shall have knowledge or information that such Employee has committed any fraudulent or dishonest act in the service of the Insured or otherwise, whether such act be committed before or after the date of employment by the Insured."'
Whether the employee's conduct in 1958 constituted fraudulent or dishonest acts is a question presented for determination. An answer in the affirmative would present another crucial question as to whether plaintiff or any of its officers had knowledge or information of the employee's acts. These questions must be resolved from the facts and circumstances established by the record.
Plaintiff has engaged in the wholesale grocery business since 1935. Its principal office and warehouse are located in Shreveport. Branch offices and warehouses are located in Monroe and Bernice. Hearne was employed as a salesman for 12 or 13 years prior to the alleged defalcation of 1966. He worked out of the Monroe office of which Charles Fred Salley, Sr., was manager. The territory over which Hearne served as salesman consisted generally of northeast Louisiana. He called weekly on his customers, about 125 in number, at the rate of 20-30 per day. His sales averaged $35,000.00 to $40,000.00 per month. He made the sales, fixed the terms of credit, and made the collections. At the conclusion of each day's services he made his reports which, together with the collections, were placed in a safe overnight. These were processed by office personnel the following day.
Sales and collections were made weekly; collections were for the sales of the preceding week. Three copies of invoices were made — a first sheet, a second sheet denominated an "original," and a delivery sheet. One of these was delivered to the customer. Collections were generally made on an invoice basis; that is, upon payment of each invoice, the salesman would mark the customer's copy "Paid."
Plaintiff's salesmen were granted much leeway and were permitted to exercise considerable discretion in the conduct of their operations in making sales and collections. They were not required, after making collections, to remit to the employer the precise checks or cash received by them. Salesmen, in some instances, would use cash received in prior collections to cash checks for other customers or to adjust differences in checks received in the payment of accounts. It was permissible to remit collections by means of the salesmen's personal checks. Though described as an excellent salesman, Hearne was characterized as a very bad collector.
With respect to the incident of 1958, upon which defendant relies to establish its primary defense, Charles Fred Salley, Sr., plaintiff's manager, testified Hearne reported to him that the accounts of some of his customers were out of balance and expressed a desire to get them "straightened out," whereupon, without further inquiry, Hearne was referred to one of plaintiff's bookkeepers for assistance in reconciling the accounts. This reconciliation disclosed to the bookkeeper that there was a deficit in Hearne's remittances of $1,984.86. Thereupon Hearne delivered his personal check to the bookkeeper to cover this deficit. The funds thus received were credited to the appropriate accounts. The conclusion of the matter was not immediately made known to Salley, but the bookkeeper, several days later, reported to him that the matter had been taken care of.
Of primary importance are the questions (1) as to whether Hearne's conduct of 1958 warrants a conclusion that his acts were fraudulent or dishonest within the intent and purpose of the bond, and (2) whether plaintiff or any of its officers had knowledge or information that the employee's acts were fraudulent or dishonest.
If Hearne's acts in 1958 should be judged in the light of his defalcation eight years later, it might appear reasonable to infer that his prior acts were fraudulent and dishonest. However, no connection between the two incidents was shown, particularly of a continuous course of conduct. The latter incident was too remote to establish the employee's intent and purpose eight years prior thereto. Therefore, the employee's acts of 1958 must be judged independently of those of 1966.
Hearne, as a witness for defendant, testified he had no intent whatsoever to commit a dishonest act or to defraud his employer. His acts in reporting the discrepancies to his manager, in expressing a desire to straighten his accounts, and, subsequently, in making payment, tend to support his testimony.
If the salesman's acts could be characterized as fraudulent and dishonest, the record makes it very clear that neither plaintiff nor any of its officers had any knowledge or information they were of that character. Plaintiff's officers testified they had no such knowledge. Subsequent actions confirm this fact. Hearne was continued in his employment for eight years following the incident of 1958. In the meantime his wife was employed and served in the bookkeeping department of the business. No showing was made that any suspicion had been aroused in Salley, his assistant manager, or other of the office personnel as to Hearne's honesty. The manager made no report of the incident to fellow officers of plaintiff corporation, who were his brothers, apparently because of the insignificance of the incident.
Generally, in the absence of proof to the contrary, there is a presumption that all men act fairly, honestly, and in good faith. Kalpakis v. Kalpakis, 221 La. 739, 60 So.2d 217, 33 A.L.R.2d 1224 (1952); Curran & Treadaway v. American Bonding Co., 193 La. 763, 192 So. 335 (1939).
