The borrowing of money, by a bank, though not illegal, is so
much out of the course of ordinary and legitimate banking business
as to require those making the loan to see to it that the officer
or agent acting for the bank had special authority to borrow
money.
Whether a vice-president of a national bank who had, without
authority from the board of directors, paid into the bank a large
sum of money and received certificates of paid-up stock for a still
larger amount could, on the subsequent insolvency of the bank
without ratification of such
Page 152 U. S. 347
increase, recover back his subscription money, or was to be
treated as a general creditor, is a question which a court cannot
settle in an action to which he id not a party.
In December, 1888, the Western National Bank of New York,
organized under the laws of the United States, and having its place
of business in the City of New York, filed a bill of complaint in
the Circuit Court of the United States for the Southern District of
Ohio against David Armstrong, as receiver of the Fidelity National
Bank of Cincinnati, Ohio. The bill alleged that the Fidelity
National Bank was indebted to the complainant bank in the sum of
$207,290 on account of a loan made on May 28, 1887, by the New York
bank to the Ohio bank "at the special instance and request of E. L.
Harper, who was then the vice-president and general manager of the
said Fidelity National Bank, with full authority to make said loan
on its behalf." The bill further alleged that said loan was secured
by collateral notes, signed by one A. P. Gahr, and endorsed by said
E. L. Harper, and by the endorsement and delivery to the
complainant by E. L. Harper of certificates for 1,600 shares of the
capital stock of the said Fidelity National Bank; that said notes
were, when they fell due, and still are, entirely worthless by
reason of the insolvency of said Gahr and Harper; that said stock
certificates did not do not represent stock of the Fidelity
National Bank, but were wholly invalid and void because they did
not constitute a part of the original and authorized stock of said
bank, but were a part of a proposed increase of the capital stock
of said bank, on account of which E. L. Harper had paid into the
bank upwards of $180,000, but which increase had never been voted
for by the stockholders of said bank, nor had notice of said
intended increase of said capital, with a certificate that the full
amount of the same had been fully paid in, ever been sent to the
Comptroller of the Currency of the United States, nor had the
Comptroller ever assented to such increase of capital, as required
by law, but that nevertheless said Harper had procured from the
president and cashier of said bank the certificates of stock so as
aforesaid pledged with the complainant; that when said certificates
were so issued to
Page 152 U. S. 348
Harper, the stock of the Fidelity National Bank had an
established market value of $153 per share, and that the
complainant bank relied on said certificates as one of the
securities for said loan when it made the same; that said moneys,
so paid in by Harper on account of proposed stock, were held by
said Fidelity National Bank on special deposit, and in trust for
said Harper until such increase of stock should be duly authorized.
The relief prayed for was that David Armstrong, receiver of the
Fidelity National Bank, which had become insolvent, should allow
the claim for said loan, and pay, out of the assets in his hands,
dividends, the same as to other creditors of said bank, and that
the complainant bank should be subrogated to the rights of Harper
on account of the moneys so paid in for stock proposed to be
issued, and which the complainant alleged to constitute a preferred
claim.
Armstrong, receiver, entered an appearance and demurred to those
portions of the bill in which were alleged the facts respecting the
proposed issue of additional stock, and in which the complainant
prayed to be subrogated to Harper's supposed rights in respect to
the same. The alleged grounds of the demurrer were a want of
necessary parties, in that the Fidelity National Bank and E. L.
Harper were not made parties to said bill, and for
multifariousness.
Subsequently, in November, 1889, the court below sustained the
demurrer to so much of said bill as was recited therein, being the
said allegations seeking subrogations, and gave leave to answer the
remainder of said bill.
An answer was duly filed denying that the Fidelity company was
indebted to the complainant bank; that the complainant had, on May
28, 1887, or at any time loaned the Fidelity National Bank the sum
of $200,000 or any other sum, and alleging that the notes mentioned
in the bill, made by A. P. Gahr and endorsed by E. L. Harper, were
discounted by the complainant bank for said Harper, and that the
proceeds of such discount were received by said Harper; that the
said notes were at no time the property of the Fidelity National
Bank, and that the Fidelity National Bank
Page 152 U. S. 349
never had any interest in said transaction, and was in no way
responsible therefor.
The cause was put at issue, evidence taken, and on April 8,
1890, a final decree was entered dismissing the bill at the cost of
the complainant. The case comes to this Court on appeal from said
decree.
MR. JUSTICE SHIRAS, after stating the facts in the foregoing
language, delivered the opinion of the Court.
Whether the transaction of May, 1887, was a discount by the
Western National Bank of New York in favor of E. L. Harper of the
four notes made by A. P. Gahr and endorsed by Harper or was a loan
by said bank to the Fidelity National Bank is the question
principally discussed in the briefs and oral arguments of the
respective parties.
