#### Jacob Ouderkirk, Resp’t, *v.*The Central National Bank of Troy, App’lt.1

*(Court of Appeals,*

*Filed February 25, 1890.)*

1. Banks and banking—Liability fob. bonds left in custody of cashieb.

Plaintiff left bonds with defendant’s cashier as collateral security for discounts and all loans being paid the cashier gave him a receipt that the bonds were retained for like future use or safe keeping. Upon his finally ■demanding the bonds, defendant could not produce them. They had been kept in the safe with other valuables, of none of which any account had been kept in the books of the bank, and no examination in respect thereto •ever had. No one knew of the possession of the bonds by the bank except the cashier, who was finally removed as a defaulter. *Meld,*that the bank was not a gratuitous bailee, but was chargeable with the exercise of a high degree of care in their keeping, which the evidence justified the jury in finding they had omitted.

2. Same—Liability of boabd of dibectobs.

The contract under which the bank held the bonds extended from the time of their reception until they were finally returned to the depositor, *574and the hoard of directors were negligent in leaving the custody of its-securities to a single officer, no matter how high his character and reputation, for a long space of time without supervision, examination or inquiry.

Appeal from judgment of supreme court, general term, third department, affirming judgment in favor of plaintiff.

*Orin*Gambell, for app’lt; *J. M. Landon,*for resp’t

1

 Affirming 22 N. Y. State Rep., 127.

Ruger, Ch. J.

Many of the questions involved in this case are authoritatively decided in the case of *Pattison*v. *Syracuse National Bank,*80 N. Y., 82. It is there held that national as well as state banks have authority to receive bonds and other securities, gratuitously and otherwise, for safe keeping and general banking purposes, from third persons as a customary and usual incident of the business of banking, and that where the proof shows that the cashier has been accustomed, with the knowledge of the directors of the bank, to receive such deposits, it is a question of fact for the jury to determine whether he did so on behalf of the bank or as an individual. It is also plainly inferable from that case,, that private instructions given to the cashier by other officers of the bank in relation to deposits, which are not communicated by him to the depositors, do not constitute any limitation upon the liability of the bank in case a loss occurs. See, also, *Caldwell*v. *Mohawk Val. Bank,*64 Barb., 333. It was further held therein that a bank is chargeable for the loss of securities, gratuitously kept, for gross negligence alone, and that, having lawfully received securities on deposit, it was bound either to return them when called for, or show some sufficient ground for not doing so.

It is obvious that a bailee, whatever the character of the bailment may be, when its purpose has been fully satisfied and performed, is bound, upon request, to redeliver the thing bailed to its lawful owner. This is necessarily implied, in all cases, from the nature of the contract of bailment. The authorities are unform to the effect that such redelivery may be excused in the case of a bailment mutually beneficial to the parties, by proof that the deposit has been lost or destroyed without negligence, or want of such care on the part of a bailee as prudent men, under similar1 circumstances, commonly take of their own goods. In the case-of gratuitous bailments, however, the bailee is liable only when chargeable with gross neglect. Edwards on Law of Bailment, 7 *et seq.;*Jones on Bailments, 23.

It necessarily follows from the nature of the obligation and the-refusal to return the property, that the burden of showing the-circumstances of the loss rests upon the bailee, and, unless the-evidence shows the exercise of due care by him according to-the nature of the bailment, he will be held responsible for the-breach of his contract to return the property bailed. *Pattison*v. *Syracuse Nat. Bank, supra; Caldwell*v. *Mohawk Val. Bank, supra; Collins*v. *Bennett,*46 N. Y., 490; *Cutting*v. *Marlor,*78 id., 454; *The Russell Mfg. Co.*v. *N. H. Steamboat Co.,*50 id., 121.

The sufficiency of the evidence to establish the exercise of proper care will, generally, be a question of fact for the jury to *575determine upon all of the circumstances of the case, and tho question here presented is whether under the circumstances proved the jury was warranted in finding that the defendant was negligent in exercising the degree of care required for the safe keeping of .the bonds in question.

The proof showed that the plaintiff was a merchant, residing at Troy, and a regular customer of the bank, and in March, 1888, left his bonds with the bank as collateral security for discounts made and to be made for him by such bank upon notes signed by him alone, .and that they were never returned or offered to be returned to him by the bank. Discounts and renewals upon the security of such bonds were obtained by the plaintiff from time to time, extending over a period of nearly four years, when the last discounted note held by the bank was paid by an agent of the plaintiff. Upon that occasion the cashier delivered to the agent, upon his own suggestion, a receipt signed by him, as cashier, acknowledging that the bonds had been received by the bank as collateral security for discounts made by it to plaintiff, and that all such loans having been paid, the bonds were retained for future like use or safe keeping, subject to the plaintiff’s order. Thereafter, as theretofore, the bank continued to pay the coupons falling due on the bonds to the plaintiff until October, 1887. In February, 1887, the plaintiff demanded the return of the bonds, and was informed that they could not be found; but no information was afforded him in respect to the circumstances attending their disappearance or the mode by which they had been removed, if at all, from the possession of the bank.

