Lippitt v. Ashley

• Decision Date: 16 July 1915
• Docket Number: Nos. 534-537.,s. 534-537.
• Citation: 89 Conn. 451,94 A. 995
• Court: Connecticut Supreme Court
• Parties: LIPPITT et al. v. ASHLEY et al.

94 A. 995

89 Conn. 451

LIPPITT et al.

v. ASHLEY et al.

Nos. 534-537.

Supreme Court of Errors of Connecticut.

July 16, 1915.

Prentice, C. J., and Roraback and Wheeler, JJ., dissenting in part.

Appeal from Superior Court, Hartford County; William L. Bennett, Judge.

Actions by Norris S. Lippitt and others as receivers, against F. L. Ashley and others, Ezra B. Bailey and others, George P. Clark and others, and James T. Coogan and others. From judgments for defendants, plaintiffs appeal. Affirmed as to the last two actions, reversed and remanded as to the first two.

These are four actions brought by the receivers of the Windsor Locks Savings Bank against the directors of the bank, arranged in four groups according to their terms of office, to recover damages for the alleged negligence of the directors in permitting the assets of the bank to be stolen by its treasurer, and to recover, under section 3453 of the General Statutes of 1902, the amounts of certain dividends declared and paid in excess of net profits. These actions were tried together in the superior court, and were heard together on the appeals from judgments for the defendants rendered in each case.

The Windsor Locks Savings Bank was incorporated in 1871, and in that year Alfred W. Converse was elected secretary and treasurer of the bank, an office which he continued to hold until November 28, 1910, when he resigned. Charles F. Cleveland was elected secretary and treasurer as successor to Converse, and performed the duties of that office until May 17, 1912, when the plaintiffs were appointed receivers. During his administration of the office of treasurer Converse embezzled approximately $93,000, and also made false reports to the directors, in consequence of which they declared and paid dividends amounting to nearly $100,000 in excess of earnings.

Converse was a veteran of the Civil War, and a successful business man, postmaster, town clerk, treasurer and registrar of the town of Windsor Locks for many years, and was universally trusted and respected. He received and paid out all moneys of the bank, kept all the books, drew and signed all checks, made out all reports, and, with some clerical assistance, performed all the other clerical duties of the bank.

The bank began as a very small institution and grew gradually, and at the time when the receivers were appointed its deposits were substantially $581,000. During the greater part of its existence its office was in a small room in the Converse Block. It was operated with great care and economy, the total expenses for the whole 41 years of its existence averaging somewhat over $1,800 a year for rent, salary of treasurer, taxes, and all other general and incidental expenses.

The books of the bank comprised deposit and withdrawal registers, a general ledger, a daily balance hook, and depositors' ledgers, containing the individual accounts of the depositors. The deposit registers purported to contain a list of all deposits made by depositors, the name of each depositor, the number of the account to which the same was credited on the individual ledger, and the amount of each deposit, all arranged in chronological order. The total semiannual dividends credited depositors at any dividend date was also entered in this register in a single lump sum. The items entered on these books were footed continuously from beginning to end, so that the footing at any given date purported to indicate the gross amount of all sums (including both deposits and dividends) credited to depositors from the organization of the bank to the date of such footing. The withdrawal register purported to contain a list of all sums withdrawn by depositors, showing the days on which such withdrawal was made, the number of the account to which the same was charged on the individual ledgers, the amount so withdrawn, and the signature of the depositor or his agent. These items were also footed continuously from beginning to end and the footing at a given date purported to indicate the gross withdrawals charged against depositors from the organization of the bank to the date of such footing. In the general ledger the gross deposits and gross withdrawals, gross income received from interest, and all other items of receipt and expense, were entered from time to time. With the exception of the entries in the expense account the items in this ledger are not self-explanatory, but were carried into the general ledger from the deposit and withdrawal registers, and from other books.

