This is an appeal by the plaintiff from an order of the District Court for the Western District of Pennsylvania dismissing its action at the close of the plaintiff’s evidence on the ground that upon the facts and the law the plaintiff had shown no right to relief. The plaintiff is the receiver of the Commercial National Bank of Bradford, Pennsylvаnia, hereinafter called the bank. It seeks by amended bill in equity to recover from *549 former directors of the hank $120,000 in dividends alleged to have been unlawfully declared by the directors and to obtain an accounting for money alleged to have been lost by the bank as a result of the negligence of the directors in the management of the bank’s affairs. The defendant, Willis H. Powers, was elected a director in 1904, John E. Golden in 1925, Robert L. Mason and Harry M. Wick in 1928. All served as directors until the closing of the bank in 1935. Powers and Mason were president and vice president. All four died after suit was started and their personal representatives were substitutеd as defendants.
The bank is a national association incorporated in 1890 with a capitalization of $100,000 which was later increased to $300,-000. The by-laws provided that the entire board of directors, which consisted of five persons, should make a careful examination of the bank four times each year, once in each quarter, and at any other times when in the judgment of the directors it was advisable. The audits actually made by the directors were perfunctory, however, and in making them the directors relied, as to the details, largely upon the assistance of officers and employees whose work was being audited.
In 1920 Cаrl Anderson, a bookkeeper of the bank, was found to have embezzled $22,150 for which full restitution was made. In 1931, Reed Campbell, employed as teller and bookkeeper, was discovered to be short in his accounts. In order to satisfy the surety company which had issued a fidelity bond covering Campbell that the latter’s embezzlement was in excess of $25,000, the amount of the bond, the directors ordered an investigation of Campbell’s accounts to be conducted in secret by a committee of four employees of the bank. It afterward appeared that two of the committee were themselves at the time engagеd in embezzling funds of the bank. The investigation disclosed that Campbell had manipulated correspondent bank accounts so as to conceal defalcations amounting to $80,822.91. No effort was made by the committee or the directors to find the full extent of the Campbell shortage, which in fact was $359,-344.25 in excess of thе sum reported by the committee of employees. The actual Campbell defalcations were sufficient to wipe out the profits and surplus of the bank and to impair its capital structure. No effort, however, was made by the directors to determine whether the bank’s bookkeeping system was defectivе or to conduct a more accurate audit of its accounts.
At the close of the year in which the Campbell shortage was discovered, December 1931, and semi-annually thereafter until June, 1935, the directors declared dividends which totalled $120,000. Throughout this period the capital of the bank was seriously impairеd and at the close of the period was entirely wiped out. In September, 1935 a national bank examiner discovered that the bank was short in its accounts $1,249,-000. This was approximately $800,000 more than the shortage which actually existed at the time of the discovery of the Campbell defalcation. The shortage necessitated the closing of the bank.
The major portion of the 1935 shortage was traced to Frank Calkins, assistant cashier in the loans and discount department, one of the bank employees who had previously investigated the Campbell shortage. His peculations covered a period of at least five years during which, among other fraudulent operations, he manipulated the correspondent bank account with the same system as that used by Campbell. A shortage 'for which S. B. Benson, another of the employees who had investigated the Campbell peculations, was responsible, was discovered in the depositors’ checking accounts. In addition Harold L. Miller, receiving and paying teller and bookkeeper for the savings department, had embezzled in the savings department for a period of ten years. It was testified that an independent audit, even though partial, would have disclosed the Campbell and Calkins shоrtages; a complete audit would have disclosed all the peculations. There was also testimony that it is the most universal practice of national banks to have independent audits of their accounts made periodically.
The amended bill of complaint presented two issues for the determination of the district court. First: ■ Did the directors become personally liable by the terms of the National Bank Act for the $120,000 in dividends which they declared out of capital in violation of the act? Second: Did the directors become personally liable for the $120,000 thus paid out and for other losses sustained by the bank because of failure to exercise that degree of care in the conduct of the bank’s affairs which is imposed upon directors by the common law?
First, as to the statutory liability of the directors for the declaration of dividends out of capital at a time when the *550 bank in fact had no profits and no surplus. The Natiоnal Bank Act confers upon the directors of a national bank discretion to declare dividends out of profits (R.S. § 5199, 12 U.S.C.A. § 60), but prohibits dividends to be made if losses have been sustained equal to undivided profits, or in excess of net profits on hand after deducting losses and bad debts, or payable out of capital (R.S. § 5204, 12 U.S.C.A. § 56). Personаl liability is imposed upon the directors if they “knowingly” violate the Act (R.S. § 5239, 12 U.S.C.A. § 93). It is not disputed that in the present case the Act was violated by the directors when dividends were declared which could only be paid out of capital or depositors’ money, since the losses sustained through the embezzlements had wiped out all the undivided profits. The question on this branch of the case is whether the evidence was sufficient to support a finding that the directors “knowingly” violated the Act. The defendants argue that although the directors knew that losses had been sustained they did not know the full amount of the losses, or that the losses exceeded the undivided рrofits and, therefore, did not “knowingly” violate the Act.
