Bank Commissioners v. Bank of Buffalo

The Chancellor. It is not denied by the counsel for the Bank of Buffalo that there has, as to that bank, been an actual violation of the provision of the revised statutes which prohibits the directors of a monied corporation from making loans or discounts to the directors of the corporation, or upon paper on which they or any of them are responsible, to an amount exceeding in the aggregate one third of the capital stock of the company. (1 R. S. 590, § 1, sub. 9.) It is insisted, however, in behalf of all these banks, that this is not such a violation by the corporation of its act of incorporation as will authorize the bank commissioners to apply to the chancellor for an injunction against the corporation and its officers to restrain them from exercising their corporate privileges, and for the appointment of a receiver to wind up the affairs of the company, in pursuance of the directions contained in the eighteenth section of the safety fund act. This objection proceeds upon the supposition that the restrictions contained in the several subdivisions of the first section of the title of the revised statutes relative to monied corporations are only binding upon the directors of the company as individuals, and not restrictions upon the corporation itself. In this, however, I am fully satisfied the counsel for the defendants are wrong. The object of the legislature was to prevent the corporation from doing any of the acts prohibited in this section of the statute. And the term directors is used for the corporation itself, or as the board or body exercising the corporate franchises, by whom or under whose direction or authority alone these violations of the statute could ever occur. The 33d section of the act incorporating the Bank of Buffalo, (Laws of 1831, p. 81,) and the corresponding section in the charters of the other two companies, in terms, make these provisions of the revised statutes and all provisions contained in the same chapter, except such as have been repealed or modified, applicable to the corporations of the several Buffalo Banks, as if they were actually contained in their acts of incorporation. The restriction upon the amount of loans and discounts to the directors, or upon their security, is therefore a provision of the acts of incor — 503 — poration of these several companies, within the intent and meaning of the 39th section of the article of the revised statutes relative to proceedings against corporations in equity, (2 R. S. 463;) the violation of which by the company or its authorized officers will authorize a proceeding against the company in this court by injunction, and the appointment of a receiver of the effects of the corporation. The statute does not in terms authorize this court, upon such a suit instituted here, to decree a formal dissolution of the corporation. But by an examination of the 44th section of this article relating to proceedings against corporations in equity, it will be perceived that the legislature contemplated the making of a final decree on the bill or petition against the company, which was to deprive it of all its corporate property and powers. And as the receiver who is appointed upon such a proceeding, unless restricted in his powers by the order for his appointment, is absolutely vested with all the corporate property and effects, and is authorized to distribute the surplus thereof among the stockholders after paymént of the debts of the company, it follows of course that a final order or decree for the appoinment of such receiver is a virtual dissolution of the corporation, (See 2 R. S. 464, § 41, 42, 44; Idem, 469, § 68, and 471, § 83.) I have no doubt, therefore, that this court has the jurisdiction and power to decree such a dissolution of either of these companies whose board of directors has violated' the provisions of their charter restricting the amount of loans or discounts to directors, or has authorized or permitted the officers of the bank to violate the same. All loans and discounts made by the officers of the company from its corporate funds must be presumed to have been made by the authority of the directors, unless they show that the funds of the bank constituting such loans have been improperly appropriated for that purpose, against the instructions of the board of directors or without authority, so as to make the officers guilty of a fraud or embezzlement. And even where the officers of the bank have been guilty of a fraud by violating the charter against the positive instructions of the directors or otherwise, if the directors neg — 504 — lect to remove such officers and continue to entrust them" with the bank funds, they will be considered as sanctioning the fraudulent act. A neglect by the officers of the corporation to inform themselves of the amount- already loaned to directors, cannot justify a violation of a positive law of the state which it is their duty to know and conform to. If the board of directors authorize or allow their president or cashier, or any other officer of the bank to make loans or discounts in his own discretion, without having the same formally passed upon at a regular meeting of the board, the corporation is liable for a violation of its charter, or of any law binding on such