Shortly after Converse's appointment in 1871 he began the embezzlements which continued until his resignation, nearly 40 years later. Generally speaking, the method employed by him to conceal his embezzlements consisted in either falsifying the footings upon the deposit register so that the footings indicated a less amount than had been in fact received and credited, or by omitting to make entries on the deposit register of amounts actually received. In order to make the other books agree with the falsified deposit register Converse falsified the entries of total deposits in the general ledger and entered the total withdrawals for the various months in sums larger than the actual withdrawals as indicated by the withdrawal register, and further made false entries of the cash received and paid out in the cash account of the general ledger. During all this time the individual depositors' accounts in the depositors' ledger were correctly kept, and in all instances correctly showed the deposits actually received from, and the withdrawals actually made by, each depositor, and also correctly showed the balance, if any, due each depositor at any given time. The total balances due depositors were not footed on the individual depositors' ledger, and the result of this system of falsifying the books was that the total liabilities of the bank to its depositors, as appearing in the deposit and withdrawal registers and carried from them into the general ledger, were greatly understated, but the same were properly and correctly stated in detail, though not in gross, in the depositors' ledger.

The finding of the court is that these embezzlements and falsifications would have been discovered at any time by a reasonably careful audit of the books of the bank, or by any reasonably careful comparison of the depositors' ledger with the deposit and withdrawal ledgers. The by-laws of, the bank prior to 1877 required the annual appointment by the directors of two auditors, who should audit the treasurer's accounts quarterly and make written reports of the result. In 1874 this section of the by-laws was amended so as to require semiannual audits. In 1877 the General Assembly passed a statute, now section 3447 of the Revision of 1902, requiring the directors, managers, or trustees of every savings bank to annually appoint two or more auditors, not directors, managers, or trustees thereof, who should examine the books, accounts, and securities belonging to such bank and make a sworn statement, showing the true condition thereof on the 1st day of October in each year. The directors complied with the by-laws of the bank and the statute, and appointed annually two competent auditors, who went through the form of auditing the books of the bank at least twice in each year, and sometimes oftener, and reported to the directors the results of their examination. The report made as of October 1st in each year was upon a printed form prescribed by the bank commissioners of the state. None of these reports purported on its face to exhibit a comparison of the liabilities to depositors as shown by the deposit and withdrawal registers, or by the general ledger, with the liabilities to depositors as shown by the depositors' ledger, and none was in form a trial balance of the kind hereinafter referred to. The bank commissioners of the state of Connecticut also examined this bank semiannually for 39 years, in accordance with section 3457 of the General Statutes, and their published reports of it showed the condition of the bank to be the same as that shown in the statements of the treasurer and auditors to the directors. The finding of the court is that reasonable care on the part of the auditors required that they should make a reasonable effort to compare a substantial number of items entered in the individual ledgers with corresponding entries in the registers at least once in two years; that no such effort was ever made by the auditors during the entire history of the bank; that no reasonably careful audit of the books of the bank was ever made by any person prior to January, 1912, and no attempt to compare the net amount due depositors as indicated by the depositors' ledger with the net amount due depositors as indicated by the deposit and withdrawal ledgers. It is also found that the embezzlements and falsifications of Converse could have been discovered at any time by such an audit or by such a comparison.

From time to time the directors required Converse to furnish them statements of the condition of the bank and its earnings, to be considered by them for the purpose of determining whether dividends had been earned. Such statements were furnished by Converse, and showed that dividends had been earned, but they were in fact untrue statements, taken from the false balances in the general ledger. Believing these statements to correctly state the condition of the bank and its earnings, and relying upon their knowledge of the bank as derived from the reports of the auditors and bank commissioners, the directors declared dividends semiannually from 1872 to 1912, excepting the semiannual dividend for July, 1878, which was omitted. In declaring these dividends the directors supposed that their total amounts would be calculated upon the false and grossly understated amounts of deposits as reported to them by the treasurer. In point of fact the dividends at the rate per cent. voted by the directors were...