Lieberman v. The First National Bank of Wilmington

• Decision Date: 01 June 1898
• Court: Court of Chancery of Delaware
• Parties: NATHAN LIEBERMAN, v. THE FIRST NATIONAL BANK OF WILMINGTON, AND PIERCE GOULD, SHERIFF

40 A. 382

8 Del.Ch. 229

NATHAN LIEBERMAN, v. THE FIRST NATIONAL BANK OF WILMINGTON, AND PIERCE GOULD, SHERIFF

Court of Chancery of Delaware, New Castle

June 1, 1898

BILL FOR INJUNCTION BY THE SURETY IN THE BOND OF AN OFFICER OF A BANK.--The complainant was surety in two bonds of Peter T. E Smith, given to the defendant bank, to secure the faithful performance of his duties as paying teller. The first bond was dated Nov. 1, 1879, for $ 15,000.00 and on February 24 1893, judgment was entered thereon against the complainant and his co-sureties. Prior to the execution of this bond it was in proof that complainant then a large depositor in the bank consulted the cashier, with respect to the risk of becoming surety for Smith, and was by him assured that the books and accounts of Smith were all right and that he would run no risk. This assurance was repeated on the day the bond was executed and before complainant signed it.

It was also in proof that a report of the condition of the bank under date of October 2, 1879, was made to the Comptroller of the Currency under sec. 5211, U.S. Rev. Stat., sworn to by the cashier and attested by the directors, and published in Wilmington newspapers. The statement, accounting for all funds of the bank, was shown to be false, in that the individual deposits appearing upon the books of the bank actually $ 4,600 more than the amount set forth in the published statement, that amount being the amount of the teller's defalcations at that time.

On July 6, 1885, complainant executed another bond for $ 15,000, as surety for Smith, on which judgment was entered on February 24, 1893. Before executing the second bond, complainant had conversations with the cashier, similar to those had prior to the execution of the first bond. A statement of the condition of the bank, similar to that above stated, under date of May 6, 1885, was made and published, being sworn to and attested by the directors. In this the amount of individual balances due, was understated by $ 15,775.08, which was the amount of defalcations of the teller up to May 6, 1885.

On the last mentioned judgment execution was issued October 19 1893, and the property of the complainant levied on, and the sheriff was proceeding to advertise and sell the same, when further proceedings were arrested by a preliminary injunction granted by Chancellor Wolcott, November 6, 1893.

The liability of complainant as surety in the second bond continued from its date until July 5, 1891, when a new bond was given with The American Surety Co. as surety.

The defalcations continued during the whole period covered by the second bond and until February, 1893, when Smith resigned.

There was much proof, showing the method by which the fraudulent misappropriations of money were made and concealed, which need not be stated in detail, but the conclusion reached by the Court was that the defalcations under the first bond amounted to $ 11,650, and those under the second bond to $ 27,750, each of which sums with interest on the several items thereof, amounted to more than the amounts of the bonds under which complainant and his co-sureties were responsible, respectively.

The cause came on to be heard upon bill, answers and proofs.

Appeal was granted, and the case was removed to the Supreme Court.

Benjamin Nields, for complainant.

The injunction in this case should be made perpetual upon the two grounds:

First. That the bonds signed by the complainant are void as to him because be became surety thereon by reason of the fraudulent representations of the defendant.

Second. That the right of the First National Bank to proceed on said bonds, or either of them, is barred by the statutes of this State.

1. Fraudulent representations.

If the false statements made by the cashier, or those made by the bank, which the complainant believed to be true, and thereby became surety, were negligently or carelessly made without knowing whether the same were true or false, such statements are held in equity to be fraudulent representations, notwithstanding the cashier and directors may have believed them to be true. 2 Brandt, Sur. G. sec. 422; 2 Pom. Eq. Jur. secs. 887-8; 1 Big. Fraud, 411, 414, 520.

There is a broad distinction between an action on the case for deceit, for fraudulent misrepresentations respecting the subject matter of a contract, and a suit in equity for the rescission or avoidance of a contract upon the ground of fraudulent representations respecting the subject matter of a contract. In the equity suit it is only necessary to prove the misrepresentation; and the contract, though honestly made, if obtained by it, cannot stand. Derry vs. Peek, L. R. 14 App. Cas. 337, 360; Arkwright vs. Newbold, L. R. 17 Ch. Div. 320; Smith vs. Chadwick, L. R. 9 App. Cas. 193; Reese River Silver Mining Co. vs. Smith, L. R. 4 H. L. 64, 79; Central Ry. Co. of Venezuela vs. Kisch, L. R. 2 H. L. 99; Redgrave vs. Hurd, L. R. 20 Ch. Div. 1; Graves et al. vs. Lebanon National Bank, 10 Bush 23; Rawlins vs. Wickham, 3 D. G. & J. 304 Morse on Banking, 226.

