Watt v. German Savings Bank

Ladd, J.

Novation : substitution of new debtor : surrender of old notes, etc. Many cases pending in the district court were consolidated for the purposes of trial. As the pleadings cover 161 pages of the otherwise voluminous abstracts, the issues will be better understood if separately stated in disposing of specific claims. A brief history of the enterprises involved seems essential by way of introduction. The German Savings Bank was organized as such, with a capital of $50,000, in 1892. A partnership known as Newman Bros., or Newman Brick Company, became indebted to the bank, and, on October 3, 1896, executed a mortgage covering its brick plant, including brick on hand and any additions thereto, to E. C. Kelly, as trustee for the bank, to secure the payment of $5,132.51 then owing said bank. A receiver was appointed for the bank in January, 1897, but it was reorganized in June following., A perusal of the opinion in German Sav. Bank v. Des Moines Nat. Bank, 122 Iowa 737, in connection with the record in this case, discloses the fact that the officers of this bank could not be made to understand Section 1869 of the Code. James Watt succeeded J. W. Geneser as cashier, March 27, 1899, and was elected a director in June of the same year. He continued as cashier until elected president of the bank, in November, 1906, and held this office until his departure from this life, in April, 1911. He had been a retail and wholesale grocer, prior to his connection with the bank, and had never been engaged in or connected in any manner with the Manufacture of brick or othei; building material. The business of the bank was prosperous under his management, its capital stock doubling, deposits steadily increasing from about $100,000 to over $1,000,000, with remunerative dividends; and, upon its consolidation with the Des Moines National Bank, in December, 1914, the value of its stock was computed at $125 per share, with the prospect of a dividend on bills receivable retained by it. This much is said in explanation of loans made in the promotion of the brick plant, which it seemed impossible for it to let go of, and on which over $40,000 were lost. The mortgage to Kelly, as trustee, was assigned to the bank, by it foreclosed, and the brick plant sold under special execution, the bank acquiring title under sheriff’s deed in April, 1902. On May 24th following, a corporation known as the- Granite Brick Company was organized under the laws of this state, with capital stock of $25,000, divided into 250 shares. Of these, 50 shares were issued to each of the organizers, who became the directors of the company, to wit: A. Newman, O. Newman, B. M. Newman, John Keefner, and James Watt. A. Newman became president of the company, Keefner, secretary, and Watt, treasurer. The latter only was connected with the bank. Nothing was paid for these shares. The bank conveyed the real estate and machin-. ery of the brick plant by deed, and the personal property by bill of sale, to the new company; and the latter, in consideration therefor, executed two notes, one for $5-13.47, and another for $7,000, to the bank, and gave a mortgage on said property to secure the payment of the last-named note. On January 19, 1906, a second mortgage was executed to the bank, securing “$13,000, as evidenced by the several notes of the Granite Brick Company and owned by the said German Savings Bank.” The first of these mortgages was promptly recorded, but the last was not filed for record until May 24, 1912. The indebtedness of the Granite Brick Company to the bank gradually increased, as it had under partnership management, and, on December 9, 1908, amounted to about $34,000, besides the current bills owed to others, aggregating $6,000. Difficulties appear to have been experienced in obtaining the approval of the state bank inspector of so large an amount loaned to one debtor, and, early in March, 1909, another corporation, bearing the same name, was organized under the laws of Arizona, with a capital stock of $50,000. It was to begin business when its articles were filed, which was on the Sth of the same month. Thereafter, the Granite Brick Company, organized under the laws of Iowa, which will hereafter be referred to as the Iowa Company, transferred all its property to the company of the same name, organized under the laws of Arizona, hereafter to be designated the Arizona Company. The latter took over the property of the Iowa Company, subject to its debts. The Arizona Company was no more successful than its predecessor, and its property was sold, on foreclosure of the two mortgages mentioned, after Watt’s death — the company’s realty for $1,500, and its personalty for $534. Through redemption under another of the bank’s judgments against the Arizona Company, a further credit of $2,500 was entered for the property. The design of the German Savings Bank in these suits, consolidated, is to recoup, from others than the two insolvent companies, the losses consequent upon credits extended to them, and to ascertain who, other than the Arizona Company, is liable for the repayment of money borrowed .from the Des Moines National and the Bevington Bank.

I. On May 21, 1912, the German Savings Bank filed its claim, duly verified, against the estate of James Watt, deceased, for $27,712.03, based on six promissory notes, said to have been executed by, or evidencing debts of, the Iowa ‘Company to said bank, prior to December 9, 1908, and a proposition of Watt’s and a resolution of acceptance by the stockholders of said company. Four of these notes were signed by the Iowa Company. Of these, one for $3,048.97 was proven to have been paid. Another was for $14,068, dated May 31, 1907; still another, for $7,000, bearing the same date; and the fourth one for $2,105.68, dated May 28, 1908. All were payable on demand. Two of the notes were signed by John ICeefner, August Newman, and A. H. Newman, but not by the Iowa Company, one being for $2,800 dated December 22, 1906, and the other, for $2,500, dated December 22, 1907. Both are payable on demand. The alleged liability of Watt’s estate is based on a proposition made by him on December 9, 1908, to the stockholders of the Iowa Company, he then being president, and the owner of 10 shares of stock, in words following:

“It appearing that the company was badly involved, and unable to dispose of its property at a price sufficient to pay all the indebtedness, Mr. Watt, president o'f the company, submitted the following proposition, which was adopted by a unanimous vote of all present:

“ 'Whereas it appears from an investigation of the affairs of the Granite Brick Company that it is indebted to the German Savings Bank in the sum of $34,000, and in addition thereto on current bills, to the amount of about $6,000,

“ 'Now, therefore, at this special meeting of the stock holders of the said Granite Brick Company, in which all the stockholders are personally present, it was resolved that there be a reorganization of said Granite Brick Company; that the capital stock thereof be increased to fifty thousand dollars; that James Watt agrees to pay off all the indebtedness of said Granite Brick Company, if each of the stock holders will transfer to him all their stock in said Granite Brick Company, and it being deemed advisable so to do, each of the stockholders do transfer to James Watt their stock in the Granite Brick Compány, the same to be his absolute property. In consideration therefor, the said James Watt agrees to pay all the indebtedness of said Granite Brick Company of all kinds and character; to increase the capital stock of said Granite Brick Company to fifty thousand dollars ($50,000.00), and deliver to each of the stockholders herein named the following shares in the reorganized company:

