City National Bank v. National Park Bank

Davis, P. J.: One important question presented by this appeal is to what extent the plaintiff is chargeable with notice or knowledge of the fraudulent manner in which Hardie, while its president,‘obtained the money of the defendant, which he afterwards paid to the plaintiff in discharge of his individual liabilities. The court submitted to the jury the question of actual notice or knowledge,, instructing them that the defendant was entitled to recover, as a counter-claim, the amount so paid, if they found that at the time of such payment the plaintiff knew that Hardie had obtained the money by fraud. The court refused to charge that the plaintiff was chargeable with constructive notice because of Hardie’s relation to it as-president at the time of committing the fraud, and of making and indorsing the check given to the plaintiff whereby the money was received by the bank and applied to his liabilities. In considering this question it is to be assumed that Hardie while president of the plaintiff’s bank committed the alleged frauds upon the defendant bank, and thereby obtained the discounts and credits against [108] which he drew his checks in favor of plaintiff. Hardie had been president of the plaintiff from its organization and the commencement of its business on the 1st day of March, 1880. J. C. O’Con-nor was its vice-president. It had a board of directors consisting of Hardie, O’Connor, and five others, and it had no regular cashier till October, 1880. At times Hardie performed the duties of both president and cashier. The vice-president was absent in Europe from the spring till August, 1880. Prior to that time Hardie had almost entire charge of the business of the bank. After O’Connor’s return he had charge of the business -of the bank in the absence of Hardie, but Hardie continued to be the president of the bank till December 16, 1880. It is manifest, from the statement of the bank’s affairs, that Hardie not only had charge of its business but was suffered-by a supine and negligent board of directors to manage it almost wholly for his own business and purposes till he had loaded it down with his own liabilities, as principal or surety, in a sum between $70,000 and $80,000, and that the collateral securities he had put in for his indebtedness were perilous, if not largely valueless. When the vice-president returned he assumed in part the management of the bank. In August the condition of the bank and the indebtedness of Hardie were fully discussed between those officers, and the vice-president, in September, told the president that he would not be able to meet his indebtedness to the bank. The vice-president then knew Hardie was going to New York to try to borrow money. Hai’die was then wholly insolvent, as is manifest not only by subsequent disclosures, but. as testified to by Mahoney, who became in October, the cashier of the bank. Hardie Came to New York in September, bringing with him the paper or securities on which he was to make his effort to borrow money. O’Connor knew what those papers were, except the Lee notes obtained by exchange after Hardie left Dallas. It was obviously the understanding that the money he could borrow, in part, if not wholly, was to be applied to relieve his indebtedness' to the plaintiff. No restriction whatever was put upon his power as president. He borrowed of Claflin & Co., on a part of the notes which he had taken up at plaintiff’s bank and brought from Dallas, some $15,000, with $10,000 of which he, acting as president of plaintiff’s bank, opened an account with defendant for plaintiff, and [109] left his own and O’Connor’s signature. Of this action O’Connor was immediately notified by telegram, and at once wrote defendant, ratifying it, and stating what officers were entitled to draw against the account, to wit: A. F. Hardie, president, himself as vice-president, and Paul Furst, acting cashier. At the same time Hardie obtained the fraudulent discounts for which the defendants seek to counter-claim against the plaintiff. Immediately on his return home, Hardie, as president of plaintiff, corresponded with defendant, remitting bills or notes for discounts, both for the bank and himself. He was not deprived of his position or power as president till a fraud on the plaintiff in indorsing his private paper in the name of the bank, and obtaining its discount for himself at St. Louis, awoke the board of directors to a sense of their duty. It is upon such a state of facts, all of which a jury could have found from the evidence, that the question arises whether the plaintiff, in receiving the fruits of its president’s fraud on the defendant, is not chargeable with notice of his acts. That question is not to be considered as one arising upon the action of the president of a bank who had in its business performed the simple functions of that office, under the control and supervision of the board of directors which the banking law requires to be created and upon which it devolves the duties prescribed by law.' It is, on the contrary, to be considered in a case where the board has negligently suffered the president not only to usurp its own functions, but to use them to