CLEWS V. BARDON.
617
for. It is certainly the duty of complainants' counsel to either reach a settlement or prepare the case for trial. Unless such action is had, defendant has leave to renew his motion at the next' term. CLEWS «(JirC'Uit (Jourt,
et ale v.
BARDON
et ale
E. D. Wi8con8in.
November 22,1888.)
A national bank was organized with a capital of $60,000. The promoter of the bank took 380 shares of stock in his own name, and procured the defend· ants to be directors, as well as a person to be elected cashier by them. The directors were not acquainted with tbe banking business. The proposed cashier was known to the directors, at least by reputation. and was supposed by them to be competent and trustwortby, and of considerable experience in the business, and they bad full confidence in bis integrity and ability to take charge of the bank. The cashier acted as manager of the loan and discount business of the bank, and the directors merely as advisers. when applied to. The promoter of tbe bank knew. and tbe other stockholders were presumed to know, that the directors were wbolly unused to the banking bus· :iness: Held, that tbe directors were not liable for the acts of the cashier in violation'of the banking law, done without tbeir participation or knowledge. 9.· SAME. The cashier made loans, in excess of 10 per cent. of the capital, to a manufacturing corporation supposed by him and by the public to be entirely solvent. None of the directors knew of the loans when made. but after a loan of $3,000 in excess of the lawful limit had been made, the <;a:"1ier informed one of them of such loan, and was by him advised to call it in when due; and thereafter such director's advice was asked las to a further discount to the same corporation, and he disapproved of it. and it was not made. Afterwards further loans or discounts were made to the same corporation, without the knowledge or consent of any of tbe directors. About eight months after the bank commenced business, one or more of the debtors of the bank failed, and the directors thereupon took the active management into their own hands. Held, that none of the directors had knowingly violated. or knowingly permitted to be violated, a,ny of the provisions of the banking law, and were not liable for such violation by the cashier.
IVE LOANS.
8.
SAME-OFFICERs MAY MANAGE BANK.
Under the banking law, the managem(;lnt of a national bank may be exercised eitber by the directors, or by the cashier or other officers; therefore the directors are not liable for the illegal or negligent acts of the cashier or other ollicers by whom the hank is m'anaged, if they bave no knowedge of such acts, and do not connive at them, or willfully shut their eyes and permit them. It seems that the liability of directors of a national bank is substantially the same under the banking law as at the common law.
4.
SAME-COMMON-LAW LIABILITY.
(Syllabu8 by th6 Court.)
In Equity. Wenzell Pinney
On final hearing.
Tiffany, (John M. Gilman, of counsel,) for complainants. Sanborn, for defendants.
BUNN, J. This suit is brought by the complainants as stockholders in the First National Bank of Superior, Wis., against the defendants as directors of said bank, to recover losses incurred by the bank in consequence of certain loans and discounts made by the bank, which turned
618
FED;ERAL :REPORTER.
out to be qad, on the ground of the alleged negligence of the said directors in. permitting such loans to be made in excess of the legal limit provided by the. national banking act.. The charge made by the complainants is that the directors negligently allowed the cashier of the bank, one T. K. Alexander, to make loans of money to the amount of $24,000, to the Paige-Sexsmith LumberCQ; and G. W. Sexsmith & Sons, in excess of the legal limit. Complainants also allege that the defendants, as such directors, negligently settled and compromised the ·several claims against these firms at 20 cents on the dollar, whereby a loss was also sustained by the bank. This is the substance of the complainants' claim against the directors. The action is brpught, and the jurisdiction of this court invoked, under and by virtue of the provisions of the act of congress known as the "Banking Acti" which provisions are as follows: "Sec. 5147. Each director shall an oath that he will, so far as the duty devolves upon him, diligently and honestly manage the affairs of the association,and will not knOWingly violate, or permit to be violated, any of the provisions of this act," etc.. . : ."8ec. 5200. 