Case Name: OTHAR K. JENSEN et al., Appellants, v. SAWYER STATE BANK, Respondent, and H. THORSON and T. D. Thorson, Interveners and Respondents
Court: North Dakota Supreme Court
Jurisdiction: North Dakota
Decision Date: 1919-05-02
Citations: 44 N.D. 225
Docket Number: 
Parties: OTHAR K. JENSEN et al., Appellants, v. SAWYER STATE BANK, Respondent, and H. THORSON and T. D. Thorson, Interveners and Respondents.
Judges: Robinson and Grace, JJ., concur.
Reporter: North Dakota Reports
Volume: 44
Pages: 225–246

Head Matter:
OTHAR K. JENSEN et al., Appellants, v. SAWYER STATE BANK, Respondent, and H. THORSON and T. D. Thorson, Interveners and Respondents.
(173 N. W. 162.)
Banks and Banking — execution of notes for Bank — responsibility.
1. Where, in order to raise moneys for banking operations, an ai’rangement is made, pursuant to an agreement of the officers and directors of a bank, to deed certain lands then held by the bank to its cashier, and for the cashier then to mortgage such lands to secure two notes for $1,500 each, to be signed by the directors thereof, and where, pursuant to such agreement, such deed, notes, and mortgages are executed and $9,000 secured thereby through a sale of such notes and mortgages, and where, thereupon, such proceeds are paid to the bank and credited to its real estate or loans and discounts account, representing real estate held, and the lands involved are thereafter treated, in making sales, in raising crops, in payment of taxes, and in rentals thereof, as the lands of the bank, and it was so understood between all the bank officials and directors, even though, on the books of the bank, the specific liability therefor is not shown in the usual form, and where such cashier, after ceasing to be such, deeded the lands involved to his successor, it is held that the bank is legally liable to the parties who assumed and executed such notes, for the amount of moneys paid by them, upon such obligation so assumed, for the interest and purposes of the bank.
Banks and banking — execution of notes fox* bank — responsibility.
2. Where, subsequent to such agreement and its consummation, ninety-five shares of the stock of such bank are sold to persons not parties to such arrangement, at about 50 per cent of the par value of such stock, and where such parties, so purchasing, examined such bank and its condition prior to such purchase, and relied in part upon the judgment of its then cashier, who knew all about this transaction, and who theretofore had received and retained a deed to the lands involved from its former cashier, and where, in addition, one certain piece of real estate so deeded is directly carried in the real estate account of such bank as owned and possessed by such bank, all of which furnished a means and an opportunity of knowing and understanding the real nature of this transaction concerning the real estate, it is held that such persons are not innocent purchasers of such stock so as to create an estoppel against the persons who assumed such obligation, in an action thereupon against the bank, even though such obligation is not evidenced upon the books of the bank in the usual form. .
Appeal and error — trial by court — review.
3. Where an action properly triable under the Newman Act is tried by the court as a law case, with the consent of the respondent, this court will con--sider and review the same as a law case, where in so doing it is without prejudice to the rights of the appellant.
Opinion filed May 2, 1919.
Addendum filed May 22, 1919.
Action to recover upon notes executed and paid, for the benefit of the defendant bank. From a judgment rendered for the defendants and interveners dismissing the action, and, from an order denying a new trial, in the District Court of Ward County, Leighton, J., the plaintiffs appeal.
Judgment reversed, with directions to enter judgment for the plaintiffs.
W. S. Lauder, for appellants.
Engerud, Holt, & Frame, and John E. Greene, Falda, Aaker, & Greene, for defendant, interveners, and respondents.

Opinion:
Bronson, J.
(upon reargument). This action was reargued before the entire court on March 8, 1919. ' The prior hearing before this court occurred on September 24, 1917, and a decision affirming the judgment of the trial court was rendered by this court jrrst prior to December 1, 1918. This action was brought to recover $9,807.45 against the defendant bank by reason of certain notes executed in a real estate transaction. The interveners, who are subsequent stockholders of the bank, interposed a complaint in intervention, alleging an estoppel and praying for a dismissal of plaintiffs' causes of action. The action was tried in the trial court as a law case without a jury, and judgment was rendered, pursuant to findings of the trial court, for the dismissal of plaintiffs' complaint.
