Summary
ERROR to the Circuit Court of Maryland.
This was an action of assumpsit brought in the Court below by the defendants in error, against the plaintiff in error, Etting, as the endorser of the promissory note of James W. M‘Cullough, under the following circumstances,
In the year 1819, the president of the Branch Bank, established at Baltimore, his pártner in trade, M‘Cullougli, the cashier of the branch, and Williams, one of the directors of the parent bank, had contracted a debt to the bank to the amount of 3,497,700 dollars. The directors at Philadelphia, in consequence of some information which- they had received respecting it, passed a resolution, on the 19th of February, 1819, calculated to draw forth a complete statement of the case, with all its circumstances. This resolution. brought the papers it required, and, also, brought the president and cashier to Philadelphia, who attended for the purpose of making verbal explanations. These were received, and the.case was. referred, on the 16<th of March, to a committee, whose report was made oh the 30th of the said month. It appeared by this report, that' the securities offered for the debt consisted of 20,848 shares of the stock of the bank, of 26,550 shares previously pledged for very large sums in London, Liverpool, New-York, and Bostoq, the amount of which was not stated, and the personal liability of the debtors themselves. The'report stated, As the result of many conferences, and a good deal of deliberation,” an offer on the part of the debtors to give additional security for 900,000 dollars, payable in five years by annual instalments. A part of the proposed arrangement was, that the shares previously pledged in London, and elsewhere, should be liberated from the claim of the bank, and that the separate liability .of each for 300,000 dollars, should be received, instead of the joint liability of all for 900,000 dollars, This offer, with some modifications, was accepted by the bank.. A part of the security offered by M£Cullough, were sixteen merchants of Baltimore, who were to become bound for 12,500 dollars each. The committee recommended the acceptance of these terms, and also recommended, that the sufficiency of the security offered by Williams, and M'Cullough, including the sixteen sureties proposed by M'Cullough, should be referred to the members of the board residing' in Baltimore. This course was adopted by the bank, and the committee ©f members residing in Baltimore reported on the whole subject. Of the sixteen names proposed for their consideration, three were withdrawn, and three were objected to. Among those who were accepted was Etting, the plaintiff in error. The negotiations, investigations, and arrangements, for the completion of the business, were some time in progress. Propositions were made for changes of the securities, and, on the 10th of May, the president, of the bank addressed a letter to the committee in Baltimore, urging them to bring it to an immediate- close. On the 14th of May, the committee at Baltimore reported the documents which had been executed in pursuance of previous arrangements made with the debtors, a report of which was made by the committee at Philadelphia, on the 17th of the same month, and, on the 18th, M‘Cullough was removed from the .office of cashier, which he had held from the first establishment of the bank. It was admitted, that he was a young man worth nothing, who had a fa - mily, and whose salary as cashier was 4,000 dollars.
When the n ite endorsed by Etting, the plaintiff in error, ft 11 due, he refused to pay it; on which it was. protested for non-payment, and this sult was brought by the bank. At the trial m the Court below, the whole matter was given in evidence, and the Court was moved to instruct the jury on the law which would arise on the facts of the case, and the inferences which the jury might draw from those .facts. The counsel for the plaintiffs moved the Court to instruct the jury, that if they should be of opinion, from the evidence, that the defendant, Etting, without any commurfication with the plaintiffs, but on the application d£ M‘Cuí]oügh only, agreed to become his endorser, under the arrangement made between him and the plaintiffs, although they, should be satisfied, from the evidence offered by the defendant, that the said M‘Cullough deceived the said Etting; that it was known to the bank before, or pending the negotiation, that the debt from M'Cullough, or the greater part thereof, had ,grown out of his unauthorized and fraudulent appropriation of their funds to his own use, which knowledge the bank did not promulgate, though they contemplated his removal as soon as the securities should be given, in conformity with the arrangement which had been made ; that the defendant endorsed the note in ignorance of any fraud on the bank, or of any abuse of his offiee of cashier, or of any. probability of his removal from the said office; that, had the defendant 'known these circumstances, he would not have endorsed the said note : and that the bank fore bore to promulgate either the information they possessed, or their intention to remove the said M‘Cullough, under the inr ression, that the disclosure would increase the difficulty of the said M‘Cullough in procuring secu-ity, if not render it impossible for him to procure it; yet,, if they shall also be of opinion, that the defendant, without making any inquiries of the plaintiffs on the subject of such information and intention, or holding any communication with them on the subject of his intended endorsement, did, of his own accord, on the application of the said M'Cullough, and for the purpose of giving-effect to the said arrangement, endorse the said note on which this action is brought, that there was nothing in the evidence so given by the defendant, to affect the plaintiff’s right of recovery in this action. That, in order to vitiate the said note and endorsement in law, and to bar .the plaintiff’s right of recovery thereon, on the ground of a fraudulent misrepresentation, or fraudulent concealment of circumstances known to them, and unknown to the defendant, it was incumbent on the defendant to show that he applied to the plaintiffs for information, or heid some communication with them for the purpose of receiving such information, and that on such application or communication, the plaintiffs either misrepresented or concealed such circumstances; and that, in the absence of such proof, there was nothing in the facts so given in evidence' by the defendant, to affect the right of recovery in the action.