'rile totalliabilitie.i(to any association of any person, or ot any company, corporation, or lirm,.for money borrowed, including in the liabilities of· a company or firm the liabilities of the several members thereof, shall at no time exceed one-tenth of the capital. etc. ;But the discount of bills of exchange drawn in good faith against actually eXisting values. and the discount of commercial or business paper actually owned by the person negotiating the same, shall not be considered asroolley 1J0rrowed." "Sec. 5239. If the directors of any national banking association shall know·lngly violate, or knowingly permit I\IlY of the officers, agents, or servants of association to violate, any of the provisions of this title, all the rights, prh'ileges, and franchises of such association shall be forfeited. ... ... ... ;And in cases of such violation, every director who participated in or assented to thesama shall be held liable in his personal and individual capacity for all d.amages which the association, Its shareholders, or ·any other person, shall have sustained in consequence of such violation." , The question to be determined, ill whethel'or not tpe. complainants make a case against the directors, under the of lliow. There is not. much dispute about the facts. The bank was organized in Februttr'/f 1882, with a capital stock of $60,000,andD. M. Sabin, of Stillwater, .chosen as its president. The prorpoter of the bank was one C. Edgar Hrmpt, who subscribed 380 out of 600 shares of stock, and obtained subscriptions for most of the other shares. He solicited and ind nced' the defendants, who resided at Superior, to become.directors, and to subscribe small amounts of stock and brought from St. Paul Mr. T. K. Alexander, who had been acting as cashier of the Second National Bank of St. Paul, and recommended him as It proper person to choose as the new bank, who was chosen on the organization of the bank to act as such; the directors taking a bond from him in the sum of $30,· 000. Alexander was known to the directors at Superior, by reputation ,at least, and was supposed by all to be entirely: competent and trustworthy, .and of considerable experience in banking business. It appears that tlw directors and stockholders had full confidence in the integrity Al.exander to take charge Of and run the btl.nk, and some
CLEWS t'. BARDON.
619
of the officers'connecteq with tbe Second National Bank of St. Paul, where Alexander had acted a13cashier, tool: stock to the amollut of $14,bOO in the new bank, which was putin operation in May, 1882; Alexander acting as cashier and principal manager of the loans and discounts / of the bank. The defenda.nts never had any experience in bauking business, and undertook to act as directors without compensation. Haupt was the originator and promoter of the bank. He virtually chose the directors and cashier, and, for himself and others, whom he represented, subscribed for most of the stock. He knew, and the other stockholders presumably knew, that the'local directors were wholly unused to banking methods and business, and no doubt it was the general understanding of all interested that Alexander, with such assistance and advice as he might from time to time seek and obtain froln the directors, was to manage: the affairs of thebauk. He, in fact, for the first seven or eight months, did mainly run the bank, and make all the loans and discounts; the direct- ' ors giving such advice and information from time to time, in regard to thestanding of customers, as the cashier required. From August 5 to August 20, 1882, the cashier loaned to the Paige-Sexsmith Lumber Co. $10,000, which was $4,000 in excess of the legal limit. No part of this amount was loaned with the knowledge or consent of either of the defendant directors. Alexander says in his testimony that he cannot recall how it came about that he violated the law, but he thinks that it was through carelessness; that the company stood so high financially that he thinks he was careless in the matter. After one loan of $3,000 and another of $6,OUO had been made, Alexander told defendalltBardon that he had loaned the Paige-Sexsmith Lumber Co. $9,000 on the indorsement of the Sexsmiths and Paiges, and Bardon told him it was too much to loan to anyone firm without security, inquired as to the time the notes ran, and addsed him. to call them in. Shortly after this,Alexander consulted with Bardon as to making a further loan to the same parties, and Bardon advised him not to make it, and it was not made. About August 20, 1882, Alexander made them a further loan of $1,000, without consulting with any of the directors. Afterwards, in the fall of 1882 and succeeding winter, Alexander discounted the notes of G. W. Sexsmith & Sons indorsed by Pai'.{e-Sexsmith Lumber Co., to the amount with the directors, and without their of$20,OOu more, without knowledge or consent. These parties were large lumber firms, doing business at Superior and at Fond du Lac, were well known to Alexander, and were of high standing financially. They were borrowing largely at several leading banks. Alexander says he got his information regarding tbeir financial credit from one or two of the Oshkosh banks, from Bradstreet's, and from his knowledge ofihe firms at Superior. His answers to inquiries respectillgtheir standing were all to the effect that they were of standing, and good financial strength. Indeed, there is nothing in the evidence to show that the financial credit of these COl'POrations and firms were at all suspected at the time the loans were made. says that he was .familiar with the Jaw, but that he did ·not think the discount of the.last 320,000 of Dotes .came within the pro, ,
620'
FEDERAL REPORTER.
