Lilly v. Hamilton Bank of New York

• Decision Date: 06 December 1909
• Docket Number: 50.
• Citation: 178 F. 53
• Parties: LILLY et al. v. HAMILTON BANK OF NEW YORK.
• Court: U.S. Court of Appeals — Third Circuit

178 F. 53

LILLY et al. v. HAMILTON BANK OF NEW YORK.

No. 50.

United States Court of Appeals, Third Circuit.

December 6, 1909

John K Andre, for plaintiffs in error.

Thomas Earle White, James M. Gifford, and Anson M. Beard, for defendant in error.

Before GRAY, BUFFINGTON, and LANNING, Circuit Judges.

LANNING Circuit Judge.

The Hamilton Bank of New York City, the plaintiff below recovered a judgment against the defendants below, the plaintiffs in error here, on a promissory note for the sum of $50,000. The bank purchased the note before maturity from E R. Thomas and O. F. Thomas, the former of whom was president and both of whom were directors and members of the discount committee, of the bank. One of the questions presented by the assignments of error relates to what the defendants insist was a fraud perpetrated by the Thomases upon the defendants, who were makers of the note. The essential facts as to this branch of the case are these: On October 5, 1907, the Thomases and John J. Coyle entered into a written contract by which the Thomases agreed to sell and deliver to Coyle certain stocks and bonds, and Coyle agreed to pay to the Thomases, as part of the consideration therefor, the sum of $100,000 in cash, and to redeliver to the Thomases the bonds and a portion of the stock as collateral to secure the payment of the residue of the consideration money.

The contract was signed on Saturday afternoon after the banks had closed, and it was then orally agreed, so the defendants contend, that in lieu of the payment of $100,000 in cash Coyle should deliver to the Thomases a certificate of deposit for $50,000 and the note now sued on for $50,000, on condition that the Thomases should use neither the certificate of deposit nor the note before delivering to Coyle 1,056 shares of the stock of the Provident Savings Life Assurance Society, which it was understood should be done on the following Monday. The stock, except 39 shares, was never delivered to Coyle. Notwithstanding this fact, on October 16, 1907, at a meeting of the Hamilton Bank's discount committee, E. R. Thomas offered the note to the bank. The discount committee was composed of five members, who were Mr. Sullivan, its chairman, Mr. Martin, Mr. Reisenberg, and the two Thomases. Mr. Ives, vice president of the bank, was the discount committee's secretary. Mr. Martin had died before the date of the trial. Mr. O. F. Thomas was not called as a witness by either side. Of the other four persons present, Messrs. Sullivan, Reisenberg, and Ives testified for the plaintiff to the effect that, when E. R. Thomas offered the note to the bank, he stated to the committee that he had received it in part consideration for the sale of his interest in the Provident Savings Life Assurance Society, and that its makers were men of large wealth; that Sullivan, Reisenberg, and Martin then considered the offer, the two Thomases taking no part in the conference and not being present at it; that at the close of the conference the Thomases were called to the other members of the committee, and informed that the bank would purchase the note provided the Thomases would guarantee its payment; that the Thomases agreed to guarantee its payment; that the other three members then voted to accept the note; that the Thomases did not vote on the question, or take any part in deciding whether the bank should accept the note; that Mr. Ives prepared the guaranty, which was signed by the Thomases, and that the note was thereupon purchased by the bank for the sum of $48,861.11, and that sum placed to the credit of E. R. Thomas on the books of the bank. Mr. E. R. Thomas, who testified for the defendants, also repeatedly declared that he took no part in deciding whether the bank should purchase the note. The minute of the proceedings of the discount committee is as follows:

'Mr. E. R. Thomas offered a note for $50,000 made by a number of wealthy men in Phila., which he and his associates had received in the matter of the sale of the Provident Savings Life Insurance Company, and, after some discussion, it was voted to accept the note, provided Messrs. E.R. and O. F. Thomas guarantee same.'

The authority of the discount committee to accept paper for the bank was conferred by the following by-law of the bank:

'That two local directors be added to the discount committee, and that all loans of $5,000 and over, not passed on by the board of directors, be referred to this committee, and receive the unanimous consent of all members present at the meeting before being entered.'

