Warner v. Penoyer

• Decision Date: 03 November 1898
• Docket Number: 82.
• Parties: WARNER v. PENOYER et al.
• Court: U.S. Court of Appeals — Second Circuit

91 F. 587

WARNER v. PENOYER et al.

No. 82.

United States Court of Appeals, Second Circuit.

November 3, 1898

Edward W. Paige, for appellant.

Frederic K. Collins, for appellees.

Before WALLACE, LACOMBE, and SHIPMAN, Circuit Judges.

WALLACE Circuit Judge.

The First National Bank of Watkins was organized in 1883, had a capital of $50,000, was located in a village of about 3,000 population, and carried a line of deposits and discounts approximating $200,000. It had paid dividends semiannually of 4 per cent., except in 1893, when the usual July dividend was not declared. So far as appears, it was a prosperous and well-conducted concern until within two years of the time of its failure, when, owing to the mismanagement, frauds, and criminal acts of its cashier, its assets were depleted to the extent of about $140,000. February 8, 1894, its doors were closed, and its assets passed into the hands of a receiver. The receiver, alleging in his bill of complaint that the losses of the bank were attributable to the disregard of the directors of their trusts and duties, brought the present action to charge them with the amount. The court below dismissed the bill, influenced largely by the judgment in Briggs v. Spaulding, 141 U.S. 132, 11 Sup.Ct. 924 and convinced that the directors were less negligent than those who were absolved by the supreme court in that case. This appeal requires us to review the whole case made by the proofs, to determine whether there was error in the decision.

There is not a particle of evidence indicating that the directors were aware of the culpable actions of the cashier. They trusted the cashier implicitly, relying on his fidelity and capacity, and had no suspicion of the real condition of the affairs of the bank, apparently not even when the dividend was passed.

Since its organization until his death, which occurred in August 1892, William M. Love, the father of the cashier, had been the president of the bank. He was the largest stockholder and took an active part in conducting its business. While he supervised its affairs, there were no serious irregularities on the part of the cashier. These began a month or so before his death, inferably when his failing health devolved larger control and opportunities upon the cashier. The cashier had acted in that capacity since the organization of the bank. He was a small stockholder, and was in good repute financially and morally. Upon his father's death, the management of the bank devolved, almost exclusively upon him, none of the directors being bankers, or men of much business experience. August 27, 1892, the directors selected a new president, the defendant Tuttle, who had long been a director, and was probably as well qualified as any of the board, voting him a small salary. He was a farmer, residing two or three miles from the village, and was one of the largest stockholders. He remained president until the bank failed. He visited the bank frequently, sometimes advised with the cashier about discounts, and, when the cashier was absent, signed drafts, and authorized small discounts. He was not familiar with bookkeeping, and never looked at any of the bank books. A leather wallet, containing the discounted notes maturing the current month, was kept on the bank counter during business hours. He occasionally looked at some of the notes in this wallet. He never investigated the assets of the safe. He relied on weekly statements prepared by the bookkeeper or cashier, and which he examined every Tuesday morning, and upon conferences with the cashier or clerks, to keep himself informed about the business and condition of the bank. The directors had an examining committee and a discount committee, but these committees only met at the semiannual meetings of the board of directors. At these meetings the cashier would bring in a list, prepared by him, of the outstanding discounted notes, and some of the members of the examining or discount committee would look the notes over, and tally and compare them with the cashier's list. At the meetings held in July, 1892, and in January and July, 1893, the discounts were reported as examined and approved.

The discount committee was composed of two directors and the president. One of these directors visited the bank two or three times a week, and approved such paper as the cashier asked him to consider. The other never acted.

Periodical reports to the comptroller of the currency, in the prescribed form, were prepared by the cashier; the attesting directors accepting his statements without any independent investigation. His statements were likewise accepted, without independent investigation, at the semiannual meeting, as showing the condition of the bank.

This summarizes the evidence respecting the supervision exercised by the president and directors of the business management of the bank. They did not at any time investigate, or cause an investigation to be made of, its resources and liabilities. They all deferred to the better judgment and banking experience of the cashier, and, as testified to by the vice president, the entire management of the bank was practically left to him, as the man best qualified of all those who were interested in it. No evidence is in the record about the examinations by the official bank examiners, or about the circumstances which led to passing the semiannual dividend in July, 1893; nor is there any as to what took place at the semiannual meeting of the directors in January, 1894, the last meeting before the failure.

The principal item of loss for which the receiver seeks to charge the defendants arose from transactions of the cashier with the Western Improvement Company, an association engaged in land speculation, having but little, if any, financial responsibility. The cashier was the vice president and a stockholder of that concern, and his associates were not residents of Watkins. In April, 1892, he discounted a note of $3,046, made by Church, its president, and indorsed by Benger, its treasurer, and placed the proceeds to the credit of its treasurer on the books of the bank. Thereafter, from time to time until the bank failed, he discounted other notes for the concern, among them 10, for $5,000 each, gave it fictitious credits, and permitted it to overdraw its accounts. Nearly all the notes were renewed as they matured, and were carried unpaid until the failure. Some of the notes were made and indorsed by the officers of the company, some of them by the officers as individuals, and some by individuals who were stockholders in the company. The discounted notes were entered regularly in the discount register. Whether or not they were kept in the wallet of the maturing notes does not satisfactorily appear. Kapell, the teller and bookkeeper, was not asked the question.

Miss Hore, the other bookkeeper, testifies that she does not recollect having seen any of them. Tuttle testifies that he never saw any of them. Neither party examined the cashier as a witness, although his testimony was available.

When the bank failed, the Western Improvement Company owed it $72,000; about $24,000 arising from overdrafts, and the balance from worthless discounts. None of the directors knew of the overdrafts, or seemed to have been aware of these discounts. The members of the examining committee testify that they have no recollection of having seen any of the discounted notes among those delivered by the cashier to the directors at the semiannual meetings, except one for $2,500. The cashier's list presented at the meeting in July, 1893, is in evidence, and upon it appear eight notes, for $5,000 each; but the list does not give the names of the makers, or otherwise describe the notes, except as to three, two of which are marked 'Lembeck,' and the other 'G.W. Co.' Who 'Lembeck' was does not appear, but 'G.W. Co.' probably designated the Goundry Wagon Company, a concern which was solvent at that time, and in which the vice president of the bank was interested. These are the only notes in the list for above $3,000; the great majority of them being for sums below $300. It appears by the discount register that there were at that time unpaid five notes, each for $5,000, discounted for the benefit of the Western Improvement Company. The defendants Gray and Tuttle, who examined the discounts at that meeting, testify that they have no recollection about any of the $5,000 notes.

The directors of a national banking association are authorized to appoint a cashier, and delegate to him all the usual powers of such an office, including the discounting of notes. Rev St. U.S. Sec. 5136. To him is properly confided the custody of its property, money, securities, and valuable paper, and the supervision of its books and accounts. He is the executive officer, who transacts its daily affairs. The directors cannot divest themselves of the duty of general supervision and control by committing this duty to him, but they properly may intrust to him all the discretionary powers which usually appertain to the immediate management of its business. Merchants' Bank v....