In disposing of the case, we are not assisted by any findings or
opinion by the court below, and we are left to conjecture the
grounds upon which that court proceeded in dismissing the bill of
complaint.
The theory that the case was that of a simple discount by the
New York bank of four promissory notes, made by Gahr and endorsed
by Harper, and secured by the assignment by Harper of certificates
of 1,600 shares of the stock of the Fidelity National Bank,
comports with the form of the notes themselves. Such a transaction
would have been an ordinary one and in the course of the usual
business of such a bank. The letter of May 16, 1887, in which the
proposition was made to the New York bank to make the loan, was
signed by E. L. Harper in his own name, without any official
designation. That the $200,000 were placed on the books of the New
York bank to the credit of the Ohio bank was not inconsistent with
this version of the case, because it appears that this was done at
the request of Harper.
Page 152 U. S. 350
On the other hand, it is claimed that because the letter of May
16, 1887, was written on the letter paper of the Fidelity National
Bank, and because the proceeds of the discount were placed to the
credit of the Ohio bank and were drawn out by drafts of that bank,
the transaction was thereby shown to have been made on behalf of
the Ohio bank, and C. N. Jordan, vice-president of the New York
bank, testified that be understood the proposition to come from the
Ohio bank for a loan to it, and that he would not have submitted
the matter for approval to the board of the New York bank had he
not so understood it.
There are other features of the correspondence that are pointed
to by the parties as making for their respective contentions. It
may be conceded that the New York bank acted upon the theory that
the loan was to the Ohio bank, and took the notes and certificates
of stock as collateral; but the liability of the Ohio bank is not a
necessary consequence of such a concession. It has further to be
shown that the Ohio bank was really a party to the transaction,
either by having authorized Harper to effect the loan on its behalf
or by having ratified his action, and having accepted and enjoyed
the proceeds of the discount.
There is no evidence whatever that the board of directors of the
Fidelity National Bank gave any authority to Harper to borrow money
on behalf of the bank, much less to borrow so enormous a sum on so
long a time. It this respect, the complainant's case stands barely
on the assertion in the bill that "Harper was the vice-president
and general manager of the Fidelity National Bank, with full
authority to make said loan on its behalf." The only evidence we
find in the record tending to support such averment is found in the
answer by J. Harvey Waters, the general bookkeeper of the Fidelity
National Bank, on cross-examination, wherein he stated that E. L.
Harper was the vice-president and managing officer, and that by
"managing officer" he meant that Harper was "the general manager of
the business of the bank." No such office as that of "general
manager" is known or named in the national bank acts, nor does any
such office exist by
Page 152 U. S. 351
usage. The most that can be claimed in this case is that Harper
acted as the principal executive officer of the bank. It cannot be
pretended that as such he had power, without authority from the
board, to bind the bank by borrowing $200,000 at four months'
time.
It might even be questioned whether such a transaction would be
within the power of the board of directors. The powers expressly
granted are stated in the eighth section of the National Bank Act,
Rev.Stat. ยง 5136, par. 7: A national bank can
"exercise by its board of directors, or duly authorized officers
or agents, subject to law, 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."
The power to borrow money or to give notes is not expressly
given by the act. The business of the bank is to lend, not to
borrow, money; to discount the notes of others, not to get its own
notes discounted. Still, as was said by this Court in the case of
First Nat. Bank v. Nat. Exchange Bank, 92 U.
S. 127:
"Authority is given in the act to transact such a banking
business as is specified, and all incidental powers necessary to
carry it on are granted. These powers are such as are required to
meet all the legitimate demands of the authorized business and to
enable a bank to conduct its affairs, within the scope of its
charter, safely and prudently. This necessarily implies the right
of a bank to incur liabilities in the regular course of its
business, as well as to become the creditor of others."
Nor do we doubt that a bank in certain circumstances may become
a temporary borrower of money; yet such transactions would be so
much out of the course of ordinary and legitimate banking as to
require those making the loan to see to it that the officer or
agent acting for the bank had special authority to borrow
money.
Even, therefore, if it be conceded that it was within the
Page 152 U. S. 352
power of the board of directors of the Fidelity National Bank to
borrow $200,000 on time, it is yet obvious that the vice-president,
however general his powers, could not exercise such a power unless
specially authorized so to do, and it is equally obvious that
persons dealing with the bank are presumed to know the extent of
the general powers of the officers.
Without pursuing this part of the subject further, we think it
evident that Harper had no authority to borrow this money, and that
the bank cannot be held for his engagements, even if made in behalf
of the bank, unless ratification on the part of the bank be shown.
It is scarcely necessary to say that a ratification, to be
efficacious, must be made by a party who had power to do the act in
the first place -- that is, in the present case, the board of
directors -- and that it must be made with knowledge of the
material facts. There is not the slightest evidence shown in this
record that the board of the Fidelity National Bank, by any act,
formal or informal, undertook to ratify Harper's action in the
premises, or that they ever had any knowledge of the
transaction.