“‘To August Newman .....................10 shares

To Miss Rose Newman and brother..........10 shares

To Arthur Newman........................10 shares

To H. B. Hawley..........................10 shares

To Benson & Marxer.......................10 shares

To John Keefner..........................10 shares

To James Watt.....................■.....440 shares

“ ‘Said stock to be fully paid up when issued. James Watt further agrees, with reference to the 440 shares owned by him in the reorganized company, that he will sell any portion of said 440 shares to any of the foregoing stockholders at the actual value of said shares. The said above-named stockholders to have ten days’ option whether or not they will purchase any portion of said 440 shares, on the above condition, from the ninth day of December, 1908.’’ ”

2. contracts : utera^per-011' feet. ' 3. Contracts: performance : substantial performance. The executors of the estate, among others, interposed the defenses: (1) That the proposition and resolution were abandoned and never carried out; and (2) that the Arizona Company executed its notes to the German Savings Bank, which accepted same in satisfaction of the Iowa Company’s notes, and cancelled and surrendered the latter. The president and the secretary (Keefner) were appointed a committee to carry out this arrangement, but the secretary did not act. The president proceeded so to do, and neither he nor the executors of his estate is in a situation to plead the invalidity of the .resolution on the ground that Mrs. Keefner, part owner of ten shares in the Iowa Company, was not present at the stockholders’ meeting, especially in view of the circumstance that neither she nor any other ever raised objection on that ground. Nor was there any substantial variance from his undertaking in organizing a new company, rather than increasing the capital stock of that existing. . The same result was accomplished, and accepted as compliance with the terms of the resolution by all those interested except the Keefners; and, having availed himself of all the advantages of the resolution, neither he nor his representatives should be permitted to assail its validity, • on the ground that he did not perform his part precisely as he had promised. Substantial performance was all that was required; and, as those adversely interested are content with what he did, neither he nor his representatives may evade his further obligations, if any there are. On March 4, 1909, he, with others, organized the Arizona Company, with capital as stipulated, caused the conveyance by the Iowa Company of all its property to the Arizona Company, subject to the Iowa Company’s debts, and also caused the shares of stock therein to issue as follows: August Newman, 10 shares; Rose Newman and brother, 10 shares; John and Jessie Keefner, 10 shares; Arthur Newman, 10 shares; Benson & Marxer, 101 shares; James Watt, 88 shares; J. C. O’Donnell, 88 shares; L. J. Klemm, 88 shares; H. N. llaAvley, 98 shares; J. O. Wells, 88 shares.

Each of the shareholders in the IoAva Company, except Mr. and Mrs. Keefner, received the number of shares stipulated in the resolution. Keefner concluded to have nothing further to do with the concern, and therefore did not receive the certificate of 10 shares prepared for himself and wife. The shares reserved to Watt were issued to himself and the four others last named. That Avhich was done was a substantial compliance with Watt’s undertaking, though he appears to have been compelled to organize a new company outside of the state, probably in order to avoid a recent statute exacting the full payment of all stock issued by any corporation-organized for pecuniary profit within the state. The evidence, however, is conclusive in sustaining the other defense. The Arizona Company, on May 31, 1910, executed its promissory note for $13,000, for and instead of the $14,068 note heretofore mentioned, and this latter note was renewed on October 31, 1911. The Arizona Company executed its promissory note for $7,000 on May 3, 1910, for and instead of the note of like amount of the Iowa Company, and reneAved it on October 31, 1911. Said Arizona Company executed its note of $2,105.68 for and instead of the note of like amount of the IoAva Company. Upon receipt thereof, the notes of the Iowa Company were surrendered, and subsequently the bank brought suit against the Arizona Company on its notes so taken, and obtained judgment thereon. That this amounted to a complete novation of the indebtedness cannot well be questioned. Michigan Stove Co. v. A. H. Walker & Co., 150 Iowa 363; Foster v. Paine, 63 Iowa 85.

“Where the note of a third person is taken for a preexisting debt, which is surrendered up, and the holder of the note thus taken elects to sue, and merge the note into a judgment, he Avill be estopped to say that he did not take the new note in substitution for, and in extinguishment of, the old debt, especially while the judgment so taken remains, so far as appears, a valid, enforceable security. After one has taken a second or substituted note, and surrendered up the original, and has cut off all defenses to the note so taken, either by transferring it to an innocent holder, or by himself putting it into a judgment, he will be estopped from taking another judgment against the original debtor on the obligation theretofore surrendered up.” Dick v. Flanagan, 122 Ind. 277 (23 N. E. 765).

See Hooker v. Bubbard, 97 Mass. 175; Tysen v. Sommerville, 35 Fla. 219 (17 So. 567); In re Petition of Bocken, 93 Mich. 342; 29 Cyc. 1137.

4. contracts : construction: subject-matiigatíon.of ob" Neither in the reports of its examining committee to the state auditor nor otherwise did the bank assert any claim against Watt on these notes based on the resolution (though required to state liability of directors as borrowers and as endorsers), or otherwise. There was a complete novation of the indebtedness, and the claim, in so far as.based on the four notes, was rightly denied. According to Keefner, the notes signed by him and August and A. H. Newman were given for money loaned by the ° ° ° bank to the Iowa Company, and were carried 011 ®.e books of the latter as bills payable. But this did not constitute these notes obligations of that company. It did not sign the notes. There is no evidence in the record that the bank ever looked to it for payment. They were charged off the books of the bank as of doubtful value. Though, upon satisfaction of the notes, the makers might fix liability for repayment on the company, surely the bank is not in a situation to establish a claim based solely on these notes on the mere showing that the money was loaned on the credit of the officers of this company individually, though for the use of the company. The claim was rightly rejected.

