Houston v. . Thornton

29 S.E. 827, 122 N.C. 365, 1898 N.C. LEXIS 264

• Court: Supreme Court of North Carolina
• Decided: April 5, 1898
• Status: Published

Opinions

DOUGLAS, J., dissents. The issues tendered by the defendant presented the question whether there had been fraud and misrepresentation on the part of the defendants. Those settled by the Court at the close of the plaintiff's evidence presented the inquiry whether there had been (367) negligence and wrongful acts by which the plaintiff had been damaged. The latter were proper upon the pleadings.

The plaintiff complained that the board of directors of The People's National Bank, among whom were the defendants, in February, 1890, and at sundry other times, before and after, caused to be published reports of the status of the bank which showed it to be amply solvent, whereby the plaintiff was induced in April, 1890, to purchase eleven shares of the capital stock of said bank, whereas at the times aforesaid the bank was hopelessly insolvent, and had been so for at least five years; that the said directors either knew this to be the true condition of the bank or with proper care could have known it. The complaint is full and contains a detailed statement of the acts of negligence alleged against the defendant. The bank was declared insolvent on 31 December, 1890, and the receiver took charge in February, 1891. The plaintiff not only lost the whole sum ($1,100) invested in the purchase of said eleven shares of the stock of the bank, but under the liability clause of the National Banking Act has been assessed 50 per cent on her stock and a judgment has been obtained against her by the receiver for $550 on that account in the Federal Court. The published statement of the bank, 2 January 1890, showed that the capital stock was $125,000 the deposits $87,300, the surplus $32,000, and undivided profits $6,795. The former cashier of the bank testified, without contradiction, that this statement was made by the order of the directors; that it was untrue; that there was no surplus, no undivided profits, and that the bank did not even have its capital stock; that, if the directors had examined the papers they would have known the insolvency of the bank; that, at that time, the president (Moore) owed the bank between $100,000 (368) and $120,000; that one of the directors (Thornton) owed the bank $40,000, another director (McNeill) owed it $20,000, and Starr, another director, owed it between $6,000 and $7,000 — thus between $166,000 and $187,000 being due the bank from these officials, of whom McNeill was then known to be insolvent; that Moore was also insolvent and failed in November, 1890, and Thornton in the spring of 1891; that the bank never had a finance committee; that, in November, 1889, Moore owed the bank on his unsecured paper $100,000, of which $30,000 had been due three to ten years. It is needless to go through the evidence, which shows the most culpable negligence on the part of the board of directors, for this is sufficiently shown by the above recited facts if nothing further had been proved. At the meeting of the directors on 14 January, 1890, a dividend of 4 per cent out of the profits was declared, all the directors being present, and the defendants voting for the declaration of the same, though this dividend, like all the other semi-annual dividends for the five years previous, was in fact paid out of the deposits and not out of the earnings.

The defendants asked the Court to charge —

1. That upon the facts in evidence the plaintiff cannot recover because of any negligence of the defendants, they being directors of a National Bank in the hands of a receiver, becomes an asset of the bank for which the receiver alone can sue, and the jury will therefore answer the second issue "No." This prayer was properly refused. The wrong complained of is not one towards the company, not any negligence in the duty to guard its interests and to comply with the requirements of the National Banking Act, but a wrong to the plaintiff in (369) permitting a false and fraudulent statement of the condition of the bank to be published, whereby the plaintiff, trusting in the truth thereof the high character of the defendants, was misled into parting with $1,100 for the purchase of eleven shares of the capital stock of the company which at that time was worse than worthless. This is not a cause of action that under any circumstances could have passed to the receiver. 3 Thompson on Crop., sec. 4304, 4132, 4144. If this action had been brought by a depositor, the settled doctrine of the law is that "if, in the pretended performance of duties imposed upon them by law, the directors of a bank used their official station to make false representations which are believed and acted upon by third parties, they are liable to respond for the injury done to the one defrauded thereby, and that the liability provided for in the National Banking Act cannot be deemed to preclude the right to maintain a common law action for deceit for such false and fraudulent representation." Prescott v. Houghey, 65 Fed. Rep., 653, 659, which distinguishes Bailey v. Mosher, 63 Fed. Rep., 488; Delano v. Case, 121 Ill. 247; 3 Thompson Corp. sec. 4304. The allegations and proof as to declaring dividends out of deposits and allowing an official to borrow more than one-tenth of the capital stock are not the basis of this action; if they were, then the receiver should have brought the action; but they are merely evidential to show the negligence whereby the plaintiff, not the bank, was injured and to support her action for the injury to herself.

