Summary
In Walden National Bank v. Birch, 130 N.Y. 228, it was held that a borrower could not attack a loan made to him by a national bank on its stock if the statute does not declare such transaction void.
Summary of this case from St. Francois County Bank v. HawnOpinion
Argued October 26, 1891
Decided December 1, 1891
A.S. Cassedy for appellants. B.R. Champion, for respondent.
The appellants claim that the transaction whereby the stock in question was transferred to Rutherford was in violation of the National Banking Act, which provides that no banking association "shall make any loan or discount on the security of the shares of its own capital stock, nor be the purchaser of any such shares, unless such security or purchase shall be necessary to prevent loss upon a debt previously contracted in good faith." (U.S.R.S. § 5201.) Assuming this to be true the defendants cannot take advantage of it, because the act "imposes no penalty, either upon the bank or borrower, if a loan upon such security be made." ( National Bank of Xenia v. Stewart, 107 U.S. 676.) The case cited was an action by the personal representatives of a borrower to recover from a national bank the value of certain shares of its capital stock delivered to it as collateral at the time the loan was made and, after default in payment of the note, sold by the bank and applied on the debt. The court held that if the prohibition of the statute could be urged against the validity of the transaction by anyone except the government, it could only be done before the contract was executed and while the security was still subsisting in the hands of the bank.
The decisions of the federal courts, construing the provision of said act which prohibits national banks from purchasing, holding or conveying real estate, except for certain purposes, are analogous, because no penalty is provided for a violation of that section (U.S.R.S. § 5137). While it permits banks to purchase and hold such real estate "as shall be mortgaged to it in good faith by way of security for debts previously contracted," it prohibits the taking of a mortgage to secure future advances, but does not declare void any security taken in violation of the act. It has been repeatedly held that a mortgage, although taken to secure future advances, is a valid and enforcible security, notwithstanding the prohibition and that only the federal government can take advantage of the violation of the statute. ( National Bank v. Matthews, 98 U.S. 621; National Bank v. Whitney, 103 id. 99; Fostier v. New Orleans National Bank, 112 id. 439.)
In Wyman v. Citizens' National Bank (29 Fed. Rep. 734), it was held that a contract was not void, if entered into by a national bank in violation of section 5200, which provides that "the total liabilities" to such a bank of any person, corporation or firm, shall not exceed one-tenth of its capital stock, actually paid in. The court said that "the decisions of the United States Supreme Court, heretofore made, warrant the conclusion that objections of the character presented to a breach of the banking law by a national bank can only be urged by the government."
Similar decisions have been made by this court under somewhat similar circumstances. ( Thompson v. St. Nicholas National Bank, 113 N.Y. 325, 334; Atlantic State Bank v. Savery, 82 id. 291.)
The principle on which these cases rest applies to the point under consideration and requires us to hold that even if the transaction with Rutherford was a mere evasion, and hence a violation of, the provisions of the National Banking Act, the fact is not available as a defense to this action.
The claim of the defendants that Rutherford held the stock to secure him for indorsing the note in question is not supported either by the findings or the evidence. The transaction was not with Rutherford as an individual, but as cashier of the bank. No evidence was given upon the subject except by Mr. Terbell who testified: "When I go to the bank and a man comes to the hole and I tell him anything, I consider I am saying it to the bank. This conversation was over the counter in the Walden bank. * * * I so transferred it (the stock) to him individually to secure the bank. I did not make it directly to the bank because I supposed he was the bank. He indorsed these two notes * * * when I wanted him to pin the stock on these notes he said: `When the government official comes here, we can't take our own stock, and when he comes here and sees this stock pinned on these notes, he will say: `You sell it right off and pay this.' `I will indorse them and will tell the board how it is.' The object was to get rid of the provision forbidding banks to take their own stock, and so I made the stock to him. He indorsed the paper to get around that. * * * When Rutherford took this stock away he put it in an envelope and I think told Mr. Scofield, then president of the bank, if anything happened, that belonged to me." Thus it is clear that Rutherford, as cashier, took and held the stock in trust for the bank and indorsed the notes simply to deceive the government. He had no personal interest in the matter. All that he did was for the benefit of the bank in the transaction of its business, as its officer. His object was to get security for the bank, which was in the line of his duty. The method adopted by him to effect his object was the transfer of the stock, not to the bank directly, as that was deemed inadvisable, but to himself still acting as cashier, for the benefit of the bank. His indorsement, although a contract in form, was no contract in reality, unless made so by subsequent adjudication, but an artifice resorted to by him, while doing the business of the bank, to deceive the official inspector, for its protection. In no part of the transaction did he act for himself. The plaintiff, therefore, became the equitable owner of the stock, subject to the right of Mr. Terbell to redeem. When Rutherford appropriated the stock to his own use, he deprived the bank of that which belonged to it as the beneficial owner, and which was in his name, and the evidence thereof in his custody, by virtue of his official relation to the bank. Although he may not have been guilty, under the circumstances, of strict conversion, he was guilty of misappropriating the property of the bank that had been entrusted to him as its cashier. This was in violation of his duty to the plaintiff and of the bond given by the defendants in his behalf.
