
    Lillian Traver Carr, Respondent, v. The National Bank and Loan Company of Watertown, Appellant.
    
      Fiduciary relation between the president of a bank and a person buying at his suggestion bonds held by the bank false representations made by the president — liability Of the bank therefor.
    
    The president of a hanking and loan association and the chief owner of its stock volunteered to procure advantageous investments for the widow of a friend (a woman inexperienced in business and relying upon- his integrity), and induced her to purchase bonds held by his bank; some of which were then below par, others of which were second mortgage bonds, and all of which had been purchased by the bank, at a discount, and were uncertain in value and “kiting,” under representations that they were “first mortgage bonds, first class securities, as good as gold,” and that he had gotten them expressly for her and that he would turn them into cash for her at any time. .
    
      Held, that the banking and loan association, having been the recipient of all the benefits resulting from the sale of the bonds, was responsible for the acts of its president in the premises and could not offer as a defense that the buying and selling of bonds was not within the scope of its powers;
    That the relation between the president and the widow was a fiduciary one, and that it was his duty to explain to her in the clearest and most ingenuous manner that these bonds had been purchased and were sold by his bank; that they were second mortgage bonds which had been procured at a discount, and were held for speculative purposes;
    That to annul the sale it was not necessary to prove that the president intended to perpetrate a fraud;
    That the banking and loan association was bound on tender of the bonds to repay the money paid therefor.
    Appeal by the defendant, The National Bank and Loan Company of Watertown, from a judgment of the Supreme Court in favor of the plaintiff, entered in the office of the clerk- of the county of Jefferson on the 12th day of July, 1898, upon the decision of the court rendered after a trial at the Jefferson Special Term.
    
      John Lansing, for the appellant.
    
      Elon R. Brown, for the respondent.
   Spring, J.:

By the sudden death of her husband in October, 1892, the plaintiff came into possession of $14,000, the avails of insurance policies on his life. She was apparently inexperienced in business. George H. Sherman was then the president of defendant and the owner of one-half of its capital stock and a man of business training. He was an intimate friend of the family of the plaintiff, well acquainted with her husband, and in the argument of counsel it was stated he was an officer in the church of which her husband was the rector at the time of his death. On the day before the burial of -her husband, her cousin, Hr. Lewis, of Rhinebeck, Dutchess county, in this State, came to Watertown to attend the funeral services with her. While in the city, he met Hr. Sherman and took a ride with him at the invitation of the latter. Mr. Sherman stated it was- very important that the moneys to be paid on the life policies to plaintiff should be well invested. Mr. Lewis deprecated being called upon to assist in this investment, saying he could not get anything desirable at more than five per centum, and even then at a premium. Mr. Sherman replied: “ Oh ! that won’t answer at all. I can furnish her with the very best, securities that will bring her six per cent, at par.” When Mr. Lewis .expressed surprise at this, Mr. Sherman reiterated his statement. This conversation Mr. Lewis repeated to the plaintiff. Afterward, in a talk with Mr. Sherman, he asked her what kind of security she wished. She said she knew nothing about securities, but Would leave that matter entirely to him, only she didn’t wish to put all my eggs in one basket.” He promised to look up something for her. November fourteenth she received the $5,600 on one of the policies and placed it in the bank; and between that time and February thirteenth following, the full $14,000 were paid to her and deposited with the defendant. After the $5,000 came, Mr. Sherman gave her four bonds of $1,000 each, of the Lincoln Light and Power Company, bearing interest at six per centum per annum, and payable semi-annually. At the time these bonds were handed to the plaintiff she asked him if they were first mortgage bonds, and he stated they were first mortgage bonds, first-class securities, as good as gold,” and that he had gotten them expressly for her. Afterward he let her have four $1,000 bonds of the Westchester County Waterworks tiompany, and also three of like kind of the denomination of $500 each, and which were all known as First Consolidated Mortgage six per cent Gold Bonds,” one.bond of $500 of the same designation of the Baraboo Waterworks Company, and four of the Washington Waterworks Company of $500 each. These bonds aggregated $12,000; ah bore interest at six per centum per annum, payable semi-annually, and were issued by foreign corporations, except those of Westchester county. These bonds were not examined by plaintiff; she was not familiar with their character or value, and relied implicitly upon Mr. Sherman to secure for her first-class securities, and accepted them in the undoubted belief they were of that class. They were placed in a box furnished by Mr. Sherman, and left in the vault of the defendant. During the progress of these investments, the plaintiff inquired of Mr. Sherman if she or her cousin found any securities more desirable than those he was procuring for her, if she could get the money on these. He replied to her: Mrs. Carr, these bonds are as good as gold; I will turn them into cash for you at any time.” When the Westchester county bonds were delivered to her, she inquired if they were first mortgage bonds. He had a pencil in his hand, and he tapped- on them and guaranteed to me that those were first mortgage bonds, and that they were especially good as being in the Empire State, and to hold onto them by all means. This talk all occurred in the bank.”

