292 Mass. 1 | Mass. | 1935
The Medford Trust Company was incorporated under the laws of this Commonwealth in 1908. On October 7, 1931, the commissioner of banks took possession of its property and business.
This suit in equity was brought in this court by the Medford Trust Company, hereinafter referred to as the bank or the trust company, in possession of the commissioner of banks, against twenty-five persons, who, at the time the commissioner took possession, were or had been directors of the bank, to establish and enforce liability against the defendants for losses alleged to have been caused by their improper conduct as directors. The names of the defendants and the periods during which they were directors of the bank are set forth in the margin.
The plaintiff makes the following contentions: (a) “that the defendants were negligent in making or approving a large number of loans from 1926 to the closing of the bank”; (b) “that the defendants made or approved certain groups of loans in violation of the statute forbidding a trust company to loan more than a stated percentage of its capital and surplus to a single borrower”; (c) “that certain of the defendants received illegal personal profits by virtue of certain loans made by the bank”; (d) “that on several occasions dividends in the Savings Department were declared by the defendants in violation of the law, since interest not earned and bonuses not collected were included in ascertaining the amount of apparent earnings from which dividends were declared”; and (e) “that the plaintiff has suffered substantial losses as a result' of the conduct above summarized.”' Defendants, in addition to other contentions, make the contentions, (f) that the suit was brought prematurely, and (g) that there were errors in the admission or exclusion of evidence.
Since the evidence is not reported “the findings of the master must be accepted as true unless they are mutually
The plaintiff had both a commercial and a savings department. The standard of duty for directors of such a trust company has been stated recently in these terms: “Directors are bound to exercise ordinary prudence and skill to care for and invest the money entrusted to the bank, in accordance with its charter and the governing statutes. They must be animated by the utmost good faith. They hold themselves out as having the superintendence and management of all the concerns of the bank. They thereby engage to conduct its business as men of reasonable ability, necessary intelligence and sound judgment ought to conduct it. They must be diligent in ascertaining and in keeping informed as to the condition of its affairs; they must to a reasonable extent control and supervise its executive officers and agents; they must display understanding and insight proportionate to the particular circumstances under which they act. They need not exhibit greater wisdom and foresight than may be fairly expected of the ordinary man in similar conditions. They invite the confidence of the depositing public and must afford the protection thereby implied. They are not bound to give continuous attention to the business of the bank; they are bound only to be present, so far as rationally practicable, at stated meetings of the board and of its committees. They are not required to be expert accountants or familiar with the details of bookkeeping or to know everything disclosed by the books of the bank. Having regard to the nature and extent of the affairs' of the bank and the customs of banking, directors are justified in committing the conduct of the main business to officers and subordinates and, in the absence of grounds for distrust, to assume that such persons will be upright in the performance of their duties. They are entitled to rely upon the information and advice given them by executive officers whose probity and competency are not under just suspicion, but they cannot surrender to them the responsibilities resting on directors. They are liable for negligence in the per
The master made the following general findings: The bylaws of the bank provided that the directors should choose a finance committee of their own members and that this finance committee should “supervise all the financial transactions of the Company and . . . have authority to act concerning the same, and give such direction to the officers in regard thereto as the interests of the Company from time to time seem to them to require, except when otherwise provided in these by-laws or by vote of the Directors.” Prior to January, 1928, the finance committee consisted
“Some members of the finance committee were present at the bank every day and. the committee met regularly about twice a week. The board of directors and the investment committee of the savings department met regularly twice a month, except in the summer when the meetings were usually monthly. All members of the board of directors were faithful in attendance at meetings. Except in case of illness no director was absent for more than a few meetings a year. . . . The meetings of the directors and the investment committee were held following one another, the exact order varying at different periods, but the meetings were distinct and independent. Although the defendant, Dennison, was sometimes present at the meetings of the investment committee, he took no part in them. Down to the summer of 1931 no records were kept of the meetings- of the finance committee except in one or two instances. Members of the finance committee testified without contradiction that no loan was passed by that committee if any of its members opposed. No attendance records were kept, however, and except where mortgage applications in writing were approvéd, there is no evidence (except in special instances) as to which members of the finance committee approved any particular loan before June 1931.
