Case Name: ATLANTIC CITY AERIE NO. 64, FRATERNAL ORDER OF EAGLES, PLAINTIFF, DEFENDANT IN ERROR, v. INTERNATIONAL FIDELITY INSURANCE COMPANY, DEFENDANT, PLAINTIFF IN ERROR
Court: New Jersey Court of Errors and Appeals
Jurisdiction: New Jersey
Decision Date: 1912-11-18
Citations: 83 N.J.L. 583
Docket Number: 
Parties: ATLANTIC CITY AERIE NO. 64, FRATERNAL ORDER OF EAGLES, PLAINTIFF, DEFENDANT IN ERROR, v. INTERNATIONAL FIDELITY INSURANCE COMPANY, DEFENDANT, PLAINTIFF IN ERROR.
Judges: 
Reporter: New Jersey Law Reports
Volume: 83
Pages: 583–592

Head Matter:
ATLANTIC CITY AERIE NO. 64, FRATERNAL ORDER OF EAGLES, PLAINTIFF, DEFENDANT IN ERROR, v. INTERNATIONAL FIDELITY INSURANCE COMPANY, DEFENDANT, PLAINTIFF IN ERROR.
Argued March 11, 1912
Decided November 18, 1912.
A bond insuring a fraternal order against the dishonesty of its treasurer required insured’s auditing committee, as conditions precedent to the right of the obligee to recover thereunder, once quarterly to make a full and complete examination of the treasurer’s books and accounts, and verify the bank balance by comparison of the cash on hand with the check book and bank book. It also required all money coming into his custody to be deposited immediately on the next succeeding business day in a bank. It further required insured to give notice of anything of which it had knowledge likely to cause a claim on or loss to the insurer, or of any dishonest act or default of its treasurer. Held, that the “cash on hand” which the auditing committee was required to verify was the cash on deposit in the bank as shown by the books of the bank, and where the committee, merely examined the treasurer’s bank book and check book without making any inquiry at the bank, and thus failed to discover a defalcation, tbe insurer was not liable.
On error to the Supreme Court.
For the plaintiff in error, Garrison & Voorhees ¿nd Be Witt Van Buskirle.
For the defendant in error, Bourgeois & Coulomb.

Opinion:
The opinion of the court was delivered by
Kaliscu, J.
The errors assigned by the plaintiff in error for a reversal of the judgment under review are five in number, but only one of them requires consideration by the court and that one relates to the refusal of the trial judge to direct a verdict for it, the defendant below.
The plaintiff below, a fraternal order, brought an action against the Fidelity Insurance Company, the defendant below, on a bond given by the insurance company to it, to indemnify it, the plaintiff, from any loss it might sustain, by reason of the dishonesty of its treasurer, James B. Adams. Adams subsequently embezzled $943.52 from the order, and June 28th, 1910, the order notified the insurance company of its treasurer's shortage.
The bond recites: "This bond is issued by the surety and accepted by the obligee subject to the following express conditions, which shall be conditions precedent to the right of the obligee to recover hereunder." The twelfth provision of the bond provided: "The auditing committee of the obligee shall consist of other than any of the officials named herein and shall, as often as the constitution and by-laws of the obligee require, but at least once quarterly make a full and complete examination of the books and accounts of the officials, and verify the bank balance, by comparison of the cash on hand with the cheek book and bank book."
The evidence shows that Adams assumed the office of treasurer January 19th, 1909. At that time there was standing to the plaintiff's credit, in the Atlantic City National Bank, as' shown by its ledger, $489.60. The plaintiff appointed an auditing committee to audit the treasurer's account February 23d, 1909, which was a quarterly audit, required by provision 12' of the bond, and covered the month of December, 1908, and the months of January and February, 1909. This committee reported the result of its labor, March 23d, 1909, to the plaintiff, to the effect that after a full inspection of the books it found the balance stated therein to be correct.
The evidence further showed that January 26th, there was turned over to the treasurer $176.85; February 2d, $205.95; February 9th, $240.55; February 16th, $69.15, and February 23d, $77.65.'
The bank's ledger showed that there were no records of any deposits of $240.55, received by the plaintiff's treasurer February 9th, nor of '$69.15, received by him February 16th, nor of $77.65, received by him February 23d.
The ledger further showed that March 1st, 1909, the plaintiff's balance, in bank, was $473.96, whereas from the testimony . of Mr. Gillison, one of the plaintiff's auditors, it appears that the treasurer ought to have had at that time, according to the books inspected by them, a balance to the plaintiff's credit of $883.21.
It is evident from this testimony that Adams was a defaulter before March 1st, 1909, to the extent of $409.25.
