Exchange Bank v. Gardner , 104 Iowa 176 ( 1897 )

Robinson, J.

The plaintiff the Exchange Bank of Leon is a co-partnership, which was organized in the year 1888, with a capital of thirty thousand dollars, and is engaged in business at Leon. The partners who composed the firm were the plaintiffs S. W. Hurst, I. N. Clark, H. J. Vogt, Orr Sang, C. S. Stearns, and the defendants 0. E. Gardner and R. D. Gardner. The person last named is the father of his co-defendant, and is made a defendant because he would not join as plaintiff. No relief is asked as against him. Therefore, when we refer to “Gardner,” C. E. Gardner is the person intended. Gardner was cashier of the bank from the time it was organized until the summer of 1894, when he was discharged. In October, 1890, he purchased of a Kansas City corporation, known as the Winner Investment Company, two promissory notes, one of which was for two thousand dollars, and the other for four thousand dollars. They purported to be signed by one J. R. Anderson, and were indorsed by the Winner Investment Company, and by W. E. Winner, and were secured by bonds of the Winner Building Company, a Kansas City corporation, to the amount of six thousand dollars. The larger of the two notes was renewed in the form of two notes, each of which was for the sum of two thousand dollars. In the latter part of November of the same year, Gardner purchased two promissory notes, made by Martin O. Ellis, of Kansas City, one of which was for the sum of two thousand, five hundred and seventy-six dollars and seventy-seven cents, and the other for ninety-one dollars. Both were indorsed by the persons of whom, they were purchased. In February, 1891, the larger of the two notes was exchanged for a note of the Western Lumber Company of Kansas City; new security was taken; and the maker and indorsers of the note exchanged were released. In November, 1890, Gardner purchased of D. R Emmons a promissory note for two thousand, five hundred dollars, made by one E. L. Brown of Kansas City, and indorsed by Emmons. At about the same time, Gardner also purchased a note made by one W. B. Grimes, of Kansas City, for about one thousand, three hundred dollars, which was secured by shares of stock in two Kansas City corporations. A considerable portion of the Grimes note has been paid, and the security which is held for the unpaid portion is nearly or quite sufficient to satisfy it. But a small amount has been ■ calizpfi on any of the other notes, and they are of little, if any, value. Considerable expense has been incurred in efforts to collect them, and judgments have been obtained on some of them. In all that Gardner did in purchasing the notes, in renewing some of them, and in attempting to collect them, he acted for and as cashier of the bank. The plaintiffs claim that he exceeded his authority in purchasing Kansas City paper, and was negligent in not ascertaining the financial condition of the parties liable on account of it, and its real value and the value of the securities which were obtained with it, in releasing some of the securities, and in making the investments without consulting any of his co-partners. The plaintiffs seek to recover of him the amount of the unpaid portions of the notes, and of the expenses incurred in the attempts which have been made to collect them;