“When loans were approved by the finance committee a memorandum to that effect was given to the proper officer of the commercial department or savings department, as the case might be. The loan was then entered on the ' Discount Register’ of the proper department. It was the general custom for the finance committee to authorize real estate loans and for the loans to be made by the bank on such authorization without waiting for a vote of approval by
“ The treasurer of the bank was clerk of the board of directors and of the investment committee. He recorded all votes passed at the meetings and also recorded the name of each director who voted in the negative on any motion adopted. Negative votes were rare and there were none on any of the matters involved in this case. I find that in all matters here involved every defendant who was present at a meeting of the directors or of the investment committee, as the case might be, at which such matter was acted upon, either voted in favor or acquiesced by failing to vote in opposition. At the meetings of the board of directors and meetings of the investment committee, it was the practice for someone to read the list of loans which were up for action, including in this list loans which would become due before the succeeding meeting. On each loan the name of the borrower was read and the amount, term, rate and security. When a bonus was involved that information was given. Originally the list was read by the treasurer, but at the suggestion of the bank commissioner this practice was changed and in more recent times the list was read by some member of the board. The directors would ask such questions as they desired with reference to. any of the loans and at times there was considerable discus
As to all the defendants whose conduct is in question in this suit, except Barnes, Eaton, Eaton, junior, Frank W. Lovering and McKnight, and Cushing in certain specific cases where he made a personal profit, the master found in substance that they acted in good faith.
The master made other general findings and also findings with respect to specific transactions and individual directors.
First. . We consider first the instances in which the plaintiff contends that the several defendants are liable for negligence in making or approving loans.
The master’s report contains a summary in the case of each defendant of loans or groups of loans classified as “real estate loans” with respect to which the master found that such defendant is, or, on some view of the law, may be, liable for losses resulting from making or approving such
The plaintiff makes no contention on this branch of the case that there is liability on any director for loss resulting from any loan not so summarized. In the aggregate there are thirty loans or groups of loans so summarized.
All findings of grounds for liability resulting from the making or approving of loans are based upon the participation of a specific director in making or approving a loan, at least to the extent of his being present at a meeting of the board of directors or the investment committee at which action was taken and acquiescing in such action by not voting in opposition thereto. In the absence of proof that a director present at such a meeting opposed action then taken, he is to be regarded as having assented thereto. Cunningham v. Commissioner of Banks, 249 Mass. 401, 429. In some instances, however, for special reasons, the master has not found a director, present at a meeting at which action was taken, liable on account of such action. In these instances the plaintiff does not contend that such director is liable for loss resulting from such action. None of the findings of negligence or other ground for liability is based on
In some instances the effect of breach of specific statutory requirements is involved either as bearing on liability for negligence or independent of negligence. Among the statutes significant on this branch of the case are the following: G. L. (Ter. Ed.) c. 172, § 61, provides that deposits in the savings department of a trust company “shall be special deposits . . . and all loans or investments thereof shall be made in accordance with the law governing the investment of deposits in savings banks.” G. L. (Ter. Ed.) c. 168, § 54, provides that deposits in savings banks and the income derived therefrom shall be invested only in certain securities thereinafter described in the section. Clause First of this section authorizes investment “In first mortgages of real estate located in the commonwealth not exceeding sixty per cent of the value of such real estate; but not more than seventy per cent of the whole amount of deposits shall be so invested,” and provides as follows: “If a loan is made on unimproved and unproductive real estate, the amount loaned thereon shall not exceed forty per cent of the value of such real estate. No loan on mortgage shall be made except upon written application showing the date, name of applicant, amount asked for and security offered, nor except upon the report of not less than two members of the board of investment who shall certify on said application, according to their best judgment, the value of the premises to be mortgaged; and such application shall be filed and preserved with the records of the corporation.” Clause Ninth (e) (1) authorizes investment in “A note of
The master states in his report that in arriving at his conclusions he has taken the following points into consideration: “In considering these loans and the value of the security on which they were made and the question of whether the several defendants used due care, it must be borne in mind that most of the loans criticised were made during the years 1926-1928 when public sentiment was optimistic and before the present depression began and fairness to the defendants demands that the problems be approached with that in mind. The real estate market reached its peak about 1925 and since 1928 real estate values have been declining. Furthermore, real estate values are so largely a matter of personal opinion that it is evident that in the case of loans in the savings department there must be a considerable variation between sixty per cent of the figure the master finds to be the fair value and the amount of the loan recommended before it can be said that the members of the committee or board making the loan were wanting in due care on that particular ground. It is also evident that at certain times, in certain places and in certain types of property what constitutes a reasonable variation may be greater than in other instances, so that no arbitrary rule or definite percentage can be adopted. Cer
For the purpose of dealing with the liability of directors in making or approving loans we separate them into two groups: (a) directors not members of the finance committee and (b) members of the finance committee.
1. Directors not members of the finance committee.
Fourteen loans or groups of loans are involved.
The master found expressly, however, that beginning with the meetings on December 13, 1927, in each of eleven instances some of the directors not members of the finance committee were negligent in approving a loan or loans included in the fourteen loans or groups of loans here in
In each of these groups of loans, according to facts found by the master, one or more loans were improper when made and have resulted in loss to the bank or to the savings department thereof. Most of the loans were made on first mortgages of real estate by the savings department. Each such loan on the basis of value of the mortgaged property, as found by the master, was in excess of the amount which, under G. L. (Ter. Ed.) c. 168, § 54, cl. First, legally could be loaned, though in most instances the loan was not in violation of that statute on the basis of the values certified thereunder. And according to the values of real estate securing loans of the commercial department, as found by the master, the loans by the commercial department were excessive in amount. In each instance loss has resulted, based upon the value of the mortgaged property at the time the bank was closed or at the time of the hearing before the master. The values found by the master for real estate are not inconsistent with other findings or plainly wrong.
