McShane v. Howard Bank

McSherry, J., delivered the opinion of the Court. The Howard Street Savings Bank of Baltimore was incorporated in 1847 by the General Assembly of Maryland, and by subsequent legislation its powers were enlarged and its name was changed to the Howard Bank. By the third section of its charter, the Act of 1847, oh. 88, it was empowered to take bonds for the corporation from all or any of the officers, agents or servants appointed by the directors, with security conditioned in such form as they shall approve, “for the faithful execution of the duties of such officers, agents, or servants, and to secure said corporation from loss; ’ ’ and by the ¹⁴⁶ third article of section seven it was enacted that “the President, Treasurer, Directors and other officers and servants, before entering upon the dirties of their respective offices, shall take an oath or affirmation before some justice of the peace of the City of Baltimore to discharge their several trusts diligently, honestly and impartially.” Section ten of the Act of 1854, ch. 222, prohibited officers from borrowing from the bank, and made it a penal offence for them to do so. In March, 1819, Thomas S. Ridgaway was made cashier, and he held that position until May, 1889, when hp was removed.

On the twenty-sixth of June, 1819, he delivered to the bank a bond the condition of which is in these words: “The condition of the above obligation is such that if the above bound Thomas S. Ridgaway do and shall well and faithfully discharge the duties imposed upon him as the cashier of said bank by the charter and by-laws thereof, and all other duties which may hereafter be thereby imposed upon him as the cashier of said bank, then this obligation to be void, &c.” There were no by-laws ever adopted, and the charter does not particularly describe the cashier’s duties. Henry McShane, whose executors are the appellants in this proceeding, was one of the sureties on this bond. Between April, 1881, and February 11th, 1883, Ridgaway, in violation of his duty, took from the bank and applied to his own use the sum of $>8,133.-00, and never restored or returned it or any part of it. To recover1 this sum the pending-action was brought in July, 1889.

To conceal this defalcation, and a very much larger one on the part of Samuel Edmonds, the then president of the bank, a memorandum showing the exact amount of each default, as well as other items, was kept in the drawer of the paying teller and counted as cash. This system was practiced, apparently without the knowledge of the directors, until about March, 1885, when a different ¹⁴⁷ scheme was devised and pnt into operation by Ridgaway. At that time the bank, desiring to become a member of the Clearing House, was required by the rules of the latter to submit -to an examination by an expert. It then became necessary to get this memorandum out of the apparent cash, and this is how it was done: The cashier procured accommodation promissory notes amounting to some forty odd thousand dollars made by some of the directors and customers of the bank, and caused them to be entered on the discount book, but deducted no discount.

He then carried the apparent proceeds of this fictitious discount, aggregating the full face of the notes, to the credit of the transient discount account which is checked out usually by the cashier; he then delivered to the paying teller sundry checks drawn by himself and the makers of these accommodation notes against this apparent or fictitious discount, and these checks produced a credit sufficient to take up the cash items represented by the memorandum. In other words, when the checks drawn against the transient discount j>assed into the paying teller’s hands, he paid them by merely taking the memorandum out of the drawer. When the accommodation notes matured, cashier’s checks were drawn, and the notes were taken up in that way hut not paid, and an entry was made in the deposit ledger to the debit of an account called “Sundry Account,”■ which was not, however, the regular sundry account. In 1889 the bank, being cramped, was notified by the Clearing House that it must submit to another examination, and the same scheme of borrowing notes, this time amounting to one hundred thousand dollars, was resorted to.

These notes were passed through the same process and only apparently discounted. The bank examiner rejected these notes as assets, and a reorganization of the bank followed, its stockholders surrendering one-half of its cap ¹⁴⁸ ital to make good its heavy losses. The new hoard, of directors caused suit to be brought on the bond of Ridgaway. In 1885 the finance committee, consisting of three of the directors, became aware of Ridgaway’s defalcations, but the other members of the board of directors do not appear to have been apprised of it until the reorganization in 1889.

During the time that Ridgaway 'was cashier he was regularly paid his salary, and upon his removal he delivered to the new president some certificates for shares of Baltimore and North Carolina Gold and Copper Mining Company. This stock the bank still holds. It is worth from five to thirty-five cents per share. In January, 1886, Mr. McShane addressed a letter to Ridgaway requesting to be released from the bond, and a few days later he received a reply inclosing the following letter from Edmonds, viz., “Henry McShane, Dear Sir: Your request to be relieved as bondsman for the cashier of this hank, Thomas S. Ridgaway, Esq., is hereby complied with from this date.

Respectfully, Samuel Edmonds, President.” After the reorganization the directors settled with Edmonds, receiving from him a small percentage of the amount he owed, and executing to him a release under the seal of the cor-' poration. There are several questions arising out of these facts and others to be noted hereafter, and they are relied on by Ridgaway’s sureties to defeat a recovery on the bond. The first of these is presented by the demurrer filed to the replications assigning breaches. The plaintiff declared generally on the bond; the defendants craved oyer of the bond and charter of which the plaintiff made profert; the defendants then pleaded general performance, to which plea the plaintiff filed four rejDlications assigning breaches, and to these the defendants demurred.

