Houston v. Wilhite

• Decision Date: 05 May 1930
• Parties: J. A. HOUSTON, RESPONDENT, v. J. A. WILHITE ET AL., APPELLANTS
• Court: Kansas Court of Appeals

27 S.W.2d 772

224 Mo.App. 695

J. A. HOUSTON, RESPONDENT, v. J. A. WILHITE ET AL., APPELLANTS

Court of Appeals of Missouri, Kansas City

May 5, 1930

Appeal from the Circuit Court of Sullivan County.--Hon. J. E Montgomery, Judge.

AFFIRMED.

Judgment affirmed.

L. A Warden for respondent.

R. E Ash and Irwin & Bushman for appellants.

BLAND, J. Arnold, J., concurs. Trimble, P. J., absent.

OPINION

BLAND, J.

This action was brought in six counts against the defendants, directors of the Mutual Bank of Green Castle, for accepting deposits after having knowledge of the fact that said bank was insolvent and in failing circumstances. The first count is for the recovery of the amount of a deposit by plaintiff. Counts two to five each cover the amount of a deposit made by other depositors who have assigned their accounts in the bank and their rights of action against the defendants to plaintiff. Count six cover the same deposits as those mentioned in counts one to five and is based on alleged misconduct of the defendants as directors. Defendants filed a special demurrer containing fourteen grounds. The court overruled the demurrer and defendants refusing to plead further judgment was rendered in favor of the plaintiff in the sum of $ 302.34. Defendants appealed to the Supreme Court on alleged constitutional grounds but that court found no such point in the case and transferred the cause to this court.

The only points made in defendants' brief that are developed, and therefore require consideration, are that the cause of action sued upon is not assignable and that the petition fails to allege fraud.

Defendants insist that the causes of action were not assignable because:

"There being no contractual relation between the depositor of a bank and a director of the corporation, the statute creating a liability upon the part of the director to the creditor is purely a penalty notwithstanding it may afford a remedy to the party complaining."

A decision of the question of the assignability of the causes of action in question requires a statement of the history of the liability of the directors of banks to depositors. At common law, as it was recognized in this State, the officers of a bank owed no duty to a depositor other than that owed to any other member of the public. They were not liable to the depositor of the bank for mere mismanagement of the bank's affairs nor for receiving deposits knowing the bank to be insolvent, unless the deposit was induced by fraudulent conduct of the directors. This conduct must have amounted to an affirmative willful misrepresentation of the facts with intent to deceive. [Fischer v. Tamm, 13 Mo.App. 108.] In this connection our Supreme Court in the case of Fusz v. Spaunhorst, 67 Mo. 256, 264, stated:

"Aside from statutory provisions or one of similar nature in the organic law, the directors or officers of an incorporated bank would not be individually responsible in an action at law, for injury resulting to a creditor or depositor, unless the injury were occasioned by the malicious or fraudulent act of the party complained of. Mere nonfeasance will not answer; nothing short of active participancy in a positively wrongful act intendedly and directly operating injuriously to the prejudice of the party complaining will give origin to individual liability as above indicated." [See, also, Duffy v. Byrne, 7 Mo.App. 417, 419; Bank v. Hill, 148 Mo. 380, 49 S.W. 1012; Hart v. Evanson, 3 L.R.A. (N.S.) 438.] There are many decisions to the contrary (see Hart v. Evanson, supra, l. c. 443), but the rule in this State is undoubtedly as we have stated it.

It therefore appears that under the common law mere non-feasance on the part of the officers resulting in loss to the depositor did not give rise to a cause of action against the officers. However, as before stated, if the deposit was induced by affirmative fraudulent conduct of the officers, then they were liable at common law to such depositor. In Minton v. Stahlman, 96 Tenn. 98, 103, 34 S.W. 222, the court, quoting from Thompson on Private Corporations, stated:

"Directors of a bank may make themselves liable to ordinary depositors in damages for false and fraudulent representations made by them, whereby the depositors have suffered loss, and, perhaps, also for acts done by them with intent to deceive and defraud the public generally, which have had that effect and which have caused loss to such depositors."