2. That the plaintiff cannot recover unless the jury shall believe from the evidence that these defendants participated in the fraudulent statement made by other officers of the bank, and unless the plaintiff (370) has shown such participation the jury will answer the second issue "No." Refused, and the defendants excepted.

There was no error in refusing this prayer. The ground of recovery is not the participation of the defendants in fraud, but that by their gross negligence they permitted the statements to be put forth upon their authority showing the bank to be amply solvent, with large surplus, and the declaration of 4 per cent semiannual dividends out of profits, when there had been no profits, as to all of which the defendants should have been informed. It was in evidence and not denied that all the directors were present when the dividend of January, 1890, was declared, and Starr alone voted no, as to whom a nonsuit was entered. As was said in Solomon v. Bates, 188 N.C. 311, and reaffirmed in same case,118 N.C. 321, and Caldwell v. Bates, 118 N.C. 323, "If false and fraudulent statements of the condition of the corporation are put forth under the authority of the directors, it is not necessary that they should know them to be such; it is their duty to know them to be true, and they are liable for damages sustained by any one dealing with the corporation, relying upon the truth of such reports." 1 Morse on Banking, secs. 132, 137;Kinkler v. Junica, 84 Tex. 116[84 Tex. 116]. So salutary and just a rule is supported by ample authority elsewhere, and if we are not, it is correct in itself and a just protection to which the public are entitled. It is not necessary, as the defendants asked the court to instruct the jury, that these defendants "participated in the fraudulent statements," but if the statements were given to the public by the authority of the board of directors (which is not controverted) and were in fact false and fraudulent, and the plaintiff, relying thereon (as she had a right to do), was induced to buy stock or had made deposits whereby she (371) suffered injury, all the directors are liable whether they "participated" in the fraud or not. Arnison v. Smith, 41 Ch. D. (L. R.), 348; 3 Thompson, supra, sec. 4108.

The defendants further asked the court to instruct the jury that if they should believe from the evidence that the directors used reasonable diligence in the management of the affairs of the bank, which is such as prudent men usually exercise in the management of their own affairs of a similar nature, then the plaintiff cannot recover, and the jury will answer the second issue "No." The court gave this prayer with this addition, to which the defendants excepted, to wit: "Unless you should find that the defendants declared or paid a dividend at the January meeting, 1890, out of the capital stock or deposits of the bank, and not out of the earnings, and the plaintiff was induced or misled by such declaration of dividends to purchase stock in the bank, and the defendants could have, by the exercise of ordinary diligence, known that the dividends were paid or declared out of the capital stock or deposits of the bank, and not out of the earnings of the bank, then you should answer the second issue `Yes.'" The defendants cannot complain of this modification, though the plaintiff had just ground to except (if it had been necessary) that the inquiry was restricted to one instance of negligence when there were so many others in evidence. Indeed, the court might well have told the jury that if they believed the evidence, the defendants had not "used reasonable diligence in the management of the affairs of the bank."

