Bradford v. Harford Bank

Digges, J., delivered the opinion of the Court. The appeal in this case is from a judgment- obtained in the Superior Court of Baltimore City by the appellee, the Harford Bank of Bel Air, against the appellants, William W. Bradford and Wakeman B. Munnikhuysen, partners trading as the Bel Air Packing Company, for the sum of $17,560. The declaration contained the common counts and two special counts, the first of the special counts declaring on a promissory note, dated April 10th, 1922, of the defendants for the sum of $4,500, and the second of said counts declaring on four checks drawn by the defendants on the appellee, aggregating $16,275, being dated in the month of November, 1921. The case was originally instituted in the Circuit Court for Harford County and subsequently removed to the Superior Court of Baltimore City, where it was tried with the aid of a jury, and resulted in a verdict in favor of the plaintiff, upon which verdict, after defendants’ motion for new trial was overruled, judgment was entered for the sum as stated.

During the trial twenty-one exceptions were reserved by the appellant, twenty to the admission or rejection of evidence, and one to the court’s ruling on the prayers. The plaintiff offered four prayers designated plaintiff’s first, second, third and fifth prayers, the ⁸ first and fifth of which were granted in connection with the court’s instruction. The defendant Munnikhuysen individually offered three prayers, and the defendants generally offered eight prayers, all of which were rejected except the defendants'* third prayer, instructing as to the burden of' proof, which was granted. This case grows out of the banking and brokerage operations of Archer, Harvey & Company of Baltimore City.

The claim of the appellee on the promissory note described in the seventh count of the declaration, for $4,500 with interest, was undisputed, and it is unnecessary to further allude to this note. The real contest between the parties is in respect toC(the claim of the appellee based upon the four checks drawn on the Harford Bank by the Bel Air Packing Company, as set out in the eighth count of the declaration, for the aggregate sum of $16,275. The essential facts, as disclosed by the record, which are necessary to be set out herein : for a comprehensive understanding of the case, are as follows : The Harford Bank of Bel Air is a state bank located at Bel Air, Harford County, Maryland. Its president is, and was at the time of the transaction herein referred to, Mr. Stevenson A .Williams; its vice-president, Judge William H. Harlan, and its cashier, Mr. John A. Evans.

Mr. Williams, Judge Harlan, and Mr. Evans, together with several other gentlemen, constituted. the board of directors. Loans made by the bank were made only on the authority of the executive committee of the board of directors, which met frequently, and these loans, authorized and made by the executive committee, were ratified at the next succeeding meeting of- the board of dirctors, which meetings were held weekly. Mr. Evans, the cashier, had no authority to' make loans or to- permit overdrafts. The president and vice-president kept in close daily touch with the general affairs of the bank.

On ¡November 22nd, 1921, one of the assistant State bank examiners reported to' Mr. Williams, the president of the appellee, that he had learned from information obtained ⁹ from banks and trust companies in Baltimore, and from Ms examination of the appellee’s books, that a “kite,” involving loss to' the appellee, had been going on. Upon Mr. Williams receiving this information, he in connection with the State bank examiner’s department, made further investigations, which resulted in the discovery that the practice of “kiting,” endangering the financial stability of the bank, had been in progress for some time, and that certain employees of the bank bad knowledge of this condition. These employees were Mr. Evans, the cashier, Mr. Anderson, a clerk, Mr. Bruns and Miss Gorrell. Hone of the other employees of tiie bank had knowledge or suspicion of these irregular or illegal practices.

These improper and irregular transactions, resulting in heavy loss to the bank, bad been in progress for twelve or eighteen months before being discovered, and were participated in by the firm of Archer, Harvey & Co., Mr. Evans, Mr. Bradford of the Bel Air Packing Company, and Harvey Ewing, and involved ultimately an indobedness to the bank by Evans, Ewing, the Bel Air Packing Co. and Archer, Harvey & Co., amounting to $121,475. The method followed was for Bradford, a member of the firm of the Bel Air Packing Company, to draw the firm’s check upon the Harford Bank payable to Archer, Harvey & Co., these checks being signed as “Bel Air Packing Co.” by Bradford. This company bad a legitimate account at the Harford Bank, which it had maintained for many years, either of the partners, Bradford or Munnikhuysen, being authorized to sign checks for the firm. Bradford, however, being the office man, signed the great majority of legitimate firm checks and signed all the Bel Air Packing Company’s cheeks involved in this transaction.

Upon receiving the Bel Air Packing Company’s cheek, payable to the order of Archer, Harvey & Co., C. Graham Archer, one of the firm, would endorse and deposit the cheek in the firm’s account at his firm’s Baltimore bank. In regular course the Bel Air Packing Company’s check would reach the Baltimore branch of the Federal Reserve Bank. The Federal Reserve Bank, ¹⁰ ill its daily “letter” to- the Harford Bank listed each day all of tlie checks coming through drawn on the Harford Bank, this listing being in figures only, without other description, and including therein the Bel , Air Packing' Company’s cheeks involved in the kite. When these “letters” were received by the Harford Bank, it, through its cashier or one of its employees who had knowledge of the kite, under the direction of Evans, the cashier, would issue its check on the Merchants’ Bank in Baltimore, its reserve agent, to the Federal Reserve Bank for an amount equal to the total of the items shown in the Federal Reserve Bank’s statement or “letter,” which letter also- contained the cheeks listed in the letter, drawn by its depositors on the Harford Bank.

