McShane v. Howard Bank

73 Md. 135 | Md. | 1890

McSherry, J.,

delivered the opinion of the Court.

The Howard Street Savings Bank of Baltimore was incorporated in 1847 by the General Assembly of Maryland, and by subsequent legislation its powers were enlarged and its name was changed to the Howard Bank. By the third section of its charter, the Act of 1847, oh. 88, it was empowered to take bonds for the corporation from all or any of the officers, agents or servants appointed by the directors, with security conditioned in such form as they shall approve, “for the faithful execution of the duties of such officers, agents, or servants, and to secure said corporation from loss; ’ ’ and by the third article of section seven it was enacted that “the President, Treasurer, Directors and other officers and servants, before entering upon the dirties of their respective offices, shall take an oath or affirmation before some justice of the peace of the City of Baltimore to discharge their several trusts diligently, honestly and impartially.” Section ten of the Act of 1854, ch. 222, prohibited officers from borrowing from the bank, and made it a penal offence for them to do so. In March, 1819, Thomas S. Ridgaway was made cashier, and he held that position until May, 1889, when hp was removed. On the twenty-sixth of June, 1819, he delivered to the bank a bond the condition of which is in these words: “The condition of the above obligation is such that if the above bound Thomas S. Ridgaway do and shall well and faithfully discharge the duties imposed upon him as the cashier of said bank by the charter and by-laws thereof, and all other duties which may hereafter be thereby imposed upon him as the cashier of said bank, then this obligation to be void, &c.” There were no by-laws ever adopted, and the charter does not particularly describe the cashier’s duties. Henry McShane, whose executors are the appellants in this proceeding, was one of the sureties on this bond. Between April, 1881, and February 11th, 1883, Ridgaway, in violation of his duty, took from the bank and applied to his own use the sum of $>8,133.-00, and never restored or returned it or any part of it. To recover1 this sum the pending-action was brought in July, 1889. To conceal this defalcation, and a very much larger one on the part of Samuel Edmonds, the then president of the bank, a memorandum showing the exact amount of each default, as well as other items, was kept in the drawer of the paying teller and counted as cash. This system was practiced, apparently without the knowledge of the directors, until about March, 1885, when a different scheme was devised and pnt into operation by Ridgaway. At that time the bank, desiring to become a member of the Clearing House, was required by the rules of the latter to submit -to an examination by an expert. It then became necessary to get this memorandum out of the apparent cash, and this is how it was done: The cashier procured accommodation promissory notes amounting to some forty odd thousand dollars made by some of the directors and customers of the bank, and caused them to be entered on the discount book, but deducted no discount. He then carried the apparent proceeds of this fictitious discount, aggregating the full face of the notes, to the credit of the transient discount account which is checked out usually by the cashier; he then delivered to the paying teller sundry checks drawn by himself and the makers of these accommodation notes against this apparent or fictitious discount, and these checks produced a credit sufficient to take up the cash items represented by the memorandum. In other words, when the checks drawn against the transient discount j>assed into the paying teller’s hands, he paid them by merely taking the memorandum out of the drawer. When the accommodation notes matured, cashier’s checks were drawn, and the notes were taken up in that way hut not paid, and an entry was made in the deposit ledger to the debit of an account called “Sundry Account,”■ which was not, however, the regular sundry account. In 1889 the bank, being cramped, was notified by the Clearing House that it must submit to another examination, and the same scheme of borrowing notes, this time amounting to one hundred thousand dollars, was resorted to. These notes were passed through the same process and only apparently discounted. The bank examiner rejected these notes as assets, and a reorganization of the bank followed, its stockholders surrendering one-half of its capital to make good its heavy losses. The new hoard, of directors caused suit to be brought on the bond of Ridgaway. In 1885 the finance committee, consisting of three of the directors, became aware of Ridgaway’s defalcations, but the other members of the board of directors do not appear to have been apprised of it until the reorganization in 1889. During the time that Ridgaway 'was cashier he was regularly paid his salary, and upon his removal he delivered to the new president some certificates for shares of Baltimore and North Carolina Gold and Copper Mining Company. This stock the bank still holds. It is worth from five to thirty-five cents per share. In January, 1886, Mr. McShane addressed a letter to Ridgaway requesting to be released from the bond, and a few days later he received a reply inclosing the following letter from Edmonds, viz., “Henry McShane, Dear Sir: Your request to be relieved as bondsman for the cashier of this hank, Thomas S. Ridgaway, Esq., is hereby complied with from this date. Respectfully, Samuel Edmonds, President.” After the reorganization the directors settled with Edmonds, receiving from him a small percentage of the amount he owed, and executing to him a release under the seal of the cor-' poration.

