Cory Mann George Corporation v. Old

• Decision Date: 10 January 1928
• Docket Number: No. 2640.,2640.
• Citation: 23 F.2d 803
• Parties: CORY MANN GEORGE CORPORATION et al. v. OLD et al.
• Court: U.S. Court of Appeals — Fourth Circuit

23 F.2d 803 (1928)

CORY MANN GEORGE CORPORATION et al. v. OLD et al.

No. 2640.

Circuit Court of Appeals, Fourth Circuit.

January 10, 1928.

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Edward R. Baird, Jr., of Norfolk, Va., and Ernest E. Baldwin, of New York City (Baldwin & Barns, of New York City, and Baird, White & Lanning and J. P. Jackson, all of Norfolk, Va., on the brief), for appellants.

Luther B. Way, of Norfolk, Va. (Pender, Way & Foreman, of Norfolk, Va., on the brief), for appellees.

Before PARKER and NORTHCOTT, Circuit Judges, and HAYES, District Judge.

PARKER, Circuit Judge.

This was a suit instituted by the Cory Mann George Corporation, Norton, Lilly & Co., and the Northern Coal Company, in behalf of themselves and other creditors similarly situated, against the Commercial Exchange Bank of Norfolk, its officers and directors. The purpose of the suit was to recover for funds of complainants deposited in the bank and fraudulently misappropriated by their Norfolk manager, one Arthur C. Odend'hal. It was alleged that the bank was liable for Odend'hal's misappropriations, because, through his collusion with the cashier, one Glennan, he had been allowed to draw out for his own use funds belonging to the companies which he represented. Liability of the directors was asserted on the ground of negligence in the management of the bank, and also on the ground that while the bank was insolvent they had transferred its assets to the associated banks of Norfolk and Portsmouth, under a contract providing that from these assets the associated banks should pay in full the claims of depositors as they appeared upon its books, which did not show the claims of complainants based upon the wrongful withdrawals of Odend'hal. One H. L. Page, who had formerly been a director of the bank, was later made a party to the suit, and an amendment to the bill was filed, alleging as additional ground of liability on his part that he had authorized the personal checks of Odend'hal to be charged against the account of the Northern Coal Company.

The case was referred to a special master, and on the coming in of his report a decree was entered against the bank, Odend'hal, and Glennan for $9,442.92 in favor of the Northern Coal Company, and for $57,493.61 in favor of the Cory Mann George Corporation, the latter amount including the $15,000 involved in the claim of Norton, Lilly & Co., to which inclusion Norton, Lilly & Co. did not and does not object. The decree discharged the other officers and directors from the liability alleged, and from that portion of the decree the complainants have appealed; the Northern Coal Company assigning as error, also, that its recovery should have been fixed at $14,758, instead of $9,442.92. No appeal was taken by the bank, Odend'hal, or Glennan, and the correctness of the decree, in so far as it affects them, is not before us.

Odend'hal, as the Norfolk manager of the Northern Coal Company and of the Cory Mann George Corporation, had complete control of the business of each of these corporations in that city. He kept a deposit account in the name of each of them in the Commercial Exchange Bank, in which he deposited funds from time to time, and against which he drew checks. He was authorized by each of them to check against its account in the transaction of its business, and in the case of the Northern Coal Company no signature other than his was required on the check. Checks on the account of the Cory Mann George Corporation were required to be countersigned by the cashier in its Norfolk office. That corporation also required that Odend'hal furnish each month a certificate of the cashier of the bank showing the balance on deposit to its credit; but no such certificate was required by the Northern Coal Company.

The fraud on the Cory Mann George Corporation was perpetrated by charging against its account checks drawn by Odend'hal individually, and by crediting to Odend'hal's individual account checks payable to the Cory Mann George Corporation and deposited for credit on its account. The fraud was concealed by having the cashier of the bank furnish a false statement of account, showing the balance of account as it should have been and as it would have been if the fraudulent transactions had not occurred. These statements were signed by Glennan, who was acting in fraudulent collusion with Odend'hal. No one else knew anything about the fraud which was being perpetrated, except the bank's bookkeeper, who aided and assisted the cashier in perpetrating it. It was carefully concealed from the other officers and directors, none of whom even suspected it. As the fraud consisted in charging or crediting to one account checks which should have been charged or credited to another, it was not a fraud which could have been detected by examination of the bank's books, and as a matter of fact these appeared to be in perfect condition.