The purpose of contracts of fidelity insurance is to obtain full indemnity for the acts of the person bonded, and that purpose should not be defeated unless a clear case of breach of his obligation by the person for whose protection the bond is written is presented. Thus, an employee who becomes indebted to his employer through mistake or carelessness or through application of funds of his employer for his personal use, with no intent to defraud, is not guilty of embezzlement or of a dishonest act within the intent of the bond. Therefore, the fidelity bond indemnifying against loss by any act of fraud or dishonesty of a bonded employee covers only loss from acts of fraud or dishonesty, and the loss must be actually suffered by the employer to warrant recovery on a bond conditioned against the dishonesty of an employee. The mere fact that a shortage is found does not justify a finding of fraud and dishonesty. Nor is a mere discrepancy in an employee's accounts sufficient to establish dishonesty within the intent of a fidelity bond in view of the rule of law that every man is presumed to be honest until the contrary is established.
In the case of Curran & Treadaway v. American Bonding Co., supra, it was held that a corporate employer was not barred from recovery on a fidelity bond containing a provision that the bond should terminate upon the discovery by the employer of any fraudulent or dishonest act on the bonded employee's part, though the employer's president admitted that the employer had given the employee, a former collector, a check to enable him to make good a shortage in his accounts with another party, for whom he was collecting rents, where there was no showing that the collector took any money of the other party with the criminal intent of depriving him of its use and benefit. In this connection the court stated:
"It is to be observed that while every act of embezzlement involves a shortage, every shortage does not involve an act of embezzlement. A shortage in the accounts of an employee causing loss to an employer may result from mistake, disobedience of orders, or bad judgment, and not from any wrongful intent on the part of the employee. Thus, it has been held that an employee who becomes indebted to his employer through mistake or carelessness, or using funds of the employer for his personal use with no intent to defraud, is not guilty of embezzlement and therefore of a dishonest act within the meaning of a fidelity bond." 192 So. 335, 337.
In the case of Bank of Commerce & Trust Co. v. Union Indemnity Co., 174 La. 1014, 142 So. 156 (1932), the defendant issued to plaintiff its policy covering loss "through any dishonest act whatever" on the part of an employee which was to expire on written notice, or "immediately upon the discovery by the Insured of a default hereunder on the part of such employee." There a cashier, on August 21, 1930, was found to have taken from the bank's cash the sum of $150.00 for which he placed in his till his due bill for that amount. His salary was $150.00 per month and he intended to repay the amount by services to be rendered in the ensuing month. The employee, however, was requested to and did resign about December 31, 1930, after which it was discovered that he had embezzled $12,545.00 which he had covered by forged, fictitious, and unauthorized notes. In rejecting the defense that the bond as to the employee expired on August 21, 1930, when the bank discovered the shortage of the $150.00, the court stated:
"We are of opinion that the defense is without merit. The policy of June 9, 1930, covered only dishonest acts, and there could be no default on that policy except by dishonesty. And, before denouncing an employee to his bondsman as dishonest, an employer has a right to satisfy himself that the employee is in fact dishonest, and need not do so on mere suspicion. American Surety Co. v. Pauly, 170 U.S. 160, 18 S.Ct. 563, 42 L. Ed. 987." 142 So. 156, 157.
In the cases cited, the policy provisions relied upon were of the same import as the one under consideration in this case. The defense was the same and the courts found that the acts of the employees were not, in themselves, fraudulent or dishonest. In the instant case there is no showing in the record that Hearne had any criminal intent, by his acts of 1958, of defrauding plaintiff or of acting dishonestly, for, as stated, he voluntarily reported the discrepancies in his accounts, expressed a desire to straighten them out, and, moreover, gave his own check to make appropriate adjustments in the accounts. The words "fraudulent or dishonest act" imply positive acts of wrongdoing, the discovery of which releases the insurer of its obligation on the bond.
Discovery is an important element, and one of the questions for determination in this case is: Did plaintiff acquire knowledge of any positive act of dishonesty committed by Hearne which would, under the provisions of the bond, immediately effect its termination? This question, we think, must be answered in the negative.
Our conclusion is that defendant has not established that Hearne committed a fraudulent or dishonest act in 1958 or that plaintiff or any of its officers had knowledge of such an act, if committed, that would serve under the provisions of the bond, to which we have referred, to effect its cancellation as to the employee in 1958.
Lastly, defendant attacks the sufficiency of the evidence to establish the extent or the amount of the loss sustained by plaintiff. The record discloses that knowledge of Hearne's defalcation in 1966 was acquired after he had an accident. His absence from his employment required that his customers be served by Samuel Joseph Tubbs, Jr., plaintiff's assistant manager in Monroe. The loss was established through a comparison, made by Tubbs, of the invoices in plaintiff's possession, evidencing sales and deliveries of merchandise, with the copies in the customers' possession which Hearne had marked "Paid" for which no remittance had been made by the salesman to his employer. From this investigation the loss was determined and listed.