5. Guaranty : discharge of guarantors: guaranty of debt: novation of debt: effect. II. On March 4, 1909, Watt, Hawley, Klennn, O’Donnell, and Wells each executed to the German Savings Bank a separate instrument in words following:

“This agreement made and entered into this 4th day of March, A. D. 1909, by and between Jesse O. Wells, party of the first part, of Des Moines, Iowa, and German Savings Bank, party of the second part, of Des Moines, Iowa, witnesseth:

“Whereas the party of the first part is a stockholder in a corporation known as Granite Brick Company, located and doing business in the city of Des Moines; and

“Whereas said Granite Brick Company is indebted to the German Savings Bank, party of the second part, and is desirous of obtaining an extension of time on said indebtedness;

“Now, therefore, in consideration of such extension of time as may be given to said Granite Brick Company by the German Savings Bank, and for the purpose of obtaining such extension, and in consideration of one dollar in hand paid, the party of the first part does hereby guarantee the payment to the German Savings Bank by the Granite Brick Company of the sum of $4,000 of the said indebtedness owing by the Granite Brick Company to the German Savings Bank, with interest thereon at such rate as may be agreed upon between said brick company and said bank. This guarantee is intended as a guarantee of $4,000, other than the like sums the payment of which is guaranteed to said bank' by the other stockholders of said brick company.

“The party of the first part does further agree to waive demand, notice and protest, and does ratify and consent to any extension or extensions of time which may be given by said party of the second par*t to said Granite Brick Company, upon any of its indebtedness, and does further agree to endorse the notes of said Granite Brick Company and any renewals thereof, if requested by said bank to do so, for the amount above guaranteed. Witness my hand the day and year above written.”

6' consideration: consMeration tension ot ‘ Claim based thereon for $4,000 was filed against the estate of Watt on May 13, 1912; and on December 12, 1913, actions were begun on like instruments against the other parties executing the same. Two of the defenses interposed are common to the five suits, to wit: That (1.) this guaranty was of the indebtedness of the Iowa Company, and all of such indebtedness has been discharged by the execution of notes of the Arizona Company, or otherwise satisfied; and (2) the consideration for the execution of the guaranty was never performed. Taking up these defenses in the order stated, it is to be said that, at the time these papers are presumed to have been signed, i. e., their date, March 4, 1909, the Arizona Company had not been organized. Though it may have been contemplated, it was not indebted to anyone, nor had it begun to do business. It could not lawfully do so xmtil its articles of incorporation were recorded in Arizona, and this did not happen until four days later, and it acquired no property until conveyed to it by the Iowa Company. Certificates of stock were not issued until the 20th of that month. That the indebtedness of the Towa Company was contemplated finds confirmation in the testimony of Wells and IClemm. The former testified that Watt stated that the paper of the Granite Brick Company had been or might be criticised, and asked him to sign it, and said that he would have some stock issued to him as collateral security, which would be ample. Wells had not been a stockholder in the Iowa Company, and was not then advised concerning the organization of a new corporation. Surely he had no reason to suppose, then, that he was undertaking to guarantee indebtedness of a corporation to be organized thereafter, and to be by it created, but rather, one in existence, of which he knew, and an existing debt of the latter’s. Klemm testi fied that Watt and O’Donnell requested him to sign the guaranty, and that O’Donnell said that there was “some comment on the Granite Brick Company’s paper there, and they wanted to make a good showing in regard to the committee on examination.” Both witnesses swore that- they were told that, if they signed the paper, the bank would take care of it. Hawley was not called as a witness, and Watt and O’Donnell are dead. This evidence indicates that a temporary purpose only was to be subserved, -i. e., securing the indebtedness of the Iowa Company until it might be cared for or taken over by the Arizona Company, rather than that the obligations were to secure the debts of a corporation thereafter to be organized. Moreover, the consideration recited in the guaranty is “such extension of time as may be given to said Granite Brick Company by the German Savings Bank, and for the purpose of obtaining such extension.” No extension was ever applied for or granted, for the reason, manifest in the record, that the Arizona Company discharged the obligations of the Iowa Company by executing its notes instead, or procuring money elsewhere to satisfy the same. No other consideration was shown. True, the bank forebore from enforcing collections for a while, and took the Arizona Company’s notes in lieu of those of the Iowa Company; but this was not in pursuance of a promise other than may be inferred for such time as it might elect, and this would not constitute valuable consideration, as it imposed no obligation on the bank to forbear for any specified length of time. Strong v. Sheffield, 144 N. Y. 392; Gates v. Hackethal, 57 Ill. 534; 9 Cyc. 345. For these reasons, the court did not err in dismissing the claim on the guarantee against the estate of Watts, or the suits against the other signers thereof.

7' TxoNs°fAcorñaMntyd°onS' unpaid s oc t. III. Shares in the Arizona corporation were issued to the persons signing the guaranty considered in the preceding paragraph. These shares were not paid for, otherwise than by surrendering stock in the Iowa corporation. As part of the claim against the estate of Watt, and as a separate count in petition filed in the actions on the guaranties, face value of the shares, alleged not to have been paid for, is sought by the German Savings Bank. The lat ter appears to have been a judgment creditor of the Arizona Company, which is Avithout property, and, as is contended, 88 shares of stock each were issued to Wells, Klemm-, O’Donnell, and Watt, and 98 shares to Hawley. The face value of this stock avrs $100 per share. Several defenses are interposed, which may be separately considered.

8. corporasideratton con" (a) Bach of said stockholders contends that there was a consideration, in that stock in the Arizona Company Avas issued in payment of the property of the Iowa corporation, and that this was in accordance with the arrangement between the stockholders, for ghares were issued by the Arizona Company as per the requirement of the resolution of the stockholders of the Iowa Company, save that, of the 440 shares to be issued to Watt, 88 were issued to him, and 352 shares distributed to the other four defendants. Surely, the assumption by Watt of all the indebtedness of the loAva Company was consideration for the issuance of the 440 shares of stock; and if these were by his consent issued to others, it is not perceived wherein there is room for complaint by the German Savings Bank. If Watt was entitled to the 440 shares, he might dispose of them as he pleased, and the circumstance that they were issued direct to his associates, instead of to him and then assigned to them, can make no difference. Moreover, the new company, according to a resolution of1 the stockholders,’ issued all its stock, as stated, in payment of the property and assets of the Iowa Company, “subject to the debts of the Iowa corporation.” Sure ly, these shares of the capital stock were not issued without consideration.

