Franklin Bank v. Cooper , 36 Me. 179 ( 1853 )

Shepley, C. J. —

This suit was commenced on September 13, 1850, upon a bond made to the bank by Hiram Stevens as principal, and the defendant’s testator and others, as his sureties, to secute his faithful performance of, the duties of cashier, and other duties.

1. Whether the action can be maintained may depend upon a construction of the Act approved on June 9, 1849, c. 196. By the first section the corporate capacity of the bank is continued for two years from the first day of October then next, for the sole purpose of collecting the debts due to the corporation. The stockholders are authorized to choose three persons as trustees who are empowered to prosecute and defend in the name of the bank any suits at law or in equity. By the second section the trustees are authorized to prosecute to final judgment,, execution and satisfaction, any claim or demand (meaning any action) which may be pending, in the name of said, corporation; “ and to institute suits in the name thereof any time during said two years, and to prosecute the same to final judgment, execution and satisfaction.”

Although the corporation ceased to exist on the first day of October, 1851, the Legislature might authorize the trustees to prosecute suits then pending for the benefit of the former corporation, in that or any other name. The trustees, by the provision of the Act, might commence suits at any time prior to and on the last day of the two years. Was it the intention, that all suits should then abate, and that the debtors should then be absolved from all liability to pay, and that the former stockholders should be deprived of all benefit to be derived from existing debts ?

A construction producing such results Avould be at variance with the general policy and purpose of the law, which provides, that on the dissolution of any corporation all its real and personal estate shall be vested in the individuals, who may be stockholders at the time. c. 76, §. 28. It should not be adopted, if the language may fairly receive a different construction. So far from difficulty is the construction, which would avoid such consequences, that it requires no more than to permit the language used to operate according to its literal meaning. The trustees are expressly authorized to prosecute actions commenced within two years “ to final judgment, execution and satisfaction.” There is no limitation of the time within which this is to be done. There was no occasion for it; the purpose being to allow sufficient time to accomplish the object. It is only by implication that any limitation of that time can be made, and if one be so made it may extend to the day after the suit has been properly commenced.

If the purpose had been no more than to continue the charter for two years for the collection of debts within that time, this would have been fully accomplished without the careful insertion and repetition of language authorizing the prosecution of suits to final judgment and satisfaction. A construction which would limit that power to the two years would give no effect to the language conferring it.

Any inconsistency between the provisions of the first and second sections of the Act, unless such limitation of the power to prosecute be admitted, is not perceived. By the first section the corporation is continued for two years for the sole purpose of collecting its debts. By the second section the trustees are authorized to use its name after that time to prosecute pending suits.

As by the general Act respecting corporations all their property at the time of their dissolution is vested in the individuals composing their stockholders, it is said, that the trustees in this case must after the two years be deprived of all power and interest in the debts then due. The second section of the Act of 1849, declares, that the trustees shall have power to receive all demands belonging to said bank, in trust, for the use of the stockholders ; and the provisions of the statute, c. 76, § 28, are thereby so far varied as to permit them to exercise the power thus conferred. Although no time is fixed for the execution of that trust, and for a distribution of the moneys collected, there can be no difficulty in causing it to be executed so soon as the stockholders become entitled to have it done.

Nor will any party defendant, should he be successful in his defence, necessarily lose his costs. Although the trustees are not personally liable, the Court may on motion stay proceedings until security be given for their payment. Freeman v. Cram, 13 Maine, 255.

Nor will it be necessary, that accounts filed in set-off should be disallowed. They would constitute a part of the suit to be prosecuted.

It is no valid objection to a literal construction of the Act, that no provision was made to enable creditors of the bank to prosecute suits against it after the expiration of its charter. It was only leaving them in the condition of all other creditors of corporations, which have been dissolved. No such provision has been or can well be made after the dissolution of a corporation.

2. It is alleged, that the bond was not valid because it was not made in conformity to the provisions of the statute.

The statute, c. 77, § 24, prescribes no form. It only requires, that a cashier should give a bond conditioned for the faithful performance of his duties. The condition of this bond does require more. A bond with a condition differing from that required by a statute is not necessarily void. It wilL be good, not as a bond by the statute, but as a contract at common law, if the condition does not require the performance of any immoral or unlawful act. There was nothing wrong or unlawful in requiring the cashier to account for property entrusted to him in former years as cashier. .

