Frelinghuysen v. Nugent

• Decision Date: 25 September 1888
• Citation: 36 F. 229
• Parties: FRELINGHUYSEN v. NUGENT et al.
• Court: U.S. District Court — District of New Jersey

36 F. 229

FRELINGHUYSEN v. NUGENT et al.

United States Circuit Court, D. New Jersey.

September 25, 1888

A. Q Keasbey and J. Emery, for complainant.

J. W Taylor, for respondent Jenkinson.

T. N McCarter, for respondents Kelly and others.

BRADLEY Justice.

On Monday, the 31st day of October, 1881, the Mechanics' National Bank of Newark, an old and reputedly strong and wealthy institution, closed its doors, and announced itself bankrupt. Perhaps no single event had ever occurred in that city which so completely shocked and astounded its inhabitants. By his own confession, made to the directors on the day previous, the catastrophe was caused by the delinquency of Oscar L. Baldwin, the cashier. His story was that he had used the bank's money to carry along a firm of morocco manufacturers by the name of C. Nugent & Co. consisting of Christopher Nugent and his brother, James Nugent; and that the means by which he had kept the transactions concealed were a series of fictitious charges against the Mechanics' National Bank of New York, the correspondent of the Newark bank in the latter city, by which, according to the books of the Newark bank, the New York institution was in debt to it in the gross sum of over $1,900,000, while in truth and in fact the Newark bank owed the New York bank over $270,000, which was shown by the books of the latter; the discrepancy being nearly or quite $2,200,000. This was the proximate amount of deficiency found to exist in the funds of the bank. The whole capital (which was $500,000) and the surplus were entirely swamped, the assets were insufficient to pay the deposits and other debts of the bank, and the deficiency had to be made up by the directors and stockholders. The institution was completely wiped out of existence. The cashier, who had held his office for 18 years, and occupied an eminent position in the city of Newark as a financier, either for the purpose of diverting to some extent the odium and execrations which he knew would fall upon his head, or because his story was the true one, endeavored to lay the inciting cause of the defalcation at the door of C. Nugent & Co., and especially Christopher Nugent, the senior partner of the firm. His statement is substantially this: That about 1872, Nugent & Co., who had been large dealers with the bank, became embarrassed, and wanted him Baldwin to get them more money to use in their business than the directors of the bank would give them by regular discount; their line of discount being then about $75,000. Being overpersuaded by Christopher Nugent, and relying on his promise to secure the bank by a conveyance of their property in case of disaster, he lent the firm, on their own paper alone, on behalf of the bank, considerable sums, amounting in 1872 to about $142,000, without reporting the loans to the directors,-- a step which it was necessary to conceal, and which gave Nugent a power over him. The latter, availing himself of this advantage, and magnifying the profits he expected to realize from the business, and repeating his promises to secure the bank in case of disaster, induced Baldwin to continue and increase his advances, until in 1874, they amounted to more than $400,000. That he then told Nugent the thing could go on no longer; that he should tell the directors, and end his own life. Nugent implored him not to do anything of the kind; represented that his business was growing better, and that soon he would control the matter, and be able to pay all his debts. Baldwin yielded, and renewed his endeavors to carry the firm along, involving further advances and extension of the business; and so year by year the debt increased until it reached over $2,000,000, under the weight of which the bank failed. During all this time Baldwin says that he met Nugent almost daily; explained to him the situation, so that he knew he was lending him the funds of the bank, and that the dread of exposure was forcing him to do it. Nugent, he says, would furnish him at the beginning of a month with a list of payments to be made, saying it was all, when frequently it did not cover half, and other checks would appear. During the entire period of these irregular advances, Nugent & Co. were in the habit every day of sending to Baldwin their receipts, cash, checks, and notes, sometimes forty or fifty thousand dollars worth of paper, which Baldwin would deposit to their credit, or get discounted for their benefit; in fact, Baldwin says he practically acted as their agent in the management of their financial affairs; taking all their receipts, and paying their obligations. He says that Nugent (he generally speaks of Christopher Nugent, who represented the firm) would leave with him his drafts on Martin & Runyon, (New York brokers,) signed in blank 10 or 20 at a time and he (Baldwin) would fill them up for whatever amounts were necessary from time to time to make their account good; sometimes by check as cashier, and sometimes by cash. This diversion of the funds of the bank was concealed by charging them to the Mechanics' Bank of New York; and drafts on Martin & Runyon were sent to that bank for collection, and charged to it. So it happened that the advances thus made to Nugent & Co. became falsely charged to the New York bank, and the entire deficit in the Newark bank's assets was due to such advances; all which, according to this account, went into the concern of C. Nugent & Co., and produced the corpus of its assets, or at least the major part thereof.