Many of the loans in question were large construction loans. At a meeting of the investment committee on December 13, 1927, a construction loan by the savings department secured by a first mortgage on real estate — the West Springfield Theatre — was approved. According to the subsidiary findings the nature of this loan, the location of the mortgaged real estate and the recent experience of the bank with a somewhat similar construction loan should have put the investment committee on inquiry as to the adequacy of the investigation made by the finance com
In 1928 began a group of loans on the Tragia Theatre in Leominster. A large construction loan on first mortgage of real estate by the savings department and a loan on second mortgage of the same real estate by the commercial department were approved at the meetings of the investment committee and of the directors respectively. As in the case of the loan previously discussed there are facts found showing that the members of the investment committee, acting as such or as directors, should have made inquiry as to the adequacy of the investigation of the finance committee — which as found was in fact inadequate — and failed to do so. Their attention was directed to the loans already made to this borrower including a large construction loan on a building which he did not have funds to complete. And the findings are consistent with the conclusion that losses resulting from later loans in connection with this theatre were a consequence of the negligent approval of these earlier loans.
On November 27, 1928, the investment committee approved loans by the savings department to the Dunbar Contracting Co. ■— a corporation, the stock of which was owned by one Siegel who had borrowed large sums from the bank and whose connection with the corporation was understood by the directors — one loan secured by a first mortgage of vacant land at High and Winthrop streets and the other a large construction loan on first mortgage of an apartment house on Lot A, Fells way. The facts found with regard to this loan on vacant land support the conclusion reached by the master that it required some explanation. And the large amount previously lent to this corporation and the past experience of the bank with con
At a meeting of the investment committee on March 26, 1929, a loan by the savings department to Siegel secured by pledge of a second mortgage of Lot A, Fellsway, was approved. No finding of negligence on the part of directors not members of the finance committee was made. However, at a meeting of the investment committee in July a report of the commissioner of banks was read to the directors characterizing the loans to the Dunbar Contracting Co. as excessive and listing these loans as “Real Estate Loans where the Value of the Property is in Question.” At a meeting of the investment committee on October 8, 1929, a further loan to Siegel secured by the pledge of a second mortgage on Lot A, Fellsway, was approved. The situation with respect to construction loans had then become worse. The finding of the master that members of the investment committee approving this loan who had been present at the meeting when the report of the commissioner of banks was read, or at the meeting when the first loan on Lot A, Fellsway, was approved, were negligent was not plainly wrong. See Prudential Trust Co. v. McCarter, 271 Mass. 132, 146-151. Nor was the finding plainly wrong that the loan by the commercial department on the Hancock Street property to the Reserve Security Company, approved April 8, 1930, so far as it covered interest on the first mortgage already considered, the expenditures on the property and cost of completing the building,
Findings of negligence in approving four other loans or groups of loans in 1930 and 1931 — 996 Farrington Street, Quincy; Main Street, Haverhill; Warren Street, Brighton; and Greenlay Apartments — are subject to similar considerations and need not be discussed in detail. They are not plainly wrong. The directors, according to the findings, were by this time aware of the “serious situation with reference to the bank’s mortgages” and “knew or should have known that they could no longer rely upon the judgment of their finance committee on real estate values” nor as to construction loans. The members of the investment committee, who approved a loan by the savings department on a mortgage on 996 Farrington Street, according to the facts found, would have been negligent in approving it as a new loan and are not the less responsible for loss resulting therefrom because, though money was transferred from the savings department to the commercial department, no money was paid out by the bank on the loan, and the bank as a whole was benefited. Deposits in the savings department of a trust company are required to be kept separate from general assets of the company and are specially protected. G. L. (Ter. Ed.) c. 172, § 61. Commissioner of Banks, in re Prudential Trust Co. 240 Mass. 478, 482-484. The Main Street, Haverhill, loan by the commercial department to the Reserve Security Company was approved after the commissioner of banks had criticised previous loans on the same property and a special committee of the bank in a report to the directors had appraised the property at less than the principal of the mortgages then on it, as the directors voting to approve the loan knew or should have known. They were bound to
The other three transactions, involving directors not members of the finance committee, are the Royall Holding Corporation transaction, the Salem Street Realty Co. transaction and the loan to Siegel on pledge of a second mortgage on Lot A, Fellsway, approved March 26, 1929. In the Royall Holding Corporation transaction the defendant Eaton was benefited personally at the expense of the bank by receiving jointly with his partner, the defendant McKnight, an unwarranted payment for incorporation expenses of this company and was liable for the amount thereof. The Salem Street Realty Co. transaction was a purchase for the discharge of certain mortgages held by the bank, and cash and obligations of the bank, of shares of stock in the Salem Street Realty Co., the sole asset of which was the equity in certain real estate on Salem Street, Medford. The purpose of the defendant McKnight in carrying out the transaction was to conceal the loss sustained on these second mortgages and in effect to purchase the Salem Street property, which the law did not permit it to purchase directly. See G. L. (Ter. Ed.) c. 172, §§ 33, 38, 41, 42. The master found that this “was not a case where a bank might properly take real