corporation, in the making of such loans or discounts. The objection that it does not appear from the' petitions that all the bank commissioners met together and consulted as to the propriety of making the applications before' the petitions were presented, is not well founded. The petitions are presented in the names of all the commissioners, by one of them as solicitor for the whole. Where several persons join in a suit in this court by their solicitor, the. court will not inquire whether the same is authorized by such parties,- unless some of them object to the proceeding, or the adverse party shows affirmatively that the suit has been imy properly instituted by some of the complainants or petitioners in the names of the others without authority. In' the-case of Bronson v. Mann, (13 John. Rep. 460,) the supreme court held that where a legal proceeding was- to be instituted' by the commissioners of highways as such, it was not necessary that they should all meet or consult and agree to make the application in order to render the institution of such proceeding valid. In the present case the statute expressly authorizes the bank commissioners or any or either of them to make the inspection and examination for the purpose of ascertaining whether any bank has violated its' charter, or any other law of the state binding, on the corporation ; and if upon such- examination- or otherwise, such commissioners shall discover any. such violation, they should immediately apply to the chancellor for an injunction. The? — 505 — statute evidently contemplates a very summary remedy for the abuse of chartered privileges, and to protect the rights of those who are interested in the funds of the bank, either as creditors or stockholders ; to whom great injury might result if it was absolutely necessary to assemble all the commissioners from distant parts of the state to consult together before any application could be made to the court for relief. The section of the revised statutes relied upon by the counsel for the banks, (2 R. S. 555, § 27,) is not a restriction upon the powers of public officers, trustees and others; but was intended to enlarge the powers of a majority, so as to give them a right to exercise a power in some cases in which it would have been necessaiy, if this statutory provision had not been adopted, to have obtained the concurrence of the whole to exercise the power. The fact that the officers of the bank proceeded to make additional loans or discounts to directors or upon paper upon which they were responsible without taking the proper precautions to ascertain whether such additional loans or discounts would not exceed the legal limit, cannot exempt the corporation from liability to be proceeded against for a violation of the provisions of its charter. It is the duty of the officers of a bank to keep a proper account of loans or discounts for the benefit of the directors, either as individuals or w'here they are concerned with others as partners or otherwise, and of the paper discounted upon which they are answerable a§ endorsers, &c. And the power of making loans or discounts to directors or for their benefit should only be entrusted to the board of directors at one its regular meetings, unless it be for a very limited amount, Neither should the board of directors authorize or permit the financial officers of the bank to make loans or discounts to any person beyond a certain limited amount, or whereby the liabilities of any individual or company would exceed such amount. Indeed no individual partnership firm, whether in the direction or otherwise, whatever may be the extent of his or their business and supposed responsibility, should be allowed to absorb the whole or a very large amount of the loans or discounts of — 506 — the institution even with the immediate sanction of the board of directors. Such management by those who are entrusted with the control of the affairs of the institution is inconsistent with the objects for which its charter was granted. It is also inconsistent with the duties of the directors of the bank to its own stockholders; as it necessarily cripples the means of the institution and endangers its safety by the failure of a single individual or copartnership firm. And I have no doubt that the embarrassments under which these Búllalo banks and many others in the state have labored since the commencement of our present commercial difficulties may be attributed, in a great measure, to a disregard of the correct principles of banking and the unlimited control which a very few .persons have been permitted to exercise over the loans and discounts of the banks with which they are connected. In the case of the City Bank, although the books of the institution do not show an excess of loans and discounts to directors beyond the amount allowed by law, I am satisfied that the charter has been violated in this respect. If a loan or discount is knowingly made for the benefit of a director, or of a firm with which he is connected in interest or as a copartner, it is a loan or discount to him, within the intent and meaning of the legislature, although the name of the director of this firm does not appear upon the discounted paper, or he does not guaranty the payment of the loan. And the bank cannot by making the