Acting upon the faith of Baldwin's statements Frederick Frelinghuysen, the receiver of the bank appointed by the comptroller of the currency, filed the original bill in this case on the 5th of November, 1881, charging, in substance that, by the complicity of Nugent & Co. in the embezzlement of the cashier, they became trustee ex maleficio of the bank's moneys, and held their entire property and assets subject to and charged with a trust for the use of the bank to the extent of said moneys in preference to the claims of any other creditors. The bill prayed an injunction against the disposal of the property and application was also made for the appointment of a receiver to take charge of it for the benefit of all parties interested therein under the order and direction of the court, and an injunction was granted, and George B. Jenkinson was appointed receiver, and as such took possession of the whole property and assets, both of the firm of C. Nugent & Co. and of the individual partners, as completely as if the parties had been declared bankrupt, and he had been appointed the assignee. This was certainly, in the language of the medical profession, very heroic treatment; and, if Baldwin's representations were true, (and he verified them by oath,) the course pursued was probably justified by the circumstances. A whole community had been shocked and thrown into financial disturbance, if not actual panic, by the enormity of the delinquencies disclosed; and there was naturally a demand for severe measures, and a rigid execution of the law. Baldwin, of course, was subject to criminal prosecution, and criminal proceedings were also commenced against Christopher Nugent. But there were other interests involved besides those of the bank. Nugent & Co. were indebted to a large amount-- somewhere about $375,000-- for materials and other things used in and about their business, and a large number of their creditors immediately commenced suit against them, or threatened to do so. The Nugents denied the allegations of Baldwin as to any complicity with him in embezzling or improperly using the funds of the bank, and denied that they had any knowledge or notice that he made loans to them on account of the bank without due authority. Their counsel prepared an answer to the bill of complaint in this case, and the Nugents swore to it on the 21st day of November, 1882, in which all the charges made by Baldwin and by the bill of any such complicity or knowledge were squarely and fully met and denied. They also denied that they had obtained through Baldwin's means any such amount of money or loans as he pretended they had. They admitted that Baldwin had acted as their financial agent for several years past, ever since they were first embarrassed in 1872 or 1873; that they turned over to him daily all their receipts, and he paid their obligations as they became due. They state that this mode of transacting their business was done at his request; and they admit that they gave him drafts signed in blank to use for them in case of necessity during the absence of Christopher Nugent, who was the principal business manager of the firm, but they never knew that he made any such irregular use of them as he pretends in his statement. They state that their bank-account was always kept good, or, if temporarily deficient, they always made immediate arrangements for making it good; but that for the last few years they had been unable to know exactly what the account was, except as Baldwin informed them, inasmuch as they could get from him no pass-book or statement; that they had not had a pass-book since early in 1879; that once a week they sent Baldwin a list of the assets turned in to him during the week past, and once a month furnished him with a list of their obligations coming due for the month; but they were much embarrassed for want of an accurate statement and account from him as to the condition of their accounts in his hands, and often applied to him for such a statement, which he would promise to give them, but never did. It was stated in the bill of complaint, founded on suggestions of Baldwin, as a reason for the absorption of such a large amount of money as it was charged that the Nugents had received through him, that they had speculated...