As already stated there is no express finding of negligence on the part of directors not members of the finance committee with respect to the loan by the savings department approved on March 26, 1929, secured by a pledge of a second mortgage on Lot A, Fellsway. The master found, however, that “the members of the investment committee had notice of the fact that this loan was made on the security of a pledge of a second mortgage on property on which the bank held the first mortgage” and that if “the fact that this loan was made on the security of a second mortgage made it illegal . . . the . . . members of the investment committee [other than members of the finance committee] violated the law in approving it.” (A similar situation existed as to the defendant Coulson, Jr., in reference to the loan approved October 8, 1929.) The investment of deposits in savings departments of trust companies in a loan on security of a pledge of a second mortgage is not authorized by statute (see G. L. [Ter. Ed.] c. 172, § 61; c. 168, § 54, cl. Ninth [e] [1]; see also cl. First) and ordinarily is illegal. No exception is made of a loan secured by a pledge of a second mortgage on property on which the bank holds the first mortgage. And in such a case there is no merger of the mortgages giving to the second mortgage the standing of a first mortgage. Very likely the pur
It is contended by the defendants Brewer and Coulson, Jr., — and also the defendant Coulson, who was a member of the finance committee — who ceased to be directors before the bank closed, that the losses found by the master to have resulted from the loans here considered were not sustained until after these defendants ceased to be directors and resulted not from their breaches of duty as directors but rather from intervening causes arising after they ceased to be directors. It is not fatal to recovery in this suit that it does not appear that, when these defendants ceased to be directors, the liabilities of the bank exceeded its assets or that losses had then been sustained by the bank as a result of the breaches of duty of these defendants. These defendants are responsible for losses resulting after they ceased to be directors from breaches of duty committed by them previous to their ceasing to be directors. Fletcher, Corporations, § 996. And conduct of continuing directors in connection with these loans after these defendants ceased to be directors was not such as to break the causal connection between the breaches of duty of these defendants and the losses sustained by the bank. There is no express finding of intervening negligence on the part of continuing directors in connection with these loans. But even if, in the situation to which these defendants contributed by their breaches of duty, the conduct of the continuing directors was not characterized by a high degree of prudence in taking new obligations, renewing loans or failing to liquidate loans, the losses sustained did not fall outside the field of “probable injurious consequences which were to be anticipated” from these defendants' breaches of duty. Lane v. Atlantic Works, 111 Mass.
2. Members of the finance committee.
Members of the finance committee in many instances voted to approve the transactions described as "real estate loans” included among the fourteen loans or groups of loans already considered and are responsible for resulting losses in accordance with the principles stated. In many instances there are other grounds for the liability of members of the finance committee for such losses. These additional grounds for liability of members of the finance committee are similar to grounds of liability for losses resulting from the other sixteen loans or groups of loans and need not be considered separately. In the case of one of these fourteen transactions previously considered • — • Royall Holding Corporation transaction — the defendant McKnight is found to have acted in bad faith. He is liable on that ground to the extent to which he profited jointly with the defendant Eaton from the transaction. In the case of another loan previously considered — the loan on a pledge of a second mortgage of Lot A, Fellsway, approved March 26, 1929 — members of the finance committee were found to have been negligent in authorizing the loan. And in the case of a third loan already considered — the Warren Street, Brighton, loan — the approval of which by the directors was found to have been negligent, the members of the finance committee, one of whom was not present at the meeting of the directors at which the loan was approved, are found to have been negligent in making the loan.
Sixteen loans or groups of loans summarized as "real estate loans” remain to be considered. Except for one
Most of these loans were made by the savings department. As to fourteen of these loans or groups of loans there are express findings of negligence of one or more members of the finance committee — usually in making or authorizing the loan, in some instances in authorizing payments on construction mortgages. There are findings in connection with loans by the savings department that the certificate of value required by G. L. (Ter. Ed.) c. 168, § 54, cl. First, was not filed, that values certified were far in excess of the fair values; and that loans were excessive in amount based upon such fair values. In some instances responsibility for losses on later loans is found to have resulted from negligence in making earlier loans. In one instance — 996 Farrington Street — some members of the finance committee knew that one member, Cushing, was profiting personally by the loan. Recital of the subsidiary findings in detail and analysis of the findings as to each loan are not required. It is enough to say that the findings that some of the defendants were negligent in connection with these loans and that losses on later loans resulted from negligence in making earlier loans are not inconsistent with the sub
It follows from what has been said that as to each of the so called “real estate loans” in the summary in the master’s report under the name of each director, such director is liable (except as discharged) for the loss to the bank resulting from such loan. In view of this conclusion it is not necessary to consider whether in any case the same result might be reached on grounds not here discussed.
