Savings Bank of Louisville's Assignee v. Caperton

• Decision Date: 02 June 1888
• Citation: 8 S.W. 885,87 Ky. 306
• Parties: SAVINGS BANK OF LOUISVILLE'S ASSIGNEE v. CAPERTON et al. MEYERS et al. v. SAME.
• Court: Kentucky Court of Appeals

8 S.W. 885

87 Ky. 306

SAVINGS BANK OF LOUISVILLE'S ASSIGNEE v. CAPERTON et al.

MEYERS et al. v. SAME.

Court of Appeals of Kentucky.

June 2, 1888

Appeals from Louisville chancery court.

Action by Gustave Meyers and others, depositors in a bank, to hold liable John Caperton and others, as directors, for loss occasioned by the cashier's defalcation. The cross-petition of the bank's assignee, who was made defendant, was dismissed, from which he appeals. Judgment was rendered for defendants, and plaintiffs appeal.

R Weissinger and A. P. Humphrey, for the assignee. Wooley &amp Buckner and Kohn & Barker, for Meyers et al. James Speed, A Barnett, and Thos. & John Speed, for appellees.

PRYOR C.J.

This action was instituted by Gustave Meyers and others against the president and directors of the Louisville Savings Bank to recover the various sums due to them as depositors in its savings department, the loss having been caused from the embezzlement of the funds of the bank by J. H. Rhorer, the cashier. The ground of recovery is the alleged negligence of the directors in the general conduct of the bank, and particularly in their failure to inspect the books of the bank, and a want of diligence in supervising the acts of their subordinate, the cashier. The bank, by reason of the defalcation, was rendered insolvent, and an assignment made in January, 1880, of all of its assets to the appellant Jones. The creditors of the bank filed their petition in equity, alleging that Jones, the assignee, refused to sue the directors or to unite with them in the action. Jones was made a defendant to the action, and by a cross-petition sought to recover of the directors for the default of Rhorer, on account of their negligence with reference to the affairs of the bank; alleging that he had delayed the litigation for the purpose of ascertaining the condition of the bank, and the facts, if any, upon which a recovery could be had against the directors. A controversy originated in the court below as to the right of Jones to maintain the cross-action, and, on motion of the creditors, they were allowed to prosecute the cause of action set up in the original petition, and the claim of the assignee, in so far as it affected the depositors, was dismissed. It is not necessary, in the light of the facts presented, to discuss the right of either Jones or the creditors to maintain the action, further than to say that the bank or its assignee is the proper party plaintiff, in such cases, unless it plainly appears that a cause of action exists, and the bank refuses to bring the action. We will proceed, therefore, to consider the case on its merits. The corporation, the Louisville Savings Bank, was organized in the year 1866, and was the successor of a bank called the "Louisville Savings Institution," the former having been merged in the latter, by taking all its assets and assuming all its liabilities. An election of directors was held in August, 1866, and James Guthrie, Jordan F. Ward, James W. Heming, Milton H. Rhorer, and Jonas H. Rhorer were elected. The directors then elected J. H. Rhorer, the subsequent defaulting cashier, president, and Thomas Barclay cashier; and when this was done, directed the president and other officials to have the balances on the books of the old bank transferred to the books of the new bank. Guthrie died in April, 1869, and John Caperton was made director in his stead. In 1871, J. H. Rhorer resigned as president, and was made cashier; Barclay having ceased his connection with the bank. Caperton was then elected president. In 1874, M. H. Rhorer resigned as director, and Andrew Sabine was placed in his stead. From the 1st of January, 1871, J. H. Rhorer filled the place of cashier, teller, and book-keeper in the commercial or general department of the bank. The bank had two departments in the same building,--one known as the savings department, and the other as the general or commercial department; both regarded, however, as the one bank, and money often transferred from one department to the other. The directors sought to be made liable are Caperton, Heming, Speed, and Sabine, the fifth director being J. H. Rhorer. The books of the general department were kept by Rhorer, and of the savings department by Joshua F. Speed, Jr. In the year 1872, shortly after Rhorer was elected cashier, the bank built what is termed a safety vault, at a cost of $55,000. The capital stock of the bank was only $100,000, one-fifth of which was owned by J. H. Rhorer, the cashier. Rhorer was not only the cashier and the one-fifth owner of the stock, but, as is manifest from the proof in this case, was the leading spirit in directing and controlling the affairs of the bank during the series of years in which he was engaged in making fraudulent entries in the books of the bank to enable him to appropriate its funds to his own use. His entire administration of the affairs of the bank evidences a systematic purpose in embezzling the funds of the institution, and betraying an almost unlimited confidence placed in him by the directors. It was not until the 9th of January, 1880, that the frauds were discovered, although practiced for the nine years he was cashier, and long before, and then made known by the written acknowledgment of Rhorer, found with the papers of the bank, to the effect that he had been robbing the bank, and had surrendered himself into the custody of the law. The investigations and settlements made since the assignment, shows the defalcation to be $118,000.

