Commercial Banking & Trust Co. v. Doddridge County Bank

This is a suit in chancery brought by Commercial Banking Trust Company, a domestic banking institution, incorporated, of Parkersburg, against the Doddridge County Bank, a domestic banking institution, incorporated, of West Union, E. A. Rinehart, its receiver, George Ward, Commissioner of Banking, and C. E. Lawhead, as receiver for a number of closed banks. Its primary purpose, since the dismissal, on demurrer to the bill, of C. E. Lawhead, receiver, etc., from the suit (Commercial Banking Trust Company v.Doddridge County Bank et al., 118 W. Va. 37, 188 S.E. 663), is to require the receiver to account for and turn over certain notes, or amounts realized therefrom, pledged as collateral to a bond, given by the Bank to further secure the Trust Company in what the latter alleges was a loan. The answer on behalf of the Bank challenges the agency of L. R. Charter, Jr., who engineered the original transaction, and denies his authority to act for it; it also denies that the transaction was a loan, asserting that the same was a deposit, and that, being a deposit, the Bank was without power to pledge the notes set out in the bond, which was executed approximately fifteen and one-half months after the original transaction. From a decree finding, among other things, that the transaction was in fact a loan; that the bond was valid; and that the notes pledged were property of the Trust Company for purposes of said pledge, the Doddridge County Bank and E. A. Rinehart, receiver of said Bank, appeal.

Charter, prior to his appointment as Commissioner of Banking, had been president of the Bank, and after termination of his duties as commissioner, was restored to the presidency in the place of J. G. Charter, a brother, who had been president during the former's term as commissioner. The Bank was generally known as the Charter Bank. L. R. Charter, Jr., was recognized as the dominant spirit, and continued, while Commissioner of Banking, to be active in securing deposits for the Bank, and became surety on several depository bonds.

Sometime prior to October 16, 1931, Charter, then Commissioner of Banking, approached Blizzard, president of the Trust Company, with reference to a deposit by Lawhead, receiver, of receivership funds, explaining that the Doddridge County Bank had a good deposit from Lawhead, and that he, as Banking Commissioner, would rather that this, or at least a part of the deposit, be in some other bank. This, according to the allegations of the bill of complaint, not denied in the answer, was followed by a proposal, that if the Trust Company felt like letting the bank have about $40,000.00, he believed that Lawhead would deposit with the plaintiff an equal sum of receivership moneys. On this point, Blizzard testified that Charter inquired that if Lawhead would make a good deposit with the Trust Company, how would the latter feel about making a corresponding deposit in size with the Bank; that whatever Lawhead deposited with the Trust Company, the latter was to deposit an identical amount with the Bank. This deposit, according to Blizzard, would remain with the Trust Company until the money deposited by it in the Bank was repaid. In other words, the receivership account with the Trust Company was at no time to be reduced below the amount advanced to the Bank, nor was the amount so advanced to be drawn against by the Trust Company. While there seems to have been no mention of weeks or months in connection with the proposal, Blizzard states that "the words 'in a little while' or 'very soon' or something of that kind was implied"; that neither he, nor the Trust Company, would have agreed to the "loan or deposit * * * except for a very short period of time." Blizzard was advised that the Bank was solvent and all right in every respect. The proposal was presented to and approved by the Trust Company's board of directors, and Charter advised of its action. Shortly thereafter, to-wit, October 19th, two checks, drawn on the Doddridge County Bank, and signed by Lawhead, receiver, and totalling $39,082.88, were received at the Trust Company's banking rooms, one by early mail, and the other, delivered by Miss Charter, a sister of the then Commissioner of Banking. The checks were thereupon endorsed by one of the officials of the Trust Company, and handed to Miss Charter. The records of the Doddridge County Bank show a deposit of two checks, on October 21st, to the credit of the Trust Company. Blizzard had no conversation with Lawhead relative to Charter's proposition until after the presentation and endorsement of the Lawhead checks.

