Jones v. Johnson

• Decision Date: 14 January 1888
• Citation: 6 S.W. 582,86 Ky. 530
• Parties: JONES v. JOHNSON et al. EMERY'S SONS v. TRADERS' BANK & WAREHOUSE CO. et al.
• Court: Kentucky Court of Appeals

6 S.W. 582

86 Ky. 530

JONES v. JOHNSON et al.

EMERY'S SONS v. TRADERS' BANK & WAREHOUSE CO. et al.

Court of Appeals of Kentucky.

January 14, 1888

Appeal from Louisville chancery court.

The stockholders of the Traders' Bank & Warehouse Company began suit to compel the assignee to sue the directors for negligence in its management; and Thomas Emery's Sons creditors of the bank, joined in the suit, and sought to establish their claim against the bank. From the judgment obtained the stockholders and Emery's Sons appealed.

Certain persons loaned money to a cashier on his notes, with stock of the bank as security, not knowing that the loan was for the benefit of the bank. The bank records showed that the stock was sold to the cashier to raise money for the bank, which agreed to protect him. He deposited the money when obtained with the bank. Held, that the remedy of the lenders if any, was against the directors by individual suits for tort, and their claim could not be joined in a suit by stockholders to settle the assets of the insolvent bank, or by creditors to enforce their contract.

One subscribed to bank stock on condition that at the end of a certain period, if he wished, he could return the stock, and receive back the note he had given in payment, and which contained the same stipulation. Held, that the stockholders, not having been misled, were bound by the contract.

Wm Reineke and J. S. Pirtle, for appellant.

Muir, Bijur & Davie, R. W. Woolley, I. J. Caldwell, and Charles H. Gibson, for appellee.

PRYOR C.J.

A number of defendants in this case having made motions to dismiss this action on account of a misjoinder, and for other causes, the action was dismissed by a judgment below. That, on an appeal to this court, was reversed, and will be found reported in 10 Bush, 649. The action was instituted by stockholders of the Traders' Bank & Warehouse Company, to compel its assignee, Ullman, to settle the business of the corporation, and distribute its assets, and to make the president and directors of the bank liable for the negligent manner in which they had managed its affairs. By an answer and cross-petition, Thomas Emery's Sons set up a large claim against the corporation, asking a judgment for the amount against it, and that the stockholders be compelled to pay up their stock for its satisfaction. The court below adjudged that Emery's Sons were not creditors of the bank, and dismissed their complaint, from which they have appealed. It was also adjudged that the directors were not liable to the stockholders by reason of any neglect of duty, and from that judgment the stockholders have appealed.

The organization of the Traders' Bank & Warehouse Company, as well as the subscription to its capital stock, was mainly due to the personal exertions and influence of George P. Doern, its cashier, who was reputed to be a man of much wealth, and regarded as possessing the highest order of personal as well as business integrity. His father-in-law, Nuenberger, had retired from business, owning, as was supposed, a large estate, and was indorsing and sustaining Doern in all of his business transactions. James Johnson was made president of the bank, and his co-appellees, Theirnan, Clifton, Chase, Hecht, etc., were the directors. They seem, from the record before us, to have been inexperienced in the business of banking. Doern was elected cashier by reason of his superior business qualifications, and for the additional reason, no doubt, that himself and his father-in-law owned more than one-half of the stock subscribed. The stockholders and directors were looking to Doern as the medium through which the enterprise was to be made a success. A great deal of the stock taken had not been paid, but notes executed for the amount by the stockholder, under the belief that one-half of the amount subscribed would soon be paid in dividends. Some $40,000 of stock taken by Doern was paid for in real estate, or at least that much was unproductive capital. Doern, as cashier, seems to have had almost the complete control of the bank; and the directors, having the utmost confidence in his integrity, as well as his pecuniary ability to meet all of his engagements, were not vigilant in the examination of his accounts with the bank, and within less than a year he had become largely indebted to it, and in fact had wrecked the entire enterprise. The corporation having assigned to Ullman, and Ullman declining to sue the directors for their alleged neglect of duty, the stockholders, or a portion of them, instituted this action; charging-- First. That the directors, knowing Doern to be insolvent, allowed him to largely overdraw his deposit account, and, with a full knowledge of the facts, permitted him to take cash out of the teller's drawer, and apply it to his private use; he placing his tickets in the drawer showing the amount taken, and the directors counting these tickets as cash. Second. They had discounted Doern's paper for large amounts when they knew it was not good, and the parties to it insolvent; and had permitted insolvent parties to overdraw their respective accounts, and had afterwards accepted Doern's check for these overdrafts. Third. That the directors had canceled the bond of Doern, executed as cashier, and released his sureties. Fourth. That the directors had sold to Doern 400 shares of stock, and took his note therefor; and when he paid in $20,000 on his notes, they made him a present of, or permitted him to check out, $1,492.32 of the amount. Fifth. They elected him a director after he was removed as cashier, and had paid him his salary as cashier when he was entitled to nothing. Sixth. That the directors, after settling with Doern and his father-in-law his overdrafts, had permitted Doern to check out the balance said to be due him on settlement. Seventh. That they had released certain stockholders--Horace Scott and William Johnson--from the payment of their stock subscribed. Eighth. That the directors, except Chase, drew from the bank various sums amounting to $4,344, for their own use, and surrendered worthless stock therefor. Other charges of mismanagement and neglect are made, not necessary to be considered, as those enumerated, and more specifically alleged as to amounts and dates than here stated, embrace the principal subjects of controversy.

