Court Opinion

ID: 8846704
Source: CourtListenerOpinion
Date Created: 2022-11-26 16:59:30.023431+00
Date Added: 2024-06-11T17:05:21.867997
License: Public Domain

BUTLER, District Judge,
(dissenting.) The defendants’ offer of testimony raises the only question presented. The court holds the offer admissible: First, because the plaintiff (below) did not prove consideration for the indorsement, and, second, because the facts stated in the offer constitute a defense, even with such proof. I am not prepared to assent to the first position, though I do not consider it very important. Production of the note was, of itself, sufficient proof of such consideration, in the first instance. The defendants could have put plaintiff to further proof by proper averments, and call for it by the usual notice before trial. I am not satisfied that such averments were made, and the customary notice was not given. In support of the court’s views in-this respect, Stewart v. Lansing, 104 U. S. 505, and Lerch Hardware Co. v. First Nat. Bank of Columbia, 109 Pa. St. 240, are cited. In the first it does not appear whether such notice was given or not. As authority for the general statement there found, Smith v. Sac Co., 11 Wall. 139, is cited. In that case the issue (of plaintiff’s bona fides) was distinctly raised by the pleadings. Where-the common-law method of pleading is pursued the question is al*911ways raised by notice, (Holme v. Karsper, 5 Bin. 471;) and the practice of giving such notice is still observed where new methods have been adopted. Since the intx*oduction of affidavits of defense in Pennsylvania, it has been held sufficient to prevent judgment by default to a,ver fraud in the inception of the note. Whether, however, this contemplates the customary notice to prove consideration is not entirely clear. An examination of the cases leaves the mind in some doubt. In practice the notice is usually given. Where, however, the alleged fraud is not connected with the inception of the note, but with the use made of it, the rule requiring proof of consideration by the indorsee, does not apply. Tlxe distinction seems shadowy, if not unreasonable, but it is well settled. Sloan v. Banking Co., 67 Pa. St. 472; Hutchinson v. Boggs, 28 Pa. St. 296. Whether, in view of the affidavit, the fraud here involved, was connected with the inception of the note, or simply with the use subsequently made of it, is too nice a question to be considered without gx*eater occasion for it than exists. The affidavit avers that the note was executed for the bank’s use. If so, it might well he argued that the fraud consisted in applying it to another purpose. Nor am I satisfied that if the question was properly raised, so as to put the plaintiff to proof of the bank’s bona Siles, he has not furnished it. In Ms sworn statement he distinctly avers that the note was taken in due course and for valuable consideration; and this is not denied in the affidavit of defense. On the trial he showed that the note was discounted and the proceeds placed to Kennedy’s credit. It is by no means clear that this was not sufficient proof under the circumstances. Shoe Co. v. Eichenlaub, 127 Pa. St. 169, 17 Atl. Rep. 889. It is unnecessary, however, to discuss either of these questions because as the case must go back for retrial they can be eliminated by the customary notice, or without it by proof that Kennedy drew against the credit. If nothing else was embraced in the decision I would not, therefore, feel called upon to express dissent The second proposition stated above is, howevex*, vital to the parties’ rights, and so important generally, that it seems to he my duty to express a dissent, and to sta,te my reasons therefor.
The proposition is that even though the bank received the note in good faith, paying value, the facts alleged in the offer constitute a defense. These facts are substantially that Kennedy, president of the bank and “its sole managing officer,” obtained the note without consideration, for the bank’s use in its clearing house transactions. That the act of Kennedy was a pure fraud is not doubted. He desired the note for Ms individual purposes alone, and so used it. Nevertheless if he had authority to represent the bank in the transaction it stands in his shoes, and cannot recover, notwithstanding it received the note in good faith, for value. That his office as president, did not confer such authority is, I think, reasonably clear. The duties and powers of national banks, of their presidents, directors and other officers, are derived from the statute, relating to this subject. The provisions principally applicable *912are found in section 5136 of the Revised Statutes, and are as follows: “The bank may exercise by its board of directors, or duly-authorized officers or agents, all such incidental powers as shall be necessary to carry on the business of banking, by discounting and negotiating promissory notes, drafts, bills of exchange, and other evidences of debt; by receiving deposits; by buying and selling exchange, coin, and bullion; by loaning money on personal security, and by obtaining, issuing and circulating notes, according to the provisions of this statute;” also “that the bank may elect or appoint directors, and by its boat’d of directors appoint a president, vice president, cashier, and other officers, define their duties, * * * and dismiss them at pleasure;” may also “prescribe, by its board of directors, by-laws regulating the manner in which its stock shall be transferred, its directors and other officers elected or appointed, its property transferred, its general business conducted, and the privileges granted to it by law exercised or enjoyed.”