The transaction was set up on the Trust Company's books as follows: (1) as a deposit by C. E. Lawhead, receiver, and (2) the Doddridge County Bank was charged with a like amount, on the general ledger, under "Cash and Due From Banks" (one of the three classifications of receivables, the other two being "Loans and Discounts" and "Other Resources"). Had the Bank given a note for $39,082.88, the transaction, according to the officers of the Trust Company, would have been entered under "Loans Discounts". All moneys due the Trust Company from banks or loans were carried in separate accounts in the general ledger. The assistant cashier of the Trust Company, in making up the report reflecting the condition of the institution, as of December 31, 1931, inquired of L. R. Charter, Jr., who happened to be present at the time, regarding the way the transaction should be carried in the report, and was instructed to follow the original entry. The Bank, however, carried the transaction as an individual deposit to credit of the Trust Company, and the same appeared in the Bank's periodic reports along with other individual deposits.

Lawhead made additional deposits to his account in the Trust Company in November, 1931; May, 1932; and January, 1933. It appears that some time prior to March 22, 1932, he was permitted to make withdrawals with the understanding that the account would be promptly restored to its original total. On the last-mentioned date, we find Blizzard writing to Lawhead to the effect that the latter had reduced his account with the Trust Company to a point below the amount which originally had been placed with the Bank, and asking for a deposit to carry out the original understanding, or that he have the Bank remit to the Trust Company so that the original understanding would be preserved. Lawhead replied on March 23rd that he would see that the account was restored to the original balance of $39,000.00, as he "was not conscious that it had dropped below that figure." Some months later (February, 1933) the Bank, at the request of the Trust Company, made delivery to the latter of collateral, totalling $41,000.00. A bond was prepared at the Trust Company, listing the collateral, and the same together with the collateral forwarded to the Bank — the bond to be executed and returned to the Trust Company, and the collateral to be retained by the Bank, as property of the Trust Company, for purposes of collection and renewals. This latter arrangement to secure the Trust Company was due primarily to repeated demands on the part of the receiver, for a bond from the Trust Company securing receivership deposits and for the unrestricted right to check against said deposits. All the notes listed in the Bank's bond, and not paid, are now in the hands of Rinehart, receiver.

It further appears from the evidence that on July 18, 1933, the date of closing, the Bank was 52% insolvent.

A domestic banking institution, under Code 1931, 31-4-6, is expressly granted the right to borrow money. And as a necessary incident to its banking business may lawfully become a depositor of another bank. State ex rel. Carroll v. CorningState Savings Bank, 136 Iowa 79, 113 N.W. 500; Leach v. FirstNational Bank, 206 Iowa 265, 217 N.W. 865; 7 Zollman, Banks Banking, section 4971.

If the transaction was, in fact, a loan, the Bank undoubtedly had authority to pledge notes, etc., as collateral to secure the same. Code 1931, 31-4-9.

Before beginning an analysis of the instant case, it is imperative that we get a picture of the fundamental differences between a "loan" and a "deposit", as those terms are used in general banking practice. We look in vain for a comprehensive distinction. All attempted definitions recognize the close relation between the two and the difficulty of laying down a specific rule of distinction, applicable alike to all cases.Murray v. First Trust Savings Bank, 201 Iowa 1325, 207 N .W. 781, 783; Peoples Bank of Dixon v. Bone, 121 Kan. 768,250 P. 276, 279. One court observes: "Bank deposits and bank borrowings are alike in but one respect that one result of each is the relation of debtor and creditor. In every other respect the two operations are not only different but in complete antithesis." Farmers' Merchants' State Bank v. ConsolidatedSchool Dist. No. 3, 174 Minn. 286, 291, 219 N.W. 163, 165, 65 A.L.R. 1407.