hibition, but that it was a discount of commercial or business paper, already owned and in circulation; that he had the law in mind, but did not think he was violating it. About January 1, 1883, some eight months after the bank was organized, one or more of the debtors of the bank having failed, the defendants, the resident directors, took the act. ive management of the bank into their hands, and have run it ever since. The Paige-Sexsmith Lumber Co. and George W. Sexsmith & Sons soon after failed, and the directors, after a full investigation of their affairs, sold the notes the bank held against them for 20 per cent. of their face value, which was, no doubt, all that could be obtained for them, though it afterwards turned out, on settlement of their estates, that about 24t per cent. were paid on these notes. But I think the directors acted prudently in making sale of the notes as they did. The comptroller of the currency at Washington ordered an assessment of 40 per cent. on the capital stock, to make good the losses, which was paid by the stockholders in full .. Though the testimony is quite voluminous, these seem to be the leading facts· on which the case must be decided, and the question is whether there is enough proven on behalf of the complaiHants to make the defendants liable, under the provisions of the banking act, for the loss to the stockholders. There is not, if by a proper construction of the statute it is neeessary to show that the directors had actual knowledge, or in some way participated in, connived at, or assen.ted to, the violation of the .law on the part of the cashier; because there is no evidence even tending to show any such knowledge, participation, or complicity on the part of directors. The evidence shows, on the contrary, that they had no knowledge of any such violation of the law until after it took place; nor did they approve or COD sent to it. But, as I understand the position of complainants' counsel, it is that such actual knowledge or consent need not be shown; that it is enough to show that the directors, who, by virtue of their office, are vested with the authority and duty to look into and manage the affairs of the bank, if they conferred that authority, and imposed ,that duty, upon the cashier, and allowed him to manage the bank,-that the directors are legally chargeable with knowledge of all that the cashier did. But I cannot think that such a mere construe: tive knowledge of or assent to the illegal acts of the cashier, in the cir-:-' cumstances of this case, is what is contemplated by the statute as sufficient to charge the directors personally, with all· the consequences of such illegal acts. This might and probably would be so, if the exclusive duty of managing the active affairs of the bank was devolved upon the org. But it seems clear enough that, under the law as it stands, and as it stood in 1882, the management of the bank might be intrusted either to the directors or to the cashier or other officers'. If this was thecase, then, it would be just as legal and proper to intrust the matter of making loans and discounts to the cashier, as was done in this case, as to intrust the same duty to the directors. And every business man knows as a matter of common observation, throughout this part of the country at least, that, business is generally left with the officers of the bankj'rather '
CLEWS V. BARDON.,
621'
than with the directors. And in all such cases the position of a director would be intolerable if, having his own money invested in the bank, and himself acting without compensation, and having exercised all the diligence in his power in the proper selection of the officers, he were to be chargeable with the mistakes and shortcomings of such officers. I think the banking act places their liability upon the true ground, and that it stands about as it would in the like circumstances at the ,common law. In either case the directorisbound to good faith. He must act honestly. He must not commit fraud, nor be privy to it, nor willfully shut his eyes, and abstain from making inquiries. If he hM knowledge that an illegal transaction is to be enacted by the officers in charge, and consents to it, or connives at it, or willfully shuts his eyes, and permits it to be done, or is guilty of such gross and willful neglect of duty as amounts to bad faith, he will be held responsible. This was so at the common l&.w, and is no doubt so under the banking act. But where the directors act in entire good faith, and select a person to manage the affairs of the bank, whom they have every reason to believe is competent and honest,they themselves having had no experience in banking, they have d01l6,just what the stockholders themselves would have done ,in the same circumas ordistances. They have acted prudently, and with proper narily prudent business men would act in rtlference to their own aff#rs. Under such circumstances, to hold them chargeable with all the illegal acts of the person selected to manage the bank would be a harsh rule. The honor of being a resident directorwould scarcelY,.,compensate for such a responsibility. The directors, in this case,I think used all proper caution and diligence in the selection of a cashier. He was the p::rson recommended by 'the principal stockholders, and the one in whom they placed. their confidence. His reputation was good,and the directors had entire confidence in his honesty, and ability to rUI) bank; and, when they had reason to distrust his competency, theyt60k the management of the bank into their own hands. The evidence does not even raise a suspicion that they did not act in E!ntire good faith fr0ni first to last, and I think they acted with ordinary prudence and tion. They had their own money invested in the stock of the bank: They were giving a portion of their time to forward the common interpay. Under these circumstances, to hold them ests of the bank, liable for the mistakes of the cashier, whom,all trusted alike, in making, loans in excess of the statutory limitation, to which the directors were not privy, nor consenting, would seem to be harsh and And I cannot think that such a construction of the act of congress. (:au be maintained, and I am the more confirmed in this .view by the few adjudged cases that have arisen under these provisions. 8eeMovius v.U,e, 30 Fed. Rep. 298; Witter8 v. Sowles, 31 Fed. Rep. 1. Also casesi.td· judged upon general principles of common law and equity jurisprudence, as follows: In'l'e Denham, 25 eh. Div. 752; Dwnn's Adm'rv. Kyle, 14 Bush, 134; Jones v. Joh'fIJJon, (Ky.) 68. W. Rep. 582; Assignee v.(Japer... ton, (Ky.) 8 S. W. The complainants' .billmust be dismissed, with costs. .