The president and cashier are the executive officers of the bank, and as such may represent it in the routine business ordinarily transacted by these officers; but without any express or implied delegation of authority by the directors, they cannot represent it in, and bind it to, such transactions as that under consideration. If they can, what becomes of the office of directors, to whom, for the protection of stockholders and the public, the management of the bank is intrusted, and what function of the bank may they not discharge? I need not pursue this subject, however, for the defendants do not stand upon Kennedy’s authority as president, but upon an alleged delegation of authority, as set out in the offer. An intelligent discussion of the subject requires a clear understanding of what is proposed as evidence of such delegation. The terms of the offer in this respect are that “in the actual management of the business of the Spring Garden Rational Bank, the president was the sole managing officer; that the cashier occupied the position more of clerk than of actual cashier.” What is the proper signification of this language? I am not clear that it amounts to more than an offer to prove that Kennedy discharged the duties of cashier as well as those of president. If more was intended why were the words “that the cashier occupied the position more of clerk than cashier,” inserted? Any other interpretation than that suggested recpiires the exclusion of this language as immaterial. Apparently it was introduced to qualify or illustrate the preceeding terms “sole managing officer of the bank.” That the defendants so understood the offer seems to be shown by their assignment of error, in this respect, which is as follows: “Because the learned judge overruled the offer of defendants to show that the president was the executive officer of the bank.” In this view of the offer it clearly does not embrace what is necessary to prove the alleged delegation of authority to represent the bank in this transaction. But in any possible interpretation of the language it is no more than an offer to prove that he was the “sole managing officer of the bank” in the transaction of its ordinary and legitimate *913business; that is, to prove that the directors expressly or impliedly conferred such authority upon him. There is no pretense of an express delegation; no by-law, order, or minute of the hank on the subject is suggested. The allegation is that the directors acquiesced in his exercise of the authority, and thus justified an implication that it had been delegated. There can be no doubt that the board of directors may delegate its authority; the statute so provides; nor is there any room for doubt that such delegation may be implied from its acts; as where it has acquiesced in the exercise of its authority by others. If, therefore, it were shown that the directors of the Spring Garden National Bank acquiesced in the president’s “sole management, of its business,” it might be inferred that they had authorized him to so manage. But it nowhere appears that the borrowing of commercial paper, especially for the purpose avowed here, is any part of the usual, or unusual, business of national banks. The court certainly has no knowledge that it is; and I do not believe it is. In this view the implied authority alleged, would not embrace this transaction, even if the bank itself might lawfully have entered into it. In my judgment, however, the bank could not have lawfully entered into it; and in this view it is, of course, clear that no authority in Kennedy to do it, could be implied from his “sole management of the bank’s business.” The implied authority could not possibly extend, in any construction of the offer, beyond the lawful business of the bank. Thus we are brought to the question: Is the borrowing of commercial paper, for the purpose here avowed, embraced within the legitimate business of national banks? In my judgment, as before suggested, it is not. Not only is no warrant for it, express or implied, found in the statute, but on the contrary the scheme there provided fox* the protection of stockholders, creditors and the public, in my judgment, forbids it. Its direct purpose and effect is deception. The inflation of assets, and the creation of fictitious credit. The allegation in this instance that the paper was desired to supply the place of smaller and less desirable notes on hand, is unimportant. It was avowedly wanted because “it would look better for the bank to have a large note, of a responsible firm, like Simons, Bro. & Co.,” —in other words it would enable the bank to conceal its exact situation, and give it a credit which it did not deserve. If the purpose had been to create a better appearance before the bank examiner the impropriety would have been little greater.
There are many apparently harmless things which national banks may not do. They may not deal in lands, or stocks, or commercial paper, except in the manner and for the purposes authorized by the statutes, act as brokers, nor enter upon any other business or transactions foreign to the object of their creation. First Nat. Bank v. National Exchange Bank, 92 U. S. 122; Bank v. Hoch, 89 Pa. St. 324; Weckler v. Bank, 42 Md. 581; Bank v. Johnson, 104 U. S. 271; Danforth v. Bank, 48 Fed. Rep. 271, 1 C. C. A. 62. I do not propose to remark upon the authorities cited by counsel on either side, bearing on this question, except to the ex*914tent they are relied upon by the court. Merchants’ Bank v. State Bank, 10 Wall. 604; Coats v. Donnell, 94 N. Y. 168; Bank v. Armstrong, 50 Fed. Rep. 798; and Morse, Banks, § 160, — are cited by the court on this subject In the first of these cases the defendant’s cashier purchased gold coin of the plaintiff, paying for it with the check of Mellon, Ward & Co. What the case decides is embraced in the two following propositions, stated by the court:
“First. If the gold actually went into the bank, as was admitted by the cashier, the bank was liable as for money had and received, whatever might have been the defect in the cashier’s authority, to make the purchase. Second. It should have been left to the jury to determine whether, from the evidence (if the gold did not go into the bank) as to the powers exercised by the cashier with knowledge and acquiescence of the directors, and of the usage of other banks in the same city, it might not fairly be inferred that the cashier had authority to bind the bank by the contract which he made for the coin.”
