Court Opinion

ID: 5222257
Source: CourtListenerOpinion
Date Created: 2022-01-06 16:36:46.18386+00
Date Added: 2024-06-11T08:27:31.932736
License: Public Domain

Kellogg, J. (dissenting):
A brief statement of some of the facts relating to this trust company, the manner in which it did business and the connection of the defendants therewith, makes unnecessary a discussion of the liability in ordinary cases of a director of a. trust company for negligence in the performance of his duties. We may assume that he is at least charged with exercising the same care which the ordinarily prudent man would exercise under like circumstances, and that each director is liable only for his own negligence and not for the negligence of a fellow-director.
This company began business March 31, 1902, and about, the 1st of October, 1902, was discovered to be upon the brink of ruin by reason of the illegal, and reckless manner in which its business had been transacted.
The defendant Satterlee states his-introduction into the business as follows: Dresser “ told me that he had heard of this matter from Mr. Greig, and that they had' started to get up a Trust Company, and some Texas parties were interested and had an option, so to speak, or a claim to subscribe to a considerable portion of .this Trust Company stock. * * * He wanted me to become interested in it with him, as his counsel, and to guide him particularly at that time in the relations of Mr. Greig and himself with the Texas people who had been in the matter from its inception, and who wanted to get an increas*306ingly large share and take an increasingly prominent part in its direction.”
Dresser had no knowledge or experience in financial institutions, nor does it appear that any of the officers or any one of the other six members of the executive committee had any practical experience as executive or financial men in any moneyed institution.
The by-laws provided that “the affairs of the company shall be managed and its corporate powers exercised by a board of twenty-five directors,” and also “The Executive Committee shall exercise all the powers of the Board of Directors, when the Board is not in session, except the power to fill a vacancy in the Board. 'The assent of the Executive Committee shall be required for all investments that shall be made of the funds of the Company in stocks, personal securities and bonds and mortgages, and for the disposal of the same, and of the funds of all special trusts; and no guardianship, receivership or other special trusts shall be accepted by the President Without either their approbation and concurrence or that of the Board of Directors, unless it be ordered by a Court or Surrogate having, jurisdiction. The Executive Committee may, in- its discretion, authorize the President generally to make investments in such securities as are authorized by the charter of the Company, and to dispose of such securities without previously consulting, as to details, with the Committee; but all such transactions shall be reported to the Committee at its next meeting.”
Satterlee, at the request of Dresser, purchased ten shares of stock to qualify as a director and become a director, a member of the executive committee and counsel for the company, his law firm being designated as official counsel. The defendant Gould also became a director at the request of Dresser, but with the distinct understanding that he was to pay no attention to the affairs of the company or attend the board meetings, and all he did as a director was to qualify, and later to resign. This committee was to meet weekly and subject to call by the president, and was required to keep minutes which were to be read at each monthly meeting of the directors.
The limitations imposed upon a trust company are well considered in Gause v.. Commonwealth Trust Co. (196 N. Y. 134).
*307The executive committee held its meetings weekly until July 22, 1902. The next meeting was September ninth, at which Whitmore, Greig and Dresser only were present, and the only business done was adopting a resolution authorizing the president to make or guarantee loans in the company’s name when necessary. The object of this resolution was to permit the trust company to guarantee the loans of Dresser and Nixon hereafter referred to, which were made in order to float the shipbuilding scheme. Although regular notices for committee meetings were*-sent out weekly the members did not attend.
A proper banking practice required the submission. o£ all loans to the executive committee tor. its approval at the next meeting following the loan, and this practice was not followed. On Hay twenty-seventh the committee instructed the secretary to present to it at every meeting a complete list of all loans and collateral not previously passed upon, and to merge the reports of both of its offices in one. Apparently the first report of loans was made to the committee on June seventeenth, when the minutes show the loans from the beginning were submitted and approved. The next was on July eighth. Satterlee, though present at both these meetings, apparently gave no attention to or took any interest in the reports and was negligent in not understanding the details of loans made prior to that time.
Immediately after the business was organized questionable transactions took place and it became early apparent that the president did not understand the law of banking, or that if he did, he had no regard for the law. From April eleventh until the crisis the company was buying and selling its own stock through brokers and otherwise, the amounts paid appearing upon the books as advances, and when the first semi-annual statement was required, about June thirtieth, the president gave his check for the amount and the account was canceled. There were no funds to pay the check and it remained in the cash items; afterward the amount was returned to advances. There was no loss; in fact the company made a profit by these. illegal transactions.