The money used in payment of these bonds, with one exception, was obtained on checks against plaintiff’s account with defendant, made and signed by Sherman. It developed that the securities were not of the gilt-edged class represented by Sherman. The Lincoln bonds, even in the easy times of 1892, were not valued above from fifty to sixty cents on a dollar. The company was struggling along under a heavy bonded indebtedness. The Westchester county bonds were second mortgage bonds, as they were subject to a prior lien of $100,000; and the Baraboo bonds were in the same category.

All of these bonds were issued • by companies in which a firm known as Moffett, Hodgkins & Clark Co.” was interested, or had organized, as they had been in charge of establishing the water systems in these various localities. Many of these bonds had been by that firm put up in banks throughout the country as collateral security for notes made by it, and the Washington Waterworks bonds, transferred to the plaintiff, were held by the defendant at that time to secure a promissory note it owned, made by that firm, and the moneys received from the plaintiff were applied towards its payment. As matters have turned out, all of these securities are way below par in value, and were kiting and uncertain - and dependent upon the inflation of booming days for their negotiation. As they all bore interest at six per cent, payable semi-annually, if well secured, in the year 1892, when money was seeking such investments, they - would havq readily sold above par. The fact that they were hawked about and discounted among eastern capitalists ought to have apprised these men, skilled in financial transactions, that they were not the most desirable of securities.

The facts further demonstrate that Sherman was not acting as the disinterested friend of ¡the plaintiff. These bonds were all owned by the defendant. The cashier of the bank had made a personal examination of these several western towns, where the bonds had their origin. .This investigation had been made at the instigation and expense of Moffett, Hodgkins & Clark Co. The bonds had been purchased at a discount of five per cent and unloaded on their customers and purchasers, wherever they could be found, at par. Rot-that the bank intended to perpetrate any fraud; not that its-officers did not believe these securities would be met as they respectively matured; 'but the rub of the controversy here is, they did not-fill the measure of the representations made by Sherman to the? plaintiff. They were not the kind of property she was led to believe she was receiving from her magnanimous friend who had volunteered to procure for her first-class securities. Mr. Sherman played himself in a dubioirs position. As president, manager and chief owner of the stock of defendant, it was his' duty to dispose of these bonds at the best prices obtainable. This obligation was-incompatible with his self-assumed relation to the plaintiff. For her he must manfully discard his official position, his duty to his fellow-stockholders, and turn over to this woman, who was relying-upon his 'integrity, his business ability and ripe experience, securities- ' which were “ gilt-edged, as good as gold.” Like many a' worse man, he proved unequal to the emergency. To annul the transactions, the result of this double relation, it is not necessary to establish that Mr. Sherman intended to perpetrate a fraud upon the plaintiff. (Munson et al. v. Syracuse, G. & C. R. R. Co., 103 N. Y. 58; Smith v. Seattle, L. S. & E. Ry. Co., 72 Hun, 202, 208; Conkey v. Bond, 36 N. Y. 427.)

As was said in the case first cited: “ But we are of opinion that-the contract of September 14, 1875, is repugnant to the great rule of law which invalidates all contracts made of a trustee or fiduciary, in which he is personally interested, at the election of the party he represents. There is no controversy as to the facts bringing the case as to Munson within the Operation of the rule. * * * He stood in the attitude of selling as owner and. purchasing as trustee. The law permits no one to act in such inconsistent relations. It does not stop to inquire whether the contract or transaction was fair or unfair. It stops the inquiry when the relation is disclosed, and sets aside the transaction, or refuses to enforce it, at the instance of the party whom the fiduciary undertook to represent, without undertaking to deal with the question of abstract justice in the particular case.”