Second. Making or approving loans in violation of G. L. (Ter. Ed.) c. 172, § 40.
The master’s report contains a summary in the case of each defendant of loans classified as “Excessive Loans to a Single Individual” with respect to which such defendant in some view of the law may be liable for violation of G. L. (Ter. Ed.) c. 172, § 40.
G. L. (Ter. Ed.) c. 172, § 40, with exceptions not here material, is as follows: “The total liabilities of a person . . . including in the liabilities of a firm the liabilities of its several members, for money borrowed from and drafts drawn on any such corporation having a capital stock of five hundred thousand dollars or more shall at no time exceed one fifth part of the surplus account and of such amount of the capital stock of such corporation as is actually paid up. Such total liabilities to any such corporation
The primary question on this branch of the case is whether this statute applies to loans of the savings department secured by mortgages of real estate, either alone or in combination with loans of the commercial department. We think that it does not.
The terms of G. L. (Ter. Ed.) c. 172, § 40, are broad enough to include liabilities for money borrowed from the savings department whether or not the loan is secured by mortgage of real estate. The trust company, though having two separate departments, is an entity. Commissioner of Banks, in re Prudential Trust Co. 240 Mass. 478, 483. Commissioner of Banks, in re Prudential Trust Co. 244 Mass. 64, 73. Money borrowed from the savings department is borrowed from the corporation. Unlike the general provision governing investments of a trust company, this section is not in terms limited in its application to “capital or general deposits” (see G. L. [Ter. Ed.] c. 172, § 33), as distinguished from savings deposits which are “special deposits.” G. L. (Ter. Ed.) c. 172, § 61. See also G. L. (Ter. Ed.) c. 172, § 73. There are, however, specific provisions for dealing with and investing savings deposits which are not applicable to commercial deposits. G. L. (Ter. Ed.) c. 172, § 61, provides that savings deposits '“shall be special deposits and shall be placed in said savings department, and all loans or investments thereof shall be made in accordance with the law governing the investment of deposits in savings banks.” The law referred to is G. L. (Ter. Ed.) c. 168, § 54, which provides that • deposits in savings banks “shall be invested only” as therein described in great detail. G. L. (Ter. Ed.) c. 172, § 62, provides that savings deposits “and the investments or loans thereof . . . shall not be mingled with the investments of the capital stock or other money or property belonging to or controlled
Prior to the passage of St. 1908, c. 520, which first provided for a savings department in a trust company, savings deposits in such a company were general deposits, could be invested in any securities legal for the investment of the general assets of the trust company (see St. 1888, c. 413, §6; R. L. c. 116, § 12) and obviously were subject to the provisions now contained, in somewhat changed form, in G. L. (Ter. Ed.) c. 172, § 40. See St. 1888, c. 413, § 17; R. L. c. 116, § 34: St. 1908, c. 520, contained in substance the provisions referred to above now embodied in G. L. (Ter. Ed.) c. 172, §§ 61, 62. See St. 1908, c. 520, §§ 2, 3. Section 2 provided in terms that loans and investments of savings deposits "shall be made in accordance with the statutes governing the investment of deposits in savings banks.” And § 16 of St. 1908, c. 520, provided that "All acts and parts of acts inconsistent herewith are hereby repealed.” The provision governing investment of savings deposits of a trust company was in form at least an authorization of, as well as a limitation upon, the investment of such deposits. The natural interpretation of this provision, particularly in view of the highly detailed provisions governing the investment of deposits in savings banks therein referred to, is that the provisions governing investment of deposits in savings banks were in all particulars substituted for the provisions previously applicable to the investment of savings deposits in a trust company and did not merely add further limitation thereto. See R. L. c. 113, § 26, specially els. First, Fifth and Seventh; G. L. (Ter. Ed.) c. 168, § 54, specially els. First, Third, Sixth A, Seventh and Ninth. So interpreted the provision in St. 1908, c. 520, § 2, in regard to the investment of savings deposits was inconsistent with the provisions previously applicable including those embodied in somewhat changed
On the interpretation here given to G. L. (Ter. Ed.) c. 172, § 40, and the master’s findings the only loans made or approved in violation of this section were some of the Tragia Theatre loans by the commercial department. Many of the directors are liable for losses resulting from these loans on grounds independent of any violation of G. L. (Ter. Ed.) c. 172, § 40. Other directors, however, are liable for such losses, if at all, only because of violations of this section. Whether at any time this section was violated depends on the aggregate amount at that time of
G. L. (Ter. Ed.) c. 172, § 40, is mandatory, and places restrictions on the power of directors. See Greenfield Savings Bank v. Abercrombie, 211 Mass. 252, 258. But the statute does not provide in terms that directors approving loans in violation of it shall be liable for resulting losses, and absolute liability for such losses is not to be implied. As was stated in the Greenfield Savings Bank case with reference to the effect of another mandatory statute, directors are “-prima facie responsible” for losses resulting from violations thereof (page 259). But it is clearly implied that such responsibility may be rebutted by showing that the directors were without fault. And the cases relied on by this court in the Greenfield Savings Bank ease are not inconsistent with that implication. Furthermore, the rule in regard to the duty of directors of a trust company
There is, therefore, no liability of any director by reason of violation of G. L. (Ter. Ed.) c. 172, § 40, who is not found liable on independent grounds for loss resulting from the Tragia Theatre loans.