On June twenty-third $700 was loaned to J. W. Young on collateral which was merely an agreement to transfer to the *308company certain stock in a company thereafter to be formed. On June twenty-fourth $5,000 was loaned to Young, a man of little financial and personal standing, secured by an order on Lewis Nixon for shipbuilding bonds, not then issued, of a company which had at that time no property. On July twelfth, on similar security, it loaned him $2,500 while he was not in this country. On June thirtieth $800,000 was loaned for thirty days to a firm on shipbuilding bonds. This was an excessive loan prohibited by the Banking Law, the capital and stirplus of the company being $1,500,000. On June twenty-sixth $50,000 was loaned to Eeiss, Dresser’s partner, for which on October twenty-seventh the note of Engel, an employee of the. firm, was taken, secured by shipbuilding collateral. ' No actual loss was sustained on the above loans. They are mentioned as tending to show how and by whom the affairs of the company were conducted.
The losses to the company came from its participation in underwriting the bonds. of the United States Shipbuilding Company, of which Dresser was vice-president and director. Briefly, the shipbuilding company’s scheme was to purchase the plants of certain other companies, payment for which was to be made at the trust company on August eleventh. It involved the underwriting of $9,000,000 of bonds at ninety, with bonuses of twenty-five per cent of preferred, and twenty-five per cent of common stock. The property so acquired was to be the security for the bonds, which were to be issued after August eleventh, when the shipbuilding company should have acquired title to the mortgaged property. Dresser and probably the other directors had no confidence in the character or financial standing of Young, the promoter of the shipbuilding company, and at first Dresser refused to meet him, but finally did so at the request of another trust company and its counsel, who also were interested with Young in the formation of the shipbuilding company. Dresser was led to believe that one third of the underwriting had been subscribed in Paris, one-third in London and the other one-third was to be underwritten in New York.
He undertook to obtain the $3,000,000 subscription allotted to New York. If he succeeded his company was to be banker *309for the shipbuilding company and otherwise act for it, and was to receive the compensation mentioned hereafter. If he did not succeed, his company was to receive nothing and was not otherwise to act for it. A prospectus of the shipbuilding company was issued which named the Trust Company of the Republic as the party to receive applications for bonds, and gave notice that said trust company, would open subscription books for public subscription, and reserved to the trust company the right to give preferential allotments to the shipbuilding trade and its employees. Dresser secured the subscriptions to the underwriting as agreed, and when he learned that the London underwriting had failed he agreed with the promoter and the representative of the other trust company that he would do all he could to obtain $1,700,000 of that underwriting, with the understanding that the remainder of the amount allotted to London would be arranged for with the Paris underwriting. With some help from his executive committee and directors, he secured his share of the London subscription, in a large part from his own directors and officials, and thereafter, from June fourteenth to June nineteenth, the trust company advertised the bonds in the New York papers for public sale at ninety-seven and one-half. The advertisement recited that the trust company was authorized to receive subscriptions; that the entire issue of $9,000,000 had been underwritten, and that “The Trust Company of the Republic reserves the right to close the subscription at any time and to reject any and all subscriptions.” notwithstanding this advertisement, it was not then definitely known that the balance of the London subscription would actually be taken in Paris, and the real status of tire Paris subscription was not understood. The trust company actually received $476,755 from the public sale, and Dresser had obtained subscriptions for $4,700,000 of bonds.
As August eleventh, the date for payment, approached, it was unlderstood there would be delay in receiving the money from the Paris underwriters, but it was hoped that it would eventually be realized. If the underwriting failed, the trust company would lose its compensation and would lose the shipbuilding company’s accounts; it would be discredited; the loans which it had made, secured by the shipbuilding underwriting, *310would be uncovered, and the persons who had purchased bonds from the company could not receive them; The company had made itself so far a part of the scheme that its failure meant an irreparable injury. The situation was met by an excessive and illegal loan by the trust company to Nixon upon the security of the shipbuilding bonds, and loans of large amounts were obtained by Dresser and Nixon elsewhere by pledging the shipbuilding bonds and upon the trust company guaranteeing them.
The defendant Satterlee went abroad on his vacation July sixteenth and returned September twenty-ninth. Soon after he returned he discovered the large loan made to Nixon and the large guaranties made by the company. He and. others became alarmed, and undoubtedly his able and effective management, with the assistance of his friends, saved the trust company from failure. By the formation of a syndicate which,, in consideration of certain shipbuilding bonds, settled the Nixon and Dresser notes and the company’s guaranty, it resulted that the company sustained no loss therefrom.