Had Sherman made no statement whatever as to the character of these bonds, a suit for the rescission of the transaction would lie. He was acting in a fiduciary capacity for the plaintiff. It was his. duty to explain to her in the clearest, most ingenuous manner that these bonds had been purchased and were sold by his bank; that they had been procured at a discount; that they were second mortgage bonds and were held for speculative purposes. The bare suppression of these facts was tantamount to proof of actual fraud so-far as implicating him' in a legal liability to her is concerned. (Hammond v. Pennock, 61 N. Y. 145.)

There was a default in the payment of the interest on the Baraboo bonds in June, 1894, and thereafter the interest on some of the other bonds was not paid by the obligors as it matured from time to time. . The defendant paid this defaulted interest as it accrued until October, 1896. After the default occurred the plaintiff undertook to have Mr. Sherman take back the bonds and repay her as he had promised. This agreement he repudiated. The bonds then were not negotiable, unless at a great sacrifice, as- the fictitious value imparted to them had disappeared. It was not until August, 1896; that the plaintiff learned these bonds had been purchased by defendant, and were owned by it at the time of the respective transfers toller, and that her supposed agent was in fact disposing of securities-held by defendant and obtained for the purpose of speculation. She then tendered back what she had received, demanded her money and sought to rescind the transaction.

Mr. Sherman has died since the commencement of the. action, but the salient facts which rendered the defendant liable are undisputed and arise mainly from his relation- to the parties and the character of the securities transferred to the plaintiff under the' guise of first mortgage bonds.

While the evidence is undisputed that the bank was the owner of these bonds and expected to sell them, and was, therefore, an undisclosed principal, it is contended that the transaction was with Mr. Sherman as an individual and hot' as a representative of the bank. He had no interest in the bonds except as one of the owners of the capital stock of the defendant. The bank had these bonds for sale. It received the avails of these transfers. It knew Sherman had disposed of the bonds and to whom.,' It received the fruits of his agency, and must accept also the burden imposed by that relation. (Fairchild v. McMahon, 139 N. Y. 290; Reynolds v. Leyden et al., 57 N. Y. Supp. 210.)

It is further urged on behalf of the bank that the statements made by Sherman to the plaintiff which induced the acceptance of the bonds were simply the expression of an opinion of their value. He stated they were first mortgage bonds. The vice of that statement was its falsity as to the character of the securities. Their value depended very materially upon the truthfulness of that representation. It was of much force in controlling her action. It was more than a naked statement as to the value. (Fairchild v. McMahon, supra; Harlow v. La Brum, 82 Hun, 292.) But, as we have stated, the nature of the transaction carries its own condemnation irrespective of any declaration.

The point is pressed that the buying and selling of bonds are not within the compass of the powers of the bank, and it cannot be made responsible for the excessive exercise of its powers by its officers. That is, a corporation, acting solely through officers, receives the fruits of the business engagement made by its chief functionary, knowing he is acting in its behalf, clothing him with authority to consummate the specific act complained of; and yet, when a rescission, is sought, because of his fraud, the bank can screen itself behind the want of power in it to make the deal. The bank purchased the bonds, not for an investment, but to sell at a profit. It advertised broadcast that it held them for sale. There was no pretense then of the lack of authority, although every' stockholder must have been aware of the business carried on, for publicity was given to the fact by the bank itself that it held these bonds for disposal. The doctrine"of ultra vires cannot be resorted to shield the defendant after its action in these transactions has been so open and notorious. (Burden v. Burden, 159 N. Y. 287, 304; Kent v. Quicksilver Mining Co., 78 id. 159, 184.)

The bank has been the recipient of all the benefits resulting from these sales, and, if the officials have been guilty of misconduct, it was while they were pursuing the business of the defendant. It would be inequitable to hold now that the bank is not responsible for whatever its president did under its commission.

The judgment is affirmed, with costs to the respondent.

All concurred, except McLennan, J.. not sitting.

Judgment affirmed, with costs.  