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Ornn v. Merchants' National Bank.

"2d. That this Chicago property was originally owned by one Walker, who sold it to one Watson, who sold it to defendant Lewis Ornn. The property was valued at about $4,000, and Watson executed to Walker a deed of trust for $2,000 of the purchase-money. This deed of trust was an existing lien on the property at the time it was conveyed by Watson to Lewis Ornn, and at the time he conveyed it to plaintiff, and which said existing lien Ornn agreed to pay off when due, and protect the second lien held by plaintiff of $1,500.

"3d. That after the Chicago property was conveyed to the plaintiff, $500 of the indebtedness upon said deed of trust became due and payable, and the plaintiff, upon the request of Lewis Ornn, and in order to protect its lien of $1,500 from being lost, paid it; and the note and mortgage in suit here were given for that $500, but were given before said payment was made; and that the plaintiff, after taking this note and mortgage, sent drafts to Chicago to make payment of said $500.

"4th. That the property described in the mortgage in suit here, at the time of the making of the note and mortgage, was the homestead of the defendants, Lewis Ornn and his wife, Abbie E. Ornn. "5th. That the plaintiff is a National bank.

"And as a conclusion of law, the court finds that this mortgage is valid under the National Banking Law."

McComas & McKeighan, for plaintiffs in error.

VALENTINE, J. [After deciding a question of practice.] The plaintiffs in error also claim that the mortgage now sued on is void. They claim that it is void for the reason that it is a mortgage upon real estate given to secure a debt concurrently created. The facts affecting this question are substantially as follows: The bank is a National bank. Lewis Ornn owed it a large sum of money. To partially secure the payment thereof he gave a mortgage to the bank on some property owned by him in Chicago, Illinois. There was a prior lien of $2,000 on said Chicago property which Lewis Ornn agreed to pay. Five hundred dollars of the same afterward became due, and the bank, in order to save and protect its own lien on said Chicago property, and at the request of said Lewis Ornn, paid said sum of $500, and then took the note and mortgage now sued on for that amount on property situated in Crawford county,

Graves v. The Lebanon National Bank.

Kansas. We think the mortgage is valid. The taking of the mortgage under such circumstances was not a violation of the National Banking Law. We think the bank had a right to get all the security it could for money which it necessarily had to pay out. And therefore we do not think that the mortgage is void. The judgment of the court below is affirmed.

All the justices concurring.

GRAVES, appellant, v. THE LEBANON NATIONAL BANK.

(10 Bush, 23.)

Bank Sureties on official bond of cashier released by negligence of directors — Presumption as to date of instrument - Acceptance of bond.

Defendants became sureties on the official bond of a bank cashier, being induced so to do by a statement published by the directors, according to law, whereby the affairs of the bank appeared to be well managed. The cashier of the bank was a defaulter when the statement was published, of which fact the directors, by the use of slight care, might have learned. In an action on the bond for subsequent embezzlements, held, that the sureties were not liable; they had a right to believe that, before publishing the statement, the directors had used reasonable diligence in ascertaining the condition of the bank, and, being misled by the statement, were not bound. A bond was dated the day of 1869. Held, that the legal presump

tion was that it did not become binding on the obligors until the last day of that year.

It is not essential that National banks shall signify their acceptance of the official bonds of their officers in writing.*

A

CTION against the sureties on an official bond. The opinion states the case.

Roundtree & Rodman, for appellants.

W. J. Lisle and W. B. Harrison, for appellees.

LINDSAY, J. The judgment now before this court for revision

* As to the bonds of officers of National banks and the liability of sureties thereon, see note to Tapley v. Martin, post.

Graves v. The Lebanon National Bank.

is that rendered in the cross-action of the National Bank of Lebanon v. E. A. Graves, D. L. Graves, and R. C. Harris, sureties for Mitchell, the defaulting cashier.

Although the bond sued on was executed to the president and directors of the bank, it is evident that it was for the protection of the association, and no sufficient reason is perceived why it may not maintain the action.

The right to take advantage of a supposed defect of parties appearing on the face of the cross-petition has been waived. Appellants did not make this defect a ground of demurrer, nor was it taken advantage of by plea. The answer goes to the merits of the controversy, and upon the issues raised the cause was prepared and submitted for judgment. The fact that there is a defect of parties plaintiff cannot be made a question for the first time in this court.

The National Bank of Lebanon organized under the provisions of the National Currency Act of June 3, 1864. It commenced business on or about the 3d of August, 1869, at which time Mitchell was selected as cashier, and was at once inducted into office. Although required to execute bond immediately, for reasons not satisfactorily explained by the record, the bond was not delivered until about the 1st of November following. In June, 1870, Mitchell was discovered to be a defaulter to a large amount. He failed to make good the losses occasioned by his breach of duty, or to sufficiently indemnify the bank, and this action was instituted to recover from his bondsmen the amount of these losses.

