Walden National Bank v. Birch — 41 N.Y. St. Rep. 275

Majority

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The Walden National Bank, Resp’t, v. Caleb Birch et al., App’lts.^[1]

(Court of Appeals, Second Division,

Filed December 1, 1891.)

Headnote

1. Principal and Surety—Liability op surety on bond on bank CASHIER.

One T. to secure his notes due plaintiffs assigned thirty shares of plaintiff’s stock to R., plaintiff’s cashier, which the latter really took in trust for the hank and endorsed the notes simply to deceive the IT, S. Government and avoid the statute which forbids a bank taking its own stock as security. Ten of the shares were sold and applied to the indebtedness and R. converted the balance to his own use. In an action upon the R’s official bond signed by defendants, Held, that defendants could not take advantage of the fact that the transfer to R. was in violation of the U. S. Revised Statutes because the act imposed no penalty, and the prohibition of the statute could be urged against the validity of the transaction only by the government.

2. Same.

When R. appropriated the stock to his own use, although he may not have been guilty under the circumstances of strict conversion, he was guilty of misappropriating the property of the bank that had been entrusted to him as cashier, in violation of his duty to the plaintiff and of the bond given by the defendants in his behalf.

3. Same.

The plaintiff did not by recovering judgment against R. as endorser waive its right to sue him in tort and thus deprive defendants of a substantial right in case they paid the bond.

Appeal from a judgment of the general term of the supreme court, ®in the second judicial department, affirming a judgment entered upon the decision of the court at special term.

This was an action to recover from the defendants as sureties of one Rutherford, cashier of the plaintiff’s bank, the value of certain of its securities alleged to have been converted by him.

The trial court found the following facts: Said Rutherford was cashier of the plaintiff, a national bank, from its organization until March 19, 1887, except during a few months in the year 1886, when he was ill. The bond in question, dated February 2, 1887, is in the penalty of $4,000, and contains the condition that if said Rutherford, “ honestly and in good faith, performs all the duties of cashier in the Walden National Bank, and all the duties in any manner incident thereto, while acting as such cashier, and also all such duties, acts and work as may be required of the said William Gr. Rutherford by the said bank, or its board of directors, which shall from time to time be assented to on his part, and in all respects conduct honestly and in good faith toward or in respect to said bank, its moneys and securities, and the moneys and securities of any other person, or persons, left in any manner with said bank,' then the above obligation to be void, otherwise to remain in full force and virtue.” Prior to December 12, 1882, one Terbell owned thirty shares of the stock of said bank, of the par value of $100 per snare, and on that day he assigned and delivered the same to said Rutherford in his “ individual name,” and

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thereupon it was transferred to him on the books of the bank, and three new certificates for ten shares each were issued to him therefor.

At this time Terbell was indebted to the bank to an amount exceeding $9,000 upon certain notes made or endorsed by him and discounted by the plaintiff for his benefit. He was not indebted to said Eutherford, but was in financial difficulties and wanted to secure the bank. Said stock was thus transferred to ¡said Eutherford upon the understanding “that it was to be held for the bank as collateral security for the payment of ” said notes. The transfer “took place over the counter of the bank while said Eutherford was acting as its cashier, and the transaction was with him in that capacity.” Said Terbell “ understood he was dealing with the bank, and not Eutherford personally, and the only reason given at any time for assigning the stock to Eutherford instead •of the bank was, as Eutherford told Terbell, because the banking act prohibited the bank from making loans upon the security of its own stock.” “ Said cashier, after the transfer aforesaid, put said stock in an envelope and informed the president of the bank that it belonged to Terbell, and the bank thereafter held such stock as security for Terbell’s paper, although it held it in Eutherford’s name.” December 20, 1883, Terbell made his note for $1,000, .and April 1, 1884, another for the same amount, each payable to the order of Eutherford and endorsed by him, and. the plaintiff discounted both for said Terbell and at the time “ held said bank •stock as security for the payment ” thereof, under the aforesaid agreement. The endorsements of Eutherford “ were in form only and was only done to make the transaction appear regular, under the national banking laws.” The note dated April 1, 1884, was given to take up a note made by Terbell and held by the plaintiff •on December 12, 1882, or in renewal of a note given for that purpose. September 1, 1886, at the request of Terbell and the plaintiff, Eutherford sold ten shares of said stock to the defendant Snyder for $1,210, which was applied on the indebtedness of Terbell to the bank, except a small sum, which was placed to his •credit on the books. Up to this time the dividends upon the ■stock had been credited to Terbell, and after this sale the dividends upon the twenty shares remaining were equal to the inter•est on said two notes and “ they were balanced in that way by the cashier, said Eutherford.”

January 13, 1887, Eutherford borrowed $1,000, upon his own note and for his own use, from the Groshen National Bank, to which he gave as collateral security ten shares of said stock. The note was not paid and the bank last named sold said collateral and with the proceeds paid the note. March 18, 1888, Eutherford borrowed another $1,000, upon his own note and for his own use, from the Chase National Bank and assigned to it the remaining ten shares of said stock as collateral. That note was not paid and that bank sold its collateral and paid its note out of the proceeds.