If the language used will permit it, the bond should receive a construction, that will make the sureties liable only for official acts or neglects subsequent to its execution. Hence it has been decided, that a bond with a condition, that the principal has accounted and will account, binds the sureties for an account only from the time the official term commenced, for which they became his sureties. Armstrong v. United States, 1 Peters’ C. C. R. 46; United States v. Brown, Gilpin, 155.

The language used in the condition of this bond will not allow a construction, which would thus limit the liability of the sureties. After providing for the faithful performance of his duties and for his accounting for all property entrusted to him during his continuance in office, the condition contains this clause : —- “ And shall account for all notes, drafts and money, drafts, notes and property heretofore 'entrusted to his hands and possession as cashier of said bank since he has held the said office of cashier of said bank.” No person about to become surety upon reading the condition could fail to understand, that he would become liable for an account by the cashier of all property entrusted to him since he had been cashier’ as well as for his future faithfulness. If he voluntarily became a surety on a bond containing such a provision, he cannot by any legal construction be relieved from the obligation thus assumed.

3. The bond is alleged to be void because the testator became a surety upon it, while he was a director of the bank, in violation of the provisions of the statute, c. 77, § 24. It bears date on October 1; the testator ceased to be a director on October 5. The bond appears to have been approved on October II. It did not become a valid contract until accepted. The bank did not violate any law, by receiving the testator at that time as a surety.

4. The declarations of a director of a corporation respecting its past transactions have been held to be inadmissible as testimony. “ Polleys v. Insurance Co. 14 Maine, 141. The declarations stated in the testimony of Mitchell, would rather appear to have been in a meeting for business when the bond in suit was under consideration and accepted. The meeting for the choice of officers appears to have been holden that year on October 5. Although the bond bears date before that time, it must be presumed to have been executed after the choice of officers, and it appears to have been executed before those declarations were made.

The testimony offered and excluded of William Stevens, 2d., respecting similar declarations, made by Mr. Otis in the autumn of 1849, would not be admissible as stating the declarations of an officer of the corporation. But at that time Mr. Otis had become one of the trustees, holding the legal interest in all the assets of the corporation, and using the corporate name, only to enforce the claims of the trustees to recover in this and other suits, and his declarations, being a trustee and a party having a legal interest in the bond, would be admissible.

5. It is alleged, that the signature of the testator to the bond was procured by fraud. It is not alleged to consist in any fraudulent or positive act, but in withholding from him the knowledge, that there was an existing deficiency in the accounts of the cashier. *

The testimony of Alpheus Lyon, as offered and excluded, would not, had it been received, have proved, that the directors who received the bond, knew that there was an existing deficiency in the accounts of the cashier. It would only prove irregularity and neglect in keeping his accounts in past time. The condition of the bond did not make the testator liable for such neglects. His responsibility for the past years was limited to an account for all property.

The testimony of Mitchell, as reported, states, that the president of the bank, in a meeting of the stockholders, informed him, “ that when they found there was a deficiency, they threatened to sue the cashier} or might use the words prosecute him, and required him to get Cooper, the testator, to sign a bond with him.”

There will not be found an entire agreement in the decided cases and books of authority, respecting the effect of a concealment or an omission to communicate facts known to the party seeking security, and unknown to the party about to become a surety. In some codes of law, and in some decisions, the conclusion is arrived at from a consideration, whether the facts omitted to be stated were intrinsic or extrinsic to the contract. And in others whether the person about to become a surety sought information of the party having the knowledge and seeking the security.

A few cases only will be noticed. In the case of Pidcock v. Bishop, 3 B. & C. 605, the defendant, at the request of Thomas Tickell, made a guaranty to the plaintiffs for pig iron to be delivered to Tickell. The plaintiffs without the knowledge of defendant had agreed with Tickell, that he should pay them, ten shillings per ton more than the market price, to be applied to the payment of an old debt due from Tickell to one of them. The Court decided, that the withholding of.the knowledge of that agreement was a fraud upon the defendant and that his contract was not binding.

In Maitby’s case, as stated by Lord Eldon in the case of Smith v. Bank of Scotland, 1 Dow. Parl. Rep. 294, a deficit existed in the accounts of a clerk of the Fishmonger’s Company, and a person became surety without a knowledge that he was a defaulter. Lord Eldon was of opinion that by a concealment of that fact the surety was discharged.

