Swentzel v. Penn Bank , 147 Pa. 140 ( 1892 )

Opinion by

Mb. Justice Paxson,

This case has been so carefully considered by the learned master and court below, that little remains for us to add. Indeed, in a case of such magnitude, involving a vast mass of testimony, we can do little more than see that the principles upon which it has been decided below are sound.

Briefly stated, the bill was filed for the purpose of holding the officers and directors of the bank responsible for the losses resulting from its failure. It is claimed that the officers and directors were negligent in their management of the bank’s affairs, and that by reason of such negligence the losses occurred.

It is conceded on all sides that the losses and the disastrous failure of the bank were directly traceable to Mr. Riddle, its late president, now deceased. He practically emptied, the vaults of the bank in carrying on a gigantic speculation in oil. This was done with the knowledge of the cashier, and the cooperation of one or more clerks or subordinates. It would have been extremely difficult, if not practically impossible, for any person to have committed such a swindle without the cooperation of some one inside. The question is whether the directors ought to have known of these transactions, and whether their failure to know what the real plunderer was doing, was such negligence on their part as to render them liable to the creditors of the bank.

The Penn Bank closed its doors in May, 1884. It is not too much to say that its failure was a great shock to the business interests of Pittsburgh. It was the cause of much excitement ; led to a large amount of litigation, much of it directed against the board of directors. As usual, in such cases, the current of public opinion was turned against them, and up to the present time they have been defending themselves against hostile litigation. The time has now arrived when the rights of the parties can be considered calmly, and disposed of in disregard of prejudice or popular clamor.

The first question that naturally suggests itself for our consideration is, the extent of the duty which the directors of a bank owe to the stockholders, whom they represent directly, and the creditors, whom they represent indirectly.

Upon this point there is a general misapprehension in the popular mind. This finds expression, after bank failures, in severe condemnation of directors, and a general assertion of the doctrine that their duty requires them to be familiar with all the details of the management. In the popular mind thejr are held to the rule that they ought to take the same care of the affairs of the bank that they do of their own private business. Even the learned judge below evidently adopted this view, when he said in his opinion : “ If we were to decide this case on first impressions, as to the conclusions of fact to be drawn, and under the decisions cited and rules laid down in the minority opinion in Briggs v. Spalding, we would say there was gross negligence, or want of the ordinary care that a man of fair intelligence would take of his own affairs.”

It cannot be the rule that the director of a bank is to be held to the same ordinary care that he takes of his own affairs. He receives no compensation for his services. He is a gratuitous mandatory. . His principal business at the bank is to assist m discounting paper, and for that purpose he attends at the bank at stated periods — generally once or twice a week— for an hour or two. The condition of the bank is then laid before him, in order that he may know how much money there is to loan. Once or twice a year there is an examination of the condition of the bank, in which he participates. The cash on hand is counted, the bills receivable and sureties examined, to-see whether they correspond with the statement as furnished by the officers. Beyond this he has little to do with either the cash or the books of the bank. They are in the care of salaried officials who are paid for such services, and selected by reason of their supposed integrity and fitness. To expect^ a director, under such circumstances, to give the affairs.of the bank the same care that he takes of his own business, is unreasonable, and few responsible men would be willing to serve upon such terms. In the case of a city bank, doing a large business, he would be obliged to abandon his own affairs entirely. A business man generally understands the details of his own business, but a bank director cannot grasp the details of a large bank without devoting all his time to it, to the utter neglect of his own affairs.

A vast amount of authority has been cited upon this question, which we do not think it necessary to review. It is sufficient to refer to a few cases only. In Spering’s Ap., 71 Pa. 11, the subject is very fully discussed by the late Justice Sharsvvood, and the rule of ordinary care is laid down. Not, however, the ordinary care which a man takes of his own business, but the o£dinaxy.cju^e„iff_a.3MP-_directoi in the business of a bank. Negligence is the want of care according to the circumstances, and the circumstances are everything in considering this question. The ordinary care of a business man in his own affairs means one thing; the ordinary care of a gratuitous mandatory is quite another matter. The one implies an oversight and knowledge of every detail of his business; the other suggests such care only as a man can give in a short space of time to the business of other persons, from whom he receives no compensation.

The same learned judge, in Maisch v. Saving Fund, 5 Phila. 30, laid down the'rule as follows : “As to the directors, however, receiving no benefit or advantage, they can be considered only as gratuitous mandatories, liable only for fraud or such gross negligence as amounts to fraud.” Again, in Spering’s Ap., supra, he said: “ Indeed, as the directors are themselves stockholders, interested, as well as all others, that the affairs and business of the corporation should be successful, when we ascertain and determine that they have not sought to make any profit not common to all the stockholders, we raise a strong presumption that they have brought to the administration their best judgment and skill.”,

We may also refer to Briggs, Receiver, v. Spaulding, 141 U.S. 132, which goes even further than our own cases upon this point. It does not relieve a director from the consequence of gross negligence in the performance of his duty, but it holds that he is not responsible where he has used the ordinary care which bank directors usually exercise. It is true this was the case of a national bank, but we apprehend that what is negligence on the part of a director of a national bank, would, as a general rule, be negligence by a director of a state bank, and subject to the same liability.