The Superior Court overruled the demurrer, whereupon rejoinders were filed', and issues were joined thereon. ¹⁴⁹ The first replication avers that the charter of the hank imposed upon Ridgaway the duty of discharging diligently, honestly and impartially the trusts of his office as cashier, but that he did not so discharge them in that he wrongfully converted and applied to his own use divers sums of money in his custody and under his control belonging to the bank. The second avers that he did not diligently, honestly and impartially discharge the trusts of his office as cashier in that upon ceasing to be cashier on May the first, 1889, he failed to account for or turn over to the bank $8,133.00 of its moneys which had come into his custody and under his control as cashier since April, 1881. The third avers that by the charter of the bank it was provided that no officer of the bank should borrow money from it, and that whilst Ridgaway was cashier he had under his control divers sums of money which he has ever since retained, pretending that he had borrowed the same from the bank; and the fourth avers that he did not diligently, honestly and impartially discharge the trusts of his office as cashier in that he wrongfully withdrew by drafts and checks divers sums of money, though he had no money on deposit with the bank, and to conceal his fraudulent doings made or caused to be made false and deceptive entries in the books of the bank in violation of his duty. Were these acts breaches of the obligation sued on?

Row, the argument shortly stated is this: The condition of the bond provides that Ridgaway shall well and faithfully discharge the duties imposed upon him as cashier by the charter and by-laws ; there are no by-laws, and the charter imposes no duties upon him, therefore, no act that he did of those set forth in the replications was a breach of the condition of the bond, and consequently no liability has attached to his sureties. The obligation of a surety is to be strictly construed and his liability is not to be extended by mere implica ¹⁵⁰ tion beyond the letter of his contract. Upon that contract he has a right to stand, and nothing can be lawfully imported into its terms to enlarge his responsibility. But still “the bond constituting the contract must have such construction given to it as to carry out the intention of the parties thereto. ” Engler vs. People’s Fire Insurance Company, 46 Md., 333 .

Whilst the particular duties of the cashier' are not set forth or described in the charter of the bank, there are, at least, two distinct duties imposed upon him thereby, the faithful observance of Avhich was guaranteed by the obligation of the sureties. The third article of the seventh section required him, as one of the officers of the bank, to make oath that he Avould discharge liis trusts diligently, honestly and impartially;- and a subsequent statute expressly prohibited him from borrowing any money from the bank. However undefined his general duties might have been, that of being honest in his position was explicitly enjoined by the very terms of the charter. By these terms he was forbidden to avail himself of his official position to misapply or embezzle the funds of the bank, or to resort to any unlawful or dishonest device inconsistent with the diligent, honest and impartial performance of his trust.

The charter exacted honesty of the officers, and whatever else it failed to require, that it unequivocally imposed. Aside from the consideration that the very nature of the employment involved that duty, the direct and mandatory language of the act imposed it, and imposed it, too, under the sanctity of an oath. Upon what principle can it be said that a cashier, Avhose sworn duty it is to discharge his trusts honestly, has not violated that duty by the embezzlement of the funds of the bank, even though the charter contains no provision forbidding him to steal ? If he did steal, are his sureties relieved merely because the charter did not declare- in so many words that he ¹⁵¹ should not steal ?

If he did embezzle, has he done that which the charter required him to swear he would do— honestly discharge his trusts ? His embezzlement of the funds of the bank was a direct violation of a duty imposed by the charter — a duty which his sureties guaranteed that he would honestly perform. The charter prohibited an officer from borrowing money from the bank. If Ridgaway did nevertheless appropriate the bank’s funds, pretending that he had borrowed them, he was clearly guilty of a breach of duty imposed by the charter; and if loss resulted from that act his sureties are liable within the strict letter of their engagement.

These conclusions seem to us to he perfectly clear and entirely free from doubt or difficulty. Entertaining this view, we are of opinion that the replications demurred to properly assigned breaches of the condition of the bond, and that the demurrers were rightly overruled. The same question was raised by the tenth, eleventh and twelfth prayers presented by the appellants to the Court below. These prayers were properly rejected for the reasons we have already given.

It was urged that the fictitious credit produced by the pretended discount of the accommodation promissory notes, and that the checks drawn thereon, whereby the memorandum representing Ridgaway’s indebtedness to the bank was withdrawn from the paying teller’s drawer, operated as a payment of what Ridgaway owed, and that his sureties are consequently released. This contention cannot he supported. The accommodation notes were procured for the purpose of hiding, by simulated entries, the defalcations' of the bank’s officers, and for the further purpose of covering up, temporarily, losses sustained on its discounted paper. False and fraudulent credits were given and equally false and fraudulent checks were drawn against those credits to conceal the actual truth from the bank examiner.

The notes were ¹⁵² returned to the makers and not a dollar was ever paid upon them. The whole transaction consisted only of untruthful entries made hy a faithless officer to cover up his .own dishonesty, and to misrepresent the real condition of the hank. Under these circumstances th.e Court was entirely right in granting the appellee’s seventh prayer, and in instructing the jury, under the fourth prayer of the appellants as modified hy the Court, that these transactions furnished no defense to the sureties unless the promissory notes were discounted for the bona fide purpose of extinguishing Ridgaway’s deht. And this would have been so even though the directors of the bank had been aware of and had participated in the fraudulent conduct of Edmonds and Ridgaway.

The directors owed a duty of fidelity to the stockholders, and their breach of that duty by participating in the malversations of executive officers, or by aiding the latter in their attempts at concealment, differs nothing in principle from a case where the directors deliberately authorize a cashier to plunder the funds of a bank, or to cheat the stockholders of their interest therein'. “Every act of fraud, every known departure from duty, by the board, in connivance with the cashier, for the plain purpose of sacrificing the interests of the stockholders, though less reprehensible in morals or less pernicious in its effects than the cases supposed, would still be an excess of power from its illegality, and, as such, void as an authority to protect the cashier in his wrongful compliance.” Minor, et al. vs. The Mechanics’ Bank of Alexandria, 1 Peters, 70 . This principle was correctly announced to the jury'in the sixth instruction given by the Court at the instance of the appellee. The first prayer presented by the appellants asked the Court to instruct the jury that if they found that Edmonds loaned the money in question to Ridgaway, or if Edmonds conspired with Ridgaway