Case Name: SHAW, Banking Com'r, v. McSHANE et al.
Court: Texas Courts of Civil Appeals
Jurisdiction: Texas
Decision Date: 1930-11-05
Citations: 33 S.W.2d 277
Docket Number: No. 3820
Parties: SHAW, Banking Com’r, v. McSHANE et al.
Judges: 
Reporter: South Western Reporter Second Series
Volume: 33
Pages: 277–286

Head Matter:
SHAW, Banking Com’r, v. McSHANE et al.
No. 3820.
Court of Civil Appeals of Texas. Texarkana.
Nov. 5, 1930.
Rehearing Denied Dec. 18, 1930.
King, Mahaffey, Wheeler & Bryson, of Tex-arkana, for appellant. <
Keeney & Dalby and Rodgers & Rodgers, all of Texarkana, for appellees.
-Writ of error granted.

Opinion:
HODGES, J.
This suit was filed by the banking commissioner of Texas against the appellees on three promissory notes aggregating $7,311.94, less a credit of $450 on one of the notes. The notes were executed on different dates during the year 1923, payable .to the Guaranty State Bank of Texarkana, and were signed by N. A. Shaw, E. D. Trigg, J. É. Rochelle, J. P. MeShane, R. W. Rodgers, and V. A. Ghio. N. A. Shaw, one of the signers of the notes, died before the institution of this suit, and his widow, Mrs. Corine Shaw, independent executrix of his estate, was made a party defendant.
The defense is that the notes were executed by all the parties solely for the accommodation of the bank and without any consideration. In a trial before a jury upon special issues, a judgment was rendered in favor of the defendants. This appeal is prosecuted by James Shaw, who held the office of banking" commissioner of Texas at the time the case was tried.
The testimony in which there is no material conflict discloses the following facts:
The Guaranty State Bank was organized under the laws of Texas in 1916 with a capital stock of $50,000. A large portion of its business consisted of loans to farmers in the surrounding territory. Among those to whom loans were made was W. R. Garland, who owned a farm situated in Miller county, Ark. The farm was purchased" some time prior to 1921 for a cash consideration of $20,000, and eleven promissory notes for $5,000 each, aggregating $55,000.
Each of the notes stipulated for a reten: tion of a vendor's lien on the land and was payable on different dates over a period of eleven years. The Interest was to be paid annually. There was also a stipulation in the notes providing that in event of default in the payment of any installment of interest or principal when due, the holder of the notes had the right to declare the entire indebtedness due. Eight of these notes, aggregating $40,000, were sold and transferred by the holder to Lee Tayloe of Clarksville, Tex. The remaining three, aggregating $15,000, were transferred to the Guaranty State Bank as security for an indebtedness to that bank. It further appears from the evidence that in the contract transferring the notes there was an agreement between the interested parties that Tayloe should have a lien superior to that of the bank.
In March, 1922, Garland owed Tayloe the sum of $6,758.90 as accumulated interest on the notes. Tayloe threatened to exercise his option and declare the entire indebtedness due and foreclose his lien on the land in Miller county in the event payment was not then made. Garland notified the bank of his inability to pay the note, and Col. N. A. Shaw, one of the signers of the note sued on, who was at that time the president and in the active management of the Guaranty State Bank,' undertook to procure the money for him in order to protect the security held by the bank as second mortgagee.. The defendants Rochelle, Ghio, McShane, Kodgers, Trigg, and Shaw, were at the time directors of the bank and constituted the entire board, with the exception of. one member who is not a party to this suit. Shaw, being unable to procure money from any other source, directed Trigg, who was the cashier, to pay over to Tayloe the sum of $6,758.90 out of the bank's money in payment of the interest due from Garland. That transaction occurred on or about March 14, 1922. In consideration of that payment, Tayloe executed and delivered to Shaw an assignment of his lien on the land to the extent of the payment made, but stipulated that this assigned lien should be inferior to the lien retained by Tayloe. At the time that payment was made to Tayloe, Shaw executed his personal note payable to the bank for an equal amount. That note was listed and carried on the books of the bank as a part of its assets. Two days later, and at the request of Shaw, Garland executed his note for a like amount payable to the bank. Garland's note, however, was not listed on the books of the bank among its bills receivable, but was kept in the bank's safe.
