Case ID: ad_16/html/0131-01.html
Source: Caselaw Access Project
Author: {"author": "Hatch, J.:", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

William N. Dykman, as Receiver of The Commercial Bank, Appellant, v. Seth L. Keeney and Others, Respondents.
    
      Banking Law — liability of directors who deela/re a dividend not taken from surplus profits—payment to a bank of a debt — when new notes taken for the debt are an asset — notes given by directors to make a bank solvent — receiver estopped from questioning them, after they have been paid.
    
    The liability imposed by section 23 of the Stock Corporation Law (Laws of 1892, chap. 688) upon directors of a stock corporation who declare a dividend except from surplus profits, is to be treated as a provision for indemnity against the loss which the corporation or its creditors may sustain from the payment of an illegal or unauthorized dividend.
    Where a bank, by agreement with one liable to it upon certain promissory notes, accepts from its debtor in exchange for such notes new notes made by other parties, surrenders to him the notes upon which he was - liable, and marks his account "paid” upon, its "books, the obligation of the debtor to; the bank is extinguished., ,
    
      Semble, that it would be different if the new notes were given between the same, parties in extension of the original debt.
    Th'e requirement of section'36 of chapter 689 of the Laws' of 1893 that the bank shall charge -in the account of profit and loss and deduct from the actual profits all losses sustained by it, and., that it shall include as losses all debts owing, to it which shall have remained due without prosecution and upon .which no, interest shall have been paid for more than one year, does not apply to notes which have "been received from time to time in the ordinary course of business and1 which by the terms of the renewed' obligations are not then, due, even . though the renewed obligations embraced interest as. well as principal; and .the debt has been continued beyond a,year. . ■ ■
    Hotes given by the directors of a bank, under an. agreement, .which recites that-the notes were given in order to make the bank unquestionably solvent, and which contains nothing postponing the payment of the notes to any particular time, constitute a legal asset of the bank. ■
    Where it further appears that the directors have actually paid the notes to a receiver of the bank, he will' he held to be estopped from questioning their validity in any further litigation. • .
    Appeal, by the plaintiff, William N. Dykman, as receiver of the Commercial Bank, from a judgment of the Supreme Court in favor of;-the defendants, entered in the office of the' clerk of the county of Kings on the 20th day of January, 189J; upon the verdict of a jury rendered by direction of the court.
    This action was brought hy the receiver of the- Commercial Bank to recover from the .defendants, directors of that .hank, the amount of a dividend declared by them June 28, 1892, which the plaintiff alleged was not made from the surplus profits arising from the business of the corporation.
    Among certain promissory notes,, which the directors in declaring the-ffividend in question treated as part of the assets of the bank, were notes made by various parties and discounted for the benefit of the indorser, Gilbert Hassel, within a year prior to June 28,' 1892.
    The avails, of these notes were applied upon; notes discounted, by the bank for the benefit of the" indorser thereof, one Knowlton, which Knowlton had given in renewal of' notes made by various parties, and which had been discounted for the. benefit of Knowlton as ..indorser,, in 1889 - or prior thereto, the: bank surrendering the ' notes indorsed by Knowlton to Plassel, and marking' Knowlton’s account. “ paid.” ' • - - ' ’
    
      
      James C. Bergen, for the appellant.
    
      Jesse Johnson, for the respondents.
   Hatch, J.:

When this ease was before us upon a former appeal we held that the liability created by section 23 of the Stock Corporation Law (Laws of 1892, chap. 688) was tobe treated as a provision for indemnity for loss which the corporation or its creditors might sustain from the payment of an illegal or unauthorized dividend. (Dykman v. Keeney, 10 App. Div. 610.) We do not regard this question now' as an open one or one that we are called upon to further discuss. In fact, the decision upon the former appeal is conclusive of all the questions which are raised by the present record. The learned counsel for the appellant, however, contends with earnestness and ability, which distinguish all his efforts, that we have misapplied rules of law which áre controlling in the disposition of this case upon two questions. While we regard the points which he now makes as having been settled, in effect, by our former decision, as such questions were not elaborately discussed, we conclude to further consider them.