Upon the trial the defendant gave evidence tending to show that it was the custom of the bank to return securities, held as collateral, to the owner upon payment of loans; but that while they were so held they were kept, with other valuable securities belonging to the bank, in a steel box enclosed in an iron safe, which was enclosed in a vault. The iron safe, as well as the steel box, had combination locks and the combination upon the steel box was known to the president and cashier alone, and the cashier alone had a key thereto. There was evidence also given to the effect that the cashier had been in the employ of the bank for many years, and was a man of good reputation until December, 1887, when he was removed from his position for the alleged reason that he was a defaulter. Neither the circumstances nor the character of the defalcation was shown. All the bank officers, except the cashier, testified that they had no knowledge of the possession by the bank of the bonds in question or the place where they were kept after the loans were paid, and that they, respectively, had not abstracted them from the bank.

The by-laws of the bank provided for the aq>pointnient by its president, once at least in every three months, of a committee consisting of two members of the board, who, together with the president and cashier, should constitute a committee of examination, and who were required to examine all matters “ pertaining to the affairs of the institution,” and report the same to the board. In actual practice examinations were made only once in six *576months, instead of three, and by three examiners instead of two. The examinations were, in fact, confined to the securities- owned by the bank and such as it held as collateral for unpaid loans but the reports showed no account of such collaterals or of special deposits. The bank was accustomed to receive special deposits for safe-keeping from its customers, which were usually kept-in the vault, but no entry thereof was made on the books of the-bank, and no subsequent examination inspection or report, in relation thereto, was ever made or provided for through by-laws, except as hereinbefore stated. Examinations of the affairs of the-bank were also annually made by a government inspector, but. they related only to the loans, discounts, revenues and property of the bank, and did not include an inspection of its special deposits or unreturned collaterals. Ro evidence was given tending to show the cause of the abstraction or 'disappearance of the plaintiff’s bonds except that inferable from the circumstances above enumerated.

We are of the opinion that the bank, under the circumstances of this case, was not a gratuitous bailee of the bonds, and was, in any view, liable, at least, for the want of ordinary and reasonable care and diligence in their custody. The bonds came into its hands in the usual course of business as collateral security for-loans to a customer, and it had never relieved itself of the liability thereby incurred by returning, or offering to return them to their owner. On the contrary, it agreed, through its proper financial agent, to continue as their custodian for the purposes for which they, had theretofore been employed. The-making of such a contract was clearly within the power of the officer charged with the duty of negotiating loans and discounts, as one of the necessary incidents of the business he was employed to perform. The extension of loans of discount and credit to persons engaged in business upon stipulated securities is one of the most common features of banking, and it must often, happen that such loans are, from time to time, wholly or practically paid and satisfied. But we think this fact would not. change the character of the liability of the bank in respect to the safe keeping of such securities. Intervals of days, weeks and months may frequently elapse between discounts, and it. would be quite absurd to hold that during these periods the bank occupied any other relation to its customer than that of custodian of his bonds for purposes deemed mutually beneficial to both parties. The arrangement contemplated a course of' business which was to continue for an indefinite period, and the notice that the bank was responsible for the safe keeping of the customer’s securities so long only as particular loans were running, is founded upon too narrow a view of the obligation of the bank. The contract, under which the bank held the bonds, extended from the time of their reception until they were finally returned to the depositor, and its liability remained unchanged so long as the contract was in force. This contract enured to-the mutual benefit of the parties, as it afforded the depositor ready facilities for raising money, and to the bank the profits o£ *577the business, the retention of its customer and adequate security from loss in the transaction of its business.

Having arrived at the conclusion that the bank was not a gratuitous bailee, but received a compensation for the bailment, it follows that it was chargeable with the exercise of a high degree of care in their keeping.

It is not important in this caseto consider with critical accuracy the difference between the various degrees of care required as to the several kinds of bailments, inasmuch as the evidence authorized the jury to find that the defendant omitted the exercise, not only of a high degree of care, but also of that denominated ordinary or reasonable care. The test of what is regarded as gross negligence, or a want of the highest degree of care, by a bailee, as stated in the case of *Foster et al.*v. *Essex*Bank, 17 Mass., 499, a leading case in this country upon the doctrine of the non-liability of banks to special depositors, is “ that degree of care which is necessary to avoid the imputation of bad faith, is measured by the carefulness which the depositary uses towards his own property of a similar kind.” Ordinary neglect is said in the same case to be, according to Sir William Jones, “ such as would not be suffered by men of common prudence or discretion.”

While it is held in this state that the fact that the bailee’s property is also stolen at the same time as that of the bailor does not furnish conclusive evidence of the exercise of ordinary care, *Pattison*v. *Syracuse*Bank, yet it is the uniform doctrine of the cases that evidence of a want of such care as the bailee generally bestows upon his own property is strong and persuasive evidence of negligence on his part with respect to the property bailed.

