Robinson v. Hall , 63 F. 222 ( 1894 )

HUGHES, District Judge

(after stating the facts). The foregoing were the principal averments of the bill of the receiver of the bank. To this bill the defendants demurred, and the court below sustained the demurrers. The original bill was defective for lack of precision in several of its clauses charging negligence; but this defect seems to have been cured by two amended bills, filed by leave, and does not seem to have been made by the court below the ground on which the demurrers were sustained. The appeal to this court is from the decree below sustaining the demurrers. The case is here, therefore, on the question whether the president and directors of this hank were liable, and should be held responsible, for the losses sustained by the bank through their negligence in the particulars set out in the bill of complaint and its amendments.

Counsel for the defendants rely, in their contention that the directors of the bank should be exonerated from blame and exempted from liability, chiefly on the decision of the supreme court of the United States in the case of Briggs v. Spaulding, 141 U. S. 132-174, 11 Sup. Ct. 924. That decision is a valuable contribution to the law of the perplexing question, how far, in what cases, and under what circumstances directors of national banks should be held liable» for losses sustained'by these banks as the result of neglect of duty on their part. These officers receive no compensation. They are under no compulsion to give regular attendance to directors’ meetings, and 1 o their official duties. They are chosen for their exceptional character and standing in the community, and for their supposed knowledge of its business, and of the pecuniary responsibility of those who borrow from the bank. The most valuable directors are those who are indifferent to any advantage or prestige which the position may give them, and who serve the hank from motives which could not be compensated by money. The courts, therefore, in dealing with instances of gross and glaring negligence on the part of directors of banks, are under perplexing restraint lest they should, by severity in their rulings, make directorships repulsive to the class of men whose services are most needed; or, by laxity in dealing with glaring negligences, render worthless the» supervision of directors over national banks, and leave these institutions a prey to dishonest executive officers. The decision in the case of Briggs v. Spaulding is chiefly valuable as furnishing examples of directors whom the courts should not hold to account for neglect of duty. That case went in the court below beyond the demurrer, and was heard on the merits and on full proofs. It was one of the allegations of the bill that the bank was entirely solvent and in sound condition on the 3d October, 1881. It failed on the 14th April, 1882. Other facts in the case were as follows: On the 10th January, 1882, a board of directors was elected, composed of Spaulding, Johnson, Francis Coit, Lee, and Vought; Spaulding and Johnson for the first time. Lae was elected president, and thereupon ceased to be cashier, an office he had held for many years. The cause of the bank’s suspension April 14th was recklessness of management by Lee while cashier, and after he became president. It was not contended that the defendants had knowingly violated, or permitted to be violated, any of the provisions of the national banking act, or that they were guilty of any personal dishonesty in administering the affairs of the bank; but it was charged that they were lacking in diligence in the performance of duties enjoined upon them by the act. The suit was against Lee, Francis Coit, Spaulding, Johnson, Cushing, the executrix of Vought, and the administrators of Charles Coit. The last named had been president and director for several years until his death, in December, 1881. Except this Charles Coit and Cushing, the men sued were those who had been elected directors on the 10th January, 1882. Two of the defendants—Spaulding and Johnson— Avere elected then for the first time. The bank had lost its capital of $250,000 and also a surplus of $74,000, and had incurred liabilities in excess of assets to the amount of $535,000. All this had occurred between October 3, 1881, and April 14, 1882, when the bank suspended; all directly through the wrongful conduct of Lee, and indirectly, as charged, through the negligence of the directors. The bill Avas taken for confessed as to Lee and as to the executrix of Vought. As to Cushing, it was proved that he had resigned as director, and sold all his stock in the bank, on the 24th September, 1881, and was neArer a qualified director afterwards, or capable of negligence. Charles Coit had obtained leave of absence on the 3d October, 1881, on account of severe illness, of which he died December 11, 1881. Johnson was newly elected in January, 1882; very soon after which time his Avife became severely ill, and he himself, in consequence, fell into such mental and physical infirmity as to be incapacitated for business. Spaulding was 72 years of age, had retired from business, was elected for the first time on the 10th January, 1882, was Avholly unacquainted with the business of the bank, and was not expected, when elected, to give close attention to its affairs. He had been author of the national banking act as a member of congress, and Avas put on the board of this bank on account of his high character and wide popularity. In his answer he stated numerous circumstances tending to exonerate him from blame for inattention to the active duties of a director, which need not be detailed here. He and Johnson had been directors for the period of only three months; and in regard to the mental and physical condition of Johnson, and the age and other circumstances of ¡ápaulding, it was a question whether they could reasonably be expected to have familiarized themselves with the affairs of the bank within that time. As to Francis Coil, he had been elected to” replace another director on liny 20, 1881, when in very feeble health, and unable to transact any business. He was re-elected in January, 1882. Under the affliction of rheumatism, finding himself unable to give attention to his duties, he had sold all his stock in (he bank on the 11th April, 1882, three days before its suspension, in ignorance of its unsound condition. The supreme court decided that Cushing, the two Coits, Spaulding, and Johnson could not reasonably he held liable in their personal estates for the losses the hank sustained during their tenures of office as directors. It held that the degree of care to which those directors were bound was that “which ordinarily prudent and diligent men would exercise under similar circumstances; and in determining that, the restrictions of statute and the usages of business should be taken into account. What may be negligence in one case may not be want of ordinary care in another, and the question of negligence is, therefore, ultimately a question of fact, to be determined under all the circumstances” of each cast*. To this decision of the supreme court exonerating Cushing, Coil's estate, Spaulding, Johnson, and Francis Ooifc there was a, strong and imposing dissent. The justices were Harlan, Cray, Brewer, and Brown, whose objections are stated in an extended and very cogent opinion written by Mr. Justice Harlan. Such a dissent admonishes the federal courts which, in the course of duty, have to deal with this question, very strongly against exceeding the limits of leniency exhibited by the supreme court towards the directors with whom ir dealt in the case of Briggs v. Spaulding.

