Perth Amboy Gaslight Co. v. Middlesex County Bank

• Decision Date: 17 February 1900
• Citation: 60 N.J.E. 84,45 A. 704
• Parties: PERTH AMBOY GASLIGHT CO. v. MIDDLESEX COUNTY BANK.
• Court: New Jersey Court of Chancery

45 A. 704

60 N.J.E. 84

PERTH AMBOY GASLIGHT CO.

v. MIDDLESEX COUNTY BANK.

Court of Chancery of New Jersey.

Feb. 17, 1900.

Bill by the Perth Amboy Gaslight Company against the Middlesex County Bank. Appeal by certain creditors from a decision of the receiver of the bank refusing to prefer their claims. Affirmed.

This matter comes before the court on divers appeals from the rulings of the receiver refusing the demands of several creditors of the insolvent defendant bank to have their claims paid in full in preference to the general creditors. At the same time application is made to the court by several creditors, who have heretofore proved their claims as such and been admitted, to amend their claims so as to ask for a preferential payment. The general ground upon which the claim is made is that the claims in question arose shortly before the bank failed, and after its insolvent condition was either actually known, or, under the circumstances, ought to have been known, by the officers of the bank. The claims actually dealt with by the receiver are somewhat variant in their character. Some are based upon actual cash deposited shortly before the closing of the bank. Others are based on deposits of checks on other banking Institutions similarly deposited. Others, and those greatest in amount, are by banks which sent to the insolvent bank, for collection and remittance, checks on the Insolvent bank, drawn by depositors therein, and, in a few instances, of checks drawn on other banks, inclosed to the Insolvent bank for collection. As to this last class of items: They were forwarded by the Insolvent bank to the bank upon which they were drawn, and placed to the insolvent's credit by those banks; and, to the extent of the balance due to the insolvent bank from those correspondent banks upon which the checks were drawn, the receiver has recognized the claim as Just, and has or will pay the same in full.

The undisputed facts of the case are that the insolvent bank was systematically robbed by its cashier for several years, the extent of the thefts increasing towards the last, so that for several months before it closed its doors, which occurred on the 14th of July, 1899, it was actually insolvent, but such Insolvency was not known by any officers of the bank except the cashier. The theft was accomplished by the following contrivance: The insolvent bank was located at Perth Amboy, and kept its account in New York with the Park Bank, and in the regular course of business had, or should have had, a large balance to its credit in that bank, and, for the purpose of drawing upon that balance, kept a book of checks or drafts, with stubs, for the purpose of the entry on the stub or margin of the amount of drafts drawn, and the names of the persons in whose favor they were drawn. The cashier would draw a draft to himself for, say, $10,000, and enter upon the margin a small sum (of, say, $20 or $30). and insert as the payee some firm in New York, who, supposedly, had drawn a draft upon some trader in Perth Amboy, where the insolvent bank was located, and sent it to that bank for collection, and the bank had collected it and remitted the proceeds in a draft on New York; the Park Bank being credited by the bookkeeper of the insolvent bank with the amount upon the stub, but it would be charged by the Park Bank with the true amount drawn. In this way the cashier succeeded in abstracting at least $110,000, so that on the day before the failure, while the books of the insolvent bank showed a balance of about $80,000 to its credit with the Park Bank in New York, the books of the latter bank showed an overdraft of about $30,000. This difference of $110,000, together with some other bad debts, was more than enough to absorb the whole capital and surplus,—$50,000 each, $100,000 in all—and leave it hopelessly insolvent. Monthly balance sheets, or, as they were called, "reconcilement sheets," were sent by the Park Bank to the insolvent bank, together with the vouchers for the current month; and these were kept in the bank, where any of the officers or directors could have examined them, but, in point of fact, nobody did examine them, the whole of that work being left to the cashier. No examination was made by the president or directors, nor any committee, of this monthly account current, or any inquiry made of the Park Bank as to how the account stood on its books, until the day before the bank closed its doors. A savings bank was conducted in the same banking room with the insolvent bank,' and the officers of the savings bank and those of the Insolvent bank, called the County Bank, were the same,—that is. Mr. Valentine, the cashier of the County Bank, was also treasurer of the savings bank; Mr. U. B. Watson, the president of the insolvent bank, was secretary of the savings bank. They used the same vault, but had separate compartments assigned to each, as well as separate parts of the desk room in the banking room.

