Swentzel v. Penn Bank

• Decision Date: 04 January 1892
• Docket Number: 295,289
• Citation: 147 Pa. 140,23 A. 405
• Parties: Swentzel v. Penn Bank. Warner's Appeal. Hutchinson's Appeal
• Court: Pennsylvania Supreme Court

23 A. 405

147 Pa. 140

Swentzel v. Penn Bank.

Warner's Appeal. Hutchinson's Appeal

Nos. 289, 295

Supreme Court of Pennsylvania

January 4, 1892

Argued November 10, 1891

147 Pa. 140 at 153.

Appeals Nos. 289, 295, Oct. T., 1891, by Henry Warner, assignee, A A. Hutchinson and Thomas Hare, from a decree of C.P. No. 2 of Allegheny Co., July T., 1884, Nos. 304 and 380, on a bill in equity.

E. W Swentzel, Elias J. Unger and other creditors of the Penn Bank filed two bills in equity against the Penn Bank and Henry Warner, its assignee, W. N. Riddle, president, and Geo. B. Gordon, his assignee; F. B. Laughlin, vice-president; G. L. Reiber, cashier; James Herdman, James H. Hopkins, D. W. C. Carroll, T. Brent Swearingen, Samuel Severance, Philip Reymer, Thomas Hare, George C. Davis, Frank Rahm, A. W. Cavitt, A. A. Hutchinson and J. O. Brown, directors of the bank.

The bill averred that the Penn Bank incorporated to do a banking and insurance business, began a general banking business in the city of Pittsburgh in 1873, and continued said business until May 21, 1884, when it suspended payment; that for more than one year prior to May 21, 1884, the bank had been insolvent, which fact was known to, or ought to have been known to its officers and directors; that the officers and directors of the bank for several years before the suspension published statements showing that the bank was solvent and prosperous, but that such statements were false; that the directors of the bank carelessly and negligently permitted the president, cashier and some of the directors to use the funds of the bank in the illegitimate and hazardous business of gambling in oil; that within two years before the suspension of the bank its officers and directors permitted a large portion of the funds and moneys thereof, to be checked out and withdrawn in the names of fictitious persons and firms; that, after the suspension of the bank on May 21, 1884, the defendants caused false statements to be published concerning its condition, which statements the complainants relied upon, and increased their deposits, but that the bank was then utterly insolvent, and that it finally suspended payment on May 26, 1884; that after it was ascertained that the bank must finally suspend payment, the defendants permitted some of the directors to take and apply to their own use large sums of money then in the bank.

The bill prayed that the officers and directors be decreed to pay to the complainants all moneys lost by reason of the defendants' carelessness, negligence and fraudulent management; that it be decreed that J. O. Brown, Samuel Severance, Thomas Hare, A. A. Hutchinson and Philip Reymer pay complainants and other creditors all moneys which they drew out of said bank between May 21, 1884, and the date of the assignment to Henry Warner.

The directors filed answers denying the material averments of the bill.

The case was referred to H. Hice, Esq., as master, who found among other things, the following facts: In 1874, W. N. Riddle was elected secretary and treasurer of the Penn Bank. In 1882, he was elected president, and was re-elected at the annual election in March 1883 and 1884, and served as president until the bank suspended. Prior to May 21, 1884, the bank was apparently prosperous. Nothing seems to have occurred, or been noticed by the directors, in the business, or its transactions by the president, cashier or other employees, or in their conduct that caused any question or aroused any suspicion in their minds as to the honesty and faithfulness of those officers, or that the bank was other than solvent and prosperous, when on May 21, 1884, the doors of the bank were closed and payment suspended by Riddle, the president, without the knowledge and authority of the board of directors or any of them. Riddle stated to the directors that there had been an unusual amount of checking out of funds by depositors, and that he could not convert the securities of the bank into cash fast enough to meet the demands; that the bank however had plenty of resources, and the only need was ready money until securities could be converted. The directors then, on their individual credit, raised $289,000, and the bank reopened on May 23, 1884, and remained open until May 26, 1884, when it finally closed its doors. A thorough examination was then made of the books and affairs of the bank, and it appeared that in 1883, the president began to misappropriate the funds of the bank for the purpose of carrying on gambling speculationsin oil. The money abstracted from the bank for this purpose, was from time to time, charged on the individual ledger of the bank against persons and firms, and principally against fictitious persons and firms, as overdrafts. The president in combination with the cashier, kept these transactions from the knowledge of the directors, and, on May 19, 1884, submitted a statement to the board, which on its face showed that the bank was in good condition.

