131 N.Y.S. 1059 | N.Y. App. Div. | 1911
Lead Opinion
In Cassidy v. Uhlmann (170 N. Y. 505) the opinion in part reads: “The board of directors of a bank has the general superintendence and active management of all its concerns, and, for all practical purposes, the board is the corporation. As a‘ general rule a board of directors must act as a board. But, since directors do not exercise a delegated authority in the sense which applies to other officers and agents, it is clear that a board of directors may delegate some of its powers to committees and -.individuals selected from the board. This is common practice in the management of banks as well as other corporations. Since a board of bank directors is composed of individuals it is manifest that each director sustains a distinct relation, not only to his bank, but to its stockholders and depositors. For obvious reasons the duties which attach to this relation cannot be precisely defined. They cannot be the same under all circumstances; nor can they be imposed with unvarying exactness upon all directors alike, ” By the evidence of. the plaintiff’s witness Krech it appears to be the custom of banks in New York city to intrust to the executive committee of the board the supervision of the detail management of the corporation,; The directors generally not upon the executive, committee are not sunnosed to have knowledge of the details of the business-managernent of the corporation which are not submitted—to—them.' In other words, it is not their custom to actively search the individual transactions- in a bank that they may "learn the responsibility of its debtors, or the nature or value of the collateral. This they intrust, first, to the executive officers of the bank, who are carefully chosen and paid for their services; secondly, to the supervision of the executive committee of their body, which is chosen with a special reference to this duty, and to which committee must be reported weekly all the transactions of the hank.
This custom, however does not relieve directors generally of all responsibility. If the by laws require monthly meetings tií^mustlñake diligent effort to be present thereat. They must give their best efforts to advance the interest of the corporation, both by advice and counsel and by active work on behalf of the corporation when such work may be assigned to
This distinction between the diligence required of a director generally and a member of the executive committee is not only shown by the evidence in the case to be the custom in banks in
Finally this principle has received legislative recognition. By chapter 155 of the Laws of 1908 section 39a was added to the Banking Law (Gen. Laws, chap. 37; Laws of 1892, chap. 689), which was re-enacted by section 42 of the Banking Law (Consol. Laws, chap. 2; Laws of 1909, chap. 10). Said section was made to read in substance: “The directors or trustees * * * shall by resolution duly recorded in the minutes of the proceedings of such corporation designate an officer or officers whose duty it shall be to prepare, and submit to each director or trustee at each regular meeting of the board, or to an executive committee of not less than five members of such board, a written statement of all purchases and sales of securities, and of every discount and loan, exclusive of discounts and loans of less than one thousand dollars, made since the last regular meeting of the board, describing the collateral to the loans so made as of the date of the meeting at which such statement is submitted.” This statement is required to contain other details also. (See, also, Laws of 1911, chap. 708, amdg. said § 42.) But the significance of the provision is that the directors may by resolution provide that this detailed information should, instead of being given to the board itself, be given to an, executive committee of not less than five members. The necessary inference follows that the directors not upon the executive committee are not chargeable with knowledge of detail management, which need be reported only to the executive committee. So that the distinction which I have sought to deduce from reason and judicial authority is now made part of our statutory law.