It is also self evident that if the auditing committee had complied with the twelfth provision of the bond, the defalcation would have been discovered and the further peculations which took place by its treasurer prevented. It was the duty of the plaintiff under the third provision of the bond to give immediate notice of anything of which the obligees have knowledge, likely to cause a claim on or loss to the surety or of any dishonest act or default of any official. Compliance with provision 12 of the bond and prompt action by the plaintiff in notifying the surety would have enabled it to take such immediate legal steps which might have resulted in its obtaining a re-imbursement for its loss. And besides it was a duty resting on the obligee according to the seventh provision of the bond to render every assistance, not pecuniary, capable of being rendered to bring the defaulting official to justice and enable the surety to be re-imbursed for such loss as it shall have sustained.
The essential requirements of provision 12 of the bond are— first, the auditing committee shall at least once quarterly make a full and complete examination of the books and accounts of the officials; second, it shall make this full and complete examination, by verifying the bank balance, by comparison of the cash on hand with the check book and bank book.
The evidence shows that the auditing committee complied with tire first essential requirement, but it disregarded the second and most essential requisite, by failing to verify the bank balance, by comparison of the cash on hand with the check book and bank book. The treasurer is not supposed to have any cash on hand. The cash on hand refers to the cash on hand as appears by the books in the bank. This is made clear by provision 13 of the bond, which requires that all moneys coming into the custody of the treasurer shall im mediately and on the next succeeding business day be deposited by him in the bank in the name of the obligee. Therefore it is apparent that the only place where the auditing committee could have, ascertained the actual amount of cash on hand was at the bank. And this is the one of the safeguards against dishonest accounts that is within the contemplation of provision 12.
It is a verification by a comparison of the cash on hand, as shown by the bank balance in the books of the bank, and the accurate amount of which must of necessity be ascertained from the bank, an independent and reliable source, and by comparing such balance with the check book and bank book in the possession and under the control of the treasurer.
If this be not so then the required verification is no verification at all but simply an idle and useless ceremony, so far as the surety is concerned.
It was never intended that the verification should consist only of a comparison of the account of the books of the order, more or less under the control of its officials, and the correctness of whose accounts is under investigation. The evidence clearly demonstrates that by reason of the fact that the auditing committee failed to make the verification as required by provision 12, of the bond, in making its quarterly audit ending March 1st, it failed to detect the embezzlements made by its treasurer, amounting to more than $400, which resulted in the retention of a dishonest official in a position of trust, who, it appears, continued to embezzle the plaintiff's moneys until the total of his defalcations at the time he fled from justice pending the quarterly auditing of his account for the quarter ending June 1st, amounted to $943.52,-the amount sued for by the plaintiffs and for which it had judgment with interest.
The testimony shows that the bank book was taken away by the treasurer in his flight, so that it could not be ascertained whether the entries of the deposits evidenced thereby were really made by the bank or were forgeries.
The defendant company had a right to rely upon the performance, by the plaintiff, of its contract with it.' It had a right to place full reliance on a strict and faithful compliance hv the plaintiff with the provisions of the bond. There was no duty, arising out of the contract, resting on the surety to inquire into or inspect the manner in which the auditing committee appointed by the plaintiff performed its task. It had a right to rely upon the presumption that the plaintiff was fulfilling the obligations imposed upon it by the bond. Therefore when the auditing committee failed to discover the embezzlements by the treasurer before March 1st, 1909, it was due to its failure to comply with provision 12 of the bond in not making the verification required by that provision. The verification required by that provision, as has already been stated, would have discovered the treasurer to he a defaulter. The failure to make the discovery was due to a breach of that provision. Since, it appears that the defalcations could have been discovered if provision 12 had been complied with by the plaintiff, and that as a result from its own act they were not unveiled, it follows as a fair and jrrst conclusion that the defendant should not be held to suffer for the plaintiff's failure to give immediate notice of the defalcations to the defendant company, March 1st, when the audit was completed. The plaintiff should not be permitted to defeat the provision of the bond requiring notice where the dishonesty of the official bonded is detected, upon the plea that it had no knowledge of such dishonesty, when it appears that such want of knowledge was the result of its failure to comply with some other provisions of the bond which would have imparted such knowledge. These provisions were intended for the security of the obligor and it had the right to require a strict observance of and compliance with them. The provisions of the bond are made by the contracting parties conditions precedent to the right of the obligee to recover thereon. The plaintiff was obligated to show a performance of these provisions. This it did not do. Its failure to make the proper audit is the basis of the violations by it of the other provisions referred to.
Eor these reasons the judgment of the Circuit Court will be reversed.