From such judgment, and from an order of the trial court denying a new trial, the plaintiffs have appealed. The contentions of the parties have been ably presented before this court in briefs, supplemental briefs, and by elaborate arguments, orally made by the learned counsel upon the reargument. No attempt will be made to 'discuss in detail all the features of the evidence presented in the record. Some of the leading facts will be stated, sufficient to base an understanding upon the principles of law made applicable to the record facts by this opinion. These facts are stated as follows: The defendant is a state bank located at Sawyer, North Dakota. Its capital stock is and was $16,000. In the fall of 1912 the bank had become possessed of considerable real estate in the course of its banking operations, having procured the same through foreclosure sales or otherwise upon obligations due the bank. Accordingly, in the month of November, 1912, it had some 1,800 acres or more of lands situated in Ward county. On its books the moneys loaned or invested in such lands were represented in the real estate account, or in the loans and discounts account, in the form of bills receivable. The real estate account then showed something over $5,000 invested in real estate, and at this same time the loans and discounts account was carrying in the form of bills receivable considerable amounts of moneys invested by the bank in real estate, but not carried as such in the real estate account. At that time the plaintiff Jensen was cashier of such bank; the plaintiff Atkinson, assistant cashier; the plaintiffs Saastad, Hays, and Atkinson, and also one Kosholt, were directors thereof. Jensen, although cashier, had, in fact, no stock. The other persons mentioned owned the great majority of the stock of such bank. During the month of November, 1912, meetings of the officers and directors, as well as of the stockholders, were held with reference to securing moneys to carry on the operations of the bank. Plans were discussed of levying an assessment or of using these lands as a means whereby some moneys might be raised, as well as to lessen the real estate holdings. There was no disagreement that either one of these two plans had to be adopted or the bank must borrow money as banks usually do. As a result of these meetings a plan was adopted whereby these lands were deeded by the bank to its cashier, Jensen, who thereupon, with his wife, executed two notes each for $4,500, dated December 1, 1912, and due in two years, payable to said Atkinson, a director, and, to secure the same, also executed separate mortgages for each. of said notes on these lands. Then the directors, Atkinson, Hays, and Saastad, each as individuals, indorsed these notes so executed, and the same, together with the mortgages securing such notes, were sold to two other banks, and $9,000 in moneys secured. This money, so received, was paid to the bank; some $3,800 thereupon being placed to the credit of the real estate account which reduced such real estate account down to some $1,600, and the balance being placed in the loans and discounts account in reduction of certain bills receivable evidencing investments in such real estate. About January 15, 1913, Jensen ceased to be cashier, and one Bowman succeeded him. After this deal was so made the bank .paid interest on these two notes so sold to other banks. For instance, it paid $319 interest on February 10, 1914; it paid $107.50 interest on June 8, 1914; it thereafter made payments on the first mortgages; it paid taxes; it paid for repairs on the premises; it leased or cropped the lands and received the returns thereupon. No control over the land or payments of any kind on the notes were made by the plaintiffs, excepting the final payments made, which are the subject of this action. Some of these payments for interest, repairs, and taxes were directly charged up in the real estate account of the bank. The bank sold one-quarter section of . the land so deeded. It received two notes aggregating $894, which it credited on February 14, 1914, to the real estate account, charging such notes in the bills receivable account. It ob tained a deed from Jensen for such land. Another piece of such lands was traded by the bank for some other land, and the sum of $217 paid as excess or "boot" money. The bank received a deed for this land. No money was paid by or to Jensen on account of these transactions. Jensen also executed a deed on these lands to said Bowman, the cashier*, and the title to the lands has ever since remained in Bowman of record. In the year 1914 negotiations were begun between one Bosholt who was principally interested in such bank, with one Thorson, to purchase the controlling interest in such bank, and thereafter, in the spring and summer of 1914, pursuant to such negotiations, said Thorson and his son became possessed of ninety-five shares of stock in such bank. For this stock he paid 50 per cent of its par value. The elder Thorson has eighty-five shares, his son ten shares procured through his father. The purchase of stock began in March, 1914, thus: Thorson bought five shares from Dr. Herbst in March, 1914; thirty shares from Bos-holt in April, 1914; ten shares from Hays in April or May, 1914, and the balance during the spring and summer of that year. Mr. Ingwaldson