Campbell v. Watson

• Decision Date: 08 October 1901
• Citation: 62 N.J.E. 396,50 A. 120
• Parties: CAMPBELL v. WATSON et al.
• Court: New Jersey Court of Chancery

50 A. 120

62 N.J.E. 396

CAMPBELL

v. WATSON et al.

Court of Chancery of New Jersey.

Oct. 8, 1901.

Bill by Edward S. Campbell, receiver of the Middlesex County Bank, against Uriah Burdge Watson and others, as directors, to recover losses alleged to have been due to the defendants' negligence in the performance of their duties. Heard on pleadings and proofs taken in open court. Decree for the complainant.

The complainant, Edward S. Campbell, is the receiver appointed by this court of the Middlesex County Bank, an insolvent banking corporation, located and doing business at Perth Amboy, in the county of Middlesex. The defendants, U. B. and James T. Watson, J. Lawrence Kearny, Edward R. Pierce, Patrick Convery, Robert N. Valentine, and John G. Wilson, were, at the time of the appointment of the receiver, and at the time of the bank's failure on July 12, 1899, and for more than six years had been, the directors of said bank, the defendant U. B. Watson having been the president thereof. The allegations of the bill are, that during the period mentioned—about six years—the bank sustained losses to the extent of over $300,000, which produced its insolvency, and that those losses were due to the negligence of the directors in the performance of their duties. The losses are set out in detail, and classified. The greater part of them was due to the peculations and dishonest practices of the man who was the cashier during that time, George M. Valentine, the son of one of the directors. The bank was organized under a special charter granted by the legislature on February 1, 1872, with a corporate life of 20 years. At the end of that period, February 1, 1892, its existence was continued for a further period of 50 years, by virtue of a certificate made January 15, 1892, by the directors, in pursuance of an act entitled "A further supplement to an act entitled 'An act concerning corporations,'" approved April 21, 1876. 1 Gen. St. p. 972. By the third section of the act of incorporation it is declared that the affairs of said corporation shall be managed by a board of not less than seven nor more than eleven directors, five of whom shall be a quorum for the transaction of business, except in cases of discount, which may be regulated by the by-laws; that the said directors shall be stockholders, and shall, before entering upon the duties of said office, severally take and subscribe an oath or affirmation faithfully to execute the trust reposed in them as directors. The seventeenth section declares that it shall be the duty of said corporation, on the first Monday in the months of January, April, July, and October in each year, to publish, in one or more of the newspapers published in the county of Middlesex, a statement, under oath or affirmation, of the actual condition of said corporation, conforming, as nearly as may be, with the annual statement now required by law, and shall forward a duplicate thereof to the secretary of state, to be by him filed in his office. Upon its organization, the bank adopted a set of by-laws, part of the thirteenth of which is: "There shall be a standing committee, consisting of the president, and directors, appointed by the board every three months, to continue to act till succeeded, who shall have power to discount and purchase bills, notes, and other evidences of debt, and who shall, at each regular meeting of the board, make a report of the bills and notes discounted and purchased by them since their last previous report." The nineteenth by-law provides as follows: "No overdrafts shall be allowed by the cashier, nor shall he omit the protest of any note, check, or bill, unpaid at maturity, without the advice and consent of the president or standing committee." The twentieth by-law is as follows: "There shall be appointed by the board, once in every three months, a committee of three, whose duty it shall be to examine into the affairs of the bank, to correct the cash, and make an inventory of the assets and compare the same with the ledger balances, to ascertain the condition of the bank and the accuracy of the books; the result of which examination shall be reported to the board by the committee at the next regular meeting." The minute books of the bank show that no committee was specially appointed under this twentieth by-law, but on the 17th of January, 1882, a finance committee was appointed, consisting of the president, Mr. Valentine, and Mr. Hall, then a director, and at that meeting it was resolved: "That the finance committee be instructed to make a thorough examination of the affairs of the bank, and report the result to the next meeting of the board;" and that at a meeting of the directors on February 7, 1882, the finance committee appointed at the meeting held January 17th reported that they had carefully performed their duty, and found the books and vouchers of the bank, including the cash account, all correct. After that, finance committees were appointed in January, 1883, January, 1884, and January, 1885. No entries appear in the minutes of any report of these last committees; and the allegation of the bill is that no committee under the twentieth by-law to examine into the affairs of the bank was appointed for several years, including the period of the cashiership of Valentine.