discount or loan nominally to another person evade this provision of the statute, so as to save itself from the consequences of such a violation of the charter. And this court will not suffer a salutary restriction of this kind to be evaded by any device whatever, if the substance of the act complained of is precisely that which the legislature intended to prohibit. In the present case the draft of $39,000, which was taken by the bank from Smith, in payment of the acceptance of Smith & Macy, which had been sent to the bank for collection and had then become due, was clearly a loan for the benefit of that firm to enable them to meet and take up their acceptance, although, other persons had promised to see it paid when it became — 507 — due. And the court cannot shut its eyes to the obvious fact that the draft on Hicks & Co. was made in the name of Smith alone, instead of the names of the firm, upon the mistaken supposition that the discount of such a draft would not be a violation of this provision of the charter, as a discount to Macy who was a director in the bank. If Smith & Macy had been in no way connected with this institution, no one can reasonably suppose that the officers of the bank would have taken this draft of the individual partner for such a large amount, instead of the security of the firm, in payment of a demand sent there for collection by another institution. The continuance of the business of this bank, after it had neglected for more than ten days to pay the draft of SI0,000 which had been demanded at the banking house, was also a violation of the charter which authorized the bank commissioners to institute these proceedings. A mere, refusal to pay a note or bill or other evidence of debt issued by a bank, where the officers of the institution had probable cause for believing that the bank did not owe the debt and therefore was not bound to pay it, would not subject the institution to a loss of its charter; although it should after-wards be ascertained that the debt was legally due. In such a case, however, the holder of the bill or draft would probably be entitled to his ten per cent damages, in lieu of interest, until payment was actually made according to the provisions of the 31st section of the act of incorporation. Here there was no doubt as to the liability of the bank to pay the draft which it had issued for the redemption of its bills. But the cashier neglected to pay it when demanded upon the erroneous information that the president had made arrangements by which it would be paid elsewhere. The statute however is imperative; and the officers of the institution went on at their peril after the expiration of the ten days, without informing themselves of the fact that it was not paid. But the situation of the commercial community at that time, and the notorious fact that all the other banks in the state suspended specie payments within a few days thereafter, the necessity and propriety of which was ac — 508 — knowledged and sanctioned by a legislative act, would of it" self render it improper for the bank commissioners to enforce the penalty against this institution for that cause alone, if it can now proceed with its banking operations with safety to the public, and can obtain authority from the chancellor for that purpose in conformity to the 30th section of its act of incorporation. It is admitted by the bank commissioners that they were misled and acted under a mistake in supposing that the Commercial Bank at the time of the examination had loaned or discounted to its directors more than the amount authorized by the statute. But it is insisted that this bank has been guilty of a violation of its charter in receiving from the Bank of Lyons the bills of that institution in exchange for its own bills. And I agree with the bank commissioners that it appears from the statement of this transaction, as made by the president and cashier, that it was not only contrary to the correct principles of banking as authorized by the laws of this state, but also a violation of that provision of the revised statutes which prohibits a bank from receiving the bills of another monied corporation in exchange for its own. It is avowed by the officers of the Commercial Bank that their object in obtaining the bills of the Bank of Lyons was to pay them out for deposits in lieu of their own bills which they would be compelled to redeem in specie. The effect of this arrangement would therefore be to substitute a circulating medium in the neighborhood of the Commercial Bank which was not payable in specie there but at a distance, in lieu of its own bills which, if issued, could be immediately converted into specie at the will of the holders thereof. This was probably one of the principal evils which the legislature intended to guard against in prohibiting a monied corporation from receiving from another the notes or bills of the latter in exchange for its own. The Commercial Bank received these bills of the Bank of Lyons in exchange for its own, even if there was an express agreement on the part of the Bank of Lyons that they would not use the Commercial bills until after notice that its own bills had come back and been redeemed, and a neglect on the part of the — 509 — Commercial Bank to furnish funds to meet them. It