(h)- In any event, the German Savings Bank is not in a situation to assert the claim for unpaid portions of the face value of this stock, if not fully paid for; for that credit was extended to the Arizona Company with knowledge that the stock was issued without other consideration than stated.

Recovery of a creditor from a stockholder for unpaid subscription for stock, or, in event of payment in property, for the undervaluation, is allowed on the theory that a fraud has been practiced on the creditor, who has the right, in dealing with the corporation, to assume that its stock is fully paid; and, of course, there can be no recovery where the creditor deals with full knowledge that payment therefor has not been made. State Trust Co. v. Turner, 111 Iowa 664.

9. Banks and banking: imputing knowledge of director to bank. As early as October 30, 1908, the directors of the bank were informed in a report made by Watt to them that a change would be made in the management of the Granite Brick Company, and that its prospects were very bright. A director of the bank, Jerry B. Sullivan, prepared the resolution heretofore set out, in pursuance of which the Arizona Company was organized, and which recited that shares of stock were to be issued without other consideration than therein recited. It does not appear that he was acting as attorney for the Iowa Company in preparing the resolution. Certainly, he did not represent the bank in connection with what he did; and, for this reason, the latter is not presumed to have been informed by him of what he ascertained in that transaction. What he learned was not acquired in the course of his employment, or in the performance of some duty owed to the bank, as agent or director, and therefore he was under no obligation to communicate to it anything he ascertained. Hum mel v. Bank of Monroe, 75 Iowa 689; Caffee v. Berkley, 141 Iowa 344; Anderson v. Kinley, 90 Iowa 554; Findley v. Cowles, 93 Iowa 389; Goodbar, White & Co. v. Daniel, 88 Ala. 583 (16 Am. St. 76). The general rule is that the i>rincipal is bound by the knowledge of the agent, and that rule is based on the duty of the agent to communicate to the principal his knowledge with reference to the subject of the negotiation, and the presumption that he has performed that duty.

There are exceptions to this rule, however, as where to disclose information to a principal would violate professional confidence, or be inimical to the agent’s interest, or where the circumstances are such that, in all reasonable probability, the principal was not informed by the agent. Sometimes notice is constructive, as when the principal is unconnected with a previous transaction in which the information is obtained, and “where the transaction in question closely follows and is intimately connected with a prior transaction, in which the agent was also engaged, and in which he acquired material information, or where it is clear from the evidence that the information obtained by the agent in a-former transaction was so precise and definite that it is or must be present to his mind and memory while engaged in the second transaction, then the foregoing req-. uisite (general rule) becomes inapplicable.” 2 Pomeroy on Equity Jurisprudence (3d Ed.), Section 672.

See Findley v. Cowles, 93 Iowa 389; German Sav. Bank v. Des Moines Nat. Bank, 122 Iowa 737; 2 Thompson on Corporations (2d Ed.), section 1626; Hummel v. Bank, supra; Lea v. Iron Belt Merc. Co., 147 Ala. 421 (119 Am. St. 93); Meehem on Agency (1st Ed.), Sections 721, 770, Note 2.

Knowledge of the method pursued in the organization of the Arizona Company, then, may not have reached the bank through Sullivan, who prepared the resolution of the directors of tlie Iowa Company on which the organization of the Arizona Company was based, nor, owing to conflicting interests, through the directors of the latter company, even though directors of the bank at the same time. But the headquarters of the two companies, throughout their active existence, were at the bank. All meetings of their directors were held in the directors’ room of the bank. Much of their business was there transacted. The stockholders of the Iowa Company were met there when Sullivan prepared the resolution on which the incorporation of the Arizona Company was based, and when it was adopted. The incorporators met there to adopt the articles of incorporation of the Arizona Company and elect its officers; and in the same month, March 30th, what had been done was reported to the board of directors of the bank at its regular meeting, as in the minutes thereof appears the following:

“President Watt reported regarding the reorganization of the Granite Brick Company. After a thorough discussion of same, Mr. Wilcoxen congratulated the officers and directors for their part in the reorganization of the Granite Brick Company, stating that, in his opinion, the paper of the company is first class, and is as good as any paper in the bank. Mr. Wilcoxen presented and moved the adoption, and seconded by Mr. Wells, the following resolution:

“ ‘Whereas the president and cashier of this bank have been instrumental in the reorganization of the Granite Brick Company, with a view of securing its indebtedness to the German Savings Bank, by accepting from five different individuals the guaranty of each for the sum of four thousand dollars, in all amounting to twenty thousand dollars, we commend and approve their action. Unanimously adopted.’ ”

10. Banks and banking : knowledge of director knowledge of bank. These circumstances leave no doubt as to the bank’s knowledge. If Watt reported truthfully, as, in the absence of anything to the contrary, he must be presumed to have done, and if the organization of the company was thoroughly discussed, as stated, it is hardly conceivable that the basis on which stock was issued could have been overlooked, especially since Sullivan, who was as well informed on this subject as Watt, was present, and, so far as any professional obligation as attorney was concerned, was entirely free to discuss the matter. Had the board of directors not been aware that the funds of the company had not been increased, probably sole emphasis would not have been placed on the guarantees, as rendering the credits of the bank sound. Nothing to .the contrary appears in the record, and we find that the bank was informed, long before extending credit to the Arizona Company, of the consideration, such as it was, for the issuance of the several blocks of its stock. The directors of a bank constitute its governing body. As such, they superintend and control all its affairs, and in the fullest sense represent the bank; and notice to the board was notice to the principal, regardless of having agencies through which to transact its business. Bank of Pittsburg v. Whitehead, Sproul & Co., 10 Watts (Pa.) 397 (36 Am. Dec. 186), and valuable note.

As said in Toll Bridge Co. v. Betsworth, 30 Conn. 380, “what the directors know regarding matters affecting its interests, the corporation knows.” The bank, once informed, will not be permitted to forgét, upon some change in its directorate. Mechanics’ Bank v. Setons, 1 Pet. (U. S.) 298.

Our conclusion is that recovery for alleged unpaid subscriptions for stock was rightly denied.