There are several questions arising out of these facts and others to be noted hereafter, and they are relied on by Ridgaway’s sureties to defeat a recovery on the bond. The first of these is presented by the demurrer filed to the replications assigning breaches. The plaintiff declared generally on the bond; the defendants craved oyer of the bond and charter of which the plaintiff made profert; the defendants then pleaded general performance, to which plea the plaintiff filed four rejDlications assigning breaches, and to these the defendants demurred. The Superior Court overruled the demurrer, whereupon rejoinders were filed', and issues were joined thereon.

The first replication avers that the charter of the hank imposed upon Ridgaway the duty of discharging diligently, honestly and impartially the trusts of his office as cashier, but that he did not so discharge them in that he wrongfully converted and applied to his own use divers sums of money in his custody and under his control belonging to the bank. The second avers that he did not diligently, honestly and impartially discharge the trusts of his office as cashier in that upon ceasing to be cashier on May the first, 1889, he failed to account for or turn over to the bank $8,133.00 of its moneys which had come into his custody and under his control as cashier since April, 1881. The third avers that by the charter of the bank it was provided that no officer of the bank should borrow money from it, and that whilst Ridgaway was cashier he had under his control divers sums of money which he has ever since retained, pretending that he had borrowed the same from the bank; and the fourth avers that he did not diligently, honestly and impartially discharge the trusts of his office as cashier in that he wrongfully withdrew by drafts and checks divers sums of money, though he had no money on deposit with the bank, and to conceal his fraudulent doings made or caused to be made false and deceptive entries in the books of the bank in violation of his duty. Were these acts breaches of the obligation sued on?

Row, the argument shortly stated is this: The condition of the bond provides that Ridgaway shall well and faithfully discharge the duties imposed upon him as cashier by the charter and by-laws ; there are no by-laws, and the charter imposes no duties upon him, therefore, no act that he did of those set forth in the replications was a breach of the condition of the bond, and consequently no liability has attached to his sureties.

The obligation of a surety is to be strictly construed and his liability is not to be extended by mere implication beyond the letter of his contract. Upon that contract he has a right to stand, and nothing can be lawfully imported into its terms to enlarge his responsibility. But still “the bond constituting the contract must have such construction given to it as to carry out the intention of the parties thereto. ” Engler vs. People’s Fire Insurance Company, 46 Md., 333.

Whilst the particular duties of the cashier' are not set forth or described in the charter of the bank, there are, at least, two distinct duties imposed upon him thereby, the faithful observance of Avhich was guaranteed by the obligation of the sureties. The third article of the seventh section required him, as one of the officers of the bank, to make oath that he Avould discharge liis trusts diligently, honestly and impartially;- and a subsequent statute expressly prohibited him from borrowing any money from the bank. However undefined his general duties might have been, that of being honest in his position was explicitly enjoined by the very terms of the charter. By these terms he was forbidden to avail himself of his official position to misapply or embezzle the funds of the bank, or to resort to any unlawful or dishonest device inconsistent with the diligent, honest and impartial performance of his trust. The charter exacted honesty of the officers, and whatever else it failed to require, that it unequivocally imposed. Aside from the consideration that the very nature of the employment involved that duty, the direct and mandatory language of the act imposed it, and imposed it, too, under the sanctity of an oath. Upon what principle can it be said that a cashier, Avhose sworn duty it is to discharge his trusts honestly, has not violated that duty by the embezzlement of the funds of the bank, even though the charter contains no provision forbidding him to steal ? If he did steal, are his sureties relieved merely because the charter did not declare- in so many words that he should not steal ? If he did embezzle, has he done that which the charter required him to swear he would do— honestly discharge his trusts ? His embezzlement of the funds of the bank was a direct violation of a duty imposed by the charter — a duty which his sureties guaranteed that he would honestly perform. The charter prohibited an officer from borrowing money from the bank. If Ridgaway did nevertheless appropriate the bank’s funds, pretending that he had borrowed them, he was clearly guilty of a breach of duty imposed by the charter; and if loss resulted from that act his sureties are liable within the strict letter of their engagement.

These conclusions seem to us to he perfectly clear and entirely free from doubt or difficulty. Entertaining this view, we are of opinion that the replications demurred to properly assigned breaches of the condition of the bond, and that the demurrers were rightly overruled. The same question was raised by the tenth, eleventh and twelfth prayers presented by the appellants to the Court below. These prayers were properly rejected for the reasons we have already given.