It is true that a corporation may become liable upon contracts
assumed to have been made in its behalf by an unauthorized agent by
appropriating and retaining, with knowledge of the facts, the
benefits of the contracts so made on its behalf; but there is no
room for such a contention in the present case. The money advanced
by the New York bank was indeed, at Harper's request, placed to the
credit of the Ohio bank, but it was shown that it was withdrawn
partly by Hopkins, the assistant cashier, and partly by Harper
himself, by drafts in the name of the bank, but that the moneys
thus drawn never came into the actual possession or use of the
bank. The moneys were appropriated by Harper to his own use, or at
all events, it does not appear that the bank ever got a penny of
the borrowed money, or any benefit or advantage whatever, by reason
of the transaction. The mere placing of the money in the name of
the Ohio bank involved no ratification by the bank unless it was so
placed with its knowledge and assent; nor did the withdrawal of the
money
Page 152 U. S. 353
by drafts drawn by Harper or by his direction in the name of the
bank constitute a receipt by the bank of such money, unless it was
in point of fact received and used by the bank or for its benefit.
Not this, but the contrary, was shown.
So far, then, as the case of the plaintiff in error depends on
the alleged loan of money to the Fidelity National Bank, we find no
error in the decree of the court below in dismissing the bill.
This brings us to the consideration of the other phase of the
case -- namely that which arose on the claim of the New York bank
as the holder of 1,600 shares of the stock of the Fidelity National
Bank, transferred to it as security by Harper, to be subrogated to
the supposed right of Harper to be repaid the moneys paid in by him
on account of his subscription for an increase of stock, not voted
for by the stockholders and not approved by the Comptroller of the
Currency.
The court below sustained the demurrer to this portion of the
bill. Two grounds were asserted in the demurrer -- one, the
insufficiency of parties, in that neither the Fidelity National
Bank nor Harper was made a party, the other that of
multifariousness. It is now contended before us that Harper was not
a necessary party, because, as is averred in the bill and admitted
by the demurrer, he had pledged and assigned this stock to the
complainant bank, and it is argued that the bank thereby became
vested with whatever rights Harper had to have his money returned
to him as a special deposit. It is also contended that asserting
such a right of subrogation is so far within the equities of the
bill and so necessary an incident of the transaction as to relieve
the bill of the charge of being multifarious.
It is not easy to see why, if the complainant were really
entitled to be subrogated to the rights of Harper in respect to the
hypothecated stock, such a claim might not be set up in the same
bill in which it seeks to be allowed, as a lender of money to the
Fidelity National Bank, to participate in the payments made by the
receiver.
But however that may be, it seems to us that Harper, having
procured an issue to himself of certificates of paid-up stock,
Page 152 U. S. 354
was in no position, when the bank became insolvent, before the
necessary steps to legitimate the increase of stock had been taken,
to demand back his money as if it were trust money, or constituted
a preferred claim against the assets of the bank in the hands of
the receiver. The utmost that he could claim would be to be treated
as a general creditor, and entitled as such to participate in the
payments made by the receiver.
In the case of
Armstrong v. Stanage, 37 F. 508, which
was the case of a suit by the receiver of the Fidelity National
Bank to recover from a subscriber to the preferred increase of
stock of that bank the amount of a promissory note given in payment
of such subscription, it was held by MR. JUSTICE JACKSON, then
circuit judge, that, as the necessary steps had not been taken to
legitimate such increase of stock before the bank became insolvent,
there was a failure of consideration, and the receiver could not
enforce payment of the note. We, however, agree with the court
below in thinking that such a question could not be raised in the
present case, to which Harper was not a party. Harper had paid in
the full amount of his subscription, and had procured the issue to
himself of certificates for his stock, and has parted with the
legal title to the stock by transferring the certificates to the
New York bank. In such circumstances, it might be claimed with some
appearance of justice that Harper and his transferee were precluded
from opening up the transaction and procuring a rescission of the
subscription. If that were so, the holder of such stock, whether
Harper or the New York bank, might have been compelled to
contribute to the payment of the indebtedness of the insolvent
bank.
National Bank v. Case, 99 U. S.
628.
So too, even if it were held that Harper was not precluded from
surrendering his stock and recovering back the money paid on
account of it, it might yet be made to appear that Harper, if he
were answerable for the mismanagement which resulted in the bank's
insolvency, could not, in a court of equity and as against the
creditors of the bank, recover back his subscription money. But it
is plain that such questions as
Page 152 U. S. 355
these could not be adjudicated in the absence of Harper as a
party, and we therefore think the court below did not err in
sustaining the demurrer for that reason.
Upon the whole, we are of opinion that the decree of the court
below, in sustaining the demurrer, and in dismissing the bill,
should be
Affirmed.