11. Frauds, siaiute ok: debt of another : oral promise. IY. The Bevington Bank, a partnership, composed of Watt, O’Donnell, Klemm, T. F. Kelleher, and J. B. Sullivan, filed its claim against the estate of Watt on May 9, 1912, based on two promissory notes: one for $5,000, dated December 21,1908, executed by the Granite Brick Company, payable to said bank, and endorsed by J ames Watt; and the other for $10,000, dated May 21, 1909, executed by the Granite Brick Company, and payable to said bank. The alleged liability of Watt on this last note is predicated: (1) On Watt’s alleged promise to endorse the note; (2) on the fact that the loan was for his benefit, and he promised to pay the note as an individual undertaking; (3) on the fact that he is liable to pay same, under the arrangement of December 9, 1908, being his proposition and the resolution of acceptance of the stockholders of the Granite Brick Company; and (4) on the fact that Watt knew, at the time, that said Granite Brick Company was insolvent, and,'notwithstanding this, caused the loan to be made to it for his own use and benefit, and without the knowledge or consent of other partners in the Bevington Bank. The executors, for answer, pleaded that the German Savings Bank was, in fact, owner of and operating the brick plant; that the incorporation of the companies and operation of the brick plant in their names was a mere subterfuge, to evade the statute forbidding a savings bank from engaging in any other business; and that the loans were really those of the said bank, and it only was liable thereon; and otherwise denying liability on the $10,000 note. The parties to this partnership, known as the Bevington Bank, entered into written articles whereby the capital was to be $3,000; Watt to act as president; Klemm, vice-president; O’Donnell as cashier; and Joseph A. Stamen, assistant cashier.

Business was begun July 1st following. The testimony in connection with the correspondence of Watt and O’Donnell with the assistant cashier in charge of the bank leaves no doubt that they exercised a minute control of all matters connected with the bank, and that the assistant cashier merely followed their directions in carrying on its business. Neither Sullivan nor Kelleher ever had any interest in either the Iowa or the Arizona Company, and did not take an ac- live part in the management of the Bevington Bank, and were never consulted about its loans. Indeed, the bank, located in the village of Bevington, which contained a population of about 150 people, and was situated 35 or 40 miles from Des Moines, made no loans, except these two to the Brick Company, elsewhere than in Bevington and its immediate vicinity. No account was kept with other than the Gemían Savings Bank. On December 21, 1908, when the $5,000 note ivas taken, it had on hand $1,885.99, and with the German Savings Bank, $2,348.82, or $700 less than the loan'made. Nevertheless, O’Donnell sent the note of $5,000, signed by the Iowa Company, and endorsed by Watt, with instructions as follows:

“In lieu of this note, please send us your draft for this amount. Carry the note in your bills receivable, and if you have not sufficient money on hand at this bank to take care of it, you send us your time certificate, as you have heretofore, and with notes endorsed, and attach to this certificate as collateral security.”

A certificate for $5,000 was issued accordingly, and the note was accepted in that amount, and credit to the Brick Company was entered by the German Savings Bank, check having been issued to it and endorsed over. On May 21, 1909, when the Arizona Company executed its note for $10,-000 to the Bevington Bank, said bank had on hand $1,754.27, and had overdrawn -its account with the German Savings Bank $396.91, and it was already indebted to that bank, exclusive of the overdraft, in the sum of $24,200.

The assistant cashier was in Des Moines on the 19th or 20th of May previous, and testified that Watt then said to him:

“‘I want to borrow $10,000, and I want to borrow it from the Bevington Bank.’ I told him T thought, if we had $10,000 to loan, we could make better use of it by loaning the money around Bevington, to people that might become pros pective customers, etc., and lie said, Well, that is all right too,’ but he says, ‘I want to make the loan.’ And I told him then that it might — that he would not have any trouble getting the money in Des Moines at some of the other banks; but he said he didn’t want to do that, and said he wanted to use the money for the Granite Brick Company. He said that, ‘Of course,’ he said, ‘you know I own the Granite Brick Company, and of course I have with me Mr. O’Donnell, Mr. Klemm,’ and he mentioned a few more people; but he said ‘They are just there,’ he says, ‘to fill the offices.’ He said, ‘They don’t have any particular interest in the matter, but the note will be signed by Mr. O’Donnell and Mr. Klemm for the Granite Brick Company.’ And so we let the matter go; and a day or two later, Mr. O’Donnell came down with a $10,000 note, and we gave the German Savings Bank—

“Mr. Kelleher: AVas there anything in the talk had between you and Mr. AYatt in reference to whether you had the money at Bevington to loan — $10,000 ?

“A. Yes, I told him that we didn’t have the money. Well, now,’ he says, ‘that is all right,’ he says, ‘we will fix that,’ he says, ‘all the money you loan me, the German Savings Bank will loan you back, just as much money as what you loan me.’ He said the note would be made out on demand, and that he expected that, in a week or two, at the highest in about three weeks, to pay this note, as he was on a deal then to turn some property, and as soon as he had the deal closed, he would have money enough to pay this $10,000 back. A day or two later, Mr. O’Donnell came down to Bevington with a $10,000 note, and that is the note the reporter has identified as Exhibit 19.”

He had no information other than that derived from Watt that such a note was being drawn, until O’Donnell brought the $10,000 note, signed by the Arizona Company, and payable on demand to the Bevington Bank on May 22d. The transaction, however, had been entered on the books of the German Savings Bank the day previous. A deposit was made to the credit of the “Pressed Brick Company” in that amount in the form of a check, and a charge of $10,000 to the Bevington Bank was entered on its hooks. However, the note was accepted by the assistant cashier the following day, and the certificate of the Bevington Bank to the amount of $10,000 issued to the German Savings Bank. If a check for that amount was issued, the record does not so indicate, but rather that the transaction was a mere matter of bookkeeping. The loan would not have been made by the assistant cashier but for the circumstances recited. At that time, there was an overdraft of the Iowa Company on the German Savings Bank of $6,150.97. This, of course, was extinguished, leaving a balance of $3,856.53, $1,708.38 of which was applied in satisfaction of the accrued interest on various notes of the Iowa Company to the bank. In December, 1908, Watt had directed the manager of the Iowa Company not to draw any more checks on the German Savings Bank, and shortly thereafter sent for and obtained all the books of that company; and on December 22d, the day after the $5,000 note was given, an account was opened with the “Granite Pressed Brick Co.,” with a deposit of the proceeds of that note; and on the same day, $2,000 was checked out to pay a note of Watt’s of that amount, owed to the bank, probably for money advanced for the use of the Iowa Company, and more than what remained was applied on its debts. The overdraft increased, as said, until it reached over $6,000, when the $10,000 note was given, all in paying debts of the Iowa Company. The record leaves little, if any, doubt that all, or substantially all, of the proceeds of these notes were made use of in discharging the indebtedness of the Iowa Company, which, as seen, Watt agreed, at the meeting of the stockholders of the Iowa Company to pay; 'and this may account for his speaking in the first person, and for what he undertook to do, as evidenced by his con versation with the vice-president of the Bevington Bank, as testified by the latter’s 'son, John Klemm, who was in the employment of the German Savings Bank:

