Taylor v. Thomas

This action is brought to recover the sum of $4,800, with interest from July 1, 1904, because of deceit practiced upon the plaintiff by the defendants. During the year 1904 the defendants were directors and stockholders of the Citizens’ National Bank of Sara-toga Springs, which was a national banking association. On April 6, 1904, the regular report of the condition of the bank was made, and was attested by the defendants; the report showing the condition of the bank at the close of business on the 28th day of March, 1904, and containing the following items: Capital stock, $100,000; surplus, $50,000; undivided profits, $13,456.75. On or about May 24, 1904, William R. Waterbury, then a stockholder of the Citizens’ National Bank, met the plaintiff, his brother-in-law, and spoke to him concerning the purchase of 20 or 30 shares of the said bank stock. Mr. Waterbury informed the plaintiff that he considered the stock a good purchase. He told him the substance of the report of April 6th, the amount of the capital stock, the surplus, and approximately the undivided profits, referring at the time to the said report. He also told him of the dividends that the bank had been paying and his own estimate of the value of the stock. The statement showed the stock to be of a book value in excess of $160 per share. The plaintiff left before the conversation was completed, but later wrote to Mr. Waterbury, inclosing two checks, which aggregated $4,800, and instructing Mr. Waterbury to buy the shares of stock spoken of. The checks were sent on or about the 1st day of June, 1904, and the stock was delivered by Mr. Waterbury to the plaintiff June 27, 1904. The plaintiff himself never saw

On or about the 37th day of June the Citizens’ National Bank received notice from the Comptroller that its capital was impaired to the amount "of $100,000, and must be made good by assessment, or the bank would be placed in liquidation. Directly thereafter the assessment was regularly made of 100 per cent, on the capital stock, and thereafter, but before this action was begun, the plaintiff paid his assessment in the sum of $3,000. It is admitted that no losses were incurred by the bank between the 38th day of March, 1904, and the 30th day of June, 1904, so that the condition upon the 38th day of March was the same as upon the 30th day of June, when the assessment was made. On or about March 1, 1904, the Comptroller informed the bank that items carried as assets to the amount of more than $194,000 were doubtful, and that immediate steps must be taken to collect them, or they be removed from the books of the bank. These items appeared in the report dated April 6th. These facts were known to the defendants at the time they attested the report.

The defendants claim that this action cannot be maintained; that the only action, if any, available to the plaintiff, is one under the national banking act; that the statute provides for actions to recover relief against the misconduct of directors, and provides the remedy which must be followed. The rule is that, where a liability is created by statute and the statute provides the remedy, that remedy is exclusive and must be followed. Plank Road Co. v. Morley, 33 N. Y. 553 , 554. But here the liability set forth in the complaint is not created by statute. The action is not a statutory action. It is the common-law action to recover damages for deceit affecting the plaintiff only, not the bank or the stockholders generally, and must be considered as such. In the complaint the plaintiff has set forth a cause of action for deceit, and not a cause of action under the statute.

Such a right of action exists. Prescott v. Haughey (C. C.) 65 Fed. 653 , 655-659. There is nothing in the United States statutes that destroys the common-law action for deceit practiced by the directors of a national bank. Hardmann v. Bowen, 39 N. Y. 198 . If the plaintiff were attempting to enforce a'liability created by statute against directors of a national bank, we should have a different case than that at bar. Hale v. Hardon, 95 Fed. 766 , 769, 37 C. C. A. 240 . The cases cited'by defendants sustain these propositions. Bank v. Peters (C. C.) 44 Fed. 13 , 14; Hayden v. Thompson (C. C.) 67 Fed. 273 ; Gerner v. Thompson (C. C.) 74 Fed. 125 , 126; In the latter case the court says:

“But rights of action arising at the common law and growing out of transactions not injuriously affecting the capital stock or the interests of the shareholders at large may be enforced by any one suffering special injury thereby.”

If, therefore, the evidence establishes all of the elements necessary for a recovery in such an action, the action in its present form can be maintained. Fuelling v. Lean Mfg. Co., 183 N. Y. 78 , 85, 75 N. E. 1098 , 3 L. R. A. (N. S.) 303 , 111 Am. St. Rep. 691 .

The report of April 6, 1904, was attested to be true by the defend

The defendants urge that, though the report should be found false, there is not sufficient proof that the defendants knew it to be false, and that they cannot be held liable in an action for deceit based upon the false report unless they attested the report knowing it to be false. The bank had received notice from the Comptroller about March 1, 1904, that $194,000 of the items counted as assets of the bank were doubtful and must be collected or charged off. This notice was known to the defendants at the time, they being directors of the bank, and it was a direct warning to them by the bank examiner and Comptroller that assets to nearly twice the amount of the capital stock were considered doubtful. This warning is, of course, not competent proof that the doubtful paper was uncollectible; but it gave to these defendants notice that they should not include all those assets in the report, at least without investigation and examination. Had they examined, as they should have done, they would have learned that the capital was impaired to its full amount. The failure to make any examination is not mere negligence, misjudgment, or want of caution; nor is it mere casual indifference to results or breach of duty. It amounts either to actual recklessness of results, or to a willful refusal to make the examination, so that they could innocently make a good report, when a true statement of the condition of the bank would perhaps have been ruinous. The facts are very different from those existing in Robinson v. Hall (C. C.) 59 Fed. 648 , and Warner v. Penoyer (C. C:) 82 Fed. 187 , among other things, from the fact that here the defendants had direct warning in writing from the Comptroller, after reports from the bank examiner, of the bad condition of the assets. After the warning by the Comptroller and proof of the actual condition of the

