Wallace v. Lincoln Savings Bank

89 Tenn. 630 | Tenn. | 1891

Lurton, J.

This is a bill....by a sharerholder and creditor of the Lincoln Savings Bank in behalf- of himself and all other share-holders and creditors against such directors of the bank as held office at different times between the organization of the bank, in 1870, and its suspension” in 1886. The other defendants are the corporation itself, under its corporate name, and the trustee of the corporation under a general assignment for benefit of creditors made in August, 1886. The bill charges that the defendant directors, by their inattention, negligence, and mismanagement, have been guilty of a breach of trust, whereby the bank has been reduced to insolvency, its capital wasted, and the shares rendered worthless.

There was a decree in favor of complainant for the use of the corporation against several of the defendants, holding them liable for certain losses sustained through improvident discount, overchecked accounts, and neglect to bring suits upon matured paper. The decree has been appealed from by qomplainant and defendants. Such a bill cannot be maintained by complainant for his peculiar and personal benefit. The wrongs complained of do not especially affect his stock or his demands as a creditor. The negligence of the defendants was in the discharge of duties to the corporation as such; and the corporation, for such negligence, has a right of action. Primarily, therefore, such suit should be brought by the corporation in its corporate name; and only under peculiar circumstances will a creditor or stockholder be permitted by Courts of Equity to bring the suit which, the corporation has failed to bring. But where the corporation is disabled from suing — as, where the managing agents of the corporation, its officers and directors, are themselves to be the defendants, or where the corporation wrongfully and willfully refuses to sue — then, in either case, a Court of Equity will entertain a suit by a share-holder, substituting him to the collective or corporate right of action. In either case it is most obvious that the recovery mijst be for the benefit of thef corporation, all its creditors and share-holders, innocent and guilty, sharing proportionately in the benefits of the decree. The learned Chancellor was correct in holding that the decree obtained by complainant inured to the benefit of the corporation, and that complainant was not entitled to any preference or priority over other creditors or stockholders. The assignment of errors on this point by complainant is therefore overruled.

The defendants were not in office at the time this suit was begun. The corporation was not therefore disabled from suing by being in the hands and under the control of the parties to be sued. It must therefore appear, before complainant will be suffered to carry on such a suit, that the corporation, or those authorized to represent it, have been requested to sue, and that they have wrongfully refused to bring the suit.

It by no means follows that the mere refusal of the corporation to bring a suit will authorize any stockholder dissatisfied with such decision to himself conduct the suit. A very wide discretion is necessarily reposed in the directors of a corporation. It is not the duty of the managers of such associations to bring suit upon every supposed wrong or injury to the corporation. If it were so strangers could never know when a settlement, compromise, or adjustment was a finality if the matter was subject to be overhauled at the suit of any discontented share-holder. So a suit might appear so desperate, or be so expensive, or, for good reasons, impolitic, that directors might, in the exercise of a sound discretion, deem it unwise to engage in litigation. In such case, if the refusal be in good faith, the Courts will rarely suffer a share-holder to overturn such decision by entertaining his suit for the same cause of action. To authorize his suit, the refusal of the corporation to sue must appear to have been wrongful. Morawetz on Private Corporations, Sec. 244.

The bill alleges and the proof shows that the president of the defendant corpoi’ation was duly requested to bring an action in the corporate name against the * former directors for the cause of action' stated in this bill. This he declined because he 'did* not deem the facts submitted to him justified such suit. This demand was not laid before the directors then in office, and they have never been requested to sue, nor have they declined to sue. The directors, not the president, represent the corporation. ^ The failure to show that a majority of the board had wrongfully refused to bring such suit, would be fatal to complainant’s right to sue but for certain facts now to be stated.

In August, 1886, this bank was hopelessly insolvent, and, in that situation, a general assignment of all its assets was made to the defendant, Hancock, as trustee, for the benefit of all creditors, any surplus to be paid over to the corporation. Hancock accepted the trust and qualified as trustee. Subsequently he was requested to bring this suit and declined, deeming himself unauthorized. This right of action passed as an asset to the trustee. Hume v. Bank, 9 Lea, 744.

After the assignment he represented the corporation as well as its creditors, and was alone authorized to have sued upon a corporate right of action. This point has been repeatedly settled by other Courts. Williams v. Hilliard, 38 H. J., 376; Ackerman v. Halsey, 37 N. J., 273; Jones et al. v. Johnson et al., 86 Ky., 530; Savings Bank, etc., v. Caperton, 87 Ky., 306; Brinckerhoff v. Bostwick, 88 N. Y., 52.