“I was in the German Savings Bank when the name of my father was attached to the note, Exhibit 19. That was in the afternoon of May 21, 1909. At that time, I was working •down at the plant of the Granite Brick Company, and Mr. O’Donnell and my father .had been down there, and we had come in that afternoon in an automobile, and had come to the bank, and Mr. Watt called my. father in to sign that note. I was present. It took place at Mr, Watt’s desk, in-the front end of the bank. I didn’t take any part in the transaction or conversation, but I heard what was said. Mr. Watt called my father up to the desk and handed him the note, Exhibit 19, which was already filled out. Mr. O’Donnell was sitting in his chair opposite where I was standing, and Mr. Watt asked my father to sign the note. He says, ‘I want to get this money at the Bevington Bank;’ and papa said, ‘If it is to become a loan for us to make down there, I object to making it.’ Mr. Watt says, ‘You know I have already made arrangements, and I have told you before that I would loan the Bevington Bank as much money as they would loan to the Granite Brick Company.’ Papa says, ‘I object to signing that down there.’ Mr. Watt wanted to know if he would sign it if he endorsed, and my father said ‘Yes,’ and papa then signed it, and says, ‘You will endorse that note,’ and he says, ‘Yes,’ and he says, ‘I will pay it when it comes due.’ ” ,

12. Banks and banking : officers: misapplication of funds. • This leaves no doubt that the loan was made on the credit of Watt, in so far as others than he and O’Donnell participated therein; and the record indicates not only that, but also that the proceeds were applied largely in discharging debts which Watt, in the resolution heretofore quoted, had undertaken to pay. Though there was no such concern as the Granite Pressed Brick Company, Watt must have liad this in mind as the name of the company to be organized. At any rate, the áccount was evidently opened through-which to care for the obligations of the Iowa Company, precisely as the guarantees were obtained to cover its obligations, pending the organization of the Arizona Company and its assumption of the outstanding indebtedness of the Iowa Company. The fair inference from the record as' recited is that he recognized his obligation to pay the note of May 21, 1909, and that it was executed on his express oral promise to endorse and pay; and he became quite as liable thereon as though he had endorsed it, as agreed. It was not a case of promising to pay the indebtedness of another, but au undertaking to accomplish a purpose of his own: i. e., obtain the $10,000 out of which to discharge, in whole or in part, the debts of the Iowa Company. The loan was not made on the credit of that company, but that of Watt, and what he did was to subserve a purpose of his own, and the promise was not within the statute of frauds. Tarbell v. Stevens, 7 Iowa 163; Johnson v. Knapp, 36 Iowa 616; Blake v. Robinson, 129 Iowa 196; McDonald v. General Construction Co., 152 Iowa 273. The statute of frauds does not apply to promises in respect to debts created at the instance and for the benefit of the promisor, and plainly enough, the trial court did not err in holding that Watt was bound by his promises. What we have said is strongly confirmed by Watt’s relation as partner in the Bevington Bank. In negotiating the loan for the Arizona Company, of which he was president, from this bank, of which he also was president, and obtaining from the German Savings Bank the money for it to loan to said company, the president of which he had been for many years, he knew that the company was without assets exceeding its obligations, — for it had merely taken over the Iowa Company’s property, subject to its indebtedness, which the resolution of December 9, 1908, recited, exceeded what might be realized from its assets; that the Bevington Hank was without funds to loan; and that the directors of the German Savings Bank were loath to allow more of its moneys to be turned into the brick manufacturing experiment. At the time of this resolution, the indebtedness of the Iowa Company was shown to have exceeded «$40,000, the stock on hand to have been less than $10,000 in value, and its bills receivable little more than $2,000; and the value of the plant was estimated by one witness not to have been $10,000,. and by another, to have had an actual value of $50,000, though he admitted that he subsequently stated that it was not worth more than $15,000 or $20,000. A dividend was never declared by either company, and each seems to have exacted the expenditure of an average of $2,000 or" $3,000 per year, to continue the enterprise as a going concern. Watt was fully advised of the financial condition of the Arizona Company, and that it was without any property or assets above the indebtedness of the Iowa Company subject to which it had acquired title; and, in view of these and other circumstances alluded to, and especially of the fact that the loan was made to subserve his own purposes, the conclusion that what was done amounted to a misapplication of the partnership funds is not without foundation. Fair dealing between partners exacted the exclusion by him of all arrangements which were likely to impair the capital or profits of the firm. He might not sink the interests of the firm into those of himself alone, or of a corporation in which he was interested. Whatever he may have obtained out of the partnership in disregard of his obligation to the firm, equity will lay hold of and restore, as far asunay be, to the partnership. Neither by open fraud nor concealed deception, nor by any contrivance masking his actual relations to the firm, can he he permitted to hold to his own use or in the use of a company in which he was interested, acquisitions made in disregard of liis relation as partner.

“The relation of partners with each other is one of trust and confidence. .Each is general agent of the firm and is bound to act in entire good faith to the other. The functions, rights and duties of partners in a great measure comprehend those both of trustee and agents; and the general rules of law applicable to such characters are applicable to them. Neither partner can, in the business and affairs of the firm, clandestinely stipulate for a private advantage to himself.” Mitchell v. Reed, 61 N. Y. 123.