In the case of Stone v. Compton, 5 Bing. N. C. 142, the defendant became surety for Coxe & Chambers for £2600. Part of that sum was not advanced but retained in'payment of an old debt. It was insisted, that the doctrine respecting concealment was applicable only to cases of guaranty, but the Court observed, that it could see no sound legal distinction arising from the form of the security; that the meto fact that part was to be deducted in payment of an old debt without any communication of that fact to the surety would not be sufficient to release him; for the plaintiffs were not to be made responsible for a want of communication between the principal and surety. The surety was relieved because a deed was read to him containing a reeital that the old debt had been paid.

The fact, that part of the money loaned was to be applied to the payment of an existing debt, could not be regarded as a matter unusual in the ordinary course of business. Money is known to be as frequently borrowed to pay existing debts as So make new purchases.

A question respecting the validity of a surety’s contract was elaborately argued and much considered in the case of Etting v. The Bank of the United States, II Wheat. 59. The Court having been equally divided no opinion was expressed. The judgment in the Circuit Court was affirmed. By the' instructions there given the surety would not be discharged by an omission to make known to him, that the cashier had fraudulently appropriated funds of the bank to his own use, unless he made inquiry with reference to his becoming surety.

In that case the plaintiff in error was not about to become a surety on the official bond of the cashier, but a surety for him for a debt due from him to the bank; and the true question was, whether the bank was obliged to make known to the surety in what manner the principal became indebted to it. It may be further observed, that it does not appear, whether the officers of the bank had opportunity to make those facts known to the surety.

It is not readily perceived how a person desirous of obtaining security can be considered to be guilty of a fraud in law by omitting to make known facts even of an important character affecting the risk of the- surety, when it does not appear, that he had an opportunity to do so. On the contrary when he does know such facts and has reason to believe, that they are not known to the proposed surety, if information be sought from him, or- if he have a suitable opportunity, and the facts are of such a character, that they are not found in the usual course of that kind of business, and are such as to materially increase the risk, it is not perceived, that if is not a duty to make them known.

In the commentaries upon equity jurisprudence, the rule is not stated with the qualification, that there may be an omission to state such facts, unless the surety makes inquiry. Nor does it even require that the party taking the security, should have á suitable opportunity to make the communication. The rule is thus stated : — “If a party taking a guaranty from a surety, conceals from him facts which go to increase his risk, and suffers him to enter into the contract under his false impressions as to the real state of facts, such concealment will amount to a" fraud, because the party is bound to make the disclosure.” 1 Story’s Com. Eq. § 216.

It is generally admitted, that an omission to communicate circumstances materially affecting the risk known to one party and unknown to the other, will destroy the validity of the contract, whenever the party having the knowledge is bound to communicate it. The difficulty consists in arriving at a correct conclusion under what circumstances one is so bound. He is so bound when his relations are such, that the other party is entitled to repose any particular confidence in him, and when inquiries are made of him respecting the surety-ship. Is he not equally bound when he has a suitable opportunity to make them known ?

There can be no doubt, that the fact that there was known to be an existing deficiency in the accounts of the cashier if communicated to the testator might have had an important influence on his conduct. No doubt that the • risk assumed would be materially increased thereby. One, who becomes surety for another, must ordinarily be presumed to do so upon the belief, that the transaction between the principal parties is one occuring in the usual course of business of that description, subjecting him only to the ordinary risks attending it; and the party to whom he becomes a surety must be presumed to know, that such will be his understanding and that he will act upon it, unless he is informed, that there are some extraordinary circumstances affecting the risk. To receive a surety known to be acting upon the belief, that there are no unusual circumstances, by which his risk will be materially increased, well knowing that there are such circumstances and having a suitable opportunity to make them known and withholding them,.must be regarded as a legal fraud, by which the surety will be relieved from his contract.

This position although not found to be stated in terms, will in effect be found sustained by the opinions and reasonings of many sound judicial minds.

If a jury in this case, should be satisfied, that the legally constituted agents or officers of the bank knew, that the cashier was a defaulter and that there was a deficiency in his accounts then existing, and that he was required to obtain the testator to become his surety for that existing deficiency with out making that fact known to the testator, having a suitable opportunity to do so, it might be their duty to find a verdict for the defendant. As the report of the case provides, that “ if the testimony of Mitchell would have any legal effect upon the case, the action is to stand for trial,” and as that testimony may possibly have such an effect, the case is to be submitted to the consideration of a jury.

Tenney, Howard, Rice and Appleton, J. J., concurred.