Neither the Bel Air Packing Company nor Archer, Harvey & Co-, put up any money. The amount of the- check, drawn by the Harford Bank'to the Federal Reserve Bank in payment of these daily statements or letters, was entered on the- general ledger of the Harford Bank. The checks drawn by depositors -of the Harford Bank and enclosed in the Federal Reserve letter or statement, and paid as- described therein, were charged against the appropriate individual accounts of such depositors, which was the regular and legal method of transacting the bank’s business. As to- the kite checks, this method could not be pursued, because the maker o-f the kite checks had no funds, or insufficient funds, o-n deposit to pay the checks.

The kite checks, drawn by Bradford in the name of the Bel Air Packing Company, were separated from the other checks enclosed in the Federal Reserve Bank letters.and not charged to- the Bel Air Packing Company’s account — which, if same had been done, would have shown overdrafts — but were laid aside by one of the clerks of the bank who- had knowledge of the kiting scheme, and were- not protested or returned upon balancing the pass book of the Bel Air Packing Company. Instead, Bradford was informed that the kite checks were at -the Hárfo-rd Bank and was given a draft to sign in the name o-f the Bel Air Packing Company, drawn on Archer,. ¹¹ Harvey & Co., for the exact amount of the kite, to he then handled, and made payable to- the Harford Bank. The Bel Air Packing Company’s draft was then entered on the general ledger, thereby bringing in balance that ledger and charged against the Harford Bank’s Baltimore correspondent and mailed thereto- for collection. When these drafts were presented to Archer, Harvey & -Co. they were generally paid by new kite checks, borrowed by Archer, Harvey & Co. from some one of the persons connected with the kite transaction, ' thus again starting the circle, and resulting, by the completion of each transaction, in largely increasing the amount- illegally paid out by Evans or under his direction from the funds of the Harford Bank.

The investigation disclosed that the Bel Air Packing Company had made and used, in the operations of the kite-, checks on the Harford Bank amounting to- approximately $175,000. It was impossible for this system to- continue indefinitely without detection, and when the col lapse came it was found that Evans had kite checks- outstanding to the amount of $4,200, Ewing, $4,800, and the Bel Air Packing Company, $16,275, the amount of the four checks sued on in this case. The total outstanding obligations of th-o-se- engaged in the kiting transaction — Evans, Ewing, Bel Air Packing Company, and Archer, Harvey & Co. — amounted to $121,475, this amount being due the bank and having been paid out of the bank’s funds in payment of checks or drafts of one or the other of the parties implicated. The four checks here sued on came in possession of the president of the- Harford Bank for the reason that the drafts given by the Bel Air Packing Company, drawn on Archer, Harvey & Co. to offset or balance these checks, were returned unpaid.

When this condition became known the liability of the four parties engaged in the kiting transaction, represented by unpaid checks or drafts, was: Evans, $4,200, Ewing, $4,800, Bel Air Packing Company, $16,275, and Archer, Harvey & Co-., -an indefinite sum, at that time known to be at least $88,000. At this time Messrs. Robert Archer and William S. Archer, brothers ¹² of 0. Graham Archer, a member of the firm of Archer, Harvey & Go., in an. endeavor to1 extricate their brother from the effect of his illegal transactions by which, in connection with the others, the bank had been defrauded, executed an agreement dated November 29th, 1921, guaranteeing the bank against loss up to $100,000, and in consideration of which guarantee the bank, in the same agreement, released Archer, Harvey & Co-, from the repayment of any loss in excess of $100,000.

This agreement being as follows: “This agreement made this 29th day of November, in the year 1921, by and between William S. Archer and Robert Archer, both of Harford Oounty, in the State of Maryland, of the first part, and the Harford Bank of Bel Air, a corporation of said State, of the second part, “Whereas the Bank Commissioner of Maryland has directed the attention of said bank to the fact that certain drafts and checks have passed between Messrs. John A. Evans, William W. Bradford, Harvey Ewing and the Bel Air Packing Company, individually, and the firm of Archer, Harvey and Company, of Baltimore City, in said State, whereby the said Archer, Harvey & Company has received large sums of money claimed as belonging to said bank, and has demanded that said bank require the repayment of said sums of money; and “Whereas the said bank has demanded such payment from Archer, Harvey & Company, and the exact amount of the money so passing to said Archer, Harvey & Company under said drafts and checks is not yet exactly determined; and “Whereas the parties hereto of the first part are willing to guarantee the repayment and refunding of said money so passing as aforesaid up to the sum of one hundred thousand dollars ($100,000), the said exact amount to be hereafter determined by the said Bank Commissioner, the same to be paid as follows': “Twenty thousand dollars ($20,000) on or before the 20th day of December, 1921; twenty thousand dollars ($20,000), with interest from this date, on ¹³ or before the 20th. day of February, in the year 1922; twenty thousand dollars ($20,000), with interest, on or before April 20th, 1922; twenty thousand dollars ($20,000), with interest, on or before the 20th day of June, in the year 1922, and the balance with interest on or before the 20th day of August, 1922. “It is understood and agreed that the said sums so passing as aforesaid from the said bank to the said Archer, Harvey and Company have reached at least the sum of eighty-eight thousand dollars ($88,-000), and may exceed the said sum of one hundred thousand dollars ($100,000). “Now, therefore, the said parties of the first part, in consideration of the execution of this agreement by the said bank and the aforesaid extension of payment herein contained, hereby guarantee to the extent aforesaid the payment of said money as aforesaid so passing from said bank to said Archer, Harvey and Company. “And the said bank in consideration aforesaid hereby releases the said Archer, Harvey and Company, both as a firm and individually, from all claims and demands whatsoever which it has or may have against them, over and above the amount hereinbefore mentioned. “Witness the hands and seals of the said parties of the first part, and the seal of the said bank and the hand of the President thereof. William S. Archer. (Seal) Robert Archer.