See Kimberly v. Arms, 129 U. S. 512 (32 L. Ed. 764); 30 Cyc. 446; United States v. Heinze, 218 U. S. 532 (21 Ann. Cas. 884), and note in which cases are collected.

A partner is not chargeable individually for losses attributable to mere errors of judgment, as distinguished from carelessness or bad faith. He is liable for such as result from any breach of his duty under the partnership articles, or which are not within the scope of the partnership business and which result from a willful disregard of duty on his part. Exchange Bank of Leon v. Gardner, 104 Iowa 176; Charlton v. Sloan, 76 Iowa 288; Snell v. De Land, 136 Ill. 533 (27 N. E. 183); 30 Cyc. 453; Burson v. Stone & Co., 135 Ga. 115 (68 S. E. 1038); Currier v. Bates, 62 Iowa 527.

The misapplication or misappropriation by Watt does not necessarily mean that he is guilty of embezzlement. See United States v. Heinze, 218 U. S. 532 (21 Ann. Cas. 884); Walsh v. United States, 98 C. C. A. 461 (174 Fed. 615). As remarked in Lear v. United States, 77 C. C. A. 527, 537:

“A reckless act, moreover, is always regarded as the equivalent of a willful one. * if * The possibility of injury was apparent on the face of the transaction, notwithstanding which the interests of the institution of which he was the trusted head were put aside, and his own made paramount, in utter disregard of the outcome.”

The circumstance that Watt undertook to endorse and pay the note plainly indicates that he had no intention of embezzling the partnership funds. On the other hand, it quite as plainly evidences a purpose on his part to so appropriate them as to render him personally liable therefor. What O’Donnell did in taking the note to the Bank of Bevington was merely in carrying out Watt’s purpose, and can be given no other significance than that he had personal knowledge of what was being done, and interposed no objection thereto. Klemm also knew of the circumstances, and acquiesced in the transaction on condition that Watt should endorse and pay the note; but the mere assent of these parties to the appropriation of the funds of the bank by Watt would not relieve him from liability therefor.

is. banks and bmtyS: lia" Counsel for the executors suggest that the certificates of deposit issued by the Bevington Bank to the German Ravings Bank had never been paid. This does not obviate the fact that these were-valid and binding obligations of the Bevington Bank,'and enforceable against that partnership, as well as the individual members thereof. Its business was so transacted as not only not to have yielded profits, but so that the original capital was entirely lost; and undoubtedly, the amount recovered from the estate of Watt will be absorbed in the liquidation of these certificates.

conclusions: understanding of wit-15' declaration oí conflieHngS mteiests. As the money of the German Ravings Bank ivas made use of indirectly in making the loan, there is no want of equity involved in the restoration of its funds, unless it shall appear that the Arizona Company was one of its instrumentalities in acquiring'property and conducting a business which the law prohibited. A thorough examination of the record has convinced us that such was imt the case, and that both companies were independent corporations, and not mere agencies of the bank to carry on a business enterprise which it might not lawfully do, under the statutes of this state. Prior to April 26, 1902, the only interest oí the bank in the brick plant was that of creditor. It had loaned to Newman Bros., or Newman Brick Company, a copartnership, something over $7,000, payment of which was secured by a mortgage on the brick manufacturing plant. That the board of directors of the bank exacted a statement from the firm concerning its financial condition on January 6, 1900, and appointed a committee to examine its books, and even took over its plant, to protect its security, did not indicate that it had undertaken to carry on a business which it was not authorized to engage in. What the bank then did was not inconsistent with the carrying on of its OW11 business OI loaning money and guardino- ibe security for its repayment, bubsequently, it acquired the plant under foreclosure of this mortgage; but, in the same year (1902), conveyed it to the Iowa Company, Avhich had been organized by those previously interested in the plant, in consideration of the execution of a mortgage back on the property to secure the payment of the indebtedness. The latter company was organized May 24, 1902, with August and Carl Newman, Keefner, Watt, and B. M. Newman, as directors and officers, the first four being president, vice-president, secretary, and treasurer, in the order named. One fifth of the capital stock was issued to each of the above-named persons. Watt only was interested in the German Savings Bank. At that time, L. J. Wells, Charles Weitz, W. M. Wilcoxen, John R. Rollins, and W. G. Harrison were directors of the bank. At a meeting of the board of directors, held June 3, 1902, Wilcoxen moved that the president (Weitz) and the cashier (Watt) be authorized to execute a deed to the Granite Brick Company, and the motion was carried. The directors of the company adopted a resolution accepting the deed and bill of sale. Of the stockholders thereiu, Watt only was interested in the bank. Wilcoxen, who was then a director of tlie bank, and continued such until shortly before the hearing in the district court, and who, as attorney, attended to the foreclosure proceedings for the bank, and prepared the conveyances mentioned, testified, in substance, that the transfers mentioned were bona fide, and further, that he had never heard that the brick manufacturing plant belonged to the bank, or that it was operating such plant through these companies. L. H. Kurts served as director throughout the same period, but, according to his testimony, had never heard that the bank had any interest in or claim to the brick manufacturing .plant, other than as creditor. August Newman, who was one of the organizers of the Iowa 'Company and its first president and a director throughout its existence, swore that he “didn’t know that the German Savings Bank had any interest in the plant,” and had never heard that the bank had any interest in it, or that the Iowa Company did not own it. Not a word is to be found in the minutes of the meetings of the board of directors of the Iowa or the Arizona Company or of the bank, inconsistent with full ownership on the part of these companies, and the bank’s- attiüide is entirely consistent with the relation thereto of an over-indulgent creditor. On and after July 30, 1906, others of the officers of the bank than Watt acquired stock of directors of the bank, in the brick companies, nor is there any evidence of the bank’s ownership of the brick plant other than the testimony of some witnesses in substance that they had so understood, and that Watt and O’Donnell had so declared. That the former is a mere conclusion and not admissible as evidence is manifest. Even if received without objection, such testimony is 110† at a]i persuasive. As to evidence of declarations by Watt and O’Donnell, we are of opinion that it nifty not be considered. Both had departed this life, and their interests in this respect were distinctly hostile to those of the bank. This being so, in whatever they may have said, they cannot be regarded as representing the bank. Love v. Anchor Raisin Vineyard Co., (Cal.) 45 Pac. 1044; State Sav. Bank v. Montgomery, 126 Mich. 327 (85 N. W. 879); Wheeler v. Home Sav. & St. Bank, 188 Ill. 34 (58 N. E. 598); 2 Thompson on Corporations (2d Ed.) 1262. Even the officers of a bank cannot be permitted to serve two masters having conflicting interests at the same time, themselves and the bank; and when speaking in their own inter’» ests, when antagonistic to those of the bank, what they may say cannot be treated as declarations bixiding their principal, the bank. This is for the reason, among others/ that such . declarations Qannot be said to have been made in the course of their employment by, or in the performance of their official duties in behalf of, the bank. Those interested in the bank who became stockholders in the companies operating the brick plant may well have had in mind the protection of the- bank’s claims against them, and probably this was Watt’s xnotive in participating' in the organization of the Towa Company, and possibly the Arizona Company also; but whatever the purpose, the evidence does not warrant the conclusion that the officers and directors of this bank persistently, for a period of ovex 10 years, violated the banking laws of this state by operating a manufacturing plant clandestinely, through the instrumentalities of apparently independent corporations.