It was urged that the fictitious credit produced by the pretended discount of the accommodation promissory notes, and that the checks drawn thereon, whereby the memorandum representing Ridgaway’s indebtedness to the bank was withdrawn from the paying teller’s drawer, operated as a payment of what Ridgaway owed, and that his sureties are consequently released. This contention cannot he supported. The accommodation notes were procured for the purpose of hiding, by simulated entries, the defalcations' of the bank’s officers, and for the further purpose of covering up, temporarily, losses sustained on its discounted paper. False and fraudulent credits were given and equally false and fraudulent checks were drawn against those credits to conceal the actual truth from the bank examiner. The notes were returned to the makers and not a dollar was ever paid upon them. The whole transaction consisted only of untruthful entries made hy a faithless officer to cover up his .own dishonesty, and to misrepresent the real condition of the hank. Under these circumstances th.e Court was entirely right in granting the appellee’s seventh prayer, and in instructing the jury, under the fourth prayer of the appellants as modified hy the Court, that these transactions furnished no defense to the sureties unless the promissory notes were discounted for the bona fide purpose of extinguishing Ridgaway’s deht. And this would have been so even though the directors of the bank had been aware of and had participated in the fraudulent conduct of Edmonds and Ridgaway. The directors owed a duty of fidelity to the stockholders, and their breach of that duty by participating in the malversations of executive officers, or by aiding the latter in their attempts at concealment, differs nothing in principle from a case where the directors deliberately authorize a cashier to plunder the funds of a bank, or to cheat the stockholders of their interest therein'. “Every act of fraud, every known departure from duty, by the board, in connivance with the cashier, for the plain purpose of sacrificing the interests of the stockholders, though less reprehensible in morals or less pernicious in its effects than the cases supposed, would still be an excess of power from its illegality, and, as such, void as an authority to protect the cashier in his wrongful compliance.” Minor, et al. vs. The Mechanics’ Bank of Alexandria, 1 Peters, 70. This principle was correctly announced to the jury'in the sixth instruction given by the Court at the instance of the appellee.

The first prayer presented by the appellants asked the Court to instruct the jury that if they found that Edmonds loaned the money in question to Ridgaway, or if Edmonds conspired with Ridgaway to enable the latter to procure said money wrongfully; and that after the reorganization, the directors with knowledge of this, released Edmonds from any liability for or on account thereof; then such release enured to the benefit of the joint wrong-doer, Eidgaway, and his sureties. The Superior Court properly rejected this prayer. Edmonds had taken some thirty-eight thousand dollars of the bank’s money wrongfully. Eidgaway had also taken eight thousand one hundred and thirty-three dollars. Each had violated his plain duty, and possibly each had helped the other to do so. But Edmonds is not a party to Eidgaway’s bond either as joint obligor or surety. The release of Edmonds for a small part of his heavy defalcation from all the balance that he owed to the hank, could in no way operate to discharge the sureties of Eidgaway from liability for what their principal owed to the hank. The sureties of Eidgaway were not answerable for Edmond’s dishonesty, and any adjustment made by the bank with Edmonds, with a view of securing something from him, neither increased nor diminished nor in any way aifected their liability for the wrongful acts of Eidgaway. The causes of action against Edmonds and Eidgaway were distinct and separate, and though both were wrong-doers, they were not such joint tort-feasors as that the release of one from the result of his wrongful acts discharged the other also from the consequences of his. In ordinary cases of joint tort-feasors, if one is released from responsibility for an act jointly committed by both and for which each is liable to the full extent of the injury done, both are discharged. Gunther vs. Lee, et al., 45 Md., 60. But the primary civil liability of Edmonds and Eidgaway was separate, and extended to the amounts respectively due by each, though each incidentally might have been involved criminally in the penal act of the other. The obligation upon each was to restore that which he had taken. The extent of that obligation was measured by the amount which each had abstracted. The return by one of them of any part of what he owed and his release as to the balance could not possibly discharge the other from his duty to restore what was due by him. As between the stockholders on the one hand, and Ridgaway’s sureties on the other, no claim existed excejat as to Ridgaway’s own misappropriations, and the release of Edmonds, for whom the sureties were in no manner bound, could not affect their liability for Ridgaway, for whom alone they were responsible.

The fifth prayer of the appellee has reference to the correspondence between the late Mr. McShane and Ridgaway. By that instruction the jury were told that the’ letter written on January 22d, 1886, by Edmonds to McShane did not release McShane from liability for any moneys taken and retained by Ridgaway from the bank after the date of the bond sued on, and prior to the date of that letter, and did not estop the hank from recovering payment therefor. There was no error in this. The defalcation had taken place between April the first, 1881, and February the seventeenth, 1883. The liability of Ridgaway’s sureties was fixed long before this letter was written, and the president had no power to release them or any one of them upon his own authority, and thus voluntarily surrender a right which belonged, not to him, but to the stockholders. It was not within the scope of his agency to do it. Morse on BanJcing, 144.