We have been unable to discover in the evidence before us proof of the exercise of reasonable care by the bailee in the custody and keeping of the bonds after the loans were discharged. Wherever they might have been kept while the loans were pending, or whoever might then have been charged with their custody after that time, no effort or precaution seems to have been adopted by the bank to identify and protect the property from misappropriation by its officers and clerks. So far as appears, any or all of the employees of the bank could, at any time, have abstracted what the bank termed special deposits, and would have been practically safe from discovery or detection, except by accident or chance, for an indefinite period of time. A course of business affording such opportunities to fallible guardians, presents an irresistible temptation to use the property under their control for illegal purposes, and usually results in the loss of the securities thus exposed. *First Nat. Bank*v. *Ocean Nat*Bank, 60 N. Y., 278. While the bank protected its own property from loss or embezzlement through its employees, by entries in its books as to its account and character, and by frequent examinations ascertained its safety and condition, no such precautions were taken with reference to the property of customers left in its possession. Fo precaution whatever, either by keeping a record of such securities, and thus facilitating the tracing; *578and recovery of them in case of loss, or examinations, inspections or inquiry in relation thereto, were resorted to or provided for by the defendant; but they were left exposed wholly to the .self restraint and unguarded control of those having opportunity to take them. *Caldwell*v. *Mohawk Val.*Bank, *supra.*

The claim that immediately upon the payment of the loans, for whose security the bonds were held, the bank could abandon their possession to the officer receiving payment thereof, without incurring liability to their owner, is too fallacious to need serious refutation. We think the case fails to show the exercise of reasonable care by the bank in the keeping of these bonds. A board of directors which leaves the custody, control and management of its securities and property to a single officer, no matter how high may be his character and reputation, for a long ¡space of time without supervision, examination or inquiry, is justly subject to the charge of negligence in the performance of its duty. It is said in Morse on Banking, p. 77, as to the duty ■of directors of banks, that they “ are bound to constant activity and thorough acquaintance with the daily course of the affairs and dealings of the institution. It is their duty to make this acquaintance so thorough that no officer can continue long and ■consistently to usurp a function of any degree of importance whatever without their knowledge.” It is further said on page 84, in relation to the duty of a board of directors in supervising the •.conduct of the officers of a bank, that if such officers had borne bad characters, or had circumstances of suspicion or demanding inquiry come to the knowledge of the board, or had the board, for any reason, been unwilling to trust their own property with them in the same manner in which they trusted the property of the bank, a case might have been made for holding the bank liable for a loss occurring to a special depositor.

It was said by the late Chief Judge Church, in *Cutting*v. *Marlor,*78 N. Y., 460, that “a corporation is represented by its trustees and managers; their acts are its acts, and their neglect its neglect. The employment of agents of good character does not ■discharge their whole duty. It is misconduct not to do this, but in addition they are required to exercise such supervision .and vigilance as a discreet person would exercise over his own affairs. The bank might not be liable for a single act of fraud or crime on the part of an officer or agent, while it would be for a continuous course of fraudulent practice * * * Here were no supervision, no meetings, no examination, no inquiry. * * * A system of management of a banking house, in which such conduct of its officers was permitted, was a breach of duty, and grossly negligent towards its dealers, and persons having stocks and bonds in its keeping.”

This language is peculiarly applicable to this case, and correctly states the rule by which the evidence for the defense should be considered That evidence utterly fails to show the exercise of that degree of care which it bestowed upon its own 23roperty, or the circumstances attending the loss of the bonds from which such care might be inferred, and fully supports the *579verdict of the jury. The defaulting cashier was not called to explain their disappearance or to state whether he took them or not, and no explanation was given why he was not so called. He was the agent whom the bank had employed as the custodian of its funds and represented it in its transactions with the public, and,, in the absence of other sufficient evidence of their loss, we think it was the duty of the bank, if it was able to do so, to produce this witness ‘for examination on the trial, and, in the absence of such testimony, the jury might well have found that the defendant had not sufficiently shown that the bonds were lost without neglect on its part.

The evidence was insufficient to establish as a proposition of law that the cashier had stolen the bonds, or that they were appropriated by him, and it was a possible explanation or solution of their non-delivery that they had been inadvertently mislaid or delivered to another depositor by some officer of the bank, or were used by the cashier in the business of the bank, or appropriated by the defaulting cashier after his misconduct had been discovered.

We think the charge of the court was not justly subject to criticism in respect to remarks made relative to the degree of care required of the bank to relieve itself from liability to the plaintiff.

Under the principles governing the case hereinbefore laid down, the bank was liable for an omission to exercise ordinary and reasonable care in protecting the property of its customers, and such care, we think, excludes the commission of any act of negligence-by the bailee.

In pursuance of these views the judgments of the courts below should be affirmed.

All concur; Gray, J., in result.