In the case of American Surety Co. v. Baldwin et al., 1932, the U.S Supreme Court was tasked with determining whether a surety company could be held liable for losses incurred by a bank due to fraudulent activities conducted by its president and director. The plaintiff, American Surety Company had issued bonds guaranteeing faithful performance of duties by employees of First National Bank in New Mexico which later suffered financial loss due to dishonest acts committed by its president and director who were also shareholders in the bank. The court ruled that under federal law, directors or officers are not considered as "employees" within meaning of bond covering liability for any dishonest act committed by an employee; hence, they cannot be held accountable for their actions under such circumstances unless explicitly stated otherwise in the contract between parties involved.

In the dissenting opinion for American Surety Co. v. Baldwin et al., Justice Stone argued that the majority's decision to allow a surety company to be held liable for an employee's fraudulent actions, even after his employment contract had expired, was incorrect and inconsistent with previous rulings. He contended that under New York law, which governed this case, a surety could only be held responsible if it had explicitly agreed to cover losses occurring after the expiration of its bond agreement. In this case, there was no such explicit agreement in place; therefore he believed that liability should not extend beyond the term of employment specified in the original contract between American Surety Company and their bonded employee.