A short time after the execution of the note by Shaw, the defendants Rochelle, Rodgers, Trigg, MeShane, and Ghio also signed the note executed by Shaw. Each of them testified that he signed the note solely for the accommodation of the bank and without any previous agreement or understanding that he would sign it. Each further testified that he received no benefit from that transaction. It is admitted that the notes here sued on are renewals of this original note Signed by Shaw at the time the money was paid to Tayloe on Garland's debt.
By an appropriate reply to the defense of want of consideration, the appellant presents the issues hereafter discussed. At the conclusion of the testimony the appellant requested a peremptory instruction in its favor against all of the defendants.' That was refused by the court and the case-was submitted on special issues. The findings of the jury in response to those issues are, in substance, as follows:
Eirst. That defendants Rochelle, Rodgers, Trigg, Ghio, and McShane did not agree to sign the original note, for $6,758.90 before the money was paid by the Guaranty State Bank to Tayloe.
Second. That the original note above referred to was executed by the above-named defendants solely for the accommodation of the bank and for the purpose of protecting the assets' of the bank.
Third. That there was an agreement between the above-named defendants and the active officers of the bank that all payments thereafter made by Garland to the bank should be applied as a credit on said note or renewals thereof.
Fourth. That the makers of the original note at the time they signed the same knew that $6,758.90 of the bank's money had been paid, to. Lee Tayloe to settle interest due him from Garland, and that such note was to be carried as an asset of the bank in place of, or to represent, the money thus paid out to Tayloe.
Fifth. That all of the makers of the original note were members of the board of directors of the bank and, at the time, owned as much as 50 per cent, of the capital stock of the bank.
Sixth. That before this money was paid to Tayloe on Garland's indebtedness for interest, Garland owed the bank a sum equal to or exceeding 25 per cent, of the bank's capital stock and certified surplus.
Seventh. That the bank did not part with anything, and that the defendants Rochelle, Rodgers, Ghio, Trigg, and McShane did not receive any benefit by reason of their signing the note for $6,758.90, and that they signed this note after the money had been paid to Tayloe.
Upon those answers the court entered a judgment in favor of all the defendants. The following are the propositions upon which the appellant relies for a reversal of the judgment:
First. That the court should have instructed a verdict in its favor "because as shown by the undisputed evidence, the execution and delivery of the notes sued on, as well as the parent note of which they are renewals, were attended by such circumstances, and the makers of the note bore such relation to the Guaranty State Bank, as that they were precluded from introducing any testimony to show that the notes, each of which recited a valuable consideration, were in fact executed without consideration and were, under the undisputed facts, estopped to deny their liability for the payment of such notes according to their legal tenor and effect."
Second. "Under the undisputed evidence and the findings of the jury, the appellant was entitled to have a judgment rendered in its favor, for the amount of the notes sued on, with interest and attorney's fees, less the credit of $450.00 endorsed upon the smallest of them, and the court erred in rendering judgment against it and in favor of the appel-lees."
Third. "The app'ellees clearly are estop-ped, in view of the undisputed evidence, and the findings of the jury, to urge that the notes in suit were executed without consideration, and because they are thus estopped, it was error for the court to render judgment in their favor."
In view of the disposition made of the case, it is unnecessary to quote the fourth proposition.
It conclusively appears from the evidence that the money paid to Tayloe was applied to the payment of Garland's debt to Tayloe and was .intended to be used for that purpose. While the draft for the money was drawn against Shaw and the subrogation agreement was made in Shaw's name, it is conceded that he was acting for the bank.
We may, therefore, treat the transaction as a purchase by the bank of Tayloe's claim against Garland. Such a purchase was but an indirect loan of the bank's money to Garland within the meaning of the statute which limits the amount of money a bank may loan to one person. Article 554 of Penal Code of 1925.