In practically all the cases we have examined we find expressions to the effect that a loan is for the benefit of the borrower, while a deposit is for the benefit of the depositor.Schumacher v. Eastern Bank Trust Co. (C.C.A.),52 F.2d 925; Hunt v. Hopley, 120 Iowa 695, 95 N.W. 205; Elston, Prince McDade v. First State Bank, 19 La. App. 385, 140 So. 510;First American Bank Trust Co. v. Palm Beach, 96 Fla. 247,117 So. 900, 65 A.L.R. 1398; Allibone v. Ames, 9 S.D. 74,68 N.W. 165, 33 L.R.A. 585; Shaw, Banking Com'r. v. McBride (Tex.Civ.App.), 9 S.W.2d 401. "The main purpose of a loan is investment. The main purpose of a deposit is safe-keeping." 5 Zollman, Banks Banking, sec. 3154, citing Warren v. Nix,97 Ark. 374, 135 S.W. 896, 898. "A 'loan' to a bank implies a definite time of repayment when the bank must tender, whereas, a 'deposit' may be retained until payment is demanded." 1 Michie, Banks Banking, 51, sec. 43. See footnote 32, p. 52. The following comprehensive summation of recognized differences is found in Schumacher v. Eastern Bank Trust Co., supra: "A loan is primarily for the benefit of the bank; a deposit is primarily for the benefit of the depositor. A loan is not subject to check; a deposit ordinarily is. A loan usually arises from the necessities of the borrowing bank; a deposit, from the confidence of the depositor in its strength. A loan ordinarily is sought by the bank for its own purposes; a deposit is ordinarily made by the depositor for purposes of his own." The above observations of Judge Parker, while of necessity very general in nature, are helpful.

It is readily seen from the foregoing that the courts recognize that a distinction between a deposit and a loan does exist. Whether in a given case a transaction is to be deemed the one or the other is a question to be determined from the surrounding circumstances, regardless of what the parties to the transaction may call it. Murray v. First Trust SavingsBank, supra; State ex rel. Carroll v. Corning State SavingsBank, supra; Shaw, Banking Commissioner v. McBride, supra;Peoples Bank of Dixon v. Bone, supra; State ex rel. Davis,etc., v. Wayne County Bank, 112 Neb. 792, 201 N.W. 907; Schumacher v. EasternBank Trust Co., supra.

In the Schumacher case, the receiver sought to secure possession of certain notes and securities pledged by his bank prior to its insolvency to the defendant trust company as security for certain advancements, and to have the pledge declared void. From the statement of facts in the opinion, it appears that the bank, being in need of money, approached the defendant and secured a loan, assigning and pledging as collateral certain notes and securities, and executing an assignment. In the assignment was a recital that the trust company had deposited with the bank the amount secured. The account therein was handled on the books and in the reports of both parties as indebtedness between banks, i. e., on the ledger of the insolvent bank as "due to banks", and on that of the trust company, "due from banks". The circuit court of appeals, after considering the factual situation, brushed aside the use of the word "deposited" in the assignment, and found the transaction to be a loan.

In the case of State ex rel. Carroll v. Corning State SavingsBank, supra, a transaction between Des Moines National Bank, intervenor, and the savings bank, involving a certificate of deposit issued by the latter, in view of the facts and circumstances surrounding the same, was held to be a loan, although the president of the intervenor, in response to the savings bank's request to send more money, had, by letter, offered to deposit more money with, and refused to make a loan to, the savings bank.

In Peoples Bank of Dixon v. Bone, supra, the plaintiff instituted a proceeding in mandamus to require bank commissioner to issue a certificate against the bank depositor's guaranty fund, on the theory that plaintiff had a deposit in the Vernon State Bank at the time it was closed. The plaintiff, acting through an intermediary, sought the funds, for which it issued its certificate of deposit. Although the form of the transaction was that of a deposit, it appeared from the evidence that the plaintiff was trying to get money at a lower rate of interest than it was paying; and that it had no intention of making a deposit with the Vernon State Bank unless the deal as a whole went through. Being in reality a loan, the judgment for the defendant was affirmed.