Neither invoices evidencing the sales allegedly made, nor records showing delivery of the merchandise purportedly sold, nor. receipts for the payments said to have been made to plaintiff's salesman were placed in evidence. No effort was made to establish these purported payments by the testimony of plaintiff's customers, by their checks, or other supporting documents. Plaintiff's former salesman, called as a witness by defendant, was not questioned under cross-examination as to either the receipt or disposition of any payments purportedly made to him.
Tubbs, plaintiff's assistant manager and witness, knew nothing of this affair except from information disclosed by his investigation, or as obtained from discussions with plaintiff's customers, or as gleaned from their records, none of which were placed in evidence. Tubbs' ultimate findings and conclusions were recapitulated in a listing, introduced in evidence, of the 32 accounts involved, with the shortage attributable to each as determined by him in the course of his investigation. Tubbs' testimony was given and the offering made despite defendant's timely and persistent objection to the effect that the testimony and offering were not the best evidence available or accessible, but that such evidence constituted matters of opinion and hearsay. These objections, in our opinion, possess considerable merit. The testimony based upon information furnished by others or obtained from records of others is hearsay and, as such, is not legal or competent. Thompson v. Brown, 163 So.2d 868 (La.App., 2d Cir. 1964).
Conclusions reached by a witness from this character of evidence, and particularly from a review of records not authenticated, constitute the witness' opinion, particularly as to the content of records viewed by him.
To permit the introduction of this character of evidence is to deprive the opposing party of the right of cross-examination of the persons providing the information or of the persons making or keeping the records reviewed. Even testimony taken in a former proceeding assumes this character and cannot be admitted in evidence against a party who did not have the right of cross-examination. Williams v. Jahncke Service, 217 La. 1078, 48 So.2d 93 (1950); Succession of Derigny, 128 La. 853, 55 So. 552 (1911); Rouyer v. Carroll, 47 La.Ann. 768, 17 So. 292 (1895).
From our review of the record, it appears obvious to us that there is better evidence by which plaintiff could have offered to establish its loss. For instance, on proper authentication, the invoice copies designated "Delivery Sheets," signed by or on behalf of the customer, would have established delivery of the merchandise purportedly sold; the customer's copies, upon which the salesman is said to have acknowledged payment, together with the customer's supporting testimony, paid checks, or other corroborating evidence would have established payments to the salesman. Plaintiff's receipt or nonreceipt of the funds collected by its salesman can be established by the testimony of those of its employees charged with that responsibility. These are mere nonexclusive examples of what we deem to be some of the legal and competent evidence which we think is available to the parties, the introduction of which may tend to either support, diminish, or defeat plaintiff's claim, a matter as to which we neither have nor express, at this time, the slightest opinion.
Under the authority of LSA-C.C. P. Art. 2164, cases may be remanded for the introduction of additional evidence when by such action the ends of justice would best be served. Magnolia Petroleum Company v. Boudreaux, 233 La. 409, 96 So.2d 650 (1957); Dietz v. Dietz, 227 La. 801, 80 So.2d 414 (1955); United Brotherhood of Carpenters & Joiners of America, etc. v. Stephens Broadcasting Co., 214 La. 928, 39 So.2d 422 (1949); Reich v. Grieff, 214 La. 673, 38 So.2d 381 (1949); Succession of Addison, 212 La. 846, 33 So.2d 658 (1947). In the instant cause, we experience a feeling of that nature.
We are, however, of the opinion that plaintiff's claim for penalties and attorneys' fees should not be concluded at this stage of the proceedings. The propriety of such an award should, in our opinion, be based upon all the facts as may be eventually included in the record, such as, for instance, defendant's investigation vel non of plaintiff's purported loss and its good or bad faith in its determination to refuse payment.
Accordingly, for the reasons assigned, the judgment appealed is annulled, avoided, reversed, and set aside; and
It is now ordered that this cause be remanded to and reinstated on the docket of the First Judicial District Court in and for Caddo Parish, Louisiana, and reopened for the limited purpose of affording to both plaintiff and defendant an opportunity to adduce further and additional evidence with respect to the extent and amount of the loss allegedly sustained by plaintiff, and as to plaintiff's entitlement vel non of penalties and attorneys' fees, and for a re-determination of these issues by the court, all in accordance with law and consistent with the views herein expressed.
Plaintiff-appellee is assessed with the cost of this appeal. The taxation of all other costs is to await final determination of this cause.
Reversed and remanded.