The transaction by which the Knowlton notes were surrendered and the Hassel notes taken by the bank, it is claimed, did not operate as payment of the Knowlton indebtedness within the meaning of the statute. It is conceded that the effect of this exchange was to discharge Knowlton from all liability to the hank,' and that it thereafter had no interest in or control over the notes and obligations, representing the loans made to him, which it formerly held. It must also be admitted that the Hassel notes represented debts due the bank; they constituted fresh living contracts to the same extent and subject iu every respect to enforcement in like manner as though actual moneys had been taken from the bank in exchange for them. But it is claimed, in the language of the learned counsel, “ that the statute refers neither to debtor nor to security nor to change of either one. * * * It can never be contended that by the surrender of a debtor’s liability and the canceling of his notes either by voluntary action on the part of the directors of. this hank, or by the accepting of a new note, that the debt itself within the meaning of this statute has been paid.” So far at least as form goes, and as matter of fact, there existed no debt of Knowlton’s due to this bank. There did exist in form and in fact debts in the form of notes by various parties, indorsed by Hassel for given amounts. Did they operate as payment of the Knowlton obligations? As between Knowlton and the bank, we think they did. His notes were surrendered up to Hassel and his account was marked “ paid ” upon the books of the bank, and there is no pretense but that the bank at that time intended to and did discharge him from further liability to it. By this transaction his debt was extinguished, and the notes indorsed by Hassel represented that debt; they were now contracts between different parties and had.the force of discharging the old debt: (Mayer v. Heidelbach, 123 N. Y. 332.) The rule would be different if the new notes were given between the same parties in extension of the original'debt. Such is the case of Jagger Iron Co. v. Walker (76 N. Y. 521) and other cases cited by the appellant. It is argued, in the brief of appellant, that the onus rested upon the defendants to show that the intent of the bank was to extinguish, the Knowlton debt, and this is undoubtedly true. But we think that sufficient appeared 'to establish that fact, without giving effect to what we regard as a concession by the plaintiff to that, effect. If the plaintiff desired to controvert it, he should have asked that the question be submitted to the jury.. He made no such request, but acquiesced in the statement of the transaction as it appeared upon the books of the bank, when the court’s attention was called to it. We think that he is now concluded thereby, and that we must dispose of the case upon the assumption that the bank received the Hassel notes as payment .of Knowlton’s pre-existing obligations. As between these parties, therefore, Knowlton’s obligations were paid.

This brings us to the question whether, for the purposes of the statute, they may be regarded' .as paid in the sense that the Hassel notes might be treated by the directors of the bank as an asset upon which a dixtidend might be based. The language of the statute is that the bank shall charge in the account of profit and loss and deduct from the actual profits all losses sustained by it, and they shall include as losses all debts owing to it, xvhich shall- have remained due without prosecution and upon which no interest shall have been paid for more than one year. (Banking Law, Laws 1892, chap. 689, § 2.6.) It does not appear that the Knowlton notes

liad remained due without prosecution for more than a year, and only in the sense that no money Avas actually paid had interest remained due. In fact, the notes had been renewed for principal and interest as they fell due from time to time. We think that the intent and meaning of this statute is, that it embraces debts, due for ■ which no provision has been made by those liable thereon for a year, and upon which interest has not been paid.' We do not think that it Avas intended to relate to, or that it embraces, notes Avhich have been received from time to time in the ordinary course of business, and which, by the terms of the renewal obligation, are not then due, even though the reneAval obligation embraced interest as well as principal, and the debt had been continued beyond a year. This was a bank of discount, in which the assets of the bank consisted largely of notes discounted and in reneAvals thereof; and in the usual prosecution of the business it might frequently happen that extensions and accommodation to its customers would result in its possession of perfectly good nqfes, where no payments either for principal or interest have been made within a year in money, and yet where the bank held a live and enforcible obligation not yet due by its terms. To hold that such an obligation must be charged up as a loss, and deducted from the assets of the bank for the purpose of the declaration of a dividend by the directors, would, Ave think, impose an obligation not. contemplated or intended by the statute. Such construction Avould certainly render the declaration of a dividend by the directors at any time extremely hazardous. The statute is abundantly satisfied by limiting its application to those debts which have become due, and remain unprosecúted, and upon which no interest has been paid for a year. Such is its terms and such Ave conceive to have been its spirit and intent. Of course, if the contract was renewed for the purpose of evasion of the statute, the directors might be held liable, and there may be other circumstances which Avould reach a like result. But there is nothing in the present case which has a tendency to show that the acceptance of the Hassel notes in the discharge of Knowlton’s debt was not done in good faith and in the usual course of business. We see no reason, therefore, for departing from the construction which we have heretofore placed upon this transaction.