had done work of auditing in banks for the elder Thorson; he was directed by Thorson to ascertain the condition of this bank. During the latter part of February, 1914, Ingwaldson visited the bank and made an examination. He testified that he looked over the daily statement, the certificate register, glanced over the other real estate account and noticed that it was nearly $8,000; that he asked what they had in that; that he examined the bills receivable and the notes and securities. That he made no examination as to what particular real estate the bank owned at that time; that he was advised that it was farm lands and a couple of lots in town. That he was informed of no notes or mortgages that had been taken for the sale of land to Jensen that he could remember. That he talked to Mr. Bowman, the cashier. The other real estate account at that time as shown in the evidence disclosed payments of interest on mortgages, and repairs or expenses charged concerning some of these lands that had been theretofore deeded to Jensen. Bowman, during these negotiations, was the cashier, and corresponded to some extent with the elder Thorson concerning the purchase, the payment, and delivery of bank stock to Thor-son. The elder Thorson, as a witness, testified, in one place in his evidence, that he knew Bowman before he purchased the stock, that he knew he had been in the bank a year or more as cashier, that he relied to some extent on Mr. Bowman's judgment as to whether the stock would be a good purchase. At another place he testified that in purchasing the stock from Mr. Hays, Mr. Bowman acted for him in the transaction; that he directed Bowman to buy it, and sent him the money to buy. That he had no communication at any time with Mr. Hays. Bowman, the cashier, bought his stock, thirty shares, in January, 1913, paying $3,000 for the same, par value, and at that time he knew all about this land transaction with Jensen. In May, 1914, an assessment of 50 per cent on the bank stock was levied and thereafter paid. After the purchase of such stock by said Thorson the bank continued to handle such real estate and to look after the same, paying the taxes, some interest on mortgages, and repairs upon the same; many of these items appeared in the real estate account until August, 1914, when the real estate account then amounting to over $11,000, a new account was instituted, termed the Rosholt et al. ac-coiint. To the new account, thereafter items of disbursements and receipts concerning these lands were charged, and some items from the real estate account were transferred.
Subsequently each of these $4,500 notes became due and went to protest, the bank refusing to pay them. These plaintiffs paid them, and, upon the refusal of the bank to recompense them, thereupon instituted this action. It is the contention and claim of the plaintiffs, in substance, that this plan, so carried out, was done for and by the bank, and for its benefit; that it was understood and agreed that the real estate so deeded to Jensen, all of the time, should be considered and regarded as the real estate of the bank, and that out of the proceeds to be realized from these lands that might be sold the notes should be paid, and if they could not so be paid when the notes fell due, then the bank should make payment of the same. The bank and the in-terveners herein, on the other hand, contend this transaction was a sale of the lands to Jensen; that the records of the bank so show; that nothing on the books of the bank show to the contrary; that furthermore these interveners purchased the stock in the bank, without knowledge of this secret, agreement or plan, and that the plaintiffs herein are estopped to assert any claim against them or the bank by reason thereof. From the record in this case it plainly appears that this transaction was had for the purpose of securing money for the bank, and for the purpose of relieving the bank of the situation then presented. That it was put through in the name of the cashier, Mr. Jensen, and the directors, as a means of accomplishing this purpose, with the thought in mind that the bank could work out, through this plan, by disposition of the lands before the notes came due. The immediate parties to this arrangement do not at all disagree in this record concerning this intent and purpose. It is true that the reports made to the bank examiner and the books of the bank thereafter do not contain any statement or record of any such agreement. It is to be noted, however, that subsequent statements made to the bank examiner,, however, listed 80 acres of these very lands deeded to Jensen in its real estate account of lands owned by the bank. As between original parties to this plan or agreement, we are satisfied upon the record that the deed of these lands was made to Jensen, not for the purpose of a bona fide sale to him of such lands, or with any intent or thought on his part of purchasing the land, but that the deal was made bona fide between the original parties in the bank for the purpose of assessing and aiding the bank in repleting its capital, lessening its real estate, and putting it in shape as a bank to continue its operations, without levying an assessment upon the capital stock. The subsequent action of the bank in treating this real estate as its own simply confirms this conclusion.