The only question presented in this case is whether the directors acted in good faith, and with ordinary care and diligence, in conducting the affairs of the bank, or such diligence as ordinarily prudent men would have exercised with reference to the conduct of such a moneyed institution. It is not a question as to how the frauds of the cashier might have been discovered, but were these directors guilty of gross neglect, which means an absence of that diligence that ordinarily prudent men in the conduct of such business would have exercised. The directors received no compensation for their services; the benefits to be derived by them from the profits of the bank flowing solely from their interests as stockholders. If their liability is to be measured by that imposed upon the president or the director who received as compensation a sum equivalent to an undertaking to supervise the entire affairs of the bank, by an actual inspection and examination of the accounts and books of the banks as well as other duties pertaining to such a position, then there would be no question as to the liability of the appellees in this case; but with services rendered that are merely gratuitous, or at least without reward, it cannot be held that a liability is to be fixed upon them for no other reason than their failure to detect the fraudulent entries made by the cashier in the books of the bank, although extending through a period of nine years. The facts, however, presented by this record, must determine the question of negligence or the want of diligence on the part of the appellees. It was incumbent on the directors to appoint all the officers necessary to carry on the business of the bank, and to use ordinary diligence in the selection of men qualified to fill such positions. In the year 1871, when Rhorer was elected cashier of the bank, and also made its book-keeper, his past life as a business man, so far as then known, was a sufficient guaranty to the directors of his honesty and capacity for the position. He had been made president of the bank at its organization, in 1866, with, as the proof shows, some of the most successful business men as directors,--Guthrie, Speed, and Heming. His experience in banking, as well as his high character for integrity, both personal and financial commended him to all business men as well qualified for such a position. There was no reason for suspecting his fidelity to his co-directors, and to the interests of the bank, whose affairs he had been called on to manage; and yet he was, at the time he was elected president of the savings bank, a defaulter in the savings institution that had been merged into the former bank in the sum of $17,000. It is insisted, as one of the grounds for imputing negligence to the directors, that Rhorer, who had been elected president of the savings bank, and was directed to transfer the balances from the books of the savings institution to the new bank, failed to open new books, but continued to use the old books, and especially the individual ledger containing the accounts of depositors, in the savings bank until its supervision, in the year 1880; that this aided Rohrer to cover up his defalcations in the old bank, and to practice his frauds in the new bank, when, if the accounts on the old books had been balanced, and the proper entries made in the new books, the fraud already practiced might have been detected; that a proper and thorough examination of the accounts of the savings institution would have been the safest method for these directors to have pursued, with new accounts opened for depositors, must be readily conceded, but Rohrer, having been cashier of the old institution, and had at the time of the merger of the two banks been elected president of the savings bank, it was not unreasonable, but consistent with the duty these directors owed to all interested, that Rohrer should have been selected to make the transfer, and to pursue that course that in his judgment was proper, in opening the books for the new bank. There was nothing to excite the least suspicion as to his honesty, and it cannot be regarded as neglect on the part of the directors in permitting him to use the books of the old for the purposes of the new bank. ...