In the case at bar we have an essentially different state of facts to consider. The frauds and irregularities which resulted in the ruin of the bank went on through a period of more than three years, during all of which time the defendant directors were in office. Many of these irregularities were not things of secret occurrence and sudden development. They were such as must have been known to the defendants, if they gave even the most casual attention to the affairs of the hank. The embezzlement of Bowden, the $45,000 loans to the Aorthrops and to Kerchner, and the losses resulting, were facts that could not have eluded the most cursory attention of the directors to their duties. In respect to their omission to register the mortgages, it is a mistake to suppose that the directors of national banks cease to be such, and that their duty to the bank lapses, when an examiner is put in charge of its funds, properties, and hooks by the comptroller of the currency. It is incumbent upon them to give attention to these affairs even more specially after the examiner takes charge than before. In the case at bar it was especially their duty to register the mortgages held by tbe bank from Mitchell, Boatwright, and tin* Aorthrops. Their duty was the more special and urgent in inspect to these securities in consequence of (he fact that the management of the affairs of the hank had been taken from its own executive officers and committed to a temporary officer appointed by the comptroller, who in all probability was unfamiliar with the registration laws of North Carolina. They were still as much the advisers of the bank examiner as they had been of the cashier, notwithstanding they were not invested by law with the control over him, which they were empowered to exercise over the cashier. It was especially the duty of the defendant directors, acquainted as they were with the local laws of registration, to see to and make certain the prompt registration of the three mortgages. Their duties as directors did not cease in these respects until after the appointment of the receiver of this bank.

In respect to tbe action of the defendants, or some of them, in. checking out their deposits two months before the suspension, in full knowledge that such an event must occur, there could he no adjudication except after plenary proofs. That depositors generally are at liberty to check out the entire funds at their credit before suspension is clear; but even they, after suspension, are entitled only to such percentage of their deposits as the assets of the bank will liquidate. If directors are depositors, and know two months or more before suspension that that event is inevitable, and that the bank can pay only a percentage of its deposits, and yet check for the whole of their own balances, thereby diminishing the percentage to which other creditors would be entitled, they certainly defraud, to the extent of the diminution, the creditors whose interest they are relied upon to protect, and should be held to strict accountability. In the present stage of this case the incident is of importance only in showing that the defendant directors were not prevented by any special circumstances from giving close attention to the affairs of the bank when their own personal interests were seriously involved.

On the whole case as shown by the record, we are of opinion that the court below erred in sustaining the demurrers to the hill as finally amended, on the grounds stated in the opinion of the learned judge below, and that the decree must be reversed. The case must go back to the court from which it came, the demurrers there filed must be overruled, and tbe case proceeded in on plenary proofs to a decree on the merits.