271 Mass. 132 | Mass. | 1930
This suit in equity is brought by the Prudential Trust Company (hereafter described as the bank), now in the possession of the commissioner of banks, to establish and enforce liability against the defendants for losses alleged to have been caused by their failure to perform the duties resting on them as directors of the bank. The bill has been dismissed as to two defendants, and there are covenants not to sue others of them.
The bill has been taken pro confesso as to still other defendants. The truth of the allegations of the bill thus is established as to such defendants. Those allegations are sufficient to impose liability on them. McArthur v. Hood Rubber Co. 221 Mass. 372, 374-375. Boston Safe Deposit & Trust Co. v. Stratton, 259 Mass. 465, 476-477. The master sets forth in his report the losses for which each is responsible. The precise amount of their liability may be determined by the single justice on the basis of these findings.
There were eight active defendants before the master. Three only of these have caused briefs to be filed and arguments to be made in their behalf in this court. This
The standard of duty for directors of a trust company with both commercial and savings departments has been recently examined and stated in general 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 performance of those responsibilities even though they have acted in good faith.
In substance and effect the cause of action in the case at • bar rests on the breach of duty arising from acceptance of the office of director. It must be supported by proof of failure to exercise ordinary care and prudence in managing the affairs of the bank. The burden of proof is on the plaintiff to establish misconduct of directors notwithstanding the heavy fiduciary obligation resting upon them. This is the implication of our own decisions. Cunningham v. Com
The case was referred to a master under a rule which as amended required him to hear the parties and their evidence, to find the facts and report the same to the court together with such portions of the verbatim testimony of any of the defendants as either party might request and photostatic copies of the audits of the bank made by the commissioner of banks for 1917, 1918, 1919 and 1920. The report of the master is comprehensive and voluminous. Annexed to it are about fifty printed pages of excerpts from the testimony of some of the defendants. Manifestly only a small part of the evidence taken by the master is in the record. It is plain also that the master has not and was not required to set out in his report all the subsidiary faets and circumstances upon which his general conclusions rest. Smith v. Lloyd, 224 Mass. 173, 176. In these conditions, the findings of the master must be accepted as true unless they are mutually inconsistent or contradictory and plainly ■ wrong. Tripp v. National Shawmut Bank, 263 Mass. 505, 511. The power and duty of this court to make additional or different findings of fact by inference from the facts reported by the master are settled. American Circular Loom Co. v. Wilson, 198 Mass. 182, 200. Glover v. Waltham Laundry Co. 235 Mass. 330, 333-334. Commissioner of Banks v. Cosmopolitan Trust Co. 253 Mass. 205, 214.
The facts relevant to the grounds of this decision as displayed in the master’s report may be summarized. The bank was organized and started business in Boston on June 1, 1915. From the beginning it had both commercial and savings departments. It began business with a capital of $200,000 and a surplus of $50,000. No change in its author
The bank adopted by-laws whereby it was provided that there should be a board of directors of not less than seven nor more than fifty, such board as a whole or by committees to have the general management, control and direction of all the business and affairs of the bank. The number of directors varied from twenty-four to thirty-five during the period of its operation. Monthly meetings of the directors were required and were held, with occasional additional special meetings. The by-laws also provided for an executive committee to consist of the president and first vice-president, five directors to be elected annually, and four other directors to be designated monthly by the president in alphabetical order to serve for that month only. The executive committee was required to hold weekly meetings and was given power, when the board of directors was not in session, to transact all business for and in behalf of the bank. The master found that none of the active defendants before him were regular or elected members of the executive committee, although they were designated and served at times as monthly members.