The proofs show that during all this time the insolvent bank kept a deposit account, such as is usually kept by country banks, with the Park Bank of the City of New York; that the account was very large in its items, amounting, on each side, to $200,000 or $300,000 a month, and that a loss, amounting to $143,916.86, arose by peculations by the cashier, perpetrated by means of false entries and charges upon the books of the insolvent bank in its account with the Park Bank. Those frauds were of three classes. The first arose as follows: The insolvent bank kept and used a book of blank drafts on the Park Bank, with ordinary stubs for marginal entries, each check and its corresponding stubhaving consecutive numbers printed thereon, and the ordinary mode of drawing money from the Park Bank was by these drafts, signed by the cashier only. It was his habit to draw a draft for one sum of money, enter on the corresponding stub a less sum, and appropriate the difference to his own purposes. The credit for this draft to the Park Bank on the books of the insolvent bank was made from this stub entry. Valentine was made cashier in January, 1892, and on October 30, 1893, he drew a draft on the Park Bank for $2,000, and entered the amount on its stub at $1,000, and that amount was credited to the Park Bank on the books of the insolvent bank. It was paid by the Park Bank, and charged to the insolvent bank at $2,000. At the end of each calendar month the Park Bank made up a complete balance sheet, or account current, in detail, which was a complete transcript of its account for the month with the insolvent bank, and forwarded it by mail, together with the vouchers for its charges against the insolvent bank. In those sheets each draft was entered separately, with its amount and number. Among them, in the sheet of November 1, 1893, was the draft for $2,000 which had been credited on the books of the insolvent bank to the Park Bank at $1,000, such credit being made from the stub. This draft for $2,000 was made in favor of the "office," which means for currency for use of the insolvent bank. On December 20,

1893, a draft for $1,632.47, in favor of Henry T. Chapman, Jr. (a Wall Street broker), was drawn by the cashier, and entered on the stub at $632.47, and credited to the Park Bank as $632.47. It was paid by the Park Bank, and charged by its number, as $1,632.47. This process was repeated six times in the year 1894, namely, on July 19th, September 12th, October 1st, October 12th, November 8th, and December 22d; so that the frauds perpetrated in this manner amounted, on January 1, 1895, to over $7,000. It was repeated twice in the year 1895, in one of which was a check for $21,000, against $20,000 entered on the stub"; and one for $2,500 to the cashier's own order, with no entry on the stub, making $3,500 abstracted in that year. There were seven abstractions in the year 1896, amounting to about $4,500. Four of these were for small amounts, without any entries on the stubs against them. There were four in the year 1897, amounting to about $2,700; thirteen in the year 1898, amounting to a very large sum of money; twenty in the year 1899, up to and including July 8th, amounting to a very large sum; the total abstractions by that mode being $124,158. The allegations of the bill and the proofs show that these monthly accounts current or balance sheets and accompanying vouchers were not concealed by the cashier, but were open to inspection and comparison with the books of the bank; but such inspection and comparison were left to the cashier, and the transcripts and vouchers were packed away, and not destroyed, and were found in the rooms of the bank by the receiver. Another mode of abstracting money was by drawing drafts on the Park Bank for currency, and giving no credit whatever therefor. There were five of those drafts, amounting to $17,000.02. A third mode of abstracting money was to make false entries of charges of currency against the Park Bank on the books of the insolvent bank. There were 11 of these false charges and overcharges, by which $5,160 was abstracted; making, altogether, by the modes stated, the sum above mentioned, $143,916.86.

The allegation of the bill is that this loss was due to the negligence of the directors in the performance of their duties; that if a committee of the board had, in pursuance of the twentieth by-law, examined the assets of the bank, such examination would have included an ascertainment of the amount standing to the credit of the insolvent bank on the books of the Park Bank in New York, and would at once have resulted in the discovery of the very first theft—$1,000—made on ...