The makers upon the notes, for loss upon which these defendants have been charged, were all of them abundantly responsible financially. The shipbuilding bonds which were offered as collateral were being readily sold in New York and purchased by the leading financiers of the city at prices which made them apparently abundant security for the notes for which they were collateral. The moneys loaned upon these-notes were all passed directly to the credit of the shipbuilding company upon the trust company’s books, and went to strengthen and make secure the very bonds that were held as collateral. These underwriting agreements, all of them, contained the provision that they were to be void unless the $9,000,000 contemplated to be sold was entirely underwritten. So that if there should be any failure to procure the $8,100,000, which was "contemplated to be procured upon the sale of this $9,000,000 of bonds, the moneys would be in the vaults of the trust company subject to the claim of the trust company thereupon as a first equity. These moneys were, therefore, all retained by the trust company itself until the full amount should, be raised, the various properties purchased and the bonds made of substantial worth. With the responsibility of the makers
It seems that in the early part of 1903 Bruckman and White and the other makers of these notes' claimed in some way that they had been misled in the making of these underwriting agreements, and demanded that they be released from personal liability upon these notes. The learned trial judge has found that their claim was that they were misled by false representations in a prospectus which was issued 'by the trust company upon the sale of these bonds. This finding is not supported by the evidence. There is no evidence anywhere in the case which shows that their claim was based upon. any misrepresentations in the prospectus. The inference of' the trial justice is wholly unjustified. The evidence is not clear as to just what was the nature of their claim. The only light thrown upon the nature of that claim lies in the agreement for the release of Bruckman, wherein it is recited: “ Whereas, said Bruckman agreed to underwrite and' purchase said securities subject to a loan of One hundred and Forty-nine thousand Two hundred dollars ($149,200), with interest at five per cent per annum, for the repayment of which loan he was not to become personally liable, the said Trust Company looking to the securities only for eventual paymentT This paper between the trust company and Bruckman, executed upon January 27, 1903, would seem to indicate that he and the others had been promised immunity from personal liability by Dresser, or some one in his behalf, which 'promise was wholly unknown to Satterlee or to any other director at the time the loans were made. Satterlee in fact swears that these loans prior to October would have been provided for by the Sheldon syndicate agreement, which will.
■ But assume for the - argument that the trial judge was right , in finding that the contention of the makers of these notes was that they were misled by statements in this prospectus. There is no proof in the case that there was any misstatement .of fact in that prospectus, or- anything upon which .'a claim pf fraudulent representation could be made. The trial judge has not found that there was any fraudulent or "false statement therein. Tt was not claimed upon the trial by the plaintiff’s attorney; for when' the question arose the court stated upon the trial: “ There is no claim of fraud here in the prospectus; no recovery asked because of fraud in the prospectus.” This statement was unchallenged by the plaintiff’s counsel.- But the trial court has held these defendants liable- upon áll the White and Bruckman notes, not because of any fraud in the prospectus, but on the ground that the act of publishing the prospectus was an act ultra vires, which gave an opportunity for the makers of the notes to- claim fraud and thereby cause this loss. It is not entirely clear how the conclusion follows the premises in' this syllogism. But* it is immaterial, because in my judgment the premises are inaccurate. Section 156 of the Banking Law' (Gen.-Laws, chap.'31 [Laws of 1892, chap. 689], as amd. by several statutes) purports to define the powers of this company. In the first' subdivision
As to the loans that were made upon these notes after the twelfth of August, another and a different ground of liability is also asserted. Early after the organization of this corporation the officers of the, corporation were in the habit of buying and selling in the name of the corporation its own stock. At one time $160,000 was invested by the trust company in its own stock. That did not appear upon the books of the company or any of the reports to the executive committee except as so much, charged to “ advances.” With the duty, however, of the executive committee to supervise the detail of the corporation, such a large charge toan indefinite account called “advances” would in my judgment put them upon inquiry, so that they were deemed to have known of this transaction. It is not claimed that anything was lost by this speculation. In fact it resulted in a profit of upwards of $2,000 to the company.- But it is claimed that there was such irregularity as 'should put the directors upon their guard as to possible future irregularity of the officers of the company. There was a further loan appearing upon the books in June of $800,000 to one firm, which was in excess of the amount that might lawfully be loaned to that-