. The Court gave the instruction as asked, to which an exception was taken,
The counsel for the defendant then moved the Court for instructions’, that if the jury should draw from the evidence-certain inferences \yhich were stated, the plaintiffs were not entitled to recover. These inferences were, that the bank was fully informed in Mareh, 1819, of the fraudulent conduct of M‘Culloúgh, the extent of his misapplication of their funds, and of his insolvency; that on receiving this information, they became satisfied of his unfitness to continue in office, and determined to remove him. That, however, they continued him in office until the 18th of May, carefully concealing the circumstances, and their determination, for the purpose of obtaining security of.the debt due to them from the said M‘Cullough, one of which so contemplated securities was the note, in question. That the defer: dant was, to the knowledge of the plaintiffs, ignorant of M‘Cullough’s breach of duty, and of the determination to remove him, and endorsed the note by reason of that ignorance.
The Court refused to give this instruction, unless the jury should be further of opinion, ’.that the defendant was led into this state of Ignorance in consequence óf inquiries made by him of the plaintiffs, or of some previous communication between them and. him.
On the farther application of the. counsel for the defendant,, praying the Court to instruct the jury, that on the statement and evidence contained in the bills of exceptions, if the jury believed the same, the plaintiffs were not entitled to recover; the Court refused to give the instruction asked, and directed the jury, that on the evidence aforesaid the plaintiffs were entitled to recover.
Judgment was rendered for the plaintiffs in the Court below, and the cause, was brought by writ of error to this Court.
3. That the continuance of M'Cullough in the office of cashier, from the 16th of March, 1819, (when his misconduct in office came to the knowledge of the president and directors of the bank, until the 18th of May following, when he was dismissed, was a violation of the duty of the president and directors to the government of the' United States, and to the public, and, therefore, vitiated any contract obtained by means of such continuance in office.
Upon the first point, it was argued, that the concealment of material circumstances, known to one party, and unknown to the other, vitiates the contract.a In the opinion given by the Court below, the principle was admitted, but with this qualification, that it must be on inquiry or communication, for the purpose of information. In this view of the subject, the only question would be, whetherthe ruléis subject tothis limitation, i. e. of inquiry or communication for the purpose of information. But an exception to the rule was supposed to exist, and it might be said, that a party is not bound to communicate circumstances extrinsic to the contract, and that the circumstances concealed were extrinsic. If this proposition were true, although there had been inquiry and communication, yet the facts themselves being of such a character that they need not to have been disclosed, that alone created the exception to the rule. But, it ivas insisted, the exception ought to be confined to those facts which are equally open to both parties. The ground upon which Etting undertook for M‘Cullough s performance, was his confidence in his supposed integrity, and in his resources and credit derived from his connexion with the bank. No case could be found, which states, that inquiry is necessary to create the obligation to disclose material facts, which are not equally within the knowledge of both parties. The fraud consists in dealing with the party in ignorance, and leaving him so. It is not necessary that the other party should have created the false impression, or intended to have created it. It is sufficient that he' knows it, and. takes advantage of it.b Undue concealment consists in the suppression of a material fact, not in the knowledge of both parties, and not of a nature to be equally known to both parties, in a case where confidence s reposed that the fact does not exist. In Laidlaw v. Organ, the intelligence was of a nature to be cclually known to both parties, and it was not a ^act resPectín§' which confidence is generally reposed that it will be disclosed.