his personal advantage, in a manner and to an extent which violated the law and subjected all the parties to its penal cousequences. In short the president had been permitted to become and be the bank, as representing all its corporate functions, and both figuratively and in fact to be its eyes and ears and all the several senses that can in law or theory pertain to corporate existence. "When such a president starts out for a raid upon the financial credulity of other banks and capitalists for the purpose of capturing funds with which to relieve himself and his bank from the embarrassments in which he has plunged it, there is no lack of reason or law in holding that his knowledge of any fraud he commits in obtaining the money shall be charged as notice to his bank when it becomes the incipient of the plunder. The mere abstract question whether the knowledge of the president of a bank of his [110] private personal dealings, when through them he brings a benefit to the bank, is notice to it of all that he himself knows on the subject ■of his acts, seems to us not controlling of such a case as this. As was held in the Schuyler case (N. Y. and N. H. R. Y. Co. v. Schuyler, 34 N. Y., 30), when directors abdicate their powers in favor of a president to an extent that virtually makes him the sole representative of the corporate body, the corporation shall not be heard to deny that he is such body, when through his wrongs they seek to derive an advantage to the corporation from any fraudulent or excessive act. If the corporation would be chargeable, had it done the act or possessed knowledge of it, they should be charged with the knowledge their president possesses. On this ground the ■court should have charged the jury that the defendants, if the fraud was found to have been committed by the president of plaintiff, was ■entitled to protection to the extent of the fruits which reached the hands of the plaintiff. These views, we think, are fully justified by The Fulton Bank v. The Canal Company (4 Paige, 127); The Bank of the United States v. Davis (2 Hill, 451); Holden v. New York and Erie Bank (72 N. Y., 286); Atlantic Bank v. Merchants' Bank (10 Gray, 532); New York and New Haven Railroad Company v. Schuyler (34 N. Y., 30). Some of these cases go far enough to hold that the knowledge of a president who has exercised only the ordinary powers of that office is the knowledge of his bank, or notice to it when he acts ■officially in receiving any advantage to the bank flowing from his individual acts. Especially may this be so when the individual ■action is taken wholly or in part for the purpose of benefiting the bank, by procuring -means with which to pay liabilities owing to or held by it against himself or another. The other' grave question of the case, to wit, the right to counterclaim in this action on the ground of joint conspiracy to defraud on the part of plaintiff and its president, was disposed of by the court by holding that damages for such a conspiracy, if established, could not be interposed as a counter-claim in this suit. The defendant alleged that the plaintiff and Hardie conspired to defraud the defendant, and by means of such conspiracy Hardie obtained a large sum of money beyond that which is shown to have been paid by him to plaintiff, and sufficient facts are averred to [111] maintain, if proved, an action of tort for fraud against the plaintiff and Hardie. Either of the conspirators would be liable to such an action for the damages sustained by the fraud. The defendant sought to waive the' tort and proceed upon the implied contract to repay the money obtained by the fraud. This clearly could be ■done. (Harway v. The Mayor, 1 Hun, 628; Wood v. The Mayor, 73 N. Y., 556; Coleman v. The People, 58 id., 555; Andrews v. Artisans' Bank, 26 id., 298.) . But it is insisted, in substance, that such an action on the implied promise would be on a joint and not several contract, and that for that reason, inasmuch as Hardie is not a party to the action as plaintiff or otherwise, the implied contract cannot be set up in this suit as a counter-claim. We think the implied contract in such case which arises upon waiver of an action for tort is joint and several and not joint alone. Such was the nature of the tort and each party could have been separately sued upon it, and the same reason extends to the implied contract. Either conspirator may be sued upon his implied promise, and be made to answer for the whole of the money obtained by the fraud consummated under the conspiracy. If this be so, when either conspirator brings an action against the injured party upon contract we see no sound reason why his liability on an implied contract to pay the defendant the moneys fraudulently ■obtained may not be asserted against, him as a counter-claim. It was error, therefore, to take the question of the defendant’s Counterclaim away from the jury, assuming that there was evidence sufficient to carry it to the jury, as we must, inasmuch as it was not withheld on any such ground. The judgment should be reversed and a new trial granted, with costs to abide the event. Beady and Daniels, JJ., concurred. Judgment reversed, new trial ordered, costs to abide event.