The master’s report contains findings with respect to personal profits of certain directors. No contention is made by the plaintiff that on the master’s findings there is any liability for such personal profits except upon the defendants McKnight and Cushing.
1. McKnight. According to the findings of the master this defendant in the years 1929 and 1930 received from one Frankini for services in connection with obtaining certain contracts the sum of $23,500 and the money was derived by said Frankini from loans from the bank. The subsidiary findings, which need not be recited, tend to show that this money was received by this defendant in violation of his duty as a director of the bank. The master’s ultimate finding is that if “the burden of proof is on McKnight to show that the money was repaid to the bank . . . this burden has not been sustained by him and . . . he owes the bank the sum of $23,500 on this item.” This finding is not inconsistent with the subsidiary findings or plainly wrong. United Zinc Co. v. Harwood, 216 Mass. 474, 476. Holman v. Moore, 259 Mich. 63, 67. The burden of accounting for the 'money so received was on this defendant. Little v. Phipps, 208 Mass. 331, 334-335. Pappathanos v. Coakley, 263 Mass. 401, 408.
2. Cushing. The following facts appear from the master’s findings: This defendant had a mortgage, or a partial assignment of a mortgage, on each of two parcels of real estate on which the bank already had security by way of mortgage senior to that of the defendant. The bank made new loans on mortgages on these parcels of land and out of the proceeds of these loans paid the defendant’s mortgages. Such payments were not for the interest of the bank. The defendant voted for the new loans knowing that he was to be paid out of the proceeds thereof. The master found that in both instances the defendant acted improperly in authorizing the new loans and that “the loss to the bank is greater than the amount paid to Cushing and . . . the bank’s loss has been increased by the exact amount thus paid Cushing.” The findings are not plainly
Fourth. Declaration of dividends in violation of law.
The master’s report lists in the case of each defendant meetings at which he was present and voted to declare dividends on deposits in the savings department which the plaintiff contends were declared illegally.
The plaintiff argues that the dividends declared at these meetings were illegal because in violation of G. L. (Ter. Ed.) c. 172, § 80, which provides in part that “No dividend shall be paid by any such corporation [a trust company], while it continues its banking operations, to an amount greater than its net profits then on hand, exclusive of the surplus fund provided for in this section, after deducting from such net profits its losses and bad debts.” This language, its context and other provisions of the statutes in regard to trust companies indicate that this statutory prohibition applies to the payment of dividends on shares of stock of a trust company out of its general funds and not to the declaration or payment of dividends on deposits in the savings department which are to be paid before the income from the investment of funds in the savings department “accrue[s] as profits to such corporation and . . . [is] transferred to its general funds.” G. L. (Ter. Ed.) c. 172, § 65. Dividends on shares of stock in a trust company were considered in Prudential Trust Co. v. McCarter, 271 Mass. 132, 152, 157, relied on by the plaintiff.
There are, however, statutory provisions governing the payment of interest or dividends on deposits in a savings department of a trust company. G. L. (Ter. Ed.) c. 172, § 68, is as follows: “Immediately before a meeting of the directors called to consider the declaration of a dividend by the savings department of every such trust company, the investment committee shall make or cause to be made an examination of the income, profits and expenses for the six months’ period next preceding the date of the proposed dividend, and shall report to the directors the estimated net earnings of the said department for the said period. No dividend shall be paid unless it is declared and author
No contention is made that any dividend prior to that of May 1, 1928, was declared in violation of law. With respect, however, to each of the seven dividends declared thereafter for payment at intervals of six months each, the plaintiff contends that the income available for such payment was insufficient for the purpose, and that consequently the dividend was unlawful. This contention is based on the ground that bonuses taken on mortgages representing the difference between the face of the mortgages and the amounts lent to the borrowers and interest items — of four groups — deducted from, or charged to, loans or paid by borrowers out of the proceeds of loans which were treated as income were improperly so treated. We pass without discussion the question whether such bonuses or any of such interest items constitute income. For even if they do not, on the findings of the master, the plaintiff cannot prevail on this branch of the case.