But it has been insisted under the appellants’ fifth and seventh prayers that if the indebtedness' of Ridgaway to the hank was known to the president and directors or the finance committee in August, 1883, and if no notice thereof was given Mr. McShane by the bank, this failure to give notice, and the letter of January 22d, 1886, operated to release the sureties. These prayers were rejected. A creditor is under no obligation to be actively diligent, in pursuit of his principal debtor. He may forbear the prosecution of his claim, and remain inactive, without impairing his right to resort to the surety, particularly when his forbearance amounts to no more than mere inaction or passivity. Sasscer vs. Young & Kemp, 6 G. & J., 243; Freaner vs. Yingling, et al., 37 Md., 491. If the creditor is not bound to active diligence his mere failure voluntarily to give information to the surety of the default of the principal cannot have the effect of discharging the-surety. Forrester, et al. vs. State, use of Kernan, 46 Md., 154; Pittsburg, Fort Wayne and Chicago Railway Co. vs. Shaeffer, 59 Pa. St., 356. This question was not involved in Roberts, et al. vs. Woven Wire Mattress Co., 46 Md., 374. But if this view was at all doubtful, the result would not be different in this case. The directors are not the creditors. The body corporate is. If the directors were derelict in not giving notice to the sureties, or if the directors even connived at the fraud of Ridgaway the sureties of the latter cannot claim exemption because of the neglect or misconduct of other officers. It is a sound principle that the failure of one officer of a corporation to discharge his duty does not release the sureties of another for responsibility for the defaults of the latter. ‘c Corporations can act only by officers and agents. They do not guaranty to the sureties of one officer the fidelity of the others. The fact that there were other unfaithful officers and agents of the corporation, who knew and connived at his infidelity, ought not in reason, and does not in law or equity, relieve them from their responsibility for him. They undertake that he shall he honest, though all around him be rogues. Were the rule different, by a conspiracy between the officers of a bank or other moneyed institutions, all their sureties might be discharged. It is impossible that a doctrine leading to such consequences can be sound.-” Pittsburg, Fort Wayne and Chicago Railway Co. vs. Shaeffer, 59 Pa. St., 356; Taylor vs. Bank of Ky., 2 J. J. Marsh, 564; United States vs. Kirkpatrick, 9 Wheat., 720. It is true some cases have held that where the employer has knowledge of the servant’s fraud and dishonesty and still retains him, and gives no notice to the surety, the latter is discharged. Atlantic and Pacific Tel. Co. vs. Barnes, et al., 64 N. Y., 385; Philips vs. Foxall, L. R., 7 Q. B., 666.

However this may be, we are of opinion that the doctrine has no application to this case. Conceding that Ridgaway was dishonest, and that the directors of the bank knew it and still retained him in his position without notice to the sureties, this could not release the sureties, even though it had been the duty of the directors to give such notice, unless it be held that the failure of one set of officers to discharge their duty will release the sureties of another delinquent officer; whereas, as we have seen, just the reverse is the law.

The prayers marked six and six and a half presented by the appellants and rejected by the Superior Court, sought an instruction to the effect, that if the bank had knowledge of Ridgaway’s default and retained him as cashier and paid him a salary, and if the bank after the default had any money or securities in its possession the avails of which might have been applied to the payment of the debt and the bank failed or neglected to hold the securities, or to apply the avails thereof and the money towards the payment of the debt, it could not recover for any money so paid Ridgaway for salary or which might have been so realized from said securities.

The mere fact that the creditor retains the principal in his employment after knowledge of a default will not discharge the surety from an antecedent liability. Pittsburg, Fort Wayne and Chicago Railway Co. vs. Shaeffer, 59 Pa. St., 356.

In the ordinary dealings between a bank and its customer, when the latter has money standing to his credit on deposit in the bank, and the bank holds his independent promissory note upon which there are sureties, if the bank upon the maturity of the note honors the customer’s check drawn against that credit instead of applying the credit to the payment of the note, the sureties are not released. The right of the bank to apply the credits of the customer to the satisfaction of such a note is rather in the nature of a set-off or of an application of payments, neither of which, in the absence of express agreement or appropriation, will be required by the law to be so made as to benefit the surety. Martin vs. Mechanics’ Bank of Baltimore, 6 H. & J., 235 ; National Mechanics’ Bank vs. Peck, 127 Mass., 301; Glazier vs. Douglass, 32 Conn., 393; Strong vs. Foster, 17 C. B., 217. Now Ridgaway stood towards the bank, in this respect, precisely in the situation occupied by a customer. To the latter the bank is a debtor to the extent of the balance to his credit on deposit. To Ridgaway it was a debtor for his salary. Its failure to set off the debt due by it to the customer against the note due by him to it does not release the sureties on that note. Why should its failure to set off the amount of the salary due by it to Ridgaway against the debt due by him to it discharge the sureties on the bond which secures that debt ? We see no reason for any distinction and in our opinion the legal principles applicable to the one case must govern and control the other.