The proof shows that at the time this indirect loan was made to Garland, he owed •the bank for prior loans an aggregate sum equal to 25 per cent, of the bank's capital stock and certified surplus, the limit fixed by law.' Hence this indirect loan was in plain violation of the terms of the statute, and the agents of the bank who were responsible.for it became personally liable to the bank for whatever loss might follow as a result of the loan having been made. The' statutory prohibition against excessive loans by banks is plain and emphatic and cannot be evaded by showing that -it is to the bank's interest under the particular circumstances for its money to be so invested. Thompson v. Greeley, 107 Mo. 577, 17 S. W. 962; Cockrill v. Cooper (C. C. A.) 86 F. 7, 12; First Nat. Bank v. Hubbard, 211 Mo. App. 9, 240 S. W. 854.
The rule is well settled that when ant agent loans money belonging to his principal in violation of instructions, the agent becomes personally liable for whatever damages the principal may sustain as a result of the-unauthorized loan. Such liability arises from the misconduct of the agent in handling his principal's money. Fidelity & Deposit Co. of Maryland v. Risien (Tex. Civ. App.) 284 S. W. 977; Brown et al. v. Farmers' & Merchants' Nat. Bank, 88 Tex. 265, 31 S. W. 285, 33 L. R. A. 359; Seale v. Baker et al., 70 Tex. 283, 7 S. W. 742, 8 Am. St. Rep. 592; 1 Clark & Skyles on Law of Agts. 875, § 384.
The officers and directors of a bank sire its agents, and are charged with the duty of exercising at least ordinary prudence and care-in safeguarding the bank's interest and in loaning its money to third parties. The' imposition of a limitation by law on the amount that may be loaned to any person is, in effect, an instruction to bank officials. To-knowingly exceed that limitation is a disobedience of legislative instructions and subjects the offenders to the same liability which would follow the disobedience of private instructions by an agent in any similar transaction.,
If those bank officials who authorized' or caused the excessive loan to Garland to-be made in this instance became personally liable to the bank for any loss that might result, such personal liability for the money would furnish a legal consideration for a promissory note to pay that debt if the borrower failed. Such officials will not be 'permitted to plead and prove as a defense that they executed the note for the accommodation of the bank. Rogers v. First State Bank, 79 Colo. 84, 243 P. 637; German American State Bank v. Watson, 99 Kan. 686, 163 P. 637. As to such officers, the principle of estoppel as pleaded by the appellant of this suit would be applicable.
The question then arises: Who of the officers of the Guaranty State Bank caused the excessive loan to Garland? The evidence conclusively shows that N. A. Shaw, the bank's president, was one if not the only party responsible for that loan. He authorized the draft drawn in Tayloe's favor upon which the money was paid out, and personally directed the payment of the draft out of the bank's ' funds; The subrogation agreement was de- ' livered to him for the bank. Clearly, we-think, the appellant was entitled to a judgment against Shaw's estate. In fact,' in frain- ing the controlling issue, the jury was interrogated only as to the connection of the de•fendants Rochelle, Rodgers, Trigg, Ghio, and McShane to the loan transaction. As to those defendants,- the material facts and :findings of the jury, are different. Upon evidence which must be regarded as sufficient, the jury found that those directors signed the note -after the money .was paid.out to Tayloe.and. that there was no prior agreement that they would sign such-a note in the event the money was paid. The judgment rendered involved the finding that those clirectors were not parties to the excessive loan to Garland, and we cannot say, as a matter of law, that such a conclusion is unwarranted by the evidence.
The jury further found, in effect, that the bank did not part with its money on the faith of those signatures to the note. Those defendants are therefore in the position of sureties who become such after the debt is contracted, and the money paid over to the borrower and who sign without an additional consideration. Under that state of facts, they have a right to rely upon the defense of want of consideration as long as the note remains in the hands of the bank, or one standing in its shoes. King v. Wise (Tex. Com. App.) 282 S. W. 570; Good v. Martin, 95 U. S. 90, 24 L. Ed. 341; Jones v. Ritter, 32 Tex. 717; Joyce on Defenses to Commercial Paper (2 Ed.) § 54.
The evidence and findings of the jury warranted the court in concluding that there was no legal consideration for the signing of the original note made by the defendants Rodgers, Rochelle, Trigg, Ghio, and McShane.