The controlling principles are like those already considered in connection with G. L. (Ter. Ed.) c. 172, § 40. Directors of a trust company as stated in Prudential Trust Co. v. McCarter, 271 Mass. 132, 138, “must do something
G. L. (Ter. Ed.) c. 172, § 68, already quoted, recognizes that directors are to look to the investment committee for information upon which to act in declaring dividends and that the investment committee, though responsible for furnishing such information, may delegate the making of the “examination of the income, profits and expenses.” They may “cause” it to be made. This section, also, by providing for a report of “net earnings” which are “estimated,” recognizes that there is some field for the exercise of judgment. To a considerable degree, moreover, as the statutes appear to recognize by permitting the delegation of the duty of making the examination, the determination of income, profits, expenses and net earnings is peculiarly an accounting function to be exercised with respect to facts shown by the books of the trust company. When, therefore, G. L. (Ter. Ed.) c. 167, § 17, authorizing the declaration and payment of dividends, is read in the light of other statutory provisions, it appears by clear implication that the standard of duty of directors of a trust company in declaring and paying dividends where the prescribed method is followed is the standard of integrity, skill and prudence fixed by the common law for the performance of the functions of such directors generally. Such directors “are not required to be expert accountants or familiar with the details of bookkeeping or to know everything disclosed by the books of the bank.” They “are entitled to rely upon the information and advice given them by executive officers whose probity and competency are not under just suspicion.” But they “must heed warnings from responsible sources.” Prudential Trust Co. v. McCarter, 271 Mass. 132, 137-138. The implication is not warranted that where the statutory method prescribed for ascertainment by directors of earnings available for dividends on deposits in the savings department is followed and directors, acting with integrity, skill and prudence, are mistaken as to the
On the facts found by the master and the principles of law above stated, there was no liability on the part of any defendant for the declaration of a dividend in violation of law. The master found expressly that “the defendants were not guilty of negligence in voting to declare the dividends.” This finding is not inconsistent with other findings or plainly wrong. Prior to declaration of each dividend a special committee of the investment committee was appointed to make the examination which the investment committee was required by statute to make or cause to be made and each committee made a report. None of the members of the special committees “was experienced in accounting and ... all relied entirely on the information given them by the treasurer and other accounting officers.” However, “only an accountant would have discovered from the books that interest items credited fell within the criticised groups . . . the special committees were informed by the treasurer or manager of the savings department that the interest had been earned . . . [and]
Fifth. Damages.
The causes of action for which this suit is brought are the breaches of duty of the several defendants as directors of the bank through negligent or otherwise improper performance by them of the functions of their offices. The duty arose by the contract of each defendant, implied from acceptance by him of the office of director, and action for breach thereof sounds in contract (Cunningham v. Commissioner of Banks, 249 Mass. 401, 429; Prudential Trust
The liability of each director is several. He “is liable only for the results of his own misconduct although such results may be magnified ... by the concurring misconduct of other directors.” Prudential Trust Co. v. McCarter, 271 Mass. 132, 138. In accepting the office of director each defendant “must be taken to have contemplated responsibility for losses to the bank, whatever they were, if chargeable to his fault.” Bates v. Dresser, 251 U. S. 524, 531. And this is true even though succeeding faults of other directors contribute to the ultimate loss if such.succeeding faults are in the field of reasonable anticipation so that the causal relation between the original fault and the loss sustained is not broken. This principle is applicable to defendants who ceased to be directors before the bank closed. In these circumstances losses are not to be apportioned among directors at fault.