When the bank was organized, the persons interested intended to incorporate it under the laws of this state, and articles of incorporation and by-laws were prepared for that purpose; but. the plan of incorporating .was abandoned, and the business was carried on by the persons who had intended to incorporate, each one contributing to the fund of thirty thousand dollars, which was raised as the capital of the bank. Each person who thus contributed was regarded as a stockholder to the amount of his contribution, and dividends were declared accordingly; but the persons interested in the business were in fact co-partners, with interests in proportion to the amount of the aggregate contributions to the capital. It is claimed, however, that it was agreed between the partners that the business should be conducted in all respects according to the articles of incorporation and by-laws which had been prepared, and that Gardner made the investments in question In violation of the provisions of those instruments which were designed to control the making of investments. There was some attempt made for a short time after the business was commenced to conduct it according to the articles and by-laws, but the attempt was soon abandoned, and no attention was thereafter paid to them in carrying on the business of the bank. The larger part of that business was intrusted to Gardner as cashier, and he made investments and transacted the business intrusted to him according, to his own judgment, rarely consulting, his associates to ascertain their views in regard to what should be done. This practice was so continuous, and of such long standing, that-it must be regarded as well known to and approved by all parties in interest. Hurst, who had contributed more than one-half of the capital of the bank, habitually occupied a place in the banking room. He acted as president, and assisted somewhat in the business, and occasionally gave directions as to what should be done. The books of the bank were at all times open to his inspection, and he frequently examined them or some of them. The affairs of the bank were examined twice each year by a committee composed of two of the partners, and their report was presented to and acted upon by the partners who constituted tlie board of directors, at their semi-annual meetings, but no report was required of Gardner, excepting as it was made in the books of the bank. At about the time the investments in question were made, the bank was holding idle capital to the amount of more than fifty thousand dollars, and Hurst was urging that a large part of it should be invested. Nearly one-third of it was money deposited by the treasurer of Decatur county, under an agreement with the county that the bank should pay seven and three-fourths per cent, per annum as interest, on all time deposits which should remain in the bank six months or more, and three per cent, per annum on daily balances in excess of two thousand dollars. Opportunities for local investments were not sufficient to absorb the portion of the idle money of the bank which it desired to invest It was under those circumstances that the promissory notes in question were offered to the bank on terms which were favorable if the notes were good. Gardner made some inquiries in regard to the value of the notes, and purchased them in the belief that they were good. From facts now known and shown in the record, it is evident that a careful investigation made in Kansas City, as to the business transactions and solvency of the various makers and indorsers of the notes and the value of the collateral securities which accompanied them, would have disclosed facts which might have caused a prudent person to decline to purchase the notes. But the evidence in regard to the financial standing of the several persons and corporations who were liable for their payment is conflicting. Some of the business, men of Kansas Oity who were engaged in banking and other financial pursuits in the year 1890 state that such persons and corporations were considered insolvent in October and November of that year, while others, constituting the larger number, testify that they were regarded as solvent. It appears that Winner and the investment and building companies which bear his name continued to be actively engaged in carrying on business enterprises some time in February, 1891, and that they did not fail until some months later. Anderson was a mere accommodation maker of the notes, which Winner indorsed, and was his teamster. That fact was not known to Gardner when he purchased the notes, and he relied, in purchasing them, upon a telegram frojn a reputable banker of Kansas City, in answer to an inquiry by Gardner as to whether Anderson had deposited first mortgage bonds to the amount of six thousand dollars to secure his notes for that sum, indorsed by Winner and the Winner Investment Company. The telegram read as follows: “James R Anderson has deposited with us bonds certified to be first mortgage to .secure his notes for equal amount. Our receipt issued therefor. Consider same, with indorsement, would be good.” The bonds were not secured by a first mortgage, and it is claimed that Gardner was negligent in accepting the telegram as sufficient evidence that the notes were good. In purchasing the note of E. L. Brown, Gardner relied in part upon a property statement made by Brown in April, 1890, which showed that at that time his assets exceeded his liabilities by more than fifty thousand dollars, and it is said that Gardner was negligent in relying upon a property statement made so long before the purchase.

It must be admitted that Gardner did not exercise the highest decree of care and diligence which was possible in purchasing the notes in controversy; and the question we are required to determine is whether, in view of the facts disclosed by the record, his failure to exercise greater care and diligence than he did makes him liable for the loss which followed the investments. There is no evidence whatever that he acted in bfi-1 faith, nor do we think he exceeded his authority in purchasing the Kansas City paper. Money of the bank was invested in Chicago, and, a little later, investments were made in Sioux City and Minneapolis paper. It is not at all propable that all of those investments were made without the knowledge of the president of the bank; and, even if not known at the- time they were made, they were certainly known within a short time thereafter, and we are satisfied that Gardner’s authority to make them was not then questioned. That he was making an honest effort to invest properly a portion of the idle'money of the bank is clearly shown, and that no question in regard to the Kansas City investments was made until after the Winner failure is, we think, also established. It was the duty of Gardner to act in good faith and with entire honesty in transacting all the business of the bank, and to exercise as high a degree of care and skill asi is generally exercised by business men in the management of such business. Bank v. Johnson, 94 Iowa, 220. But he was not liable for honest errors in judgment, nor for the failure to take the utmost precaution possible in making the investments for the bank. See Charlton v. Sloan, 76 Iowa, 288; Knapp v. Edwards, 57 Wis. 196 (15 N. W. Rep. 140). Applying these rules, we conclude that he was not so negligent in the transactions in question as to be liable for the resulting losses. This conclusion makes it unnecessary to determine questions in regard to ratification and waiver discussed in the arguments of counsel. The judgment of the district court appears to be sustained by the evidence, and is affirmed.

Kjnne, O. J., taking no part.