The president of the bank had had but slight experience in banking, although favorably known in business and reputed to be a man of large means. He owned a substantial part of the capital stock of the bank. From the early part of 1917 he devoted practically all his time to the bank. The treasurer had had a twelve-years’ experience in banking before entering the employment of the bank, the latter part of which was as assistant to the chief executive officer of a national bank in Boston. His reputation for trustworthiness and banking ability was high and the other officers and directors placed the greatest confidence in him until about five months before the bank was closed. None of
All the loans set forth in the bill were approved and put through by the president and the treasurer in the first instance and later approved by the executive committee. All the defendants knew, acquiesced in and approved of this course. It was customary in banks of the size of this bank for the president, or other authorized executive officer, to pass on loans in the first instance and report on the loans made by him, with all relevant information, to the executive committee, upon which that committee would vote approval or disapproval; and it was customary to rely upon the officer thus authorized, it not being practicable for the executive committee personally to make investigation concerning each loan. The master specifically finds that the defendants were not negligent in relying upon the investigations and reports made to them by their executive officers as to the credit,
All the information called for by the directors was furnished them by the officers of the bank and the directors did not act without having before them all the knowledge considered by them essential to the action to be taken.
The master makes detailed findings as to each of the defendants concerning his attendance at meetings of the directors and of the executive committee while designated as a member of it. These need not be narrated because in our view liability does not turn upon them. Conduct of directors in this connection is to be considered with other findings on which liability is predicated. None of these defendants ever served upon the investment committee of the savings department.
The master has made careful analyses and findings as to each of the loans alleged in the bill to have resulted in loss to the bank and to have been negligently made, and has traced the relation of each defendant with them. His conclusion is stated in connection with the discussion of each loan. There are very few of these loans in the commercial department in respect to which in whole or in part he finds negligence by some of the directors. As to another group, he finds that the loans were improvident when made but either expressly or by implication that no one of the defendants has been proved to have been negligent touching them.
There are a few loans in issue in the savings department. As to one, or one group, he finds that, unless the failure of the investment committee to approve the loan from the savings department is sufficient to charge the defendants
The directors made no inspection of the books of the bank. The only examinations of the books of the bank were made
All the audits made by the commissioner of banks contain somewhat severe criticisms of the conduct of the business of the bank. The master has grouped those criticisms in the first audit under twenty-one headings. These criticisms in the first audit need not be described further than to say that there was this statement: the “condition which has existed in the loan department has been one of extreme carelessness, and is not to be found in any other institution which comes under the supervision of this department ”; and that the concluding criticism is: “It is apparent that the company is conducting its business in an unsafe and unauthorized manner, and unless these practices are discontinued at once, the Bank Commissioner will take action under Section 8, Chapter 590, Acts of 1908.” The treasurer of the bank explained this audit to the directors. Thereafter he made reply in detail to the commissioner of banks, which the master finds was substantially correct and was so accepted by the bank commissioner’s department. In the second audit numerous comments and criticisms of the books of the bank and its loans, and suggestions and directions as to- certain changes, were made. The master groups these under twenty-six headings. Among other matters it was said that the officers of the bank were loaning too much on “slow and doubtful collaterals” and there were specifications including a large amount in second mortgages on real estate. They were requested to discontinue this practice and have a more liquid loan with collateral readily marketable at all times. The large lines extended to Harry B. Brown of $212,000 and to others were in excess of limits prescribed by the statute. This total to Brown was made up of the loans to the group which he controlled and was rightly described as made to him as a single party, although this was not known to the
The master finds respecting these audits in general and their effect upon the defendants as follows: “The foregoing audits and examinations were the only ones made of the bank during its operation. I have given the result of these examinations and audits in considerable detail, as well as the replies and explanations given by the bank’s officers in answer to the comments .and criticisms in these audits, as indicating the information and knowledge which the defendants had or could have obtained, and as showing the matters to which the attention of the officers and directors was directed. With the warnings given to them by these audits in the form of criticisms made by the bank commissioner of the bank’s method of doing business, the character of its loans and securities, and the dangers arising therefrom, directors might well be expected to exercise greater caution and diligence and be more alert to avoid the pitfalls pointed out to them, than if such warnings were not given. In this connection, the assurances and explanations given by their officers must also be considered in determining the liability of the individual directors. Many of the criticisms contained in the audits were so answered and explained to the directors that such answers and explanations might reasonably be accepted by them. They
The master has made elaborate tables showing the state of the reserve of the bank required by St. 1908, c. 520, §§ 8, 9, as amended by St. 1910, c. 377 (see St. 1914, c. 422), St. 1917, c. 283 and St. 1919, c. 82 (see now G. L. c. 172, §§ 73, 74), and has also shown the state of the reserve at the times of each of the challenged loans. It is enough to say that frequently and with increasing continuity as time went on the reserve was less than that required by law.