A case somewhat similar to the instant one isArmstrong v. Chemical Nat. Bank, (C. C.) 41 F. 234, 6 L.R.A. 226. It involved a transaction between a Cincinnati bank and its New York correspondent. The two banks had acted as correspondent banks for one another over a considerable period. The Cincinnati bank, which was endeavoring to withstand a run, until certain false rumors as to its condition had subsided, transmitted a large amount of bills receivable to its correspondent to be held by it against overdrafts in the former's account. The New York bank during the following week took up several of the Cincinnati bank's drafts. All advancements by, and overdrafts on, the New York bank, after receipt of the securities, in excess of the balance carried with the latter, were considered by the court as loans, and the correspondent permitted to reimburse itself to that extent out of the collateral forwarded it.

It is clear in the instant case that the funds were placed with the bank on the strength of Charter's solicitation. Although insufficient to sustain the chancellor's finding that the Bank was insolvent on July 16th, the evidence is, in our opinion, sufficient when considered with Charter's proposal and reasons therefor, as well as other activities on behalf of the Bank, to indicate that the advancement was sought because the Bank was in need of money. If it had been merely a matter of reducing the receivership deposits, Charter could have handled the matter without bringing the Trust Company into the picture. The transaction as between the two banking institutions was carried on the books of the Trust Company as amount due from bank. It was to be for a short while, and not subject to check.Shaw, Banking Com'r. v. McBride, supra. During such time the receivership funds were to stand as security. The banks had had no previous dealings, and no necessity was shown for a deposit for purposes of clearing checks and other banking purposes.

The presentment of the two checks, signed by Lawhead, in view of the agreement, amounted in a sense to forwarding collateral with request that the Trust Company advance money for a period of time. The fact that the $41,000.00 of collateral was later pledged supports this position. The Bank was faced with a situation, whatever it was, which made it desirable to have certain receivership funds replaced with money not subject to check. As to the Bank, the transaction amounted to a substitution of a time item, subject to the uses of the Bank in meeting its daily obligations to its regular patrons, for a portion of Lawhead's very liquid demand deposit, which of necessity was subject to large periodic withdrawals. That it was materially benefited by the advancement cannot be gainsaid. Except for slight prestige of being depository for receivership funds, the benefit to the Trust Company was absolutely nil. The fact that the transaction was entered upon the records of the Bank as a deposit can be accorded no weight in view of the other facts and circumstances in the case.

In view of the situation presented, Judge Maxwell and I are of the opinion that the transaction was, in fact, a loan.

Although it is true that the word "deposit" is used in the bond, we do not feel that such fact should control over the other circumstances surrounding the transaction, which, in its inception, we hold to be a loan. Equity regards substance and not form, and it is not bound by the names which parties may give their transactions. Schumacher v. Eastern Bank TrustCo., supra. The parties preparing and executing the bond, having had years of banking experience, will, in the absence of a showing to the contrary, be presumed to know that a bank is not permitted to pledge its assets to secure deposits, other than those of the United States, State of West Virginia, a county, district, school district or municipal corporation. Code 1931, 31-4-9; Gall, Rec'r. v. City of Wheeling et al.,119 W. Va. 93, 192 S.E. 116; 65 A.L.R. 1412; 87 A.L.R. 1456.

Inasmuch as the propriety of much of the testimony supporting the loan theory is dependent upon the understanding between Charter and Blizzard, as testified to by the latter, our next problem is whether or not the Bank is bound by what Carter did.

Ten shares of stock, according to the record, remained on the books of the Bank in the name of L. R. Charter, Jr., during the time (January 1, 1930-March 21, 1933) he was commissioner of banking. A year prior to the loan, he became a surety on a $100,000.00 bond of the Bank, payable to C. E. Lawhead, receiver, conditioned for payment of all moneys theretofore or thereafter deposited in the Bank by Lawhead; and in 1931 and 1932 he became surety on certain bonds given by the Bank as depository of public moneys of counties other than Doddridge. He appears to have been active in securing deposits of such public moneys, making trips to secure same, and issuing deposit slips therefor, on which he signed his brother's name as president.

