Citizens Bank v. Bank of Waddy

Opinion of the Court by Judge Hobson Reversing. In the year 1900 the Bank of Waddy was incorporated under the Kentucky Statutes; the 'capital stock being fixed at $15,000. It was provided by the articles of incorporation that the indebtedness of the bank, — 173 — except to depositors, should not exceed one-half the amount of the capital stock. L. W. Ditto was elected president and T. B. Hancock cashier. They were also two of the directors of the hank. The latter part of the year 1903 some of the directors became dissatisfied with Hancock as cashier, and at this juncture Hancock bought the stock of all the directors; the stock being assigned to him in blank constituting a majority of the stock in the bank. From this time on there was no board of directors. Hancock ran the bank as cashier, and there was no stockholders ’ meeting and no action was taken by the minority stockholders. Hancock took the stock which he had gotten from the directors and hypothecated it with the First National Bank of Louisville for a loan of $4,000. He made some payments on the note afterwards, but there was a balance of $3,000 of this debt outstanding when the Bank of Waddy made an assignment in January, 1906. The First National Bank still held the shares of stock as collateral to the note. On September 15, 1905, while Hancock was running the Bank of Waddy as above stated, in the name of the Bank of Waddy he borrowed $4,000 of the Fifth National Bank of Cincinnati, hypothecating to secure the note a number of notes executed to the Bank of Waddy by persons who had borrowed money from it. This note to the Fifth National Bank was renewed on January 16th, just before the assignment. In the same way in July, 1905, he borrowed $3,000 of the Bank of Commerce of Louisville giving a note which was secured by a number of notes as collateral, and it was renewed from time to time until about the time the bank failed. In November, 1905, he borrowed in like manner from the First National Bank of Louisville $3,000, and hypothecated a number of notes — 174 — executed to the Bank of Waddy. All of these three last loans were made in the name of the Bank of Waddy hy Hancock as cashier, and the money was paid over to the Bank of Waddy hy the hanks lending the money. It was used hy the Bank of Waddy. When the hank failed, it owed its depositors about $23,000 and the assets, outside of the notes which had been pledged to the three banks above referred to, were sufficient to pay only a small part of the indebtedness. In the suit brought to settle the accounts of the assignee the circuit court held that the three banks above referred to had claims against the Bank of Waddy for the amount of money which they had paid it, but it denied them a lien upon the collateral which they held and required them to turn over the collateral notes to the receiver. Prom this judgment they appeal. The limit of indebtedness for borrowed money which the Bank of Waddy could contract was $7,500, and every person dealing with a corporation is charged with notice of its powers under its articles of incorporation. But a creditor whose own debt against the corporation does not' exceed the limit, and who has no reason to know that the limit has been exceeded, is not affected by the fact that there are other debts of which he has no notice which, when added to his own, make an aggregate indebtedness greater than the corporation can legally incur. Bell & Coggeshall Company v. Kentucky Glass Works, 106 Ky. 7, 20 Ky. Law Rep. 1684, 21 Ky. Law Rep. 133, 50 S. W. 2, 1092, 51 S. W. 180; 3 Cyc. 472. The debt of each'bank was less than the limit, and none of them knew, or had reason to know, of the debts of the others, or that the limit of indebtedness had been exceeded. The debts of the banks aré there — 175 — fore not affected by this provision of the articles of incorporation. The proof is unquestioned that the money borrowed was paid to the Bank of Waddy, and was used by the Bank of Waddy. The Bank of Waddy is therefore liable for the money, as it cannot be allowed to take the money and use it without accounting for it. It is insisted, however, that the cashier, Hancock, was without power to borrow money or hypothecate the notes of the Bank of Waddy for it, and that the lending banks, therefore, acquired no lien upon the collateral. Hancock, to deceive the banks, furnished two of them what purported to be authority from the hoard of directors to him to' make the loans, but these papers turn out to be forgeries. There was in fact no board of directors and no entries were ever made on the directors’ • books after January, 1904, when Hancock bought the stock of the directors, and there was never an election of directors after this. The two banks required Hancock to furnish them these papers out of abundance of caution, and, as they were void, the question remains whether Hancock as cashier had apparent authority to do the acts referred to, for, if he acted within his apparent authority, the Bank of Waddy is bound by his action, although he did not have the express authority which he professed to have. The case is an unusual one, in this: that there were no directors of the hank and no president. The only officer it really had was the cashier. The stockholders allowed the bank to be run by Hancock as cashier. Under such circumstances he. had all the authority, as to one having no notice of the facts, that a bank cashier may properly exercise. As he was admittedly cashier, and there were no limitations upon his authority, he could exercise those powers — 176 — ■which are within the apparent scope of the authority of a hank cashier. The cashier is the agent of the bank. His acts, within his official sphere, are binding on the bank, and by the general current of the. later authorities he may borrow money in the regular* course of the bank’s business and pledge its property for its payment. 