The argument of the defendants is that the Thomases perpetrated a fraud on the defendants by the sale of the note to the bank, that they must be considered as having joined in the unanimity required by the by-law for the acceptance of the note, and that, being so considered, their knowledge of the alleged fraud is imputable to the bank.

In submitting the question of fraud to the jury the trial court charged, in substance, that, if they should find that the Thomases disposed of the note to the bank in fraud of the rights of the defendants, the law would not impute to the bank knowledge of that fraud merely because one of the Thomases was the president, and both of them were directors and members of the discount committee, of the bank.

It is a general rule of the law of agency that a principal is bound by the knowledge of his agent. In the case of The Distilled Spirits, 11 Wall. 367 (20 L.Ed. 167), Mr. Justice Bradley said that the rule 'is based on the principle of law that it is the agent's duty to communicate to his principal the knowledge which he has respecting the subject-matter of negotiation, and the presumption that he will perform that duty. ' That the rule has certain exceptions was conceded by Justice Bradley. He said, for example, that when it would be unlawful for an agent to communicate his knowledge to his principal, as when it has been acquired confidentially as attorney for a former client in a prior transaction, the reason of the rule ceases, and his principal ought not to be bound by the agent's secret and confidential information. That case did not call for any expression of opinion as to whether there is not also another exception, when the agent is engaged in committing an independent fraudulent act for his own benefit. On principle it seems it should be so. If the reason of the general rule is that the law presumes the agent has discharged his duty of communicating his knowledge to his principal, there seems to be no just ground for denying the second exception above suggested, for it cannot be fairly presumed that an agent will communicate to his principal a fraud intended for his own and not his principal's benefit. Another reason for the general rule has been stated, however, and that is that where one in transacting the business of his principal is committing a fraud for his own benefit he is not acting within the scope of his authority as his principal's agent, and therefore that his knowledge of the fraud is not imputable to his principal. Speaking of the general rule that the principal is held to know all that his agent knows in any transaction in which the agent acts for him, the Circuit Court of Appeals for the Sixth Circuit, in Thomson-Houston Electric Co. v. Capitol Electric Co., 65 F. 343, 12 C.C.A. 645, said:

'This rule is said to be based on the principle of law that it is the agent's duty to communicate to his principal the knowledge which he has respecting the subject-matter of negotiation, and the presumption that he will perform that duty. Such a presumption cannot be indulged, however, where the facts to be communicated by the agent to the principal would convict the agent of an attempt to deceive and defraud his principal. The truth is that, where an agent, though ostensibly acting in the business of the principal, is really committing a fraud for his own benefit, he is acting outside the scope of his agency, and it would therefore be most unjust to charge the principal with knowledge of it.'

Such was also the view expressed by the Circuit Court of Appeals for the Eighth Circuit in Bank of Overton v. Thompson, 118 F. 798, 56 C.C.A. 554. And in Allen v. South Boston R. Co., 150 Mass. 200, 22 N.E. 917, 5 L.R.A. 716, 15 Am.St.Rep. 185, it was said:

'The general rule is that notice to an agent, while acting for his principal, of facts affecting the character of the transaction, is constructive notice to the principal. * * * There is an exception to this rule when the agent is engaged in committing an independent fraudulent act on his own account, and the facts to be imputed relate to this fraudulent act. It is sometimes said that it cannot be presumed that an agent will communicate to his principal acts of fraud which he has committed on his own account in transacting the business of the principal, and that the doctrine of imputed knowledge rests upon a presumption that an agent will communicate to his principal whatever he knows concerning the business he is engaged in transacting as agent. It may be doubted whether the rule and the exception rest on any such reasons. It has been suggested that the true reason for the exception is that an independent fraud committed by an agent on his own account is beyond the scope of his employment, and therefore knowledge of it, as matter of law, cannot be imputed to the principal, and the principal cannot be held responsible for it. On this view, such fraud bears some analogy to a tort willfully committed by a servant for his own purpose, and not as a means of performing the business intrusted to him by his master. Whatever the reason may be, the exception is well established.'

In 2 Pomeroy's Eq. Jur. (3d Ed.) Sec. 675, it is said:

'It

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