is very evident, however, that such was not the agreement in this case. And the officers of the Bank of Lyons were not probably guilty of an act of bad faith towards the other institution, although the operation intended to be effected by both parties did not succeed, as to one at least, in the manner contemplated. The president and cashier, however, both swear that they had no intention of violating the provisions of the statute, and they probably acted without legal advice and perhaps without knowing or adverting to the statutory provision on this subject. Upon the whole, I conclude that all three of the Buffalo banks have violated their charters in such a manner as would authorize this court to grant a perpetual injunction against the further exercise of their corporate franchises^ and to place their property and effects in the hands of receivers to wind up the institutions. Considering the peculiar situation of the monied institutions and affairs of the state and of the union at the time when the acts complained of occurred, and the great injury which the commerce of the west, and of the city of Buffalo in particular, would sustain if all- the banks in that place should be destroyed, and all the debts now due to them should be immediately called in by forced collections, I think the bank commissioners have very properly submitted the question to the discretion of the court to say whether the banks should be allowed to resume their banking operations, if the chancellor is satisfied from the exhibition of the statements of their concerns and the responsibility of their debtors and the integrity of those who now compose their several boards of directors, that they can be allowed to proceed with safety to their creditors and stockholders and without injury to the public interests of the state ; and subject to such regulations and restrictions as may be proper during the continuance of the suspension of specie payments by the banks generally. In the exercise of that discretion, therefore, and believing it will advance the interests of the public as well as of the creditors and stockholders of these banks, I shall dissolve the — 510 — injunctions and permit them to resume their business; subject’ however, to the following restrictions and regulations ; with liberty to the bank commissioners to make an ex parte application for a restoration of the injunction against any of such banks, upon an affidavit that such regulations have not been complied with; and for further proceedings upon the present petition to appoint a receiver to wind up its concerns: 1. Those banks which have made loans or discounts to or for the benefit of their directors, or upon paper upon which they or any of them are responsible, beyond the amount allowed by law, shall within thirty days call in or reduce the amount within the required limits. And the several banks shall within the same period satisfy the costs of these proceedings, and pay or secure to the satisfaction of the comptroller the bills redeemed by him out of the safety fund, or on account of that fund, under the act of May last, and before any new bills of the banks shall be issued or new debts contracted by such banks. 2. That during the time of the suspension of specie payments, these banks shall not make any loans or discounts to or for the benefit of a director or of his partner in business, either directly or indirectly, whereby the whole amount of loans and discounts made to or for the benefit of such director and his co-partners, or any of them, either jointly or severally, and remaining unpaid, shall at any time exceed one thirteenth of the capital of the bank ; that no loan or discount shall be made to any person for a longer time than three months exclusive of the days of grace ; nor shall any renewal be for a longer period; that no loan or discount shall be made to or for the benefit of any individual or company, beyond the amount of $5000, except it be under the immediate direction of a majority of the directors at a regular meeting of the board, or any loan or discount whereby the amount due from the person to whom or for whose benefit the same is made, or from him and his partners in business, either jointly or severally, shall exceed $5000; that no loan or discount whatever shall be made to any director, or any person or persons connected with him — 511 — in business, or to any person for his or their benefit, unless it be made under the immediate direction of a majority of the directors at a regular meeting of the board; that no individual or company shall be permitted to overdraw his or their account with the bank ; that no loan or discount shall be made to any person or for his use or benefit to enable him to purchase or pay for any shares of the stock of the bank; and that no loan or discount shall be made to or for the benefit of any person or firm who does not endorse or guaranty the payment of the notes or securities given for such loan or discount. 3. That during the time of the suspension of specie payments, these banks shall conform to such other regulations and restrictions as the bank commissioners, or any two of them, may from time to time prescribe, with a view to the safety of the public, or to ensure the proper management of the affairs of the institution.