16. bills and livery• aiaine" effeet0 reaa: V. On May 21,1912, the Des Moines National Bank filed its claim against the estate of Watt, based on a promissory note of $10,000, dated December 14, 1910, payable oxx demand to said bank, and executed by the Granite Brick Company, and endorsed by Watt, O’Donnell, Klemm, and Wells. Action was brought against the last three on December 26, 1913. The defense of the executors of the estate of Watt is that the indebtedness was that of the German Savings Bank, and it had consolidated with the Bes Moines National Bank, the latter taking over all its assets, and, as these exceeded its liabilities, there cannot be any recovery.

17. Banks and baníking : directors : scope of authority. Klemm and Wells each interposed the defense that the German Savings Bank really borrowed the money to reduce the indebtedness of the Granite Brick Company to it, and, to induce them to endorse the note, promised to keep them harmless, and further as alleged by the executors. The note was in renewal of one for like amount, and signed by the same parties, October 26, 1909. The defense based on the alleged ownership and operation of the brick plant by the German Savings Bank has been disposed of, but Wells and Klemm insist that the loan was procured for the benefit of said bank, and that they endorsed the note for that purpose, and that, if they are held liable thereon, judgment should be entered over against the German Savings Bank. It appears, however, that a check for the amount of the loan ran from the Bes Moines’National Bank to the Arizona Company, and it was turned over to the German Savings Bank by the Arizona Company, and by it entered to the credit of said company, and applied on its indebtedness. Wells testified that, at the time the first note was given, Watt said to him at the bank, in substance, that their cash was running short, and he would like to have him and some others endorse a note; and that, when Watt produced the note, he added his name to those of the other three; that, in signing, he supposed Watt was the principal; and that Watt remarked that the bank would take care of the note. That he thought Watt the maker is not persuasive; for Watt was one of the endorsers whose names he observed, and he does not claim that anything was said to deceive him, and nothing prevented him from reading the note, if he were so disposed. He is not in a situation to assert lack of knowledge as to its contents. Bonnot Co v. Newman Bros., 108 Iowa 158; Mower H. C. & D. S. Co. v. Hill, 135 Iowa 600. Klemm understood that the maker of the note was the Arizona Company, but in other respects the talk to him was the same as to Wells. Neither was told that the borrowed money would go directly to the bank, and, in view of the maker’s being the Arizona Company, they might well have inferred that funds were to be obtained by the bank through payment by that company to it. Such payment was for the benefit of the borrower, and the bank thereby obtained no more than was its due. According to the evidence, Watt said to each of them that the German Savings Bank would take care of the note. Counsel for Wells concedes that the bank would not be bound by the promise, for that such a promise by the bank would be ultra vires. Section 1855-a, Code Supplement, 1913, provides that:

“State and savings banks may contract indebtedness or liability for the following purposes only: for necessary expenses in managing and transacting their business, for deposits, and to pay depositors; provided, that in pursuance to an order of the board of directors previously adopted, other liabilities not in excess of amount equal to the capital stock may be incurred.”

Wells and Klemm were quite as well' aware as Watt that no such order had been entered by the board of directors, and that the bank might not obligate itself for the indebtedness of another, for they were directors of the bank. They were also directors of the Arizona Company, and will be assumed to have known the law, and therefore that, through the machinations of themselves, O’Donnell, and Watt, directors of the Brick Company, they might not lawfully saddle indebtedness of that company onto the bank, of which they were directors. Moreover, if Watt did, in the interest of the Arizona Company, undertake to obligate the German Savings Bank to pay that company’s debt, the bank was not bound thereby; for in so doing, he was interested adversely to the bank, and might not'speak for it in a transaction wherein he was acting tor himself also, and for another .whom he represented, adversely interested. See State Sav. Bank v. Montgomery, supra; Love v. Anchor Raisin Vineyard Co., (Cal.) 45 Pac. 1044.

But it is argued that, even though the undertaking be regarded as ultra vires, the bank will be liable for the money received. There are two sufficient answers to this: one, that the money was received from the Arizona Company, rather than the Des Moines National Bank; and the other is that to permit such relief in the interest of some of the directors of the bank would defeat the very object of the statute quoted. To prohibit incurring a debt without an order of the board of directors, and then to allow recovery of money so obtained by or in the interest of the director violating the prohibitory statute, would not only render the statute nugatory, but put a premium on want of fidelity in the relation of director to the bank. Our conclusion throughout is in accord with the findings and decree of the district court.

Cost of printing briefs will be taxed against party filing same, and one third of cost of printing abstracts taxed against executors of the Watt estate, one third thereof and the filing fee against the German Savings Bank and Des Moines National Bank, and the remaining third against the other appellants. — Affirmed.

Gaynor, O. J., Evans and Salinger, JJ., concur.

Case Details

Case Name: Watt v. German Savings Bank

Court Name: Court of Appeals of Iowa

Date Published: Dec 21, 1917

Citation: 165 N.W. 897

Court Abbreviation: Iowa Ct. App.