In Zinn v. Mendel, 9 W.Va. 580, 595, the court said:

"From the foregoing authorities it may be clearly deduced that (although the directors of a corporation are not liable to creditors thereof, in the case before stated, for non-feasance, etc.), they make themselves liable to ordinary depositors of money, for damages for false and fraudulent representations, made by them, and, perhaps some acts done by them, with intent to deceive and defraud the public, or any person, and which have had the design and effect, and caused loss and damages to them."

We will discuss the effect of the statutes of this State upon the common law.

Section 27, article 12, of the Constitution of this State provides:

"It shall be a crime, the nature and punishment of which shall be prescribed by law, for any president, director, manager, cashier or other officer of any banking institution, to assent to the reception of deposits, or the creation of debts by such banking institution, after he shall have had knowledge of the fact that it is insolvent, or in failing circumstances; and any such officer, agent or manager shall be individually responsible for such deposits so received, and all such debts so created with his assent."

Section 11763 of our statutes, under which this action was brought provides:

"No president, director, manager, cashier, or other officer or agent of any bank organized and doing business under the provisions of this article, shall receive or assent to the reception of deposits, or create or assent to the creation of any debts of such bank, after he shall have knowledge of the fact that it is insolvent or in failing circumstances. Every person violating the provisions of this section shall be individually responsible for such deposits so received, and all such debts so contracted."

Then follows provisions allowing contributions to be recovered from one director of another. Section 11764 makes the insolvency or failing circumstances of a bank prima-facie evidence of the knowledge and assent of the directors.

The Supreme Court in Ivie v. Bailey, 5 S.W.2d 50, 53, 54, refused to say whether the constitution created a civil liability unknown to the common law but held that if it did the statutes above described provided a method of enforcing the liability created by the constitution and if not, then they provided a method of enforcing the common law liability as declared by the constitution. We are of the opinion that while in a sense the constitution created a new liability, it might be more properly said that the only change in the common law made by the constitution was to extend the liability of the officers to fraud by concealment as well as affirmative fraud. In other words the rule recognized in some other states to the effect that keeping open a bank and accepting deposits is in itself a representation that the bank is solvent and is a fraud upon those making a deposit when the officer knows of the insolvency, was adopted in this State. It was stated in Minton v. Stahlman, supra, l. c. 109, 110, where the court quoting from St. Louis Ry. Co. v. Johnston, 133 U.S. 566, 33 L.Ed. 683, 10 S.Ct. 390, said:

"'But it is believed that no case can be found in the books holding that a trader who was hopelessly insolvent, knew that he could not pay his debts, and that he must fail in business, and thus disappoint his creditors, could honestly take advantage of a credit induced by his apparent prosperity, and thus obtain property which he had no reason to believe he could ever pay for. In such a case he does an act, the necessary result of which will be to cheat and defraud another, and the intention to cheat will be inferred.' And it was decided 'that in the case of bankers, where greater confidence is asked and reposed, and where dishonest dealings may cause widespread disaster, a more rigid responsibility for good faith and honest dealing will be enforced than in the case of merchants and other traders,' and 'that a banker who is to his own knowledge hopelessly insolvent cannot honestly continue his business and receive the money of his customers, and, although having no actual intent to cheat and defraud a particular customer, he will be held to have intended the inevitable consequences of his own act--that is, to cheat and defraud all persons whose money he receives, and whom he fails to pay before he is compelled to stop business.'"

When it is remembered that an officer of a bank has a direct financial interest in keeping it open, though it be a corporation, it will be fully realized that it is taking but a small step from the liability declared in the Johnson case to hold him liable for his action in behalf of the bank. As before stated, our common law was changed by our constitution in order to bring our State into harmony with the rule that mere silence, where there is a duty to speak, creates liability in an action for deceit. That is to say, the constitution merely extended the common law rule in this State, which required affirmative willful misrepresentation of solvency, to fraud by silence in the face of knowledge of insolvency.

We have gone into this question quite fully because defendants insist that the constitution creates a drastic penalty against bank officers of a kind that comes within the rule that causes...