There is a further finding that, beginning at least as early as February 15, 1919, and from that time on, the assets of the bank taken at a fair valuation were not sufficient to have paid its liabilities in full. “If that constituted insolvency, then the bank was insolvent during that period. I find, however, that at no time from the beginning to the close was the bank unable to meet its obligations as they were presented to it, and at all times during that period it met its obligations to its depositors and other creditors as and when they arose. During this period the directors and the officers continued to invite and receive deposits, and to make loans, either in ignorance of the true condition, or with genuine hope and expectation that by continuance of the business losses could be overcome and made good, and eventually the bank once again become financially sound. This hope and expectation was not wholly without warrant, and I have no doubt that with the continuance of the bank as a going concern more might have been realized from certain loans
In connection with the conduct of the savings department, there is this finding: “Meetings of the investment committee were not held regularly. No meetings at all were held after May 27, 1919. This condition of affairs should have been known to the directors, and it was their duty to have remedied this condition when it was brought to their knowledge. Each of the annual audit reports (except the last) made by the bank commissioner’s office for the bank, at the request of the stockholders’ examining committee, in some form or other commented upon the failure of the investment committee to hold meetings and to properly perform their duties. Reasonable diligence on the part of the directors in the performance of their duty would have made them aware that the investment committee was not functioning properly.”
As to certain losses in the savings department, the master says further: “Had the investment committee properly functioned, it is problematical whether the loans or all of them would have been made. To what extent the failure of the investment committee to perform its duties contributed to the losses which the bank sustained on these loans, I am unable to find as a fact, but report the facts found for the ruling of the court whether the defending directors are chargeable with the losses so sustained because of their failure to compel proper action by the investment committee.”
As to the impairment of capital, the master finds that, “While I do not attempt to find the extent to which the capital was impaired at any particular date, I do find upon
These findings, and particularly the significant one last quoted, are abundantly justified by subsidiary findings and supporting facts set out in the report. Those findings mean that the defendants are chargeable with the knowledge which a searching inquiry by competent and disinterested bank experts in the early part of 1918 would have revealed. One of the facts which thus would have come to light is, as found by the master, impairment of the capital from February, 1917. Other such facts would have been the excessive loans to those unworthy of credit and loans in large part, if not wholly, uncollectible. Other facts which would have
The force and scope of this finding of the master, that the defendants are chargeable with knowledge of the true condition of the bank after the first two audits had been received and considered, are not effaced or dulled by the other finding already quoted in substance that, in passing upon the negligence of the defendants alleged in the bill as contributing to the specified losses claimed, he has dealt with the subject under each particular loan and in his findings has taken into account and given effect to the knowledge and notice which the defendants had or should have had in consequence of the audit reports. He has in most instances found no negligence. That finding we interpret to mean that effect was given to that knowledge and notice as bearing upon the conduct of the directors sitting on the board and passing upon each designated loan as it came up for approval or disapproval. It relates to that narrow issue. It does not take into account the responsibility and sharp obligation of the directors clothed with the power and burdened with the duty of general control and supervision of the bank and of all its affairs. It does not signify, according to our understanding, that effect was given to such knowledge and notice by considering the consequence to the welfare of the bank and the conduct of its business in the improved character of service and the more cautious judgment on the part of its executive officers which would necessarily have followed the exhibition on the part of the defendants of the genuine managerial force naturally to be engendered by such knowledge and notice in competent and careful directors. If, however,
In addition to this general conclusion it is necessary to deal briefly with a few of the defendants individually. The finding of the master that the defendant Hennessy was a director from May 2, 1916, when as a member he first attended a meeting of the executive committee, to the closing of the bank, cannot be reversed and is supported by the facts reported. His failure to take the oath of office until a later date is not decisive against his being a director. In 1916 he attended one regular and one informal meeting of the directors and three meetings of the executive committee. Thereafter he attended three meetings of the executive committee in 1917, one in 1918, two in 1919; he attended one meeting of directors in 1917, three in .1918, five in 1919 and
The findings of the master as to the negligence of Hatch, Hennessy and McCarter need not be analyzed in detail because it is manifest that they were too favorable to these defendants, and so far as adverse to them there is no reversible error or ground for their exoneration.