The evidence of Dresser indicates that he was acting in the shipbuilding underwriting for the trust company and not for himself, and that up to the time that Satterlee went abroad the executive committee was informed by him in a general way what was being done in the matter. In the minutes of the committee appears, May twentieth: “ The.President made an informal report on the Shipbuilding Combine.” May twenty-seventh: “ The Shipbuilding underwriting proposition was discussed.” At this latter meeting he stated what was desired, of the company and the benefits which would come to it. It is significant that the first record shows arix informal report on the combine; the next the underwriting proposition was discussed. On May twenty-seventh, on the stationery of the company, we find a communication to Dresser from his vice-president, stating the understanding between him and the representatives of the other trust company that the lawber was to act as trustee for the bonds, etc., and the Trust Company of the Republic to act (a) as issuing bankers and perform all the duties incidental thereto, (b) advertise prospectus, (c) receive all subscriptions, (d) pay the necessary cash to the trastees to *311clear the titles and commitments thereto, (e) deliver all bonds and shares to the subscribers, (f) registrar and transfer agent of the shares of the company, and concluded by asking his opinion as to at what price the public issue should be made, how long they should be advertised before the books were opened and how long the books should remain open. The defendant Satterlee does not remember this communication, but there was no other shipbuilding proposition up for consideration and I am satisfied that Dresser read or stated the contents of this memorandum at this meeting in the defendant’s presence. The minutes of June fourth show: “ President made a verbal report on the U. S. Shipbuilding underwriting.” The evidence shows that the general progress, of the underwriting was stated. June twenty-third the promoter Young gave to Nixon an order, which was accepted by him, to deliver to the trust company “In payment for services rendered and to be rendered in the matter of the underwriting and issue of $9,000,000 of the bonds,” $300,000 of bonds, $800,000 of the preferred stock and $800,000 of the common stock, “the same being payable to them in accordance with my letters of agreement which they hold.” It also authorized the company to retain $67,000 in cash as it was received by it. It also recited that the trust, company is to receive from the proceeds of the sale of the Bethlehem Steel Company $1,000,000 of the common stock of the shipbuilding company. Dresser was an active participant in getting the Bethlehem Steel Company into the combination and was to receive $1,000,000 of the common stock for his services, which I assume is the last item mentioned. The letters referred to in the order are not in evidence, but were evidently written before the underwriting was completed and prior to June fourteenth. Dresser prided himself on this accomplishment and there is no doubt that he informed the executive committee. Satterlee swears: “When I saw the advertisement I knew that this transaction involved the raising of several millions of dollars. I knew that before the advertisement, but I did not know the full volume. T was told by Mr. Dresser, that is I heard a statement he made at the meeting of May 27th of the executive committee, in which it appeared that there were to be several millions of bonds issued and several *312millions of stock, but I did not know the exact amount until I saw the advertisement. I knew that the putting through of that transaction ought to involve the supervision of counsel at practically every step. I do not think I made any investigation of the details of the transaction before I went away. I had no conversation with either of the members of the firm of Ward, Hayden & Satterlee with respect to- overseeing the legal side of the .transaction.” On July twelfth, just before sailing, he wrote Dresser: “Let me again congratulate you-on the splendid success you are making. You have already exceeded the confident expectations of your friends and have made a record for the Company that I believe is unique. My only word of caution would be to go slow and take it as easily as possible during the summer and not overwork yourself, as we ought to have a very busy and prosperous winter ahead of us.” From his testimony it does not appear that he had much knowledge of the affairs of the company, and it does not indicate that he knew of anything which would justify him in characterizing the success of the company, as unique except the large benefit it expected from this underwriting. He admits that Dresser stated at an executive committee meeting that the company would receive its compensation within the month and it would go into the next report. If none of the committee knew what compensation the-company was to receive it is strange that inquiry was not then made. The company had not otherwise earned anything; its service as banker had not begun.