We do not think that the word “knowingly” is to be construed so narrowly. In Corsicana National Bank v. Johnson,
The discovery of the Campbell peculations, following the previous Anderson embezzlement, was as clear a warning to the directors of the need for a thorough аnd complete audit as a notice from the Comptroller of the Currency would have been. We think that the evidence produced by the plaintiff indicating that the directors deliberately refrained from utilizing available accounting methods and from employing independent auditors to determine the full extent of thе loss to the bank at the time of the Campbell defalcations was sufficient to support a finding that the directors “knowingly” violated the statute.
Second, as to the common law liability of directors- for lack of diligence in the performances of their duties. At common law, as we shall point out, as well as under the bаnk’s by-laws, it was the duty of the directors to examine the affairs of the bank periodically. Until the discovery of the Campbell peculations the directors may have been justified in considering their examination, perfunctory as it was, all that was necessary. That event, however, made it obvious that the system followed by thеm had not served the purpose of revealing the true conditions which existed in the bank. The necessity of adopting a more searching and accurate auditing system was then clearly indicated. When the directors learned of the Campbell defalcations the duty was theirs to determine the full extent of the shortаge, the system used by Campbell in his embezzlements and the defects, if any, in the bank’s accounting system which made his breach of trust possible. ' Ordinary prudence should have dictated an investigation to determine whether other employees, equally trusted, had participated in Campbell’s *551 peculations, either through aсtive connivance or because of inefficiency.
It has long been settled that bank directors have a duty at common law to exercise ordinary care and prudence in the administration of the affairs of their bank. Briggs v. Spaulding,
It was then obvious that the existing method of supervising the bank’s affairs was inadequate and that some of the employees were dishonest or incompetent or both. Neverthеless the directors did nothing to avoid a repetition of loss to the bank and continued complacently to close their eyes to the obvious needs of their institution. It is no defense to aver that they did not know of the true state of affairs which existed in the bank when the need for investigation was so patent and the mеans for 'knowledge were so readily available. Failure to investigate the weakness in the bank’s set-up and to take the necessary steps to prevent its continuance might well be found to be negligence which bore a direct relationship to the losses later sustained by the bank through the Calkins, Benson and Miller defalcations.
In Atherton v. Anderson, 6 Cir.,
We think that the plaintiff’s evidence was sufficient to support a finding that the directors were remiss in their duties when they failed to determine the full extent of the Campbell defalcations and failed to revise their perfunctory method of examining the condition of the bank after that method wаs shown to be inadequate.
This case began as a suit in equity and it was tried by a district judge without a jury. The order of dismissal here appealed from was made upon motion of the defendants, immediately after the plaintiff had com-' pleted the presentation of its evidence. The motion was authorized by Civil Procedurе Rule 41(b), 28 U.S.C.A. following Section 723c, which provides in part that “After the plaintiff has completed the presentation of his evidence, the defendant, without waiving his right to offer evidence in the event the motion is not granted, may move for a dismissal on the ground that upon the facts and the law the plaintiff has shown no right to relief.” Thе Advisory Committee appointed by the Supreme Court says as to this rule that “for actions tried without a jury, it provides the equivalent of the directed verdict practice for jury actions which is regulated by Rule 50.” Note to Rule 41(b), 28 U.S.C.A. following section 723c. Inasmuch as an order of dismissal under Rule 41(b) is the equivalent of a directed verdiсt we must upon review of such an order view the evidence and all inferences reasonably to be drawn therefrom in the light most favorable to the plaintiff. Gunning v. Cooley,
It remains to consider the procedure which should be followed in this case after it is remanded to the district court. Civil Procedure Rule 50 provides that: “A party who moves for a directed verdict at the close of the evidence offered by an op *552 ponent may offer evidenсe in the event that the motion is not granted, without having reserved the right so to do and to the same extent as if the motion had not been made.” It is thus seen that if the defendants’ motion had not been granted by the district court they would have been entitled to proceed to offer evidence in their defense. Since we now hold thаt the order granting their motion was erroneous and must be reversed it follows that the Civil Procedure Rules require that the defendants now be afforded an opportunity to offer their evidence. We see no reason, however, in a case such as this, which was tried without a jury, to require the plaintiff to offer its evidencе a second time. Accordingly we will direct the district judge who heard the plaintiff’s evidence to proceed with the trial of the case as though the defendants’ motion for dismissal had not been granted by him.
The order of the district court is reversed and the cause is remanded for further proceedings in conformity with this opinion.