In rsgarcLto.what is ordinary care, regard must be had to the usages of the particular business; Thus, if the director of a bank performed his duties, as such, in the same manner as they were performed b]r all other directors of all other banks in the same city, it could not fairly be said that he was guilty of gross negligence. And care must be taken that we do not hold mere gratuitous mandatories to such a severe rule as to drive all honest men out of such positions. This thought is so well expressed by Sir George Jessel, M. R., in his opinion in In re Penn Coal Mining Co., 10 Ch. Div. 450, that I give his remarks in full: “ One must be very careful in administering the law of joint-stock companies, not to press so hard on honest directors as to make them liable for these constructive defaults, the only effect of which would be to deter all men of any property, and, perhaps, all men who have any character to lose, from becoming directors of companies at all. On the one hand, I think the court should do its utmost to bring fraudulent directors to account; and, on the other hand, should also do its best to allow honest men to act reasonably as directors. Willful default no doubt includes the case of a neglecting to sue, though he might, by suing earlier, have recovered a trust fund; in that case he is made liable for want of due diligence in his trust. But I think directors are not liable on the same principle.”

Holding, then, the rule to be that directors, who are gratuitous mandatories, are only liable for fraud, or for such gross negligence as amounts to fraud, it remains but to apply this principle to the facts of this case.

It is not alleged — it has never been alleged — -that the hands of these directors are stained by fraud. The bank was wrecked by its president, with the cashier and some of the clerks aiding and abetting. It was adroitly done, so far as the means were concerned, and it was concealed wholly from the directors. False entries were made in the books, and false accounts, or accounts with fictitious persons, were opened so as to hide the theft. The reports of the bank’s condition, made by the president to the directors, from time to time, showed it to be in good condition, while in point of fact it was honeycombed with fraud, and its assets squandered in wild speculations. It may be asked, why did not the directors discover this by an examination of the books? The answer is, that, if they had examined every book in the bank, with a single exception, they rvould not have found the fraud. That exception is the individual ledger. All the frauds were dumped into this book, and appeared nowhere else. The individual ledger contains the accounts of the individual depositors, and this book, by the rules of a large majority of the Pittsburgh banks, the directors are not allowed to see. This is a rule of policy on the part of most city banks, and the reason for it is, at least, plausible. A director, largely engaged in business, may have a number of rivals in the same business who are depositors in the bank. If he is permitted to examine their accounts it gives him an advantage and an insight into a rival’s affairs that few business men would tolerate. Hence, it is a question with many banks whether to adopt this rule or lose valuable customers, and they generally prefer the former. We are not speaking of the wisdom of the rule, only of its existence, as bearing upon the question of the director’s negligence. Are they to be held to be guilty of- gross negligence in not examining a book, which, by the rules of their own bank, and of four fifths of the other banks in Pittsburgh, the directors were not permitted to see ?

Nor do we think the directors were bound to regard the statements submitted to them as false, and the president, cashier and clqrks as thieves. They had nothing to arouse suspicion. All of these gentlemen stood high; they were the trusted agents of the corporation; paid for their services, and regarded in the community in which they lived as honest men.

Aside from this, the directors were among the heaviest stockholders of the bank. They collectively owned a large proportion of it. And so thoroughly were they deceived by the president as to its condition that, when the first stoppage occurred, they not only believed the suspension was temporary, but they showed their faith by their works, and upon their individual credit raised the sum of $289,000 to enable it to resume. They did not desert the ship like a parcel of drowning rats, but imperiled their private fortunes in an effort to keep it afloat. Under such circumstances it would be an act of gross injustice to hold them liable for the frauds of others, in which they had not participated — of which they had no knowledge — and which have only been brought to light with the aid of experts. ' We must measure this transaction by the light which these directors had at the time the transaction occurred. It would be unfair to judge them by the calcium light which has been turned on for six years, and which has enabled us to trace at last the sinuous path of Riddle and his confederates in crime, and the means by which this bank has been robbed and plundered. We are of opinion that the master' and the court below were right in their conclusion, and the decree is affirmed upon the appeal of the assignee, and the appeal dismissed at his costs.

HUTCHINSON’S APPEAL.

This was a cross-appeal from the same decree as that in Warner’s appeal. It was taken by the directors of the bank, and they complain that “ the court below erred in imposing upon the directors, the defendants below and appellants here, the costs of this case, including a master’s fee of $2,500.”

Costs in equity are in the sound discretion of the court, and we always hesitate to reverse for the exercise of such discretion. In this case, however, the directors have been compelled to defend themselves for years against litigation, which a careful and dispassionate examination of the case, at the proper time, would have shown to be without merit. Having succeeded in vindicating themselves from the charges made against them, we do not think they should now be compelled to pay the costs. The general rule is that the losing party shall pay the costs of his unsuccessful litigation, and we see nothing in this case to take it out of this rule.

The decree is reversed as to costs, and it is ordered that the costs here and below, including the master’s fee, be paid out of the funds in the hands of the assignee.

Thomas Hare, one of the defendants, assigns as error upon this appeal, that the court below erred in making and entering the sixth paragraph of the decree, which orders him to pay to the said assignee the sum of $8,716.23, with interest thereon from May 26, 1884, less five and seven eights per cent of the principal sum, said deduction being the amount of the dividend paid by the assignee to creditors upon the distribution, heretofore made by said assignee.

The facts are as follows: Thomas Hare and son, appellant’s firm, had the sum of $3,716.23 on deposit in the Penn Bank, on the day the bank finally closed. Being in the bank at the time, he drew this money out. The master and the court below held that he had no right to do so, and thus obtain a preference, after the bank had closed. There could be no doubt about this if the money had been his individual money. But he contends, that because it belonged to his firm he had a right to withdraw it. We think it is a distinction without a difference. It was his act, and even if we treat it as the act of the firm, it was done upon information obtained by him in his confidential relation as a director of the bank. We think the decree against him was properly entered, and his appeal is dismissed at his costs.