Every item of money realized from the sale of any of these lands involved, or from rentals or crops produced thereupon, was received by the bank. Every item of disbursement concerning these lands has been made by the bank. Every action therefor of the bank and every action of the plaintiffs herein simply corroborates the intent and purpose for which this deed was given and the manner in which these lands belonging to the bank were, in fact, used as a basis of securing money. The principal contentions raised on this appeal between the parties, pursuant to the specifications and the issues presented thereby, are as follows:
(1) Whether this action was properly tried as a law case or was properly triable under the Newman Act.
(2) Whether the bank was liable to the plaintiffs for the obligations assumed and paid by them.
(3) Whether the plaintiffs are estopped as against the bank and the interveners, subsequent purchasers of the stock of such bank.
The trial court, in its findings and conclusions, finds in substance that this obligation assumed and paid by the plaintiffs was secretly made; that it is not shown upon the books or records of the bank; that it was fraudulently and secretly withheld, and not disclosed to the interveners, subsequent purchasers of the stock of the bank; that by reason of such fraudulent concealment the plaintiffs are estopped to assert a claim against the bank.
The action in the trial court was tried as a law case to the court, a jury being waived by the defendant and interveners. The complaint in the action seeks an accounting and asks for equitable relief. The answer of the defendant bank sets up grounds of estoppel, as does likewise the complaint in intervention. Properly the action might have been tried as an equitable action under the Newman Act; but in view of the conclusion to which this court has arrived in the decision of this ease, and in view of the fact that the respondents consented to, and do not complain against, the trial and determination of this action as a law case, this contention of the appellants becomes immaterial, because not prejudicial.
Our next consideration is addressed to the liability of the bank upon this obligation of the plaintiffs so assumed and paid, in view of the record facts herein, that no formal action of the board of directors, or of the stockholders of the bank, anywhere appears recognizing the same as an obligation of the bank, and that, furthermore, in the books and records of the bank there does not appear any direct recognition of such obligation.
It is clear, from the record, that Jensen, as well as the other officers of the bank, in the fall of 1912, possessed authority to borrow money for purposes of the bank. There is nothing in the record which inhibited borrowing $9,000 for bank purposes, and to pledge security therefor. Consequently, if Jensen or the other officers of the bank had borrowed $9,000, and given these very notes signed by the bank, and had put up these lands as collateral security to secure such notes, the bank unquestionably would have been liable therefor, and, likewise, unquestionably the records of the bank would have shown in its bills payable the amount so borrowed. By means of the arrangement and plan pursued the $9,000 in question was secured by these same officers for the very purposes that a loan for that amount would have sub-served. The money secured went directly to the bank. The $9,000 so secured was not credited as bills payable; it did show as a credit in the loans and discounts account, and, as a credit to the real estate account, with a corresponding and apparent diminution in the real estate holdings offsetting such amount. As a matter of debit and credit, the bank would be in exactly the same position no matter whether it borrowed the $9,000 direct, or whether it borrowed it through the plaintiffs. However, as a matter of conforming to bank examinations and reports to be made, and with reference to amount of real estate shown to be carried, it did make a considerable difference concerning the apparent liquid assets of such bank and its ability to do banking business. If the equity of the bank in the land so deeded was, in fact, actually worth $9,000, the actual value of the stock, as a matter of debit and credit, did not improve or increase by making this deal, no matter whether'it be considered a loan or a sale. If, then, there was the necessity for an assessment upon the stock to replete impaired capital, it was just as necessary in fact after these notes were given as it was before. Accordingly we are clearly of the opinion that, as far as the bank and the original stockholders are concerned, this obligation which its cashier and others assumed for the bank was a bank obligation enforceable against the bank. First Nat. Bank v. State Bank, 15 N. D. 594, 109 N. W. 61; Rankin v. City Nat. Bank, 208 U. S. 541, 52 L. ed. 610, 28 Sup. Ct. Rep. 346; 1 C. J. 559, § 166; Flower v. Commercial Trust Co. 138 C. C. A. 580, 223 Fed. 318.