The defendants further claim that even if Rutherford held the stock for the benefit of the bank and in his capacity as cashier, still by recovering judgment against him as indorser, the plaintiff waived its right to sue him in tort and thereby deprived the defendants of a substantial right in case they should pay the bond.
Although Rutherford, upon the facts herein as found by the Special Term, had a perfect defense to the action brought against him on the notes, still the judgment entered by default was an adjudication irrevocably establishing a contract of indorsement between him and the plaintiff. ( Lorillard v. Clyde, 122 N.Y. 41; Brown v. Mayor, etc., 66 id. 385; Newton v. Hook, 48 id. 676; Gates v. Preston, 41 id. 113.) If this was a waiver by the bank of its right to sue him for misappropriating its property, it was also a waiver of its right to sue his sureties for the damages caused by such misappropriation. ( Pitts v. Congdon, 2 N.Y. 352; Chester v. Bank of Kingston, 16 id. 336; Bank of Albion v. Burns, 46 id. 170; Barnes v. Mott, 64 id. 397; Ludlow v. Simond, 2 Cai. Cas. 1; Colemard v. Lamb, 15 Wend. 329; Stevens v. Cooper, 1 Johns. Ch. 425; Harris on Subrogation, § 17.)
It must be assumed on the facts found that the plaintiff had two causes of action against Rutherford, one on the note and the other for misappropriating the security collateral to the note. If they were concurrent, the defendants cannot complain, as both could be prosecuted until one or the other was satisfied. If they were necessarily inconsistent so that a judgment on one was a defense to the other, their liability on the bond ceased when the judgment was entered.
We think that the remedies were concurrent and not inconsistent. By indorsing the notes, not formally but, as it must now be assumed, with the intention of binding himself, Rutherford became liable to the plaintiff on his contract. Subsequently by misappropriating the security that he had taken and was holding as cashier for the plaintiff's benefit, he violated his fiduciary relation to the bank and made himself liable in tort. The latter cause of action accrued nearly five years after the former, to which it had only an accidental relation. His liability on the notes did not prevent him from wrongfully disposing of the bank's collateral and making himself liable on that account also. The casual circumstance that one payment would discharge both liabilities, does not affect their independent origin and nature, because no fact, essential to liability on the note, was essential to liability for the misappropriation. There was a breach of contract and also a breach of duty in no manner dependent on such contract. Under such circumstances, no election of remedies was required, for both were available. ( Manning v. Keenan, 73 N.Y. 45, 51; Morgan v. Skidmore, 3 Abb. [N.C.] 92; Morgan v. Powers, 66 Barb. 45; White v. Whiting, 8 Daly, 23, 25; 6 Am. Eng. Encyc. of Law, p. 248.)
It may be that the error of the learned trial judge in his legal conclusion that Rutherford was not liable as indorser, affected his finding of the fact that Rutherford held the stock as cashier for the benefit of the bank. We find no exception to the facts as found that is specific enough to raise this point. While said conclusion of law was wrong, it did not constitute reversible error, because the final result reached in the judgment ordered was right.
We think that the judgment should be affirmed, with costs.
All concur, except BROWN, J., not voting.
Judgment affirmed.