Although we find no direct evidence of knowledge on the part of the Board of Directors as to Charter's activities in respect to the loan, the depositions of those of the board who testified indicate that they took little, if any, interest in the business of the institution. It is virtually admitted that the Bank was controlled by the Charters, particularly L. R., Jr.

Most banking institutions, in 1931, were faced with many trying problems, which called for a close cooperation on the part of those charged with their management. If the directors of the Bank had performed the duties placed upon them as such, they would have known of L. R. Charter's activities on behalf of the institution, especially of the advancement of funds by the Trust Company.

A board of directors of a corporation is not only bound by what it actually knows, but it may be bound by what it ought to have known, or by proper attention to its business would have known. Baltimore Ohio R. Co. v. Foar (C.C.A.)84 F.2d 67.

"The law will also impute to a corporation knowledge of facts which its directors ought to know, in the exercise of ordinary diligence in the discharge of their official duties, when the imputation of such knowledge to the corporation is necessary to protect the rights of third persons. The directors are presumed to know that which it is their duty to know and which they have the means of knowing." 3 Thompson on Corporations, 354, sec. 1783. The manner in which a corporation's business is conducted may be such as to impute to the board of directors and the corporation knowledge of business transactions entered into by a representative of the corporation. Beall v. Morgantown Kingwood Railroad Co.,118 W. Va. 289, 190 S.E. 333. It is the duty of a director of a banking institution to keep in touch with the general affairs of such institution. Hatfield v. Lamb et al., 117 W. Va. 275,185 S.E. 229.

"Directors cannot, in justice to those who deal with the bank, shut their eyes to what is going on around them. It is their duty to use ordinary diligence in ascertaining the condition of its business, and to exercise reasonable control and supervision of its officers. They have something more to do than, from time to time, to elect the officers of the bank, and to make declarations of dividends. That which they ought, by proper diligence, to have known as to the general course of business in the bank, they may be presumed to have known in any contest between the corporation and those who are justified by the circumstances in dealing with its officers upon the basis of that course of business." Martin v. Webb, 110 U.S. 7,3 S. Ct. 428, 433, 28 L. Ed. 49. In accord: Seale v. Baker, 70 Tex. 283,7 S.W. 742, 774, 8 Am. St. Rep. 592; Fishkill SavingsInst. v. National Bank, 80 N.Y. 162, 36 Am. Rep. 595.

That the Bank was in need of funds in July, 1931, is apparent. The demand deposits of Lawhead, receiver, during a banking crisis, were materially reduced by the transaction and, as we have held, a loan substituted therefor. We are of opinion that the directorate cannot now insist that they were not conversant with the financial condition, or that the Bank was not in fact benefited in the advance of $39,082.88 by virture of the transaction of July, 1931. Having accepted the benefit of the loan, the Bank is estopped from saying that Charter was not authorized to act for it. "Where a private corporation accepts the benefit of a contract made on its behalf by unauthorized agent, it thereby ratifies the contract in its entirety and will be bound to perform the obligations provided by the contract to be performed on its part." Chafin v. Main IslandCreek Coal Co., 85 W. Va. 459, 102 S.E. 291, 292, 11 A.L.R. 657. Accord: McDermott v. Fairmont Gas Light Co., 88 W. Va. 692,108 S.E. 264; Smiley v. Bank of Wyoming, 104 W. Va. 471,476, 140 S.E. 330. So, the Trust Company is entitled to recover the collateral, or the proceeds thereof, from the receiver.

By virtue of a division of the court, as presently constituted, the decree of the circuit court, to the extent indicated, is affirmed.

Affirmed.