The respondents, however, strenuously contend that, upon principles of estoppel, even though no bona fide sale of the land was made, the plaintiffs cannot maintain this action. They assert, among other things, that the interveners, who subsequently purchased ninety-five shares of the stock, had no notice of this secret arrangement or obligation when they bought the stock, and that the interveners purchased such stock only with notice of liabilities of the bank to the extent that its books then showed. It is quite apparent that this contention cannot be maintained to its full extent under all circumstances; for instance, if at the time this stock was transferred to the interveners the bank then owned a drayage bill of $50, or a bill for attorneys' fees for $100, or an obligation for rent for $200, or some similar item not then shown on the books of the bank for which the bill had not been rendered, surely the bank in such instance would be liable for such indebtedness. The principle issues presented, and'the one demanding our serious consideration, is whether, under the circumstances, there was such a concealment of the real transaction and such a lack of knowledge of the part of the interveners concerning this transaction when they purchased the stock, so as to raise an estoppel against the plaintiffs to maintain this action. This is a serious question in this case, and it is not free from difficulties. Ordinarily the commercial activities of a bank and its formal actions should be and are required to be noted either in its records or in its books. Secret and clandestine agreements which serve to create an apparent financial banking condition of a bank, and which serve to mislead the public, either depositors or prospective stockholders, should and ought to create an estop-pel as against parties who seek afterwards to enforce such secret arrangements. The main question, therefore, is whether, within this record, there appear facts and circumstances which gave or may have given to the interveners at the time this stock was purchased notice of this arrangement and necessarily of this obligation.
The interveners are father and son. The elder Thorson has had a banking experience extending over forty years. At the time he was interested in twenty-two banks. He had an auditor who examined banks for him and who did examine the condition of this bank. This bank, at the time of the purchase of the stock, was in financial trouble. The elder Thorson knew this. He bought this stock, nearly all of it, at 50 per cent of the par value thereof. The books and records of the bank at the time Thorson caused it to be investigated disclosed at least that the bank was looking after this real estate involved, was renting the same, and had negotiated concerning a sale of some of these very lands. Thorson- testified that he relied to some extent on Bow man's judgment concerning this purchase of stock, as to whether it would be a good purchase. Bowman was then the cashier of the bank.