As to defendant Gould, then, he consented to go upon the board upon an understanding with Dresser that he -should not be called upon to attend any of the .meetings... of__the board, but would simply allow the use of his name in_the directorate. This agreement was clearly beyond -the .authority of Dresser to make. The stockholders had a right to assume that as director he would comply with the obligations of his oath and accept and discharge the responsibilities of the position. . Such_an agreement, could only he made with the stockholders, themselves, and even then it is not certain that such an agreement would be effective.,as^agiin&t_aJiability claimed in- behalf of creditors. In the case aj. bar..-it-does-Jiot appear that there are any creditors whose righ-ts are ■involved.. Gould’s liability, therefore, must be determined as if_no-such agreement had been made, and he is clearlyjiable provided that the dosses with which he has been charged are attributable to his failure to perform the duties which the law imposes upon a director not a member of the executive committee. The con
As to the defendant’s after lee still other questions, arise. He was a member of the executive committee, and waft one of the firm of Ward, Hayden & Satterlee, who were the attorneys for the trust company. Upon July sixteenth he went to Europe upon his vacation and did not return until the twenty-ninth day of September. I have heretofore considered his liability as though he had been present at all these times and had- full knowledge of all the acts of Dresser and the Republic Trust Company. Trial court has found that he had no right to take this vacation except with the permission the board of directors and with a provision for, some one’s taking his place. The by-laws provided that with the, president two members of the
There is one other item of liability found as against both of these defendants which is not included in these notes. Shortly after the twenty-fifth day of September Dresser went to Europe and did not return -until sometime in November. Upon the twenty-fifth day of September he withdrew from the trust company the sum of §35,000. This was taken without security. It is spoken of as a loan to Dresser by the trial judge, but if it was a loan to Dresser it was a loan by Dresser to himself. It was not submitted to the executive committee and no knowledge thereof was given to any member either of the executive committee or of the board of directors. In Scott v. De Peyster (1 Edw. Ch. 541) the court in discussing an act of embezzlement of the secretary and treasurer of the company and the liability of the directors therefor, used the following language: " If this be so, then no blame can attach to the president or any of the directors in respect to the mere act of embezzlement or the commission of forgery in altering checks. The funds were not needlessly or improperly exposed by them to the temptation of such crimes. They had a right to repose some confidence in the secretary of the company. His station required it of them; at least, so far as to allow him to receive-whatever money was paid at their office in the course of business and have charge of such money for the purpose of depositing it in bank, and also to the extent of filling up checks to be signed by the president and himself and to be used and
All concurred, Betts, J., in the result, except Kellogg, J., who wrote for modification and affirmance.
Dissenting Opinion
A brief statement of some of the facts relating to this trust company, the manner in which it did business and the connection of the defendants therewith, makes unnecessary a discussion of the liability in ordinary cases of a director of a. trust company for negligence in the performance of his duties. We may assume that he is at least charged with exercising the same care which the ordinarily prudent man would exercise under like circumstances, and that each director is liable only for his own negligence and not for the negligence of a fellow-director.
This company began business March 31, 1902, and about, the 1st of October, 1902, was discovered to be upon the brink of ruin by reason of the illegal, and reckless manner in which its business had been transacted.
The defendant Satterlee states his-introduction into the business as follows: Dresser “ told me that he had heard of this matter from Mr. Greig, and that they had' started to get up a Trust Company, and some Texas parties were interested and had an option, so to speak, or a claim to subscribe to a considerable portion of .this Trust Company stock. * * * He wanted me to become interested in it with him, as his counsel, and to guide him particularly at that time in the relations of Mr. Greig and himself with the Texas people who had been in the matter from its inception, and who wanted to get an increas
Dresser had no knowledge or experience in financial institutions, nor does it appear that any of the officers or any one of the other six members of the executive committee had any practical experience as executive or financial men in any moneyed institution.
The by-laws provided that “the affairs of the company shall be managed and its corporate powers exercised by a board of twenty-five directors,” and also “The Executive Committee shall exercise all the powers of the Board of Directors, when the Board is not in session, except the power to fill a vacancy in the Board. 'The assent of the Executive Committee shall be required for all investments that shall be made of the funds of the Company in stocks, personal securities and bonds and mortgages, and for the disposal of the same, and of the funds of all special trusts; and no guardianship, receivership or other special trusts shall be accepted by the President Without either their approbation and concurrence or that of the Board of Directors, unless it be ordered by a Court or Surrogate having, jurisdiction. The Executive Committee may, in- its discretion, authorize the President generally to make investments in such securities as are authorized by the charter of the Company, and to dispose of such securities without previously consulting, as to details, with the Committee; but all such transactions shall be reported to the Committee at its next meeting.”