On the second point, it was argued, that here was an act done in order to give a false credit, and it did give false credit. It was a positive deceit by acts, though not by words. It was asked, whether a party might lawfully deceive in one way, and not in the other ? The law is more consistent with common justice, and says you must do nothing to deceive.a It was a case of industrious concealment.b By continuing the cashier in office, the defendants in error gave him a fictitious credit which they knew did not belong to him. It was analogous to the ordinary case of the fraudulent misrepresentation of the credit of another.c It had been said there was no inquiry. Why was there none ? Because, the very continuance of the officer in office, was evidence that they thought him honest. It might, perhaps, be contended, that nothing was positively said or done by the bank calculated to mislead the surety. But silence, or an omission to act, may, in many cases, as effectually deceive the party, as the most explicit declaration, or the most positive acts. Continuing the cashier in office was equivalent to a suggestio falsi.d
On the third point, the peculiar character of the bank was insisted on, as an instrument of the government, not. created for its own profit merely, but as a means to aid the financial operations of the governmenta Both the public and the government were deceived and injured by the misplaced confidence of the bank in their cashier. It was their duty to have removed him the ihstaiit his default was discovered. It is contrary to the policy of the law to enforce a contract obtained by a breach of duty to the public. . The bank may be considered as a public officer, and is bound by the same obligations, and owes the same duties, as any other public officer. But, would it be pretended, that a public officer coüld keep an unworthy agent or. deputy in office, for the mere purpose of securing a debt due to himself?
Mr. Fonbtanqne, as to what circumstances a contracting party is bound to disclose : “ If a man, by the suppression of a truth which he was hound to communicate, or by the wilful suggestion of a falsehood, be the cause of prejudice to another, who had a right to a full and correct representation of thejact, it is certainly agreeable to the dictates of a good conscience, that his claim should be postponed to that of the person whose confidence was'induced by his representation.”a Under certain modifications, and with certain exceptions, the party is bound to communicate all circumstances intrinsic in the contract itself; all those circumstances which enter into the contract as ingredients, and form constituent parts of it. But, with regard to-circumstances extrinsic to the contract, though forming inducements to enter into it, however powerfully he may believe and know they are operating with the opposite party, he is at liberty to keep silence. Intrinsic circumstances are such, for example, as regard the quality and price of the article, which must, of necessity, enter into the inducements. Extrinsic circumstances are those considerations which form no component part of the contract itself, but which may form inducements with the party to enter into it. The distinction is founded a the- part of the defendants in error, it was stated, that the rule is accurately laid down by in reason, and is necessary to the business of life.a With regard to the whole class of extrinsic circumstances, though, if the party undertake to disclose them, he must take care to state the truth, yet, he .may maintain the most obstinate silence respecting them, and the contract will still be valid.
As to the objection,'that the rule roust be received with the qualification, that the facts are equally accessible to both parties, it was said, that if by this was meant, that they must be equally accessible to both by the use of ordinary diligence, it could not be considered as well. founded.b And, if it meant' nothing more than that it was physically accessible, where the party pushes his inquiries in all possible directions, and takes sufficient time to make the discovery, then it was inapplicable to any practical purpose in the business- of life. The qualification -had been borrowed from the law with regard to intrinsic circumstances, to which it was properly applied, and transferred to extrinsic circumstances, to which it was wholly inapplicable. Assuming, that, with regard to extrinsic circumstances, a party may conceal them without impairing the contract, there was not a feature in any one of the instructions in this case which was not justified by the operation of that principle.' The keeping the cashier in office was doing nothing. It was a mere forbearance to act. All the cases referred to, of industrious concealment, admitted of of two answers:. (1.) That the concealment was of circumstances intrinsic to the contract. (2.) That, in all the cases, no acts were done to alter the antecedent state of things for the purpose of concealment. As to the case of Smith v. The Bank of Scotland,a which had been relied upon as analogous to the present, it would be found that there was a positive misrepresentation on the part of the bank, they alleging that further security was wanted on account of an increase of business, when, in fact, there wás a decrease. Another case from the same book might have been cited, where an attempt was made to set aside a security bond, alleged to have been obtained by unfounded representations of circumstances generally, without any direct reference to the bond, and the Court having, according to the forms of the Scottish law, appointed the sureties to say whether they would refer to the respondent’s oath, “ that he did elicit that bond ?” and the sureties having admitted, that “ they never meant to say that there was any degree of personal influence with either of them to ¿licit the' bond of relief,” the Court of Session pronounced in favour of the bond, which was affirmed by the House of Lords on appeal.b So, here, it might be asked, whether the plaintiffs below had done any thing to eUcit the note. All that was alleged was, that they had not communicated their intention of removing the cashier, when they were not asked respecting their intentions, and when it was equally lawful for them to retain or to remove him. The effort on the other side is to induce the Court to establish a new rule of law, which, however analogous to other principles merely applicable to the contract of insurance, was admitted, even by the ingenious and learned author of the treatise which had been referred to, not to form a part of the jurisprudence of this country.a
Syllabus and headnotes are prepared by the reporter or publisher, not the court, and are not part of the opinion.