4. The defendants asked the court to charge that if the jury shall believe that the defendants were selected by the stockholders, knowing that their residence away from the town of Fayetteville, at which (372) place the bank was located, rendered it impracticable for them to give close personal attention to the affairs of the bank, and that by the action of the directors and stockholders it was made the duty of the other directors to look into the daily affairs of the bank, and that these directors were to give only a general and supervisory control over the affairs of the bank; that it was not their duty to pass upon the paper discounted by the bank, but that such duty was delegated by the directors to a committee of directors known as "the discount committee," and that such delegation of powers is usual in national banks; that these directors performed all the duties assigned to them by the custom of the bank, which was well known to the stockholders; that the frauds of the officers of the bank could not have been discovered by the directors in the regular performance of their duties and without a close and critical examination into the bookkeeping of the bank and the solvency of the papers held, then the plaintiff is not entitled to recover, and the jury will answer the second issue "No." The defendants' exception to the refusal of this prayer cannot be sustained. The assumption of fact therein that the payment of semiannual dividends out of the deposits for five years and the discovery of the fact that nearly the entire capital and deposits were loaned to the president and three directors, and most of it without security, could not have been ascertained by the defendants in the proper discharge of their duty, is not sustained by the evidence. It is also in evidence that one of these borrowing officials was insolvent and two others were men of bad character, which devolved upon the defendants the duty of being more than usually diligent. On the contrary, the evidence shows them to have left the management (373) entirely to those officials. But, aside from this, there is no principle of law or morals that will permit the selection of nonresident directors of good characters, whose names shall be a pledge of honest management upon which the public shall make deposits and buy the stock of the bank, and then when the crash comes will excuse such directors from liability because, being nonresidents, they could not give proper attention to their duties, and by private arrangement it was agreed that they should not be required to do so. Such arrangement, if it had been shown, would not have released them from their duties as prescribed by act of Congress, nor from their common-law liability for negligence or fraud. There is no allegation or proof that these defendants were guilty of fraud or had actual knowledge of the frauds, or that they knew the representations in the published reports were fraudulent. On the contrary, the basis of the action is that these defendants were men of high character, who would not participate in or connive at fraud, and for that very reason, when the reports of the bank were published, the plaintiff, relying on the well known character of these defendants, trusted implicitly to the correctness of such statements and was misled, to her damage $1,100, into buying the eleven shares of the capital stock of the bank, which were wholly worthless, and entailed liability on her besides. It is no answer to this to say that the defendants themselves were also misled as to the condition of the bank, and suffered loss. They had opportunity to know the true condition of the bank. They ought to have known. It was their duty to know. They should not have permitted statements to go out upon their authority as to the condition of the bank which were untrue, and relying upon which the plaintiff was led into loss. It may be a hardship upon these defendants, but it (374) would be a greater hardship upon the public and destructive of confidence in banks if directors of good character, whose names are useful in drawing patronage, are absolved from responsibility for fraudulent representations whereby the public are duped and defrauded, because such directors had no actual knowledge of the frauds and did not participate in them. "Ignorance will not excuse when they had means of knowledge." Shea v. Mabry, 1 Lea (Tenn.), 319, 342; Seale v. Baker,70 Tex. 283[70 Tex. 283]; United Society v. Underwood, 9 Bush (Ky.), 609. Lord Erskine declared on a memorable occasion that "Morality may come in the cold abstract from the pulpit, but men smart practically under its lessons when courts and juries are the teachers." The courts hold that "culpable negligence [in such matters] is in law equivalent to fraud" (Shea v. Mabry, supra), and the surest guarantee against it is the verdict of a jury for the damages inflicted.

There are several other exceptions for refusals to give prayers asked and to the instructions given, but what has been said is sufficient to dispose of them.

The only remaining exception is that as to the fourth issue the court charged: "The action was commenced by issuing the summons, and the summons was issued when it was put out from the clerk's office, by direction and under sanction and authority of the clerk, and given to the officer for the purpose of being served. If it was sent out or handed to some one else to give to the officer for the purpose of being served, this would be an issuing of the summons, but it must leave the office for this purpose by the direction or under the sanction and authority of the clerk." This charge is correct and was taken from Webster v.Shrape, 116 N.C. 466. The presumption that it was issued (375) when it bears date is not rebutted by the bare fact of the date of the sheriff's endorsement of its receipt by him. Currie v. Hawkins,118 N.C. 593.

The court further instructed the jury, properly, that the statute of limitations having been pleaded, the burden was upon the plaintiff to show that the action was commenced three years from 31 December, 1890, which was admitted to be the date when the statute began to run. Parker v. Harden,121 N.C. 57; House v. Arnold, ante, 220. The admission settles the date, but it is a question of grave doubt, if the point had been raised, whether the statute as to the plaintiff's cause of action began to run upon the mere declaration of insolvency of the bank, 31 December, 1890, and did not in truth begin to run upon the actual discovery, later on (after the investigations of the receiver) that the bank was insolvent in the spring of 1890 at the time the incorrect statements were put forth. Code, sec. 155 (9).

Affirmed.

DOUGLAS, J., dissents.

PLAINTIFF'S APPEAL.