FEDERAL BEPORTER. l'
CENTRAL TRUST
Co.
OF
N. Y.et al.V·. WABASlI,l:5T. L. & 1'. Ry. CO.
etal.
(Oireu£t O(J1Jll't, E, Do NiB8oUri, E. D. November 13. 1888.) An insolvent railroad corporation. the various divisions of whose road were incumbered by separate mort?;ages. and the whole by a junior general mortgage. filed; a bill praying for the appointment of rec::eivers of the whole of its property tor thll benefit of all parties concerned. ltnd receivers were appointed. Bubsequentlythetrllstees in the general mortgag-e filed a bill to foreclose. and the same was consolidated with the first bill, .and a sale took place under a de· ) .cree foreclpsing the general mortgage. subject to all the divisional .senior mortgag'es. Oertain trustees of divisional senior mortg'ages. who had been made partiesdefen'dant to the original bill. and had employed counsel to pro· tect their interests. thereupon tiled claims against' the proceeds of sale. to be reimbursed for their own services and expenses for counsel fees pending the proceedings. On a reference to a master. sa'd claims were allowed, and taxed as costs, but the claim of one trustee was disallowed'on tlie ground that. pend· fng the proceedings, it had tiled a bill in anothercollrt to foreclose the divis· fO,nal mortgage inwhicb it .was trustee. and procured the appointment of other receivers for that division, Held, on exceptions to such ruling, that it . wail erroneous; t'hat such trustee was entitled to reimbursement for services and ,expenses by it incurred jl.S a party defendant to the original bill, up te> -the tfme lts division was withdra,wn and other receivers thereof were ap· , . pointed." J. B.ure. Herd. fwrthe:r. that inasmuch as.the general mortgage bondholders had con· sllnted to the allowance of similar claims in favor of otller trustees in senior divisional mortgages, as rec()[nmended by tbe master. it had established the · rule for the taxation of costs'in the particular case. and that the court would not re-«jxaminll the question.wllether such allowances were proper. On to Master'a Report on Claim of United States Trust Company and Edward. W. and Theodore Sheldon. of November 9,1885, referred to in the opinion is as "Now; onothis day come the Central Trust Oompanyof New York, and' Oheney. by Butler, Stililnan &, Hubhard. and Phillips & Stewart. thpJ\' 8\l.Uc.itor!!./lrndJhe Met'cantile Trust OOllll>llny of New Yorll, by H. S. Greene, its solicitor,andupon motilmitis ordered that this cause ue rl·fprred to Edmund T. Allen; as special m:lster, to take .and report. with all convenient \Speed. evidl'llCe:and his conclusions·on the following questions' and matters: .. '. *,. (7) I)llid" master will also report the proLable arnonntof costs incurredinthis cause inthi8 court, and in all cOllrts entertaining ancillary juthe amonnt of reasonable ('ompen8ation to be paid to, receivers, thei.r s,l/Beltol's lind counsel, lor sprvices lIlrt'ady ren1\1 'Il Said master will also take.e\idence aud report upon st,lchother matters' ertil1enttlJthe issuei:l mllde herein as may be brought befote him·.. Itis of t'rpd that said master take such portions of the evidence on,Said questions'and .maltel'lIIlS maybe taken most c,mvenielltly in the city of:NewXork or ·.particlUarly when a number of Witnesses i?J ·. or'Il"':BY of. Louis." 'The., masteid'epOTted J uoo"U; 1887 ,as follows, the eleventh paragraph'ofsaid . uA:large amount ,ot evidelloo was produced before' met in respect of claims for services rendered in this litigation by trustees of the senior mortgages upon
1.
RAILROAJ) ,00MPANlES-BoNDS ,4Nn. MORTGAGES-FoRECJ,OSURE-COSTS.
*
(In