5 Cyc. 579; 4 Thompson on Corporations, section 4748; 1 Morse on Banking, sections 158, 160; Davenport v. Stone, 53 Am. St. Rep. 467, 104 Mich. 521, 62 N. W. 722; Chemical National Bank v. City Bank, 160 U. S. 653, 16 Sup. Ct. 417, 40 L. Ed. 568; Auten v. U. S. National Bank, 174 U. S. 143, 19 Sup. Ct. 628, 43 L. Ed. 920; Aldrich v. Chemical National Bank, 176 U S. 118, 20 Sup. Ct. 498, 44 L. Ed. 611. It follows from these authorities that it was within the apparent scope, of the cashier’s authority to pledge the notes of the Bank of Waddy to secure the money borrowed by it. Such transactions between country banks and city banks are of common occurrence, and there was nothing in the circumstances known to the lending banks to- put them on notice that, there were any defects in the authority of Hancock as cashier. The resolution of the directors, was required by two of the lending banks so as to apprise the directors of what the cashier was doing and the better to secure the payment of their money at maturity. The fact that Hancock delivered to them spurious resolutions which had not been passed by the board of directors did not put the lending banks in a worse position than they would have been without these papers, which were simply nullities. The lending banks stand just as they would have stood if they had lent the money to the Bank of Waddy through Hancock as cashier without requiring anything from the board of directors. The spurious — 177 — ness of the papers deprived the banks of the added security they expected to derive from the co-operation of the board of directors, but it had no other effect on the transaction. The lending banks are entitled to a lien on the collateral pledged to them for the payment of their loans. They acted in good faith, and in the usual course of business, and there was nothing in the transactions to put them on notice that Hancock as cashier was exceeding his authority or misapplying the funds of the bank, or chat the bank authorities were not regularly constituted and doing their duty. The fact that the First National Bank of Louisville held a majority of the stock as collateral security for a loan to Hancock did not apprise it that there were no directors, or that the stockholders in the bank were taking no interest in its management. Everybody in this record treated Hancock as cashier of the bank and as possessing all the powers incidental to the position. The depositors instrusted their money to him. The stockholders treated him in the same way. Under such circumstances they who trusted most should lose rather than those who required security before parting with their money. A bank may restrict the authority of its cashier, and, when this is done, it will be only bound to those having notice, actual or constructive, of the restriction, to the extent of his actual authority. But here there was no restriction upon the authority of the cashier. Obviously a bank cashier has authority, when he finds his cash running low at the close of a day’s business, to borrow cash from another bank upon collateral to make ends meet; and, if he foresees that he may get in this condition, he may make such a loan in advance. It is said here that, when the notes were renewed from time to time, the lend — 178 — ing banks had notice that something unusual was going on. But the transactions are to be judged by what the banks each knew when it lent the money and not by what it learned' afterwards when it was too late to help matters. E. J. Paxton executed to the. Bank of Waddy a note on April 5, 1905, for $2,000. Hancock as cashier pledged this note to the Bank of Commerce as collateral security for the money above referred to' borrowed from it. "When Paxton’s note fell due in September, Hancock called upon Paxton to renew it. This Paxton did, and Planeo ck said to him that he would get the old note in a few days and deliver it to him. Instead of doing this, however, Hancock pledged this note to the Fifth National Bank of Cincinnati to secure the loan made by it. The question now presented is whether Paxton is bound to’ both the banks as innocent holders of the paper. In Wilkins v. Usher, 123 Ky. 696, 97 S. W. 37, 29 Ky. Law Rep. 1232, it was held that the holder of a note to whom it is assigned as collateral security is a holder for value, although his debt had been previously created. Neither of. the banks had notice of any infirmity in the note which it took. Under the present statute Paxton is therefore liable to each bank, but each bank should be required to exhaust first its other collateral before he is required to pay to both' of them anything more than $2,000 and interest in the aggregate. He owes $2,000, and whatever he has to pay beyond $2,000 and interest will be a debt against the Bank of Waddy whose debt he will to this extent pay off. If either of the banks to which his notes are assigned can collect its debt out of its other collateral, it should be required to do so as to protect him from having to pay twice. — 179 — Judgmeut reversed, and cause remanded for a judgment and further proceedings as herein indicated.