The basis for the computation of loss resulting from wrongfully making or approving a loan is the amount of the loan made or approved and thus the amount of money wrongfully diverted from the bank or a department thereof. Cunningham v. Commissioner of Banks, 249 Mass. 401, 429. Since the liability of directors is based upon the wrongful diversion of funds and' not upon nonpayment of borrowers’ obligations the directors are not liable for amounts, such as bonuses, which are included in the obligations of
The Salem Street Realty Co. matter which was a purchase of stock by the bank is governed by similar principles. The master found that the amount paid for the stock was in excess of its value at the time of the purchase. The bank still holds the stock. There was no evidence
The general rule with respect to interest, as stated in Prudential Trust Co. v. McCarter, 271 Mass. 132, 158, is that the “defendants are chargeable with simple interest on all sums found due from them from the time the loss to the bank occurred.” For the proper application of this rule, however, reference must be made to the cases cited in support of it. The loss sustained by reason of the personal profits received by the defendants Eaton and McKnight occurred at the time these defendants received money from the bank. And on the master’s findings loss to the bank in the Salem Street Realty Co. matter occurred at the time of the purchase of the stock in that company for an excessive price. In the cases of improper loans the times at which the losses occurred are not fixed and the findings are of losses sustained determined as of certain dates. We- think the principle that interest does not run until damages are liquidated is inapplicable to these loans but that interest is to be included as an element of damage in order to determine the amounts of the losses actually sustained by the bank (compare Gamble v. Brown, 29 Fed. Rep. [2d] 366, 381) on the ground that loss of income follows loss of principal. Dewey v. Burke, 246 Mass. 435, 437. State Street Trust Co. v. Walker, 259 Mass. 578, 584. McCormick v. King, 241 Fed. Rep. 737, 746. For periods for which interest has actually been received in accordance with the terms of the obligations, no loss of income has been sustained by the bank. And in
Since on the facts agreed upon by the plaintiff and certain defendants on the basis of evidence which we hold to be admissible and facts found as to other defendants the amount recoverable in this suit will be less than the excess of the unpaid debts of the bank over the value of its assets, it is unnecessary to consider whether the plaintiff could recover any amount in excess of that necessary to liquidate the balance of such unpaid debts. Compare Prudential Trust Co. v. McCarter, 271 Mass. 132, 157.
' Sixth. The suit was not brought prematurely as the defendants contend. The previous discussion of damages disposes of this contention. The causes of action were breaches by the several defendants of their duties as directors. Cunningham v. Commissioner of Banks, 249 Mass. 401, 429. Obviously these breaches occurred before the suit was brought. And though proof of loss resulting to the bank from such breaches is essential to recovery in this suit, such proof can be made before the bank has been fully liquidated.
Seventh. The defendants’ exceptions to the master’s report do not require detailed discussion. Many of the questions raised thereby are disposed of by what has been said. Other questions are based upon evidence not reported and consequently are not reviewable. Baush Machine Tool Co. v. Hill, 231 Mass. 30, 41. The only excep
Ordered accordingly.
Charles H. Barnes, Clifford M. Brewer, John Coulson, senior, John Coulson, junior, Andrew F. Curtin, William N. Curtis, Walter F. Cushing, William J. Daly, James T. Dennison, Alfred F. DeScenza, John E. Baton, senior, John E. Eaton, junior, Frank W. Lovering, Lewis H. Lovering, Edwin T. McKnight, Ernest B. Moore, Harry C. O’Brien, Louis E. Page, Abel S. Price, E. Waldo Reed, Charles H. Sawyer, Alden W. Teel, Henry P. Van deBogart, John E. Volpe, Frederick B. Walker. All were directors from some time prior to the period in question until the closing of the bank except the following: Barnes was a director from January, 1931, until the bank closed; Brewer, from the time the bank was organized until June 17, 1930; Coulson, senior, from the time the bank was organized until July 22, 1930;
Curtin died after the suit was brought, but his estate did not intervene and was not a party defendant. Dennison died after the suit was brought and the executrix of his estate intervened and became a party defendant. McKnight and Eaton, senior, each filed a voluntary petition in bankruptcy and the trustee of each estate was made a party defendant. After the entry of an interlocutory decree the defendant Eaton, senior, filed a suggestion of discharge in bankruptcy with a certified copy of the original certificate of discharge on July 18, 1933.
Lot 141, Ravenna Road; Lot 142, Ravenna Road; Lot25, Cerdan Avenue; 820-822 Massachusetts Avenue, Arlington; Haverhill; Royall Holding Corporation; Lot 57, Burnside Avenue; West Springfield Theatre; 400 Blue Hills Parkway; HotelDunbar; 353-357 Washington Avenue, Chelsea; Lot.B, Salem Street; Lots A and B, Ellington Street on Salem Street Realty Co. Transaction; Salem- Street Realty Co.; Lot A, Ellington Street, first mortgage; High and Winthrop Streets; Lot A, Fellsway — first mortgage; Lot A, Fellsway — collateral loan on second mortgage; Lot A, Fellsway — collateral loan on second mortgage; Hancock Street — first mortgage; Hancock Street — ■ second mortgage, Cushing; Hancock Street — second mortgage, building completion; Warren Street, Brighton; Mechanic Street, Leominster; Tragia Theatre; 996 Farrington Street; 997 Farrington Street; Griffin; Greenlay Land; Greenlay Apartments.
Main Street, Haverhill; Royall Holding Corporation, Haverhill; West Springfield Theatre; Salem Street Realty Co.; High and Winthrop streets; Lot A, Fellsway — ■ first mortgage; Lot A, Fellsway- — collateral loan on second mortgage; Lot A, Fellsway — collateral loan on second mortgage; Hancock Street, Quincy — first mortgage; Hancock Street, Quincy — second mortgage building; Warren Street, Brighton; Tragia Theatre, Leominster; 996 Farrington Street, Quincy; Greenlay Apartments. When not otherwise specified the real estate was in Medford.