There is in the evidence, exhibit 2,.a carbon copy of the letter dated March 6, 1914, from Bowman to the elder Thorson, which states that there is inclosed a statement of the real estate held by the hank. This statement tells a big tale in itself. It contains the very lands that were deeded to Jensen. It contains a purported statement of the value of such lands, and a list of the amounts that were credited to each of such pieces of land so deeded out of the $9,000 received on the notes. It also contains a list of the first mortgages against such lands, and arrives at a tentative balance of the value of the lands as against the amount of encumbrances or investments therein. If Thorson received this statement there would be absolutely no question about his notice of this transaction in connection with these lands. The record is in dispute concerning whether Thomson did get this statement. Thorson denies having received the same, and Bowman does not testify that the original letter, with the statement inclosed, was sent to Thorson; but he testifies that he does not remember, but, regardless of this question, Bowman knew about this deal. He must have prepared this statement for Thorson; and, if Thorson relied on Bowman's judgment concerning the purchase of the stock, he knew about this transaction if Bowman acted bona fide. There is nothing in the records to justify the inference that the plaintiffs were guilty of any fraudulent concealment as far as the directors or stockholders of the corporation were concerned. The earmarks of this transaction were apparent upon the face of the records of the bank, although the transaction was not carried in the usual manner as a bills payable account, for reasons that are apparent owing to the condition of the bank. Nevertheless, the bank, by its conduct, by its records, by its control over these lands, disclosed, and its records showed, the real motive of this transaction. There, therefore, is no legal reason why the ordinary rule applicable to purchasers of stock in a corporation should not apply, in other words, Thorson bought this stock subject to equities existing against the bank that might affect the value of such stock as far as this transaction was concerned. Comp. Laws 1913, § 5160. Under the circumstances the fact that the reports made to the bank examiner did not disclose this arrangement, or that the interveners may have relied in part thereupon in the purchase of the stock, does not create any estoppel against the plaintiffs in this action, in view of the accommodation service rendered by the plaintiffs to the bank and the knowledge thereof ascertainable from the books and records of the bank. Leonard v. State Exch. Bank, 149 O. 0. A. 448, 236 Fed. 316, this is an action on the obligation assumed against the bank. It is not an action involving the rights of the interveners, if any, to recover for false representations and deceit in the sale of the stock to them, similar to that in Gerner v. Mosher, 58 Neb. 135, 46 L.R.A. 244, 78 N. W. 384.
Concerning this matter, in the former opinion, it is stated that "notice that a bank has assets in the shape of land is certainly not, in itself, notice that there are secret claims against the bank on account of the land, there being nothing to that effect on the books of the bank or in the public records." A careful investigation of the record discloses, in answer to that statement, that the books and records of the bank showed, both prior and subsequent to this transaction involved, that the bank not only considered this real estate as its own, but also paid the interest on this very obligation which is the subject of the suit involved herein, as well as interest on other prior liens on said lands so involved. If the bank claimed these lands as its own; or its records disclosed a course of conduct treating the same as its own, surely any purchaser of the stock, if he relied on what the books showed concerning these lands as being real estate, would be bound by the liens then existing against the same as well as the liens that then appeared of record against the same.
The record does not justify the inference that a banker of some forty years' experience owning some twenty-two banks, employing an expert auditor to examine the bank, and who did examine this bank, was not put upon inquiry, and did not have notice of this transaction, the earmarks of which are plain and apparent upon the books of the bank themselves, both before and after he purchased his stock. It therefore follows that the trial court erred in its findings and conclusions of law. The judgment of the trial court is reversed, with direc tions to enter judgment for the plaintiffs for the sum of $9,807.45, with interest and costs, including costs of this appeal.
Robinson and Grace, JJ., concur.
Bronson, J.
(addendum). As this case has been pending before this court a great length of time, and as it has been argued and reargued before this court, and the majority opinion now reverses the former opinion rendered by this court, it is well to note a consideration or two that should be applied to the dissenting opinion now filed.
The dissenting opinion overlooks entirely that this action was tried as a law action, with the respondent consenting and not objecting thereto, and with the appellant making specific objection; accordingly this ease should be governed by legal principles applicable.
The dissenting opinion apparently has discovered a new method of re-establishing impaired capital; it might be termed the "boot strap" method. In other words, impaired capital may be restored by taking $9,000 of the assets of the bank and hypothecating or disposing of the same and receiving therefor $9,000 in cash, and, presto-change, the capital is restored. The illustration cited sufficiently answers such a contention that the procedure contemplated between the parties was a re-establishment of the impaired capital. It matters not .whether the transaction be termed an attempt to restore impaired capital or to make loan, in either event the status of the bank, as a matter of debit and credit, was just the same after the transaction was consummated as it was before. Simple principles of arithmetic demonstrate this. In the dissenting opinion, there is expressed alarm that the security is not disposed of by this court, when as a matter of fact the bank or its banking officials have had this property, or the control over it, for years. The bank can easily take care of this real estate and handle it without any order from this court so to do.
Grace and Robinson, JJ., concur.