This corporation was organized in September, 1871, and in March, 1872, it was discovered that the balance books showed an indebtedness by Doern of nearly $40,000. Doern was then removed as cashier, and a settlement demanded, resulting in the execution of the notes of Doern and his father-in-law for the amount of this indebtedness, and secured by a mortgage on real estate then of ample value to satisfy the indebtedness. That Doern had at times drawn more than his deposit account was a fact known to the directors; his account showing at times credits to Doern by way of deposit of more than he had drawn out, and at other times an amount exceeding his deposit account; but that he had overdrawn so largely was a fact unknown to the directors until March, 1872. It is shown by Johnson, the president, that, when the committee was appointed to investigate the condition of the bank and the accounts of the cashier, the money was always on hand, and no tickets accepted as cash; that the accounts were proper, and no reason existed for the belief that Doern was betraying the confidence of the directors, or withdrawing such large sums of money. It appears that Doern was a commission merchant, engaged in the purchase and sale of whisky; and, when his account was overdrawn, he gave as a reason that he was then engaged in settling up his commission business with a view of closing his house, and required more funds than he otherwise would, as he was compelled to pay out, and was making few collections. He was regarded as amply able to meet all his engagements, and his solvency was not doubted by any of the directors, and but by a few business men. He and his father-in-law owned a majority of the stock; and overdrafts that were not too large were not unusual, as the evidence shows, with those connected with such institutions, if regarded as solvent. An exercise of the utmost vigilance might have produced different results, but this was not required of the directors; but when they did discover the condition of Doern's accounts, and that practices had been resorted to by him in order to deceive, they obtained the settlement and the mortgage to secure this indebtedness. Several of these appellants, who were stockholders in common with the officers of the bank, had been permitted to overdraw their deposit accounts, and now complain of the directors for permitting the cashier to do the same thing. But it is evident that the directors secured the bank and its stockholders for every dollar that Doern had overdrawn, by the mortgages executed to secure the notes of the latter and those of his father-in-law, given in settlement of this claim; so it is needless to discuss this branch of the case further than to show the confidence of these trustees, who were representing the stockholders, in their cashier, Doern, and their belief in his ability to pay his entire indebtedness, indulged almost to the moment of time at which the corporation was declared to be insolvent. Their only remedy was in a settlement with the cashier, and to secure as much as possible the amount of his indebtedness. This they seem to have done in good faith, and to protect the bank, regardless of the rights of others.

It is proper to notice next the character of paper discounted by the bank for the benefit of Doern. It is alleged that the parties to the paper were insolvent, and known to be so by the directors, and if the facts proven establish...