The facts in this case clearly warrant the Court in determining not only that the complainant could avoid the bond on the ground of misrepresentation, but that the facts constitute fraud which would be a ground of action and a fortiori a ground of defense. 1 Big. Fraud 509, 513; Townsend vs. Williams, 117 N.C. 330, 23 S.E. 461; Solomon et al. vs. Bates et al., 118 N.C. 311, 24 S.E. 478; Cole vs. Cassidy, 138 Mass. 437; Tate vs. Bates, 118 N.C. 287, 24 S.E. 482.

The law contained in the authorities heretofore cited is clear, that in any case where one party to a contract makes false representations to the other party, material to the contract, the contract can be avoided. This rule of law is of still more conclusive application when the false representation is made by a creditor to a surety upon entering into a contract of suretyship.

2. The Statute of Limitations.

The right of the First National Bank to proceed on said bonds, or either of them, is barred by the statutes of this State.

The statute of this state provides that no action shall be taken upon a bond given to a bank or corporation, by any officer thereof for his good behavior, after the expiration of two years from the accruing of the cause of action, or after the expiration of six years from the date of such bond. Rev. Code (1893), 889. This is not a general statute of limitation but applies only to obligations given to a corporation by its officer for good behavior, faithful discharge of his duties, or touching the execution of his office, and has no application to other contracts.

To entitle the bank to recover, a cause of action must have accrued within six years after the date of the bond and the action must be brought within two years from the accruing of the cause of action. No breach of the bond, therefore, occuring more than two years before action would constitute a cause of action.

The several amounts taken prior to and including April 11, 1891, were all taken more than two years prior to entering judgment, and the three amounts taken after that date were all taken two years before execution was issued on said judgment.

The entry of judgment on the bond pursuant to the warrant of attorney was not an action brought upon the bond, since the law nowhere authorizes the corporation to take a warrant of attorney to enter judgment on such bonds, and if they were so authorized, judgment might be entered immediately and before the breach; therefore, the entry of judgment could not be such an action as was intended by the statute.

The execution issued against the complainant was an action. It was an action to enforce a liability and "the word action embraces all civil proceedings to enforce a liability." Martin vs. Talley, 72 Ala. 33.

The cause of action having accrued more than two years before the execution was issued, the execution is such an action as comes within the terms of the statute and is barred. Grimshaw vs. Wilmington, 5 Del.Ch. 183; Walker vs. Whitehead, 16 Wall. 314; Hudson vs. Bishop, 32 F. 519.

Equity will not enlarge the legal liability of a party who is under no moral or equitable obligation. Equity will not hold a surety liable where he is discharged at law. United States vs. Price, 9 How. 83; Miller vs. Stewart, 4 Wash. C. C. 28, s. c. 9 Wheat. 680; 2 Wood, Lim. 706; Hunt vs. Rousmaniere's Adm., 1 Pet. 1; Wright vs. Russell, 3 Wilson, 530; Simpson vs. Field, 2 Ch. Cas. 22; Waters vs. Riley, 2 Harr. & G. 310; Weaver vs. Shyrock, 6 S. & R. 262; Kennedy vs. Carpenter, 2 Wharton, 361; Harrison, Exr. of Minge vs. Field, 2 Wash. (Va.) 136; Dixon vs. Vandenburg, 35 N.J.Eq. 47; Brandt Sur. & G. sec. 117; Risley vs. Brown, 67 N.Y. 160; Pickersgill vs. Lahens, 15 Wall. 140; Roddy vs. United States, 3 Wall. Jr. 358, Fed. Cas. 11990; Fulden et al. vs. Lahens et al., 6 Blatch. 525; Pratt et al. vs. Northam et al., 5 Mason, 95; Sims vs. Slocum, 3 Cranch 307; Ammidon vs. Smith, 1 Wheat. 447; Leggett et al. vs. Humphreys, 21 How. 66; Getty vs. Binsse et al., 49 N.Y. 385.

The statute of limitations commences running in favor of a surety or guarantor from the time he is liable to suit, and this, as already seen, may or may not be the same time the principal becomes so liable. 1 Brandt, Sur. & G. sec. 161; St. Louis vs. Daily et al., 4 Mo.App. 172; United States vs. Babbitt, 95 U.S. 334; People vs. Burkhart, 76 Cal. 606; Grovenor vs. Stonum, 11 Ala. 679; Colvin vs. Buckle, 8 M. & W. 680.

Bradford and Vandegrift, for respondents.

A sufficient reply to the principal ground of relief set up by the complainant, --the statute of limitation on such bonds --is that the paying teller fraudulently concealed his defalcations for more than two years and...