Neither of the notes so held by the plaintiff was ever paid although payment was duly demanded, and no part of said twenty

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shares of stock was ever returned to the plaintiff notwithstanding due demand made of said Rutherford.

September 10, 1887, the plaintiff recovered judgment on its notes against Terbell and Rutherford, but no part thereof having been paid, an offer was made to the defendants to assign the same to them, “ but they declined to do anything about the matter.”

Upon the request of the defendants the court also found that the notes, made or endorsed by Terbell and held by the plaintiff on December 12, 1882, with two or three unimportant exceptions, had upon them the name of a responsible maker or endorser, in addition to that of Terbell.

The trial judge refused to find, upon the like request, that “ the transfer of said stock by said Terbell was made to said Rutherford and held by him in his individual capacity, as a personal matter, and he did not take and hold the stock as cashier for the plaintiff and as collateral security to the indebtedness to and for said bank,” and after so refusing, added: “ Rutherford was not liable as an endorser, though one in form.” The defendants excepted generally, but did not except specifically to the addition as found.

After finding these facts the trial court found as conclusions ■of law that the transaction was not prohibited by the national banking act, and if it was, that the defendant could not take advantage of it in this action; that Rutherford was not liable to the bank as endorser on said notes and that the recovery of said judgment does not help the defendants because the rule as to election of remedies does not apply; that the defendants were not liable for the stock given to the Goshen Bank on the 13th of January, 1887, because they were not then the sureties of said Rutherford, but that they were liable for the value of the other ten shares delivered to the Chase Bank, March 18, 1887, as that was after they had signed said bond.

Rutherford died in March, 1888, and this action was commenced about two months afterward.

A. S. Cassedy, for app’Its; B. R. Champion, for resp’t.

The appellants claim that the transaction whereby the stock in question was transferred to Rutherford was in violation of the national banking act, which provides that no banking association “shall make any loan or discount on the security of the shares of its own capital stock, nor be the purchaser of any such shares, unless such security or purchase shall be necessary to prevent loss upon a debt previously contracted in good faith.” U. S. R S., § 5201. Assuming this to be true, the defendants cannot take advantage of it, because the act “ imposes no penalty, either upon the bank or borrower, if a loan upon such security be made.” National Bank of Xenia v. Stewart, 107 U. S., 676 . The case cited was an action by the personal representatives of a borrower to recover from a national bank the value of certain shares of its capital stock delivered to it as collateral at the time the loan was made and, after default in payment of the note, sold by the bank and applied on the debt. The court held that if the prohibition of the

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statute could be urged against the validity of the transaction by anyone except the government, it could only be done before the contract was executed and while the security was still subsisting in the hands of the bank.

The decisions of the federal courts, construing the provision of said act, which prohibits national banks from purchasing, holding or conveying real estate, except for certain purposes, are analogous, because no penalty is provided for a violation of that section. U. S. R. S., § 5137. While it permits banks to purchase and hold such real estate “ as shall be mortgaged to it in good faith by way of security for debts , previously contracted,” it prohibits the taking of a mortgage to secure future advances, but does not declare void any security taken in violation of the act. It has been repeatedly held that a mortgage, although taken to secure future advances, is a valid and enf orcible security, notwithstanding the prohibition, and that only the federal government can take advantage of the violation of the statute. National Bank v. Matthews, 98 U. S., 621 ; National Bank v. Whitney, 103 id., 99 ; Fortier v. New Orleans National Bank, 112 id., 439.

In Wyman v. Citizens’ National Bank, 29 Fed. Rep., 734 , it was held that a contract was not void, if entered into by a national bank in violation of § 5200, which provides that “ the total liabilities ” to such a bank of any person, corporation or firm, shall not exceed one-tenth of its capital stock actually paid in. The court said that 11 the decisions of the United States supreme court, heretofore made, warrant the conclusion that objections of the character presented to a breach of the banking law by a national bank caú only be urged by the government.”

Similar decisions have been made by this court under somewhat similar circumstances. Thompson v. St. Nicholas National Bank, 113 N. Y., 325 , 334; 22 St. Rep., 929 : Atlantic State Bank v. Savery, 82 N. Y., 291 .

The principle on which these cases rest applies to the point under consideration and requires us to hold that even if the transaction with Rutherford was a mere evasion, and hence a violation of the provisions of the National banking act, the fact is not available as a defense to this action.