The insolvent bank had been regularly examined by the state bank examiner from year to year, and the attention of the president called to certain irregularities in the management of the cashier, which were corrected in part, only, by the officers of the bank. Notwithstanding these irregularities, which were serious in their character, the officers of the bank continued to have unbounded confidence in their cashier. On Saturday evening, July 8, 1899, at the close of the business of the savings bank, it had about $15,000 in cash on hand, which should have been placed by the treasurers Mr. Valentine, in a particular drawer in the inner safe of the fireproof vault. On Monday morning, July 10th, the cashier, who lived at Asbury Park, distant nearly an hour by rail, did not appear. The secretary. Mr. Watson (president of the County Bank) opened the vault and took out the package which was supposed to contain $15,000, and, opening it, found it $7,900 short. About that time he was called up over the telephone by Mr. Valentine, from New York, and told by him that he was detained, and would be at the bank later in the day. Mr. Watson mentioned the shortage to Mr. Valentine, and asked him what it meant, and received for answer that the missing $7,900 was placed in his (Valentine's) private drawer in the vault; giving as a reason that the drawer of the savings bank was not large enough to hold the package of money. Mr. Watson was satisfied for the moment with this explanation, and expected Mr. Valentine to make his appearance as promised. He did not appear, nor did he appear the next day. There was an informal meeting the next morning—Tuesday, the 11th—of a portion of the directors of the County Bank, who were also a portion of the directors of the savings bank; and some time during the morning Mr. Watson mentioned to one of them this shortage in the savings-bank funds, and it was suggested to him that, if Mr. Valentine did not come in shortly, he should break open his drawer and get the money out. Mr. Watson did nothing, however, during that day. But on Wednesday morning, July 12th, he succeeded in finding a key which opened Mr. Valentine's drawer, and did open it, and found that there was no money there. He immediately wrote to the state banking commissioner, at Trenton; stating that the cashier had not appeared since Saturday night, and asking him to institute an examination of the two institutions. The commissioner of banking sent two men to the bank on the morning of Thursday, the 13th. They arrived there a little before 12 o'clock. Before they arrived, however, Mr. Convery, one of the directors of both institutions, a resident of Perth Amboy, came into the bank to make a deposit; and Mr. Watson informed him of the situation, and asked him to go to New York and ascertain—First whether the negotiable securities (railroad bonds and the like), to a large amount, of the savings bank, which were kept in a safety-deposit box in New York, were there or not; and, second, to inquire of the Park Bank as to the balance due the County Bank. This last-was the result of a question by Mr. Convery as to whether or not the County Bank was all right, and Mr. Watson said he thought it was, as they had a large balance to their credit in New York. Before Mr. Convery, however, left for New York, the bank examiners arrived, and approved of his mission. Mr. Convery proceeded to New York with a note from the president to the cashier of the Park Bank, called there,—whether before or after he had looked after the bonds of the savings bank does not appear,—and learned from him that the account of the County Bank was overdrawn $30,000. As soon as be could be reached a telephone, and communicated the result to Mr. Watson. The information reached him about 2 o'clock, and was at once communicated to the bank examiners. If that information was correct, Mr. Watson was aware that the bank was insolvent as the difference between the balances of the two banks was $110,000, and that exceeded the whole capital and surplus of the County Bank. He then suggested to the bank examiners that the bank should immediately be closed; but they suggested to him that it was possible that there was a mistake in the books of the Park Bank, and that it would be a great injury to the bank and its creditors to close it if there really was no necessity for so doing, and suggested that they should go to New York Immediately and ascertain the situation beyond all doubt This was done. The president and one of the bank examiners went to New York, and verified the report of Mr. Convery. The bank continued business until its regular closing hour of 3 o'clock, so that it appears that it actually conducted business about one hour after the president had received the information from Mr. Convery of the true situation of affairs. The bank did not open its doors on Friday morning, July 14th.

R. V. Lindabury, for general creditors of the bank.

E. B. Williamson, for Lehigh Valley R. R. John R....