Court Opinion

ID: 3275406
Source: CourtListenerOpinion
Date Created: 2016-07-05 16:44:00.831239+00
Date Added: 2024-06-11T14:00:00.297466
License: Public Domain

In a case-note to 2 A.L.R., page 871, it is said that the directors of a commercial bank are liable for defalcations of its executive officers or employees, due to their want of reasonable care. Among the causes cited is Campbell v. Watson, 62 N.J. Eq. 396,50 A. 120, where the rule itself and the reasons for it are stated in a clear and comprehensive opinion, containing a review of the authorities by Pitney, V. C., who afterwards became a justice of the Supreme Court of the United States and was recognized as one of its most valued members. The case of Fletcher v. Eagle, 74 Ark. 585, 86 S.W. 810, 109 Am. St. Rep. 100, was also cited, where it was held that the directors are not justified in committing the entire control of the bank to the president, however honest and faithful they believe him to be.
The opinion of the majority recognizes the rule, and our dissent is based upon its application to the facts of the case. In the application of the rule, the directors are charged with knowledge when, by the exercise of ordinary care, they might have knowledge that the cashier was taking the money of the bank and using it in his own business ventures. They cannot escape liability on the ground that they were ignorant of the wrongdoing of the cashier, where their ignorance was the result of their failure to exercise reasonable or ordinary care in their supervision of the affairs of the bank. They cannot go to sleep and justify their action on the ground that the cashier had borne a good record previously for honesty and that he would continue to justify their good opinion. Bank directors must not merely be honest themselves, but they must exercise ordinary care and diligence to see that the cashier and his assistants are honest and continue to *Page 459 
be so. This is not a case where the shortage of the cashier resulted from single or disconnected acts of peculation on the part of the cashier and his assistant, but the shortage resulted from a continuous and connected course of fraudulent practices and dishonest acts on the part of the cashier and his assistant. The cashier and his assistant engaged in speculative ventures in real estate in Mississippi County, Arkansas, and in oil leases in the State of Louisiana, which required the use of hundreds of thousands of dollars. An account of these various enterprises was published in the local newspaper in the city where the bank was doing business. The directors knew that the cashier and his assistant did not have any money of their own, and they were charged with knowledge that they might be using the money of the bank. Their speculations extended over a period of three years without any effort on the part of the directors to find out if they were using the funds of the bank.
The record shows that there was a shortage of $607,526.55, which resulted from the act of Wilhite, the cashier, and Anthony, his assistant, in using the funds of the bank during the past three years. Of this amount, $117,019.51 represented overdrafts in the account of Wilhite and Anthony which had been running for three years. An additional $179,736.32 represented overdrafts in the account of James Reese, which had been running for three years. This account was a fictitious one and was not carried on the books of the bank. It represented money which had been taken by the cashier and used in his various speculations. It is insisted that these matters were covered up by spreading the various amounts of the overdrafts among the accounts of different customers. This was only done when it was expected that the bank examiner would come and examine the books of the bank, which only occurred once, or at most, twice a year. The bank examiner usually examined another bank in the city first, and Wilhite and Anthony had time to pad the accounts of the bank before the examiner came to examine *Page 460 
their bank. The record shows that the directors met monthly and signed the statement prepared by the cashier without any effort to ascertain whether it was true or untrue.
Blaine seeks to escape liability on the ground that he was absent from two of these monthly meetings of the directors. This was no excuse. An examination or comparison of any monthly statement prepared by the cashier showing the reported cash on hand, cash items and daily balances, with the actual cash on hand and the overdrafts which were in the hands of the bank and carried as cash items, would have disclosed a shortage.
It is true that it might have been necessary to have a bookkeeper to examine the accounts of the bank to have disclosed the actual amount of the shortage and the nature of it, but no particular experience as a bookkeeper and no extended examination of the bank's books was necessary to show that an actual shortage existed. As we have already seen, the bank directors were put on notice that Wilhite and Anthony were using the funds of the bank by their actual knowledge that they were engaging in various enterprises requiring large sums of money and by their knowledge of the fact that they did not have any money of their own. A prudent man would have at least asked them where they got the money with which they were speculating, and would have counted the cash actually on hand when the monthly statements were made, and have compared the cash on hand with the daily balances showing a report of the cash on hand. This would have, of necessity, disclosed the existence of the overdrafts which were carried as cash items. An examination of the cash items would have led to the fact that Wilhite and Anthony had a large account in their own names with the bank, which showed that they were using the funds of the bank in their own speculations and were always overdrawn to a large amount. An examination of the cash items too would have led to a discovery of the account of James Reese and that this was a fictitious *Page 461 
account resulting from large overdrafts, and that the money had been used by Wilhite and Anthony.
Then, too, the directors of the bank should have had their suspicious aroused during the month of August, when the cashier recommended that the bank should borrow over $300,000 with which to carry on its business. At this time the monthly statement showed a large cash balance and small overdrafts. Thus it will be seen that any sort of an examination or counting of the cash would have disclosed the shortage. If the bank had a large amount of cash on hand and a small amount of overdrafts, it would not be necessary to borrow a large amount of money with which to carry on the business of the bank. Hence no skill in bookkeeping nor any extended examination of the books of the bank was necessary to discover that a shortage existed.
Directors, by approving the monthly statements, gave assurance to the stockholders and depositors that the bank was being safely and honestly managed, without doing what prudent men of business would recognize in their own affairs as essential to make such an assurance of value. In this connection we call especial attention to the dissenting opinion of Mr. Justice Harlan in Briggs v. Spaulding, 141 U.S. 132, 11 S. Ct. 924, the trend of which has been substantially adopted and approved by this court in Bank of Commerce v. Goolsby, 129 Ark. 416,196 S.W. 803.
Mr. Justice HUMPHREYS and Mr. Justice KIRBY concur in this dissent.