It is not contended that under ordinary circumstances a director [or a member of an executive committee of a trust company who is absent from meetings for a reasonable time upon his own business or.pleasure is liable on account of transactions which took place in his absence and of which he had no notice. By becoming such officer a person does not undertake to devote his whole time to the company. The members of the executive committee received ten dollars for each meeting, and necessarily it was expected-that'they were at liberty to devote their- time to their ordinary business and pursuits, giving to the trust company just such time-as was reasonably necessary under the circumstances to protect its interests: When the defendant Satterlee left New York on his vacation *313July sixteenth to return September fwehty-ninth he knew that two of the members of the executive committee were practically of no use; that the other members were exercising very little supervision and taking but little interest in the matters and that they were practically permitting Dresser to carry on the business in his own way; that the company was involved in the shipbuilding underwriting and had gone so far with reference to it that a failure of the plan meant practical disaster. It was too late to leave without obtaining a thorough and accurate knowledge of the circumstances and details of the underwriting and taking some precautionary measures against contingencies. He had made no inquiry and had no knowledge as to the Paris underwriting- or as to the American underwriting and had no information of the trustworthiness of any of the subscriptions. The trouble came to the company from the fact that Dresser received his information from the hearsay of parties’ whose interests were opposed to his, and that the executive committee made no inquiry and sought no informar tion with reference to the plan or its execution, but was content with the hearsay from Dresser, to the extent which he chose to communicate. It is not necessary to say that the participation of the trust company in this underwriting was illegal. (Gause v. Commonwealth Trust Co., 196 N. Y. 134, supra.) It is enough to say that under the circumstances it was reckless. The defendant was negligent while here and negligent in leaving while the affairs of the company, by reason of its reckless management, were in such a serious condition.
It is unnecessary to inquire whether Dresser and the directors and executive committee who acted in part with him during Satterlee’s absence, took a wise or unwise course to relieve the company from the emergency in which it had previously been placed. He evidently did what he thought best; many of his acts were illegal and unauthorized, but it was represented to him that there was simply a .delay in the money from Paris and he felt that the expedients which he adopted were mere makeshifts to tide over a few days. ’ The .persons who negligently permitted the trust company to get involved in this matter under the circumstances are hardly in a position to *314complain because Dresser acted unwisely or illegally, or to deny that their negligence makes them civilly responsible for such acts.
The defendant Gould agreed to be and was a dummy director. If the others had followed his example Dresser would have been the board of directors and the executive committee. Gould left everything to his discretion and judgment and is fairly .responsible for it.
It is immaterial in each particular transaction to consider whether the directors and members of the executive committee knew what was being done by the company or whether their fault lay in not knowing. The method in which the executive committee permitted the business to be carried on by Dresser evidently led the officers and employees of the company to understand that Dresser was in fact the executive committee and that he was unrestrained in doing what he thought ought to be done.
About September twenty-fifth Dresser deemed it necessary to go to Paris to try and realize upon the underwriting there, and just before he departed he took from the company, with the consent of the vice-president and the, clerk who had charge of issuing checks, $35,000. Their acts can only be explained upon the supposition that they felt it was money taken to be used in the company’s business with reference to the Paris underwriting. Apparently it was not so used. When he arrived at Paris he did not find any substantial underwriting there, and the alleged Paris underwriting did not justify any expenditure. This money was never repaid to the company and is one of the items of damages which have been allowed against the defendants. In my judgment it was properly allowed.
When Dresser was obtaining the part of the so-called London underwriting which fell to him, the day when the underwriting must be closed was at hand and the subscriptions not entirely taken, and he called upon members of the executive committee to assist him. One" of the last subscriptions obtained was that of Bruckman, who later gave his notes for a part of his underwriting, secured by the underwriting- agreement or the bonds called for by it. After the syndicate had relieved *315the company Bruckman refused to pay his notes, claiming that he had been deceived. An adjustment was made after Gould had resigned as a director and Satterlee as a director and member of the executive committee. The agreement of adjustment recited: “Said Bruckman agreed to underwrite and purchase said securities subject to a loan of One hundred and forty-nine thousand Two hundred dollars ($149,200), with interest at five per cent per annum, for the repayment of which loan he was not to become personally liable, the said Trust Company looking to the securities only for eventual payment.” The trust company then accepted the bonds and relieved him from liability upon his notes. Satterlee was attorney for the company in making the adjustment and approved of and advised the execution of this agreement. We cannot assume that the recital was false. It related to the terms of a subscription taken by the company while he was a member of its executive committee. It is, therefore, some evidence against him that the Bruckman note never had any validity and that the company was negligent in advancing money upon it. Bruckman all the while was financially responsible, and aside from this recital in the agreement there is no evidence giving any good reason why his note was not collectible. This recital is not evidence against the defendant Gould.
With reference to the other notes which have been treated as an element of damage, while the makers were discharged, there is no evidence tending to show that there was any valid reason therefor.
These conclusions lead to the result that the judgment should be modified as to the defendant Gould by striking out all damages except with reference to the $35,000 item, and as to the defendant Satterlee by striking out all damages except those relating to the $35,000 item and the Bruckman notes,- and as so modified affirmed, without costs.
Judgment reversed on law and facts, new trial granted, with costs to each appellant to abide event of the action.