The defendants, as directors of the bank, evidently were at the time in a difficult position. They at least knew from the warning given by the Comptroller that the bank was probably in a bad financial condition. What actual facts they knew concerning the condition of the bank is not disclosed by the evidence. A report, however, showing losses to the amount of $194,000, would more than wipe out the capital stock, surplus, and undivided profits, as shown in the report, and would probably cause the ruin of the bank. The officers and directors of the bank would naturally hesitate to make a report which would cause.its ruin; but, however loyal this sentiment may be to the bank, it cannot relieve these defendants from the consequences of making a report either falsely or recklessly. After the warning by the Comptroller, and before attesting the report, the defendants must have proceeded upon some reasonable inquiry, and have had some apparently good ground for attesting the report as it stood (Hammond v. Pennock, 61 N. Y. 145 , 151), in order to relieve themselves from responsibility. They were not called as witnesses, either to show lack of knowledge of the actual condition of the bank, or to show that the)made any inquiry or had any apparent ground for attesting this report to be true. On the contrary, the evidence discloses that they had good reason for believing that the report was false. When this report was made of the standing of the bank it was made and published to disclose the financial condition of the bank and to assure those who would deal with the bank; and, when it was attested by directors, they knew that, if not true, they were deceiving those who read it, both as to the standing of the bank and as to the value of the stock. In this particular case the statement assured the public that, not only the capital stock was unimpaired, but there was a surplus and undivided profits of $63,000, when in fact there was no surplus or undivided profits •and the capital was lost. It is not sufficient here to say that this report disclosed the actual condition as shown by the books of the bank. These defendants could not rely upon the books after the warning they had received from the Comptroller. They were told by the Comptroller that the very books contained items of assets to the amount of $194,000 which the Comptroller considered doubtful. This is not a case in which directors, without warning and without reason to be

The plaintiff and his agent, Waterbury, relied upon the report in the purchase of this stock. This is the fair inference to be drawn from the facts of the case. Although Waterbury made statements to the plaintiff outside .of the report, it appears that it was the report itself which he relied upon in assuring the plaintiff of his estimate of the value. It was the substantial part of the inducement. It is not necessary for the plaintiff to show that it was the sole inducement. Bank v. Bank, 56 Fed. 139 , 5 C. C. A. 448 . It is said in Hadcock v. Osmer, 153 N. Y. 608 , 47 N. E. 923 :

“An action to recover damages tor deceit cannot be maintained without proof of fraud as well as injury. Actionable deceit cannot be practiced without an actual intention to deceive, resulting in actual deception and consequent loss. But, while there must be a furtive intent, it may exist when one asserts a thing to be true which he does not know to be true, as it is a fraud to affirm positive knowledge of that which one does not positively know. Where a party represents a material fact to be true to his personal knowledge, as distinguished from belief or opinion, when he does not know whether it is true or not, and it is actually untrue, he is guilty of falsehood, even if he believes it to be true; and if the statement is thus made with the intention that it shall be acted upon by another, who does so act upon it to his injury, the result is actionable fraud. Kountze v. Kennedy, 147 N. Y. 124 , 130, 41 N. E. 414 , 29 L. R. A. 360 , 49 Am. St. Rep. 651 ; Rothschild v. Mack, 115 N. Y. 1 , 7, 21 N. E. 726 ; Marsh v. Falker, 40 N. Y. 562 , 573; Bennett v. Judson, 21 N. Y. 238 ; Addison on Torts, 1007; 1 Bigelow on Fraud, 514.”

If, under those facts, one should be held liable for the damage caused, he cannot be allowed to escape liability when he had been warned that the report showed a false condition of the bank. The plaintiff has established all of the elements necessary to maintain the action against the defendants. 12 Eng. Rul. Cas. 235, 298; Palsey v. Freeman, 3 Term Rep. 51-65; Derry v. Peek, 14 App. Cas. 337-380; Arthur v. Griswold, 55 N. Y. 410 ; Fuelling v. Lean Mfg. Co., 183 N. Y. 85 , 75 N. E. 1098 , 2 L. R. A. (N. S.) 303 , 111 Am. St. Rep. 691 .

The measure o-f damages in this case is “a sum of money equal to the difference between the value of the property (stock) as it was in fact and the value as it would have been if the representations had been true.” Vail v. Reynolds, 118 N. Y. 310 , 23 N. E. 302 . Under the report of the value of the stock was $163 per share. The Comptroller’s warning that book assets were doubtful to the amount of $194,000 is not proof that the assets were in fact valueless to that amount; but the assessment directed by the Comptroller is evidence that its book value was then nothing. Whether the losses, passed upon by the Comptroller in his determination that the assessment must be made, were included entirely in the $194,000 of doubtful assets, does not appear. It does appear by stipulation that, of the $194,000 of doubtful assets, $97,000 have been collected; but I am not informed whether before or after the assessment. If we assume, as defendants in their brief say we must assume, that the 'directors did their duty and collected the entire $194,000 of doubtful assets, then the cause of the assessment must

Under the proof and the rule of damages, I am bound to hold that the plaintiff has suffered damages as claimed in the sum of $4,800, with interest from the time the stock was delivered, July 1, 1904.

Judgment accordingly.