We are requested, and it seems to be necessary, to determine jwhether the notes given .by the directors of .the batik constituted ithe,saihe!.a-ti asset of-the bank. Each of the.dotes, -in -form/ wás-a lprdmise by" the maker to pay to the bank, the sum: therein ¡specified; ;,each was delivered ,t®, the hank and. the bank held each •fromi the -date df its execution,-and the respective sums secured thereby, have (been «-paid - by the makers to. the- receiver, of the bank,, - In¡ form, ■ •therefore, the notes,-, presumptively, were "an asset of. the bank, and the Tol’ih has been reduced td substance .by payment. Their legal teffedt isS, of course, -to- he considered with the. contract: -which accompanied their creation -and Termed- a -part of the-transaction... The .-agreement ¡.recites that. the. -notes, were ’given to -make- ¡the bank .-unquestionably! solvent; ¡Bmless :á "liability attached- to the notes ¡apon their delivery ’to the hank; it: was no . more solvent after the Transaction than -before. The purpose-undoubtedly was, as expressed, to remove doitbt as - to the solvency of the bank; and to create a .-condition which removed that doubt,¡.not "as ¡a mental condition,, but ■as an -existing fact.. It was,- in effgct, ."as- we View the. ¡transaction, .a contribution of capital td tliebank for the purpose "of creating a .liability ’in support" of the "debts, regarded dbnibtftil .Or- -bad. then held by the" bank. This proposition, was mot to: provide for a. constingent liability in the sense that. ¡thebank ¡shou-kb hade: no-- interest .therein,. unless insolvency was ¡Subsequently, ascertained to. exist. But it was,-.to create:, á present condition of undoubted, solvency. And "in order- that this should be- accomplished- it was essential" that the", notes háve .present actual vitality as. an- absolute promise and liability" to "pay. the money. " With ".respect to tlieietiforcement bf the liability, it,'doubtless rested with the bank to be exercised as ■ 'contingencies might arise, -, There is nothing in the agreementbr its legal effect which provides for .postponement in "the- payment of'the notes .to any, particular- period óf time. It.is ¡said that.the notes -together should make a total -sum of $80,000, / This could mot" be,, if no liability existed to pay this sum, if required by the bank; , at the time payment was demanded.. It is not-necessary for us, at- tliisi "time, ¡to determine just what the legal status was with respect to those ¿notes upon any suppositious case. - That they related ■ td ¡the .then •existing condition of • the bank is- clear.; .that they w-ere intended as a sustaining contribution to the bad and doubtful debts then existing •is,’ we.think;; to ■ be ■ fairly gathered from the instrument which aeeompanied their delivery. Whether they con Id be enforced for liabilities which might thereafter, be created by the bank and which, at the time, had no existence, may well be doubted. We are not called upon to determine that question. And we do not now determine ■any other question in this respect than that the notes, at the time of their delivery, constituted an asset of this bank, based upon the view that it was the intent of all the parties that these notes should constitute security for a fund to care for the bad and doubtful debts then held by the bank. They have been paid in full to the receiver and he should be now held estopped from questioning their existence as an asset. Such ivas their legal effect, and they must be SO' considered in subsequent litigation, if the question becomes important.

It follows, from these views, that the judgment should be affirmed.

All concurred.

Judgment affirmed, with costs.