The other proposition stated in prayer six and a half respecting the securities delivered by Ridgaway to it must be considered in connection with the particular facts disclosed by the record and relating to this subject. It appears that on February sixteenth, 1883, Ridgaway took $750.00, of the bank’s money and in place of it left his check for that amount to which was pinned as collateral, a certificate of Baltimore and North Carolina Gold Mining Company’s stock. This check represented part of tlie indebtedness of $8,133, and with the certificate pinned to it was carried as cash by the paying teller until February, 1885. When the device heretofore, spoken of was resorted to by Ridgaway in February, 1885, to get the evidence of his defalcation out of the cash items, the paying teller handed back to Ridgaway the $150.00 check with the certificate -of stock still pinned to it. Thus Ridgaway first embezzled the money, and then by means of fictitious entries abstracted the stock which he had previously pledged to the bank. How the failure of the hank to realize anything out of this stock, under these circumstances, can affect its rights or alter the responsibility of Ridgaway’s sureties, we are utterly unable to see. Ridgaway’s fraudulent conduct prevented the bank from realizing ón the collateral, and surely this additional breach of duty on his part can furnish no exoneration to his sureties. When the creditor parts with a security upon which he has a lien for the payment of the principal’s debt and to which the surety has a right of subrogation on paying the debt, he impairs his claim against the surety. But that doctrine has no application to a case where the principal has himself fraudulently abstracted the very collateral-which he had previously pledged.

The only other security ever held by the bank of Ridgaway’s debt was a certificate for shares in the Baltimore and North Carolina Gold and Copper Mining Company delivered by Ridgaway to Mr. Hooper, the new president, and these shares the bank still holds, and the sureties will be entitled thereto upon payment by them of the amount due by Ridgaway.

The prayer marked five and a half needs no special comment, as what we have said in disposing of the fifth, sixth, and sixth and a half prayers is sufficient to show that the Superior Court was right in rejecting it.

The eighth and ninth prayers of the appellants asked the Court to exclude from the consideration of the jury the admissions of Ridgaway as to his indebtedness to the bank. These admissions were comjietent though not conclusive evidence against the sureties. State, use of Clarke vs. McKee, 11 G. & J., 378; Ruby and Longnecker vs. State, use of Vernay, 55 Md., 484.

The third prayer of the appellants was abandoned.

The second prayer of the appellants was erroneous because it was founded on the theory that the President of the bank could lawfully loan the bank’s money to an officer of the bank, despite the emphatic provision to the contrary in the charter. Engler vs. People’s Fire Ins. Co. of Balto., 46 Md., 322.

The only remaining question arises under the first, fourth and fifth prayers of the appellee. And that question is, was the Superior Court right in instructing the jury to allow interest on each of the items making up the total defalcation of Ridgaway, from the respective dates of those items ? Generally speaking, the rule is that interest should be left to the discretion of the jury; but this rule is not without exceptions, andamongst its exceptions are cases on bonds or on contracts to pay money on a day certain, and cases where the money has been used. Fridge vs. State, use of Kirk, 3 G. & J., 117; Gott vs. State, use of Barnard, 44 Md., 339; Comegys vs. State use of Dyckes, 10 G. & J., 186. Ridgaway improperly and unlawfully took and applied to his own use, the money of the bank, and his obvious duty is to put the hank in the precise position it would have occupied had the money not been taken and retained by him. As between him and the bank the duty on his part to pay interest on each sum he embezzled from the time of embezzlement was as positive as the duty to repiay the money itself. The whole sum and the interest on each item make up the true measure of damages against him for wrongfully taking and detaining or using the money of the bank. The extent of his liability fixes the extent of the responsibility of his sureties whenever the latter are answerable for him. Gott vs. State, 44 Md., supra.

(Decided 14th November, 1890.)

Finding no errors in the rulings excepted to, the judgment will he affirmed, hut the appellee will be required to pay the costs occasioned by the printing in the record of the opinion of the Judge of the Superior Court, as that opinion properly forms no part of the record.

Judgment affirmed, with costs.