The fraud on the Northern Coal Company was perpetrated by charging against its account checks of Odend'hal. The false certificates as to bank balances were not obtained, as this company did not require them, but true statements of the account with canceled checks were sent to Odend'hal, who was in absolute control of the business of the company at Norfolk. As in the case of the fraud on the Cory Mann George Corporation, there is no evidence that any of the officers or directors of the bank, with the exception of Glennan, the cashier, knew of Odend'hal's fraudulent misappropriations. More than two years before these misappropriations were discovered, however, there occurred an incident upon which the Coal Company bases its contention as to the liability of H. L. Page, president of the bank at that time. A personal check of Odend'hal's came into the bank which overdrew his personal account. Page called him over the telephone and notified him of the overdraft. He protested that he had thousands of dollars on deposit in the name of the Northern Coal Company. Page replied that he could not charge his checks to the account of that company. Thereupon Odend'hal stated that he himself was the Northern Coal Company, and that any check signed in the name of the company might be charged to his account, or any check signed in his name charged to the account of the company. Odend'hal then came to the bank and gave instructions to its officials accordingly. Some time later, upon instructions from him, the two accounts were combined.

It appears that Page did not know and had no reason to suspect that Odend'hal's statement was false. Odend'hal at the time was a man of the highest standing in the community. He had absolute control of the Northern Coal Company's business in Norfolk and of its funds handled there; and the company, although doing a large business in Virginia, had not domesticated as required by statute. It required no counter signature on checks signed by Odend'hal, and when statements were sent in showing his checks charged to its account no protest was made. Glennan and the bookkeeper who were in collusion with Odend'hal saw checks which he sent to the Northern Coal Company in Boston, and which were charged to its account at the bank; but Page denies that he had any knowledge of these checks, and there is no evidence that he had such knowledge.

During the four years of the bank's existence 75 meetings of the directors were held. An executive committee was appointed, and loans were properly supervised. The directors regularly audited the accounts of the cashier while the transactions complained of were occurring, making two audits in 1921 and one in 1920. In addition to this, they had examinations made once a year by certified public accountants. It appears, further, that no amount of auditing or examination could have disclosed the fraud perpetrated on complainants by Odend'hal, unless their own books had been examined at the same time as were the books of the bank; for the fraudulent entries did not disturb the balance as shown by the books, nor give indication that a fraud was being perpetrated. There is no evidence of negligence on the part of the directors in the selection of the cashier or of the bookkeeper who colluded with Odend'hal, but, on the contrary, the evidence is that they were both thoroughly competent and bore excellent reputations until involved in this fraud.

In January, 1922, the directors decided to liquidate the bank because it was not making money. At that time no claims were being made against it by complainants, and it not only appears that the directors did not know of their claims, but also that they had no intention of giving a preference to any one. The bank was thought to be perfectly solvent, and it was expected that its assets would pay all creditors in full, and pay also a large dividend to stockholders. In order that the financial situation in Norfolk might not be disturbed by the liquidation of a bank at that rather critical time, the associated banks of Norfolk and Portsmouth took over its assets, under an agreement that they would pay in full the claims of all depositors as shown by its books, and that the directors would indemnify them against loss in so doing. The associated banks proceeded to liquidate the bank under this agreement, and by the latter part of May had paid in full the claims of all depositors as shown by its books.

As early as February 12, 1922, complainants had learned the facts with regard to the claims asserted in this suit. Nevertheless they took no action to establish their right to share in the distribution of the assets which had been transferred to the associated banks, but stood by and allowed these assets to be used to pay in full the claims of other creditors. Not until more than five months after learning the facts, and nearly two months after the other depositors had been paid in full, did they file suit.

Upon the facts as stated three principal questions arise for our determination: (1) Are the directors liable on the...