(Seal) The Harford Bank of Bel Air, By S. A. Williams, Test in duplicate: President, lewis J. Williams. Dee. 20/21 Part payment $20,000. Feb. 20/21 Part payment $20,266. Apl. 21/22 Part payment $20,466.

June 20/22 Part payment $20,666. Aug. 22/22 Part payment $20,866.” ¹⁴ The record, further discloses that Robert Archer and William S. Archer paid the bank, in accordance with said agreement, $100,000 and interest; that Evans gave his note, which the bank accepted, for $4,200, representing his check involved iu the kite and unpaid; that Ewing paid $4,500 in compromise of his liability of $4,800 on his kite check; that by these settlements the total loss of $121,475 was reduced to $12,775, which remained, with all claims liquidated against all engaged in the kite except the Bel Air Packing Company. Demand having been made by the bank for settlement of the checks and note declared on in the seventh and eighth counts of the declaration, and refused, the suit in this case was instituted and resulted in the obtention of the verdict and judgment appealed from. The appellants practically admit the facts as claimed by the appellee, but dispute the legal conclusions deducible from these facts, as set out in the rulings of the lower court on questions of law embodied in the prayers of the plaintiff and the court’s own instruction.

The two principal legal contentions of the appellant are: First, that the bank had knowledge of the illegal transaction represented by the kiting scheme; for the reason that Evans, the cashier and one of the directors of the bank, was participant in this illegal transaction, and that all the knowledge that he possessed in respect thereto' was knowledge on the part of the bank; that the bank was responsible for Evans’ acts, and therefore, if loss occurred to> the bank through illegal transactions of which Evans had knowledge and in which he participated, it cannot recover any loss sustained through such transactions; and, second, that the agreement made by Robert Archer and William S. Archer, by which, upon the payment or guarantee of $100,000 to the bank, Archer, Harvey & Oo. was fully released, constituted and had the legal effect of a release to all of the parties in the kiting transaction which resulted in loss to the bank. The first of these contentions is opposed to the great weight of authority and is contrary to numerous decisions of ¹⁵ this Court. While it is undoubtedly true that the acts of an officer of a corporation acting within the scope of his authority and on behalf and in the interest of the corporation, will bind the corporation, nevertheless, it is equally well settled by reason and authority that if the acts of the officer are not in furtherance of the business of "the corporation and intended to' be for its benefit and advantage; they cannot bind the corporation. United States Ins.

Co. v. Shriver, 3 Md. Ch. 381 ; Winchester v. Baltimore & Susquehanna R. R. Co., 4 Md. 231 ; Merchants Bank v. Marine Bank, 3 Gill, 97 ; General Ins. Co. v. U. S. Ins. Co., 10 Md. 517 ; Gray v. Farmers Bank, 81 Md. 631 ; Schuck v. Bramble, 122 Md. 411 ; First Denton National Bank v. Kenney, 116 Md. 24 . The appellant cites as authority for his opposite contention, Maryland Trust Co. v. Merchants Bank, 102 Md. 608 .

A careful examination of this opinion does not bear out the contention of the appellant. At p-age 630 Judge McSherry, speaking for the Court, said: “The most comprehensive rule with reference to this subject which can be stated is that notice communicated to, or knowledge acquired by, the officers or agents of corporations when acting in their official capacity or within the scope of their agency, becomes notice to or knowledge of the corporation for all judicial purposes. 13 Gyc. 399.-400. There can be no doubt that Mr. Ramsay, the president of the National Mechanics Bank, knew fully and in detail the entire transaction, and that he acquired that knowledge not whilst acting for himself nor adversely to the interest of the bank, but directly and specifically whilst acting for and in behalf of the bank. Central Trust Co. v. Arctic Ice Machine Co., 77 Md. 233 .

The knowledge thus acquired by Mr. Ramsay to the effect that the money to be advanced by the bank was to be used for the purchase of the Maryland Trust Company’s shares was notice to the bank and charged that institution with knowing exactly what Mr. Ramsay knew in this) respect. Schwind v. Boyce, 94 Md. 510 .