The claim of the defendants that Rutherford held the stock to secure him for endorsing the note in question is not supported either by the findings or the evidence. The transaction was not with Rutherford as an individual, but as cashier of the bank. No' evidence was given upon the subject except by Mr. Terbell, who testified: “ When I go to the bank and a man comes to the hole and I tell him anything, I consider I am saying it to the bank. This conversation was over the counter in the Walden Bank. * * * I so transferred it (the stock) to him individually to secure the bank. I did not make it directly to the bank because I supposed he was the bank. He endorsed these two notes * * * when I wanted him to pin the stock on these notes he said,[1] When the government official comes here, we can’t take our own stock, and when he comes here and sees this stock pinned on th^se notes he will say, ‘You sell it right off and pay

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this.’ I will endorse them and will tell the board how it is.’ The object was to get rid of the provision forbidding banks to take their own stock, and so I made the stock to him. He endorsed the paper to get around that. * * * When Rutherford took this stock away he put it in an envelope, and I think told Mr. Scofield, then president of the bank, if anything happened, that belonged to me.” Thus it is clear that Rutherford, as cashier, took and held the stock in trust for the bank and endorsed the notes simply to deceive the government. He had no personal interest in the matter. All that he did was for the benefit of the bank in the transaction of its business, as its officer. His object was to get security for the bank, which was in the line of his duty. The method adopted by him to effect his object was the transfer of the stock, not to the bank directly, as that was deemed inadvisable, but to himself still acting as cashier, for the benefit of the bank. His endorsement, although a contract in form, was no contract in reality, unless made so by subsequent ■adjudication, but an artifice resorted to by him, while doing the business of the bank, to deceive the official inspector for its protection. In no part of the transaction did he act for himself. The plaintiff, therefore, became the equitable owner of the stock, subject to the right of Mr. Terbell to redeem. ■ When Rutherford appropriated the stock to his own use, he deprived the bank of that which belonged to it as the beneficial owner, and which was in his name, and the evidence thereof in his custody, by virtue of his official relation to the bank. Although he may not have been guilty, under the circumstances, of strict conversion, he was guilty of misappropriating the property of the bank that had been entrusted to him as its cashier. This was in violation of his duty to the plaintiff and of the bond given by the defendants in his behalf.

The defendants further claim that even if Rutherford held the stock for the benefit of the bank, and in his capacity as cashier, still, by recovering judgment against him as endorser, the plaintiff waived its right to sue him in tort, and thereby deprived the defendants of a substantial right in case they should pay the bond.

Although Rutherford, upon the facts herein as found by the special term, had a perfect defense to the action brought against him on the notes, still the judgment entered by default was an adjudication irrevocably establishing a contract of endorsement between him and the plaintiff. Lorillard v. Clyde, 122 N. Y., 41 ; 33 St. Rep., 303 ; Brown v. The Mayor, etc., 66 N. Y., 385 ; Newton v. Hook, 48 id., 676; Gates v. Preston, 41 id., 113. If this was a waiver by the bank of its right to sue him for misappropriating its property, it was also a waiver of its right to sue his sureties for the damages caused by such misappropriation. Pitts v. Congdon, 2 N. Y., 352 ; Chester v. Bank of Kingston, 16 id., 336; Bank of Albion v. Burns, 46 id., 170; Barnes v. Mott, 64 id., 397 ; Ludlow v. Simond, 2 Cai. Cas., 1 : Colemard v. Lamb, 15 Wend., 329 ; Stevens v. Cooper, 1 John. Ch., 425; Harris on Subrogation, § 17.

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It must be assumed on the facts found that the plaintiff had two causes of action against Rutherford, one on the note and the other for misappropriating the security collateral to the note; If they were concurrent the defendants cannot complain, as both could be prosecuted until one or the other was satisfied. If they were necessarily inconsistent so that a judgment in one was a defense to the other, their liability on the bond ceased when the judgment was entered.

We think that the remedies were concurrent and not inconsistent. By endorsing the notes, not formally, but, as it must now be assumed, with the intention of binding himself, Rutherford, became liable tó the plaintiff on his contract Subsequently, by misappropriating the security that be had taken and, was holding as cashier for the plaintiff’s benefit, he violated his fiduciary relation to the bank and made himself liable in tort The latter cause of action accrued nearly five years after the former, to which it had only an accidental relation. His liability on the notes did not prevent him from wrongfully disposing of the bank’s collateral and making himself liable on that account also. The casual circumstance that one payment would discharge both liabilities does not affect their independent origin and nature because no fact essential to liability on the note was essential to liability for the misappropriation. There was a breach of contract and also a breach of duty in no manner dependent on such contract. Under such circumstances no election of remedies was required, for both were available. Manning v. Keenan, 73 N. Y., 45 , 51; Morgan v. Skidmore, 3 Abb. N. C., 92 ; Morgan v. Powers, 66 Barb., 35 ; White v. Whiting, 8 Daly, 23 , 25; 6 Am. & Eng. Encyc. of Law, 248.

It may be that the error of the learned trial judge, in his legal conclusion that Rutherford was not liable as endorser, affected his finding of the fact that Rutherford held the stock as cashier for the benefit of the bank. We find no exception to the-facts as found that is specific enough to raise this point While said conclusion of law was wrong, it did not constitute reversible error, because the final result reached in the judgment ordered was right

We think that the judgment should be affirmed, with costs.

All concur, except Brown, J., not voting.