Satterlee, at the request of Dresser, purchased ten shares of stock to qualify as a director and become a director, a member of the executive committee and counsel for the company, his law firm being designated as official counsel. The defendant Gould also became a director at the request of Dresser, but with the distinct understanding that he was to pay no attention to the affairs of the company or attend the board meetings, and all he did as a director was to qualify, and later to resign. This committee was to meet weekly and subject to call by the president, and was required to keep minutes which were to be read at each monthly meeting of the directors.
The limitations imposed upon a trust company are well considered in Gause v.. Commonwealth Trust Co. (196 N. Y. 134).
A proper banking practice required the submission. o£ all loans to the executive committee tor. its approval at the next meeting following the loan, and this practice was not followed. On Hay twenty-seventh the committee instructed the secretary to present to it at every meeting a complete list of all loans and collateral not previously passed upon, and to merge the reports of both of its offices in one. Apparently the first report of loans was made to the committee on June seventeenth, when the minutes show the loans from the beginning were submitted and approved. The next was on July eighth. Satterlee, though present at both these meetings, apparently gave no attention to or took any interest in the reports and was negligent in not understanding the details of loans made prior to that time.
Immediately after the business was organized questionable transactions took place and it became early apparent that the president did not understand the law of banking, or that if he did, he had no regard for the law. From April eleventh until the crisis the company was buying and selling its own stock through brokers and otherwise, the amounts paid appearing upon the books as advances, and when the first semi-annual statement was required, about June thirtieth, the president gave his check for the amount and the account was canceled. There were no funds to pay the check and it remained in the cash items; afterward the amount was returned to advances. There was no loss; in fact the company made a profit by these. illegal transactions.
On June twenty-third $700 was loaned to J. W. Young on collateral which was merely an agreement to transfer to the
The losses to the company came from its participation in underwriting the bonds. of the United States Shipbuilding Company, of which Dresser was vice-president and director. Briefly, the shipbuilding company’s scheme was to purchase the plants of certain other companies, payment for which was to be made at the trust company on August eleventh. It involved the underwriting of $9,000,000 of bonds at ninety, with bonuses of twenty-five per cent of preferred, and twenty-five per cent of common stock. The property so acquired was to be the security for the bonds, which were to be issued after August eleventh, when the shipbuilding company should have acquired title to the mortgaged property. Dresser and probably the other directors had no confidence in the character or financial standing of Young, the promoter of the shipbuilding company, and at first Dresser refused to meet him, but finally did so at the request of another trust company and its counsel, who also were interested with Young in the formation of the shipbuilding company. Dresser was led to believe that one third of the underwriting had been subscribed in Paris, one-third in London and the other one-third was to be underwritten in New York.
He undertook to obtain the $3,000,000 subscription allotted to New York. If he succeeded his company was to be banker
As August eleventh, the date for payment, approached, it was unlderstood there would be delay in receiving the money from the Paris underwriters, but it was hoped that it would eventually be realized. If the underwriting failed, the trust company would lose its compensation and would lose the shipbuilding company’s accounts; it would be discredited; the loans which it had made, secured by the shipbuilding underwriting,
The defendant Satterlee went abroad on his vacation July sixteenth and returned September twenty-ninth. Soon after he returned he discovered the large loan made to Nixon and the large guaranties made by the company. He and. others became alarmed, and undoubtedly his able and effective management, with the assistance of his friends, saved the trust company from failure. By the formation of a syndicate which,, in consideration of certain shipbuilding bonds, settled the Nixon and Dresser notes and the company’s guaranty, it resulted that the company sustained no loss therefrom.