But counsel for appellant contend that on account of the relationship of those directors to the bank, they should be estopped to plead in this suit the defense of want of consideration. Estoppels are enforced'to prevent injury to one who has done something, or has failed to do something, by reason of the conduct or representations of another. According to the record in this case, the bank did nothing and parted with nothing on account of the signature of the directors above named. The loan to Garland had been completed and the transaction closed when they signed the note. Since the bank was the party accommodated, it was in no position to invoke an estoppel against these directors if, while a going concern, it had undertaken to enforce payment of the note. The situation would be different if the note had been transferred for value to some other party even though the transferee knew that those directors had signed the note for accommodation. 1 Daniel on Negotiable Instruments (5 Ed.) § 786. But as long as accommodation paper remains in the hands of the one accommodated, if the rights of no other party have become involved, it is subject to the defense of want of consideration.
The directors of a bank are under no obligation to sign their names to a note for the accommodation of a bank in order to protect it against loss from a bad loan for which th'ey are not responsible. Their refusal to perform a gratuitous promise is no more of a fraud against the bank than would be the refusal of another party under the same circumstances.
However, a situation might arise where a receiver of an insolvent bank might invoke an estoppel against such aecommoda-. tion makers in behalf of a bank's creditors and depositors. If the accommodation paper was executed and placed among the bank's assets for the purpose of deceiving the bank examiner and thereby prevent the closing of a bank, such makers would not be permitted to plead and prove the defense of want of consideration. Or if it be shown that the bank was in financial straits, or was insolvent and that credit had been extended to the bank by depositors and other creditors on the faith of such accommodation paper, a receiver in possession of such paper might invoke the rule of estoppel against those who had loaned their names to the bank for the purpose of enabling the bank to secure credit that would not otherwise have been given. Rogers v. First State Bank, supra, and German American State Bank v. Watson, supra. But that is not the state of facts shown by the record in this case. There is here no evidence that the bank was insolvent at the time this original note was executed, nor is there any evidence that this loan to Garland upon Shaw's .note alone impaired the capital stock of the bank. We must presume, therefore, that both the bank and Shaw were solvent at -the time that transaction took place. _ The fact that the bank has since passed into the hands of the commissioner does not alter the situation materially. In taking over the assets of an insolvent bank, the commissioner succeeds to the rights of the bank with reference to the management and control of its assets. His position is similar to that Of a receiver or trustee in bankruptcy, or the executor or administrator of the estate of a decedent. He holds the notes and claims due the bank subject to those defenses which might be set up in a suit by the bank itself. Keller v. Smalley and Harris, 63 Tex. 512; Scott v. Armstrong, 146 U. S. 499, 13 S. Ct. 148, 36 L. Ed. 1059; Fourth Street Nat. Bank v. Yardley, 165 U. S. 644, 17 S. Ct. 439, 41 L. Ed. 855; Steelman v. Atchley, 98 Ark. 294, 135 S. W. 902, 32 L. R. A. (N. S.) 1061; Fisher v. Simons (C. C. A.) 64 F. 311; Ryder v. Ryder, 19 R. I. 188, 32 A. 919; Reeves v. Pierce, 64 Kan. 502, 67 P. 1108; Kennison v. Kanzler (C. C. A.) 4 F.(2d) 315; 1 Daniel on Negotiable Instruments (5th Ed.) 781; 1 Tardy's Smith on Receivers, 88, and cases referred to in notes. There is nothing in the evidence in this case that would require the application of a different rule from that laid down in the cases above cited.
It is also contended that if the defendants Rodgers, Rochelle, Ghio, Trigg, and McShane did not participate in the loan of the bank's money to Garland, they nevertheless ratified the act of Shaw in making the loan and thereby became liable with him for what he had done.
Shaw was not the agent of the other directors and was not acting for them when lie made the loan to Garland. He was the president and managing officer of the bank and was acting as the bank's agent. The only-evidence of ratification furnished by the record is found in the acts of the other directors in signing the note after the loan had been made. This amounted to no more than an acquiescence in what Shaw had done. A subsequent acquiescence in that manner was not essential to complete the loan transaction • — that had already been consummated. One agent of a corporation does not become a particeps criminis merely because he approves a wrongful act committed by another agent of the same principal. The doctrine of ratification has no application to this case.
As before stated, we think the record warranted a judgment against Shaw's executrix. But, since there is no specific complaint of the failure of the trial court to render such a judgment against her alone, we have concluded to affirm the judgment in its entirety, and it is accordingly so ordered.