Western Bank v. Coldewey's Ex'tx

Opinion by Judge O’Reae Reversing. This is an action by the Western Bank of Louisville, Ky., against the estate of its late president, Anton F, Coldewey, to recover damages for about — 783 — $35,000, sustained through, the conduct of the president by personally permitting his son William Gr. Coldewey to overdraw his account with the bank without the knowledge and consent of the board of directors, an advisory committee of which board was daily on hand to pass on loans applied for, and in concealing such' overdrafts from the board and its members. It is charged that the conduct of Anton F. Coldewey complained of was the result of negligence on his part, wherein he neglected to discharge his duties to the bank, from which the damage stated has resulted; and it is also charged that his conduct was fraudulent as to the bank. The facts necessary to an understanding of. this case are these: It appears that Anton F. Coldewey had been the president of the bank since its organization, some 40 years ago, until his death, in April, 1900. The capital stock of the bank was, for many years before the death of Anton F. Coldewey, $250,000, and the surplus something over $50,000. The bank had a board of directors who met monthly as a body to consider the affairs of the institution. The board w'as an active one in the management of the business affairs of the bank, so far as they were brought to its attention. The by-laws provided for an advisory committee, and the custom prevailed from the beginning to the death of President Coldewey to have an advisory committee from this board, the president being ex officio one of its members. The other two were taken in rotation, serving for one week out of each month; there being eight other directors beside the president. This advisory committee was required to meet, and did meet, when the bank was open for business and when there was business necessitating it, every morning at 11 o’clock in the banking house of appellant. Their duties included their examining — 784 — and passing upon all applications made to the bank for loans and for discount of notes and other paper to the bank. They kept what were called “application books,” on which they supposed, and on which it was presumed, that every note offered to the bank for discount, and in which all applications to borrow its money, were entered for the inspection and approval of the advisory committee. In 1898 William G. Coldewey, who was a son of the president, Anton F. Coldewey, and who was engaged in the wholesale liquor traffic at Louisville, bought out an establishment of that nature which had been conducted by his uncle, August Coldewey, lately deceased. It was bought on credit entirely, for the consideration of about $10,000. He continued the business bought from his uncle under the name of August Coldewey & Co. Upon buying this business he opened an account with appellant bank by borrowing from it $2,-000, evidenced by his personal note for that amount, without collatéral or other security. The proceeds of the note were placed to his credit, against which he checked. This note was not put on the application book, nor was it laid before the advisory committee or board of directors. With this start William G. Coldewey personally, and in the -name of his firm August Coldewey & Co., has drawn checks at his own discretion against appellant bank, without any previous arrangement with the bank or its directors that he might do so, and although he had no funds there against which to draw the checks. The proof is conclusive that, when these checks were presented to the bank to the individual bookkeepers through the clearing house, these bookkeepers carried them to the president, Anton F. Coldewey, who kept an office in the bank, and was there almost daily in the management of its affairs, and asked him whether the bank — 785 — should pay the checks, notifying him at the same time that the accounts were overdrawn at times as high as $10,000 or more. The invariable response was a direction to the clerks to pay the checks, which was done. On some occasions, when the president was absent, the clerk would report the checks to the cashier, who directed them to be paid. By this proceeding something like $35,000 was drawn out of the bank in excess of what was put in by way of deposit and notes discounted by William O. Coldewey, in his own name and the name of the business concern he was conducting under the style of August Coldewey & Co. That this fact was known to the president and consented to by him, and in fact directed by him, the record leaves little or no room for <doubt. During all this time William Gr. Coldewey was indebted and involved apparently as much or more than he owned, and after the first few months from the beginning of this business was insolvent. Shortly after his father’s death he made a deed of assignment for the benefit of all his creditors. His estate, including that inherited from his father, would not pay much upon his indebtedness. Anton E. Coldewey received a salary of $2,000 per year from the bank as its president. He was the active head of the institution, participating personally in the daily management of its business affairs. It was he who laid before the advisory committee the paper that was to be passed upon by them. Notwithstanding the facts above enumerated, he did not tell them at any time that his son was being permitted to overdraw his account so extensively, or at all; nor did he bring to the attention of the committee a number of notes given by his son to the bank without security, which were credited upon his over — 786 — drawn ac,count, reducing it apparently to that extent. The directors testified that they did not know and had never heard of William G-. Coldewey having overdrawn, his account to the extent that he did do it, nor had they heard that he had overdrawn it at all until after the death1 Of Anton F. Coldewey. That certain of- the directors, including the president, overdrew their accounts at times, and that other persons were allowed to overdraw their accounts at times, is not material here. The practice in a bank of allowing its customers to overdraw their accounts without prearranged security is a matter at least to be determined by the governing body of the bank, its board of directors, or if the board sees proper to delegate that matter, and does delegate it to its president or cashier, then by those officers. (Pryse v. Farmers Bank, 17 Ky. Law Rep., 1056, 33 S. W., 532; First National Bank v. Reese, 25 Ky. Law Rep., 778, 76 S. W., 384.) But if the practice as a business' course is allowed by the bank at all, whether by direct action of its board of directors, or whether by its cashier or president under the authority delegated to them by the board of directors, the propriety of allowing particular overdrafts is one that addresses itself to the business judgment and discretion of-the officers having that matter in charge. If they act prudently and honestly, they will not be held responsible for losses that occur from it. On the other hand, if ('they allow the funds of the bank to be so appropriated by a customer or customers who are known to be insolvent, or whose assets or business would not justify a prudent person similarly situated to extend them” such credit, they will be liable to the bank as for a neglect of their duty, where loss results from it. We might stop this case here on the facts; for, even — 787 — if this overdrawing of accounts by a customer of appellant bank was a practice expressly allowed by authority of its board of directors, and was left by them as a matter of business discretion to the president and cashier, in this case the facts show that the line of credit extended to William G. Coldewey was far beyond what his business and property justified. It was a reckless employment of the bank’s funds, more than negligent, for, which both the president and cashier would be liable to the bank as for a neglect of their duties and a breach of their trust. To go further, as the case has been prepared and presented on this line, we find that the power was not delegated.. by the board of directors, or by the advisory committee, to the president and cashier to loan this bank’s funds otherwise than upon the advice and consent of the advisory committee, or of the board of directors. The loans that were made, for such is the effect of the overdrafts of William G. Coldewey, were not by the consent of, nor were they known to, the directors, nor to the advisory committee. . It appears, rather, that they were concealed from them. This was a direct breach of a plain duty owing by these officials, the president and cashier, to the bank and its stockholders and creditors, for which they should be and are liable to the bank, damage to it having resulted therefrom. . That the bank has not seen proper to proceed against the cashier by action does not at all lessen the liability of- the president for his breach of duty. We find, however, that several thousand. dollars of these overdrafts occurred after March 13, 1900, the last time Anton F. Coldewey appears to have been at the bank, acting as its president. After that he was confined to his home by sickness, from which he died. For the overdrafts created after March 13,1900, he is not liable, for he did not author — 788 — ize them; nor, so far as the record shows, did he know that they were being created, nor was it within his power at that time to have prevented it. For allowing these it appears that the cashier alone is responsible. A matter is pleaded in defense by way of estoppel against the bank, which is, that on September 12,1900, William G. Coldewey made a deed of trust to Gustave D. Coldewey of all the assets of August Coldewey & Co. and of his individual assets, including his share in his father’s estate, in trust for the payment of his business creditors, and that the bank, together with other business creditors of August Coldewey & Co., then agreed, in consideration of that conveyance, not to sue William G. Coldewey, but to look only to the assets so conveyed to the satisfaction of its claims against William G. Coldewey, and that by this conduct the bank had estopped itself from making any claim against Anton F. Coldewey for losses by his breach of trust as president. Before a matter can operate as an estoppel in pais, it must be shown that the party pleading it has been prejudiced in some right of his by the act complained of; that he would have done something which he could have done, but for the act; or that he was induced to do something that he would not have done, ■ but for it. It is not shown in this case that Anton F. Coldewey’s estate was injured in any way by the matter pleaded as an estoppel. Suppose William G. Coldewey, being insolvent, had determined or threatened to avail himself of the Bankrupty Act, and was induced to forego that in the bank’s favor by the agreement of the bank not to sue him upon these debts for a definite time, as it is charged. How could that have injured Anton F. Coldewey’s estate? In the first place, making the. deed of assignment did not prevent Wil — 789 — liam G. Coldewey from taking the benefit of the bankruptcy statute. In the next place, the deed of assignment did not give to William Gk Coldewey anything of his own estate that he was not entitled to under the law, without regard to that deed, except the immunity from suit for a certain time.' As Anton F. Coldewey was not the surety of William G. Coldewey, nor his guarantor, nor otherwise bound for him by contract on these matters, if Anton F. Coldewey had a right of action against William G. Coldewey, he still had it. If Anton F. Coldewey’s estate had such right, it could not be affected by the agreement between the bank and William G. Coldewey. Again, if the bank derived any benefit or advantage from the assignment and the collateral agreement, that advantage went to reduce William G. Coldewey’s indebtedness to it, and to the extent that it did reduce that indebtedness Anton F. Coldewey’s liability to the bank was correspondingly reduced. Therefore, instead of being a detriment, it was an advantage to Anton F. Coldewey’s estate that the agreement was made. There was no privity between Anton F. Coldewey, William G. Coldewey, and the bank in this matter. William G. Coldewey was bound to the bank upon his implied contract to repay it the money had and received by him. Anton F. Coldewey was bound to the bank for his tort, wherein he, in neglect of his duty, or in fraud, suffered his son to withdraw the funds of the bank, without consent of the board of directors or the advisory committee, and without collateral or other security, whereby the bank sustained the loss. This is not such a relation as that a release of one of the parties bound would release the other. (Brannin v. Loving, 82 Ky., 377, 6 Ky. Law Rep., 328.) It may be true, as claimed by appellees, and as — 790 — indicated by the opinion of the learned chancellor who tried this case, that the cashier was more culpable in the matter of allowing these overdrafts than was the president. It may furthermore be true, as claimed, that others of the board of directors were culpably negligent in the matter, though, if these facts were all so, the bank’s right of action is for the tort against all of its derelict officers who have occasioned its loss. The action may be against all, or it may be against one or more. The bank’s legal right to recover the loss indicated by this opinion against Anton F. Coldewey’s estate appears to be clear in law. The unsecured notes executed by William Cr. Coldewey in part settlement of his overdrafts, after they had been created, are to be treated as the overdrafts are. These settlements were not a loaning of the bank’s money by its board of directors, but simply -reduced to definite form the evidence and amount of the liability to it previously created by the overdrafts wrongfully permitted by-the president and cashier. The judgment of the circuit court to the contrary is reversed and cause remanded, with directions to enter judgment in conformity with this opinion. Petition for rehearing by appellee overruled.