The statute of limitations is not a defence to any of these defendants. That is settled on the facts here disclosed by Greenfield Savings Bank v. Abercrombie, 211 Mass. 252, 259. We regard Lippitt v. Ashley, 89 Conn. 451, 476-479, and Cusrtis v. Connly, 257 U. S. 260, 263, not as in conflict, but as inapplicable to the facts of the case at bar.
In the circumstances here disclosed the contention of the plaintiff that the defendants are liable for losses and expenses of liquidation cannot be supported. The facts already narrated lead to that conclusion. On this point the case is governed by Fuller v. Trustees of Deerfield Academy, 252 Mass. 258, 264, and is distinguishable from Stiles v. Municipal Council of Lowell, 233 Mass. 174, 183. It is not necessary to discuss factors not here present which might establish such liability on the part of bank directors.
The result is that, in addition to matters concerning which the master has found the defendants negligent, they also are liable (save as hereinbefore noted as to E. W. Quinn and Chamberlin) for losses of several kinds alleged in the bill which occurred after the first two audits had been received and considered. That date is May 18, 1918. A reasonable
As to losses alleged and specified in the bill, the defendants are liable for losses in the savings department. The provisions of the statute respecting the investment committee were not observed and that committee did not function, as the directors ought to have known. It cannot be assumed that losses in this department would not have been avoided if these evils had been remedied as they would have been by the exercise of reasonable diligence on the part of the directors. They are liable for dividends paid thereafter. It manifestly was negligent to pay dividends when the capital had been seriously impaired, when the reserves were deficient, and when the surplus and guaranty were adversely affected. They are liable for losses on loans to any individuals in excess of the amount of the permissible percentage on the capital. They are liable for losses on overdrafts. They are liable for losses on all loans improvidently made. Large loans to the Brown group appear to have been made before that date, and, as the master has found, without negligence on the part of the defendants. With respect to losses on these loans, the defendants are liable for increases made after that date and for such of the loans theretofore made as might have been collected or reduced in size by the exercise of reasonable business judgment in the handling and disposition of collateral. Upon the facts here disclosed and contentions here made the liability of the defendants will in no event exceed the amount necessary to liquidate the balance of the unpaid debts of the bank.
It may seem hard to these defendants to be held to this liability. The standard of due diligence and capacity on the part of directors and of liability for negligence has been thoroughly established. It is not so onerous that business men will be afraid to take office as directors. It is essential for the protection of the depositing public. To permit such laxity as is disclosed on this record to go without liability would be likely to shake public confidence in trust companies. The conclusions here reached are supported in general by numerous decisions in addition to those' in the early part of
The defendants are chargeable with simple interest on all sums found due from them from the time the loss to the bank occurred. State Street Trust Co. v. Walker, 259 Mass. 578, 584, and cases cited. gamble v. Brown, 29 Fed. Rep. (2d) (C. C. A.) 366, 381. McCormick v. King, 241 Fed. Rep. (C. C. A.) 737, 746, affirmed sub nomine Bowerman v. Hamner, 250 U. S. 504, 515.
It is manifest that the master in reaching his findings as to each defendant was not guided by the principles here stated. The plaintiff’s exceptions to the master’s report, to the effect that the master adopted an erroneous legal standard of care and duty on the part of the defendants and reached conclusions inconsistent with essential primary facts found by him, must be sustained. It- is not necessary to examine in detail the other exceptions of the plaintiff. The exceptions of the defendants to the master’s report are overruled.
We do not undertake to determine whether enough facts are set out in the report to enable the entry of a final decree in the light of arguments of counsel directed to that end, or whether further findings will be needed either by the single justice or by the master upon evidence already heard or upon further evidence. No decree was entered. The case was reserved for our determination. The case therefore is remanded to the county court for further proceedings not inconsistent with this opinion.
Ordered accordingly.