Seale v. Baker

• Decision Date: 20 March 1888
• Citation: 7 S.W. 742
• Parties: SEALE v. BAKER <I>et al.</I>
• Court: Texas Supreme Court

7 S.W. 742

SEALE v. BAKER et al.

Supreme Court of Texas.

March 20, 1888.

Commissioners' decision. Appeal from district court, Harris county; JAMES MASTERSON, Judge.

Action by A. B. Seale, a depositor in the City Bank of Houston, against William R. Baker, F. A. Rice, Robert Brewster, S. K. McIlhenny, W. B. Botts, C. C. Baldwin, and B. F. Weems, for deceit and breach of trust as directors of such bank. Judgment for defendants, and plaintiff appeals.

Scott & Levi, for appellant. Hutchinson, Carrington & Sears, for appellees B. F. Weems, R. Brewster, and S. K. McIlhenny. Baker, Botts & Baker, for appellees F. A. Rice and W. B. Botts. Goldthwaite & Ewing, for appellee W. R. Baker.

ACKER, J.

The court below sustained general demurrers to the petition, and dismissed the suit, from which judgment this appeal is taken. It now devolves on us to determine whether or not, on the case stated in the petition, appellant is entitled to recover. It is alleged in the petition that on the 19th day of December, 1885, and for one year preceding that date, appellees were directors of the banking corporation "The City Bank of Houston," actively directing and controlling its affairs and the conduct of its said business, and represented themselves and were generally and publicly known as such, and well knew and ought to have known, and by the use of ordinary care such as it was their duty to have exercised, might have known, all and singular the particulars and condition of said corporation in respect to the matters hereinafter mentioned, at the time when they severally transpired and took place. That during the period aforesaid the said defendants, who were all well and publicly known as possessed of remarkable business capacity, carried on the business of said bank, and held it out to the public as of undoubted financial ability and deserving of public confidence, and daily and continuously caused to be published, by their authority and direction, in the interest and behalf of said bank, advertisements in the Houston Daily Post, a daily newspaper and journal of general and wide circulation throughout the state of Texas and elsewhere, published in said city of Houston; and in the city directory of the city of Houston, a printed book of reference in general public use; and upon conspicuous sign-boards kept and exposed to the public at and near the door of the place of business of said bank; and upon printed letter-heads, upon and with which the business correspondence of said bank was conducted, and so generally circulated among all persons, including this plaintiff, having any transactions or correspondence with said bank, advertisements, statements, and representations to the effect and in substance that the said bank had a capital of $500,000, was in sound financial condition, fully solvent, and wholly reliable, and well deserving of public trust and confidence. That in truth and in fact the said advertisements, statements, and representations, so caused to be published by said defendants, were, at the time they were severally so published, wholly false and untrue, and the said bank, at the same time, did not have a capital of $500,000, and was not in sound financial condition, nor solvent, nor reliable, nor in any manner or wise deserving of public trust and confidence; but, on the contrary, had long before lost all of its capital, and a greater portion of its funds and assets which had come into its hands from its creditors, depositors, and customers, and was and long had been hopelessly and irretrievably insolvent; for several years its current expenses had exceeded its earnings; its affairs had been and continued thereafter growing daily worse; it had been and then was and thereafter continued doing business upon a wholly fictitious credit; and from and after September 20, 1885, if not before that time, all reasonable hope and prospect of retrieving its solvency was utterly gone, and it was a mere question of a very short time when the true condition of said bank would necessarily become notorious, and it would be compelled to suspend business, to the great loss of its creditors and customers, and in the exercise of good faith and justice to the public its business should have been suspended and wound up long before the 8th day of December, 1885. That plaintiff read and believed said advertisements, statements, and representations; and, relying thereon and induced thereby, and not otherwise, he did, on the 8th day of December, 1885, place in said bank for collection, and to be placed to his credit, a draft for $2,500, which was collected by said bank, and the proceeds placed to his credit therein as a customer of said bank. That on the 19th day of December said bank closed its doors, and suspended business in a wholly insolvent condition, whereby plaintiff has sustained damage. It is also alleged that said "false advertisements, statements, and representations were caused to be published by said defendants with intent to deceive, and they did deceive, the public and plaintiff, as to the true condition of said bank, and to induce the public and plaintiff to confide in and extend credit to and make deposits in said bank." It is further alleged that said advertisements, statements, and representations were published as aforesaid in pursuance of a common design on the part of said defendants, in which they all joined, to give said bank a fictitious credit, wholly unwarranted in fact, and to induce thereby the public and this plaintiff to extend credit to and to make and to keep deposits in said bank, and that from and after the 20th day of September, 1885, the said defendants had no hope, in reason or fact, of restoring said bank to solvency, or of in any wise improving its condition and its further continuance in business was by them designed and effected merely for the purpose of enabling certain of said directors to save themselves in respect of transactions with said bank upon which they claimed said bank was liable, directly or indirectly, to them, and this at the expense and sacrifice of such persons as might happen to have funds in said bank when such design should be accomplished; and all the deposits received and credits contracted by said bank from the said 20th day of September, 1885, until its suspension, were received and contracted without any prospect of making good or paying such liabilities, except partially only, and in so far as they might happen to be withdrawn and demanded in current transactions before the purpose aforesaid of continuing said business should be accomplished. That the transactions aforesaid, which were designed to be protected and secured by the further continuance of the business of said bank, consisted of pretended loans of money and accomodation paper by the said William R. Baker and Robert Brewster and S. K. McIlhenny, and by the McIlhenny Company, a corporation whereof the said S. K. McIlhenny was and still is the president, manager, and principal stockholder.

For the purpose of promoting conciseness and simplicity we formulate the questions involved in this appeal as follows: (1) Are the directors of a banking corporation personally liable, at the suit of an individual depositor, for damages sustained by reason of the insolvency of the corporation, when the depositor is induced to place money in the hands of the corporation solely by representations of solvency made to the general public by the directors, who ought to have known, and by the use of ordinary care, such as it was their duty to have exercised, might have known, that such representations were false? (2) Are such directors so liable to such depositor when such false representations are knowingly made with intent to defraud the public generally? (3) Are such directors so liable when such false representations are made in pursuance of a fraudulent combination and common design upon their part to give to the corporation a fictitious credit, that the business might be continued for the purpose of enabling such directors to collect certain pretended loans claimed to have been made by them to the corporation? If either of these questions is answered in the affirmative, it follows that the court erred in sustaining the demurrers, and the judgment must be reversed. After a more than ordinarily careful investigation, we conclude that each and all of them must be answered affirmatively, which dispenses with the necessity for a separate discussion of each; for, if appellees are liable under the circumstances stated in the first, a fortiori they are liable under the circumstances stated in the second and third of these questions.

Directors of banking corporations occupy one of the most important and responsible of all business relations to the general public. By accepting the position, and holding themselves out to the public as such, they assume that they will supervise and give direction to the affairs of the corporation, and impliedly contract with those who deal with it that its affairs shall be conducted with prudence and good faith. They have important duties to perform towards its creditors, customers, and stockholders, all of whom have the right to expect that these duties will be performed with diligence and fidelity, and that the capital of the corporation will thus be protected against misappropriation and diversion from the legitimate purposes of the corporation. Customers are invited to business relations, and are induced to accept and act upon such invitation, by the representations that the institution is solvent and owns a certain amount of capital, and that this capital is under the supervision and control of certain directors. It is the duty of directors to know the condition of the corporation whose affairs they voluntarily assume to control, and they are presumed to know that which it is their duty to know, and which they have the means of knowing. If the representations are false, but relied and acted...