The evidence of Dresser indicates that he was acting in the shipbuilding underwriting for the trust company and not for himself, and that up to the time that Satterlee went abroad the executive committee was informed by him in a general way what was being done in the matter. In the minutes of the committee appears, May twentieth: “ The.President made an informal report on the Shipbuilding Combine.” May twenty-seventh: “ The Shipbuilding underwriting proposition was discussed.” At this latter meeting he stated what was desired, of the company and the benefits which would come to it. It is significant that the first record shows arix informal report on the combine; the next the underwriting proposition was discussed. On May twenty-seventh, on the stationery of the company, we find a communication to Dresser from his vice-president, stating the understanding between him and the representatives of the other trust company that the lawber was to act as trustee for the bonds, etc., and the Trust Company of the Republic to act (a) as issuing bankers and perform all the duties incidental thereto, (b) advertise prospectus, (c) receive all subscriptions, (d) pay the necessary cash to the trastees to
It is not contended that under ordinary circumstances a director [or a member of an executive committee of a trust company who is absent from meetings for a reasonable time upon his own business or.pleasure is liable on account of transactions which took place in his absence and of which he had no notice. By becoming such officer a person does not undertake to devote his whole time to the company. The members of the executive committee received ten dollars for each meeting, and necessarily it was expected-that'they were at liberty to devote their- time to their ordinary business and pursuits, giving to the trust company just such time-as was reasonably necessary under the circumstances to protect its interests: When the defendant Satterlee left New York on his vacation
It is unnecessary to inquire whether Dresser and the directors and executive committee who acted in part with him during Satterlee’s absence, took a wise or unwise course to relieve the company from the emergency in which it had previously been placed. He evidently did what he thought best; many of his acts were illegal and unauthorized, but it was represented to him that there was simply a .delay in the money from Paris and he felt that the expedients which he adopted were mere makeshifts to tide over a few days. ’ The .persons who negligently permitted the trust company to get involved in this matter under the circumstances are hardly in a position to
The defendant Gould agreed to be and was a dummy director. If the others had followed his example Dresser would have been the board of directors and the executive committee. Gould left everything to his discretion and judgment and is fairly .responsible for it.
It is immaterial in each particular transaction to consider whether the directors and members of the executive committee knew what was being done by the company or whether their fault lay in not knowing. The method in which the executive committee permitted the business to be carried on by Dresser evidently led the officers and employees of the company to understand that Dresser was in fact the executive committee and that he was unrestrained in doing what he thought ought to be done.
About September twenty-fifth Dresser deemed it necessary to go to Paris to try and realize upon the underwriting there, and just before he departed he took from the company, with the consent of the vice-president and the, clerk who had charge of issuing checks, $35,000. Their acts can only be explained upon the supposition that they felt it was money taken to be used in the company’s business with reference to the Paris underwriting. Apparently it was not so used. When he arrived at Paris he did not find any substantial underwriting there, and the alleged Paris underwriting did not justify any expenditure. This money was never repaid to the company and is one of the items of damages which have been allowed against the defendants. In my judgment it was properly allowed.
When Dresser was obtaining the part of the so-called London underwriting which fell to him, the day when the underwriting must be closed was at hand and the subscriptions not entirely taken, and he called upon members of the executive committee to assist him. One" of the last subscriptions obtained was that of Bruckman, who later gave his notes for a part of his underwriting, secured by the underwriting- agreement or the bonds called for by it. After the syndicate had relieved
With reference to the other notes which have been treated as an element of damage, while the makers were discharged, there is no evidence tending to show that there was any valid reason therefor.
These conclusions lead to the result that the judgment should be modified as to the defendant Gould by striking out all damages except with reference to the $35,000 item, and as to the defendant Satterlee by striking out all damages except those relating to the $35,000 item and the Bruckman notes,- and as so modified affirmed, without costs.
Judgment reversed on law and facts, new trial granted, with costs to each appellant to abide event of the action.