In the case last cited the suit wass "against the directors and officers of an insolvent national bank in the hands of a receiver appointed under the provisions of the national banking law. The receiver had refused to sue. The Court held that the right of action was in him, and his refusal authorized a share-holder to present a bill in behalf of himself and all other share-holders, the receiver and the corporation being made defendants. The decision was not based npon any of the peculiar provision of the Act of Congress concerning effect of appointment of a receiver, or liability of officers and directors of national banks, but was squarely planted upon the general principles governing Courts of Equity in such cases. We do not think that the trustee of an insolvent corporation would have so wide a discretion as to suing as exists in the directors of a solvent and going corporation. In the ease of the refusal of the managers of a corporation, an appeal would lie to the general meeting of share-holders; and if in such refusal they did not represent the will of a majority, it could be then made to appear, and a board elected who could reverse their action. Erom the refusal of the trustee there was no appeal save to a Court of Equity. The case presented, on the face of the bill was not frivolous, but was sc grave in character and important in amount as to have made it the duty of the trustee to have submitted the charges to the decision of a Court.

This bank was organized in 1870 under a private charter granted by this State in 1869. The capital stock was one hundred thousand dollars, all of which was ultimately paid in. Some of the defendants were elected directors in 1870, and by annual re-election continued in office until 1885 or 1886. Others served for very short terms, while still others held office for from one to ten years.

They are not charged with any sort of fraudulent collusion. Indeed, no intimation is found in pleadings or proof that any one of them profited directly or indirectly by any of the alleged acts of mismanagement or . negligence. All of them were stockholders, largely interested in the success of the association,. and all suffered equally with complainant by its disastrous failure.

The liability of defendants to the corporation is predicated alone upon the proposition that certain losses sustained by the bank during its fifteen yeai’s of business activity were the direct conse-. quence of the negligence ■ of defendants while directors. The principal fact constituting this alleged negligence is a charge that tke~b.ojuicL-.of directors abdicated their trust by failure to supervise the management, and turned over the entire control of the business of the bank to the _un-limited___disc_re.ti.on .and unaided judgment of the cashier; that, as a consequence; the bank had sustained great losses tbrcragh a series ofi unwise, indefensible.., transactions, engaged in by_the cashier without the aid, advice, and supervision of those charged by their selection with the duty- of exercising an intelligent judgment in the control .of that officer. The allegation necessarily is that these transactions, so disastrous in their consequences, would have been avoided, and these losses escaped, but for the negligence and inattention of defendants in office at the dates of the several transactions. The losses alleged to be a consequence of this breach of duty may be conveniently classified as- follows:

First. — That there is an unexplained deficit of about $40,000, the proof of which consists in the fact that the liabilities of the corporation, including its capital stock of $100,000, exceeds in amount the nominal value of all assets, good and bad, by the sum stated. This difference between liabilities and nominal assets is charged to be a deficit for which defendants must account. The books of the bank are no part of the record. No balance-sheets are exhibited, and no expert testifies as to the state of . the bank as shown by its books. There are many ways in which this deficit of nominal assets may be accounted for. Debts deemed worthless ought to be charged off to profit and loss; in which case they would no longer appear as an asset. This, indeed, appears to have done to the extent of perhaps $20,000. But a more certain solution of this matter is found in the fact that 126 per cent, has been paid out in dividends upon paid-up stock. A profit justifying such dividends was made to appear by .carrying as solvent large amounts of paper held by th§ bank which subsequently turned out to be wholly' or partially worthless. So real estate taken for debt continued to figure as an asset of the value of its cost to the bank, whereas large losses were subsequently sustained when sales were made.

Again, in the statements to the directors, made by the cashier, of the business of the bank no overdrafts are shown. Iiis habit was to deduct ov¿rebecks from aggregate amount due depositors. This was delusive, for large losses -ultimately resulted from these very overdrafts. Thus it is a case where capital has been paid out in dividends, and the 'assets reduced below liabilities. Complainant does juot seek a recovery of this deficit or for dividends improperly paid. It is obvious that he could not, directly or indirectly, be allowed to again recover money already once paid him in the shape of dividends. Turquand v. Marshall, L. R. Ch. Appeal Cases, Vol. IV., p. 582.

In that case Lord Haverly said of a suit against directors by share-holders, in part originating in improper payment of dividends, “that this was a very singular claim, as, in fact, it was asking the directors to pay over again to the share-holders what they had already received as dividends.”

The Chancellor was clearly right in refusing to hold defendants to an account as to this so-balled deficit. The second assignment of error- by complainant is therefore overruled.