These statements fully cover all the case decides. The judge delivering the opinion, however, uses certain general expressions, considered important, among which are the following:
“Where a party deals with a corporation in good faith — the transaction is not ultra vires — and he is unaware of any defect of authority or irregularity on the part of those acting for the corporation, and there is nothing to excite suspicion of such defect of authority, the corporation is bound by the contract, although such defect or irregularity in fact exists.”
It is no doubt my fault, or misfortune, that I cannot understand precisely what this language is intended to express. Of course it is to be read in connection with the facts of the case; but when the facts are considered it does .not seem to have any very close relation to them. It surely was not intended to be understood as asserting that one who deals, in good faith, with -(he agent of a corporation, clearly outside the limits of the ordinary authority of such agents, can hold the corporation, (in the absence of fault on its part,) responsible for such unauthorized act. The acts of an agent bind his principal within the scope of his authority, express and implied; but no further, unless the principal is in fault, or has ratified the unauthorized act. The books contain numerous cases which illustrate this statement. No more striking example is found than that of The Freeman, 18 How. 187, in which it is held that the authority of a master to sign bills of lading does not render the vessel, or his employers, liable to a third person to whom such a bill, which he had signed without receiving the goods, had been transferred. His power extended .only to signing for goods received; within this limit it was plenary. His position gave him credit, and made the perpetration of fraud easy. And yet his principals could not be held responsible for his unauthorized act, to one defrauded by it. If the law was otherwise, no sensible person would employ an agent. In passing from the case of Merchants’ Bank v. State Bank, it may be remarked that no question of ultra vires was involved; the banks have express authority to buy coin; and also that while no more was involved than I have stated, the court was seriously divided over the result.
*915Coats v. Donnell, the second case above x*eferred to, decides simply that a bank, after enjoying the benefit of a transaction, entered into by its cashier in its name- — which in that case was, substantially, the borrowing of money from brokers, (through drafts which the latter accepted,) could not object to the brokers’ retaining the hank’s funds (in their hands) in payment of balances due, and liabilities assumed. There the by-laws expressly empowered the cashier to attend to all the active business of the bank, . * * * exercising Ms own judgment as to all matters,” etc. The court points to the fact that the cashier’s object was to obtain money to carry on the bank’s business, and that it got the fruits of the transaction. What is said about the cashier’s authority by virtue of his office, is aside of the case, and unimportant.
Bank v. Armstrong, the last of these eases, is almost identical with Coates v. Donnell; in principle it is quite so. The vice president of the bank, who had charge of its general business, used its securities to borrow money in the name, and ostensibly i\:r the use, of the bank. The money was placed to the credit of the bank, and directly after applied to the vice president’s use. Having lawful possession of the securities he could undoubtedly negotiate them; and the bank would be defenseless against his innocent indorsee. His fraud affected the bank alone, who intrusted him with its securities and business. There does not appear to have been any contest whatever over (his question. The court dismissed it in a dozen lines, without citing any authority. The controversy was about another matter. Here again the gem eral expressions of the court were unnecessary, and must be confined to the facts before it.
The citation from Morse, Banks, § 160, is principally, if not entirely, founded on general observations contained in the cases just noted, and signifies notMng more than they decide. An examination of all the cases I have found in which the exercise by the president or casMer of other than the ordinary authority of executive officers has been sustained, shows that it was because of power delegated by the directors, either expressly or impliedly; and, also, because, almost uniformly, the bank received the fruits of the transaction.
Now I trust I may not be misunderstood. Of course the question of ultra vires would be wholly unimportant if the bank itself had directly entered into the transaction, or had authorized Kennedy to do so. It could not, in such case, take advantage of its own wrong, and enforce the note. As before stated there is no pretense that the bank itself directly entered into it. The allegation is that Kennedy did so as its agent — not expressly but impliedly authorized. What I mean to assert, therefore, is that no agency to perform this act can be implied from the evidence proposed by the defendants’ offer, even in its broadest possible construction, — evidence that Kennedy “was the sole managing officer of the bank.” If upon a retrial the evidence shall go so *916materially beyond the offer as to show that Kennedy bad previously entered upon such transactions, or that be bad entered upon this particular transaction with the bank’s knowledge, or under circumstances from which such knowledge can properly be inferred, then in my judgment a valid defense will be established; but not otherwise — unless, of course it shall then appear that the bank did not receive the note in good faith, for value. I have assumed that the defendants were faultless in executing the note. Whether the purpose avowed by Kennedy should not have warned them against executing it, has not been considered.