The directors did not examine the individual ledger. On this subject the master reported as follows:

"These directors did not examine the individual ledger. Their knowledge of the condition of the bank was derived from the weekly statements required to be furnished them by the officers and the semi-annual auditings and the general information acquired from the officers. As bearing on the question whether they were negligent in this respect and whether they should not have examined the accounts in the individual ledger much testimony was taken to show the course of action of the directors in other banks in the city. Amongst others the following were examined: [Naming a large number of bank officers of the city of Pittsburgh.] These witnesses concur in stating that the form of statement furnished weekly by the Penn Bank officers to the board was substantially the same as the statements used and furnished in their respective banks, many of them stating they were more in detail. In some four or five of them spaces were provided in the statements for overdrafts, and in one or two this has been added since the failure of the Penn Bank. In two or three the auditing committee ascertain the overdrafts. The general course in these banks was for the officers to look after the overdrafts, and with the exception of two or three of the banks represented, it was not the practice for the directors to examine the accounts in the individual ledger, nor at the audits."

The master further found that the direcotrs had no knowledge of the fraudulent misappropriation of the funds of the bank. It also appeared from the testimony, that James H. Hopkins was absent from the city at the time of the suspension, and during most of the time of the irregularities in the management of the bank; that Frank Rahm was not a director at the time; and that James Herdman and Philip Reymer were in infirm health, and unable to attend to business. On May 26, 1884, after the bank had failed, the directors, Brown, Severance, Hare, Hutchinson and Reymer, withdrew their deposits. Some of these amounts were, however, subsequently paid over to the assignee.

The master recommended a decree against Riddle and Reymer, and that the bill should be dismissed as to the other defendants.

The assignee filed, inter alia, the following exceptions:

4. The master errs in failing to find that the defendants, the directors of the bank, by gross negligence in the management of its affairs made possible and invited the improper use of funds which resulted in the great loss to the bank.

5. The master errs in not finding that the directors of said bank were grossly negligent in that they did not take the ordinary precaution against excessive overdrafts and thus enabled the president of the bank to abstract its funds without detection.

6. The master errs in not finding and reporting that the defendants, directors of the Penn Bank, were guilty of gross negligence of the management of the affairs of said bank, and that by reason of such negligence the bank lost at least one million dollars, and that said defendants, Thomas Hare, James H. Hopkins, James Herdman, F. B. Laughlin, Samuel Severance, Philip Reymer, A. A. Hutchinson, Frank Rham, T. Brent Swearingen, A. M. Cavit, D. W. C. Carroll, George C. Davis and J. O. Brown are liable to Henry Warner, assignee, for said sum.

7. The master errs in recommending that the bill be dismissed as to the defendants, Laughlin, Herdman, Hopkins, Carroll, Swearingen, Severance, Reymer, Hare, Davis, Rahm and Cavitt.

8. The master errs in not finding and reporting the amount for which the defendants, W. N. Riddle and G. L. Reiber are liable to plaintiff.

9. The master errs in finding that Thomas Hare and Samuel Severance paid to the assignee the money improperly withdrawn by them from the bank on the 26th day of May, 1884, and in not finding that said Hare and Severance expressly admitted that they did not pay said money nor any part of it to said assignee, and in not finding and reporting that Thomas Hare is liable on said account for $3,716.23, with interest from May 26, 1884, to the date of the decree, and Samuel Severance is liable for $554.54, with interest from May 26, 1884, to the date of the decree.

The court overruled the fourth, fifth, sixth and seventh exceptions and sustained the eighth and ninth exceptions, and entered the following decree:

That G. L. Reiber is liable and shall pay to Henry Warner, assignee of the Penn Bank, $500,000.

That William N. Riddle is liable to the said Henry Warner, assignee, for the sum of $1,200,000, and it is adjudged and decreed that he is liable and shall pay to Henry Warner, assignee of the Penn Bank said sum of $1,200,000.

That Thomas Hare is liable and indebted and shall pay to the said...