From what has already been said it is not necessary to notice further the technical defenses relied on by appellants, except to state that we do not regard it as essential that banking institutions doing business under the National Currency Act shall signify their acceptance of the official bonds of their cashiers by a written memorandum to that effect entered upon the journals or minutebooks kept by their directory.

The acceptance of the bond may be presumed from the fact that after it has been submitted to the directory for approval it is retained by the bank, and the cashier permitted to enter upon or continue in the discharge of his duties; and that it was presented. to and approved by the directory may be established by oral testimony. Bank of United States v. Dandridge, 12 Wheat. 64; Dedham Bank v. Chickering, 3 Pick. 335; Amherst Bank v. Root, 2

Graves v. The Lebanon National Bank.

Metc. (Mass.) 522; Union Bank v. Ridgely, 1 Har. & G. 324; 1 Morse on Banking, 223.

The defalcations for which appellants are sought to be held liable are alleged to have occurred between the 14th of September, 1869, and the 3d of June, 1870. The court below adjudged that the sureties in the bond should account for such as occurred after its acceptance, and rendered judgment against them for $8,089.23.

The first business transacted by the bank after its organization was the purchase of the assets of the banking firm of Burton, Mitchell & Co.

Mitchell, the defaulting cashier, was a member of that firm, and had been acting as its cashier. The National Bank accepted from Burton, Mitchell & Co. bills and notes represented to amount to about fifty-one thousand dollars, but which in point of fact amounted to only about thirty-nine thousand dollars. This discrepancy was the result of embezzlements upon the part of Mitchell while acting as cashier for said firm. It may be presumed that Burton, the senior member of the firm, who became one of the directors of the National Bank, was ignorant of these embezzlements. The directory seem to have relied implicitly upon the integrity of Mitchell, and hence he was enabled not only to conceal the frauds practiced on Burton, Mitchell & Co., but by such concealment to commence the discharge of his duties as cashier of the National Bank by a fraud upon it.

In October, 1869, the banking association, pursuant to the provisions of section 34 of the National Currency Act, and the amendment thereto of March 3, 1869, made a report to the Comptroller of the Currency, and on the 23d day of that month caused it to be published in the Lebanon Clarion, showing in detail and under appropriate heads its resources and liabilities at the close of business October 9, 1869. This report was sworn to by Mitchell, and certified to be correct by three members of the directory.

Similar reports were made and published in the same newspaper touching the condition of the association on the 22d of January, the 24th of May, and the 9th of June, 1870. None of these reports showed embezzlements upon the part of the cashier or any officer connected with the bank. They were not only not calculated to excite suspicion as to the manner in which the affairs of the association were managed, but tended to inspire the public with confi

Graves v. The Lebanon National Bank.

dence in its prosperity and in the integrity of those to whom its business affairs were committed

Appellants plead and rely upon the statements thus officially promulgated by the officers of the bank as constituting an estoppel upon it to assert against them claims that cannot be established without showing that these official reports, made and published in obedience to law, were not true. We are not inclined to the opinion that they can claim immunity upon account of any report made after they became the sureties of Mitchell. The reports are sworn to by him, and it may be assumed that upon his representations, and upon what appeared from the books of the association as kept by him, the directors were induced to certify to their accuracy.

The directors may have been negligent in the discharge of their duties, and this negligence may have enabled Mitchell for the time. to misappropriate the funds of the bank, and to conceal its true condition by the false reports made to the Comptroller of the Currency and by false entries upon the books of the association. But this negligence cannot avail the sureties who covenanted that their principal should "well and truly perform the duties" of his position, and should "well and truly account for all moneys and other valuables that might' pass through his hands." Their covenant is unconditional, and no failure of duty upon the part of the directors of the association, short of actual fraud or bad faith, can be deemed sufficient to exonerate them from its performance. The exaction of the bond implies that the association was not willing to rely alone upon the watchfulness and care of the directory. It required in addition to that safeguard that the honesty and fidelity of its cashier should be guaranteed by sureties who were able to make good any losses it might sustain by reason of his negligence or dishonesty.

There is a question, however, arising upon the facts stated in the pleading and fully sustained by the proof, the decision of which, it seems to this court, must be in favor of the sureties; and this question being decided in their favor, their exoneration from liability on account of Mitchell's misconduct while acting as appellee's cashier, and after the bond was delivered and accepted, follows as a necessary sequence.

There is no principle of law better settled than that persons proposing to become sureties to a corporation for the good conduct and fidelity of an officer to whose custody its moneys, notes, bills, and

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