Cowles v. Gridley

By the Court, Roosevelt, J. The making and indorsement of the note sued on are admitted; but it is said that no value was received; that by an arrangement among the directors of the bank, of whom the defendant was one, the instrument was [309] never intended to be considered as a “ valid promissory note,” “ in the hands of any person, or for any purpose whatever.” On this statement of the defense, an inquiry naturally arises, for what purpose was the note given if, in every event, the promise or obligation was to be of no validity ? The case shows that the defendant was one of the original twelve subscribers to the Eighth Avenue Bank ; of which the capital was $100,000, and his proportion, as expressed in the articles of association, $10,000. He, too, with his eleven associates, were the first directors. As soon as $44,000 was paid up, the bank organized and commenced business. Their purchase of securities, to deposit with the banking department, to the amount of $100,000, must, to a great extent, therefore, have been directly or indirectly on credit—and of course, on the credit of supposed bona fide paid up or secured capital. Instead, however, of paying up, the original associates and directors gave their notes for the deficiency, each for $3650, dated January 1, 1854, payable in 6 months, with interest, to some other direct- or, and “ interchangeably indorsed by the payees.” At the same time also a certificate of the corresponding number of shares of stock was filled up and signed by the president and cashier in favor of each director, although not actually cut out from the certificate book. The notes were not only delivered to the cashier, but formally discounted on the books of the bank, and the proceeds carried to the respective credit of the makers ; who thereupon drew their checks which rvere received as cash in payment of the stock and carried into the stock ledger and transfer book, “ showing that each of the directors held such shares.” When these notes fell due, which was of course 6 months afterwards, they were renewed for another 6 months, by the directors, as a board, for themselves individually, “ omitting the indorsers,” but paying the six months’ interest. In three months the bank exploded, a receiver was appointed, and suits were brought by him, of which the present is one, on the several notes so given. And the defense now is, not as against other stockholders merely, but as against bona fide creditors, (for the receiver represents both) that, by an under [310] standing among the directors themselves, all this was to he mere form—more properly speaking mere sham—“that no rights should be acquired by the bank, in the notes, unless the directors should elect to pay their notes and take certificates of the stockand that the stock having become worthless, probably by the very acts of the directors themselves, they have a right to reject, or rather to return it, and with it to repudiate the written engagements of which it is said to have formed the consideration. Can such a defense either in law or morals, be listened to ? Can a director, in other words, be permitted to say that he agreed with a board of trustees, (himself being one,) that if there should be a gain on the stock he and his colleagues should receive it, and if a loss, the creditors and general stockholders should bear it? It will bé said, perhaps, that such was not the agreement. In words it was not; but what, I would ask, was the distinction, in substance? The whole board gave to each of its component members the right of “ election” for 6 months, and then again for 6 months more, to take or not to take the stock and to pay or not to pay the notes. What moneyed man, wdth such an option, would choose a loss or refuse a gain? .To illustrate the position more strongly, take the case of two guardians of the estate of a minor. They agree each on his own account, with both as trustees, to speculate in cotton with the funds of their ward, giying notes for the respective amounts, after the fashion of the arrangement alleged to have been made in this instance, purporting on their face to be for value received, but with a verbal understanding that if the speculation turned out a bad one they were to be allowed to “ elect” not to pay. Would it be any answer, in a suit by the substituted successor of these faithless guardians, to say that they had “ elected” to nullify their written obligation? Whatever may be the force of these analogies, one thing is clear, that there was a consideration for the note which the defendant gave. It effected a compliance with the law and enabled the defendant and his eleven associates oflicially to report under oath that the whole amount of their “ certified stock was paid in or invested,” (§ 8 of act of 1840,) and to take the chance of a profit on their [311] [New York General Term, June 6, 1857. shares without the risk of loss. But this is not all: the printed case states that when the defendant Grridley paid the interest on the original note, at its maturity, he did so on the assurance of the cáshier, “that it would come back to him, on the making of a dividend to the stockholders.” Here, then, when the second note was given, was a determination, by that very act, of the defendant’s election to take the stock and to become absolutely bound for the amount. The directors, it is further contended, had no right to discount their own notes in payment of their subscriptions. The answer is, that the provision referred to (1 R. S. 589) had no reference to the free banks, which were expressly authorized to commence business on securities instead of cash', and, unlike the old chartered institutions, were required before issuing or even obtaining any circulation, to protect the involuntary holders of their bills by a proper deposit with the bank department of the state, of public stocks or private mortgages. And even if the taking of the note had been prohibit-' ed, would it be a legitimate satisfaction to the law to deny a recovery upon it, and thus instead of punishing, to reward the wrongdoer, and that at the expense of the innocent and injured creditor? The true principle on this subject, is expressed in that section of the statute of moneyed “ corporations,” which, while prohibiting discounts to directors, beyond a certain amount, very properly adds the proviso, that “no securities, taken for any such loan or discount shall be held invalid.” (1 R. S. 590.) Judgment for plaintiff affirmed with costs. Mitchell, Davies and Roosevelt, Justices.]