Second. — The bill charges that within a few years after organization over $50,000 of the -capital appeared to have been invested in real estate; that ultimately losses approximating $20,000 were sustained by reason of this .diversion of assets. The facts do not sustain this charge. The bank did, at one time, own real estate costing nominally $50,000; but this was the result of foreclosure of mortgages and execution sales. The panic of 1873 and the hard times ensuing, together 'with local crop failures, operated to ruin large numbers of the bank’s debtors. In some cases mortgages were taken, and in others suits were brought. It was deemed safe to bid the bank’s debts upon' lands sold under execution and at foreclosure sales. Eor years following real estate steadily declined, and was almost unsalable. The bank held, hoping to save itself. Ultimately the losses complained of were realized. There is nothing in the evidence tending to show any thing more than bad judgment in the management of debts, good when made, but imperiled by subsequent events. Indeed, the proof hardly makes out a case of error in judgment; for the probability seems to be that, in bidding the debts upon the lands and holding for a better market, the bank’s officers did what the most prudent and sagacious would have done at the time and under same circumstances.

Complainants, however, insist that all the ffians represented by this real estate were made by the cashier, and without the approval or knowledge of the directors or any committee, and that all the subsequent steps resulting in its acquisition were taken by the cashier, possibly with knowledge and approval of the president of the corporation, but without the knowledge or consent of the board of directors. This is perhaps true, for it is shown' that the first board of directors by resolution gave the cashier exclusive charge of the loans and collections of the bank, and ' that down to perhaps as late as 1880 this responsibility was reposed exclusively in that officer, the directors during all that time rarely meeting’ and having little, if any, knowledge of the business of the hank beyond what- appeared in the annual statements made by the cashier to the directors and stockholders. Ordinarily this would constitute such gross negligence as to make directors responsible- both for the criminal defaults and negligent acts of the cashier. There are circumstances, however, to which it may hereafter be necessary to refer, which much mitigate this apparent abdication of duty. Ignoring these circumstances, and treating this as responsible negligence, complainant can only fix liability upon defendants by first convicting the cashier of negligence in regard to these transactions.

A cashier is bound to- exercise reasonable skill, care, and diligence in thé discharge of his duties. If he fails in such skill, or omits such care, and the bank suffers damage as a consequence, he is liable. If intrusted with the duty of making loans, he is not responsible as a guarantor of the solvency of his transactions, or responsible for an error of judgment where he has exercised reasonable skill, diligence, and prudence'. Bank of Albany v. Ten Eyck, 48 N. Y., 305.

Complainant has not shown that there was any want of care or prudence in making these loans, or in the subsequent steps taken to secure or collect them. If the cashier is not chargeable with any want of care or skill about these matters, then it follows that defendants are not liable, for they, at most, can only be liable for losses resulting ■from liis negligence in these matters. There was no negligence in the selection of the gentleman then filling the office of cashier. He bore a very high reputation as a business man of integrity and intelligence, and was better acquainted with the credit of the customers of the bank than any man in the county. ¥e therefore concur with the Chancellor in ruling that no liability attaches to any of defendants by reason of losses ultimately resulting from shrinkage in values which human foresight could not guard against.

Third. — The next loss with which it is sought to charge the directors is one of $20,000, said to have resulted from loans made to the cashier, Hampton, and to the firm of Carloss k Hampton, of which he was. a partner. Hampton began borrowing as early as 1878, either' for himself or his firm. His notes were, from time to time, renewed and other sums borrowed until the indebtedness of the two rnen reached the enormous sum of $50,000 in 1879. During this year the directors, for the first time, discovered these transactions. Hampton was himself a large share-holder, having in his own name something over $10,000 in stock. Under the charter the bank was given a lien upon the shares of a borrowing stockholder for the security of his loans. It appears that the president of the corporation had authorized Hampton to borrow to the extent of his stock, it being then at a premium. With this exception none of the directors were aware of the fact that their cashier was borrowing from tlie bank; and all, including the president, were greatly surprised when, in 1879, the extent of his indebtedness was discovered. Hampton was regarded as a man of fine estate and rare financial capacity, and the bulk of the stock was .taken by subscribers upon the understanding that he was to be made the cashier, and, as' such, to have the management and control of the bank. After his election the first official act of the directory was, by resolution, to give him exclusive control of the' discounts of the bank. Ho by-laws were adopted at any time by the share-holders, and none by the directors for their own government. Hone - of the- directors, originally or subsequently elected, had had any experience whatever in the banking business. Confidence in Iiamptou’s integrity and financial ability seems to have underlaid the action of share-holders and directors alike. A portion of the directors were country gentlemen, living remote from the location of the bank. Others were lawyers and merchants of Fayetteville, but all fully occupied with their personal affairs. The president of the bank, up to his death in 1885, was the late Col. D. W. Holman, a lawyer of large practice, which very fully engaged his time and energy. He was allowed a small salary, and seems to have been much about the bank, much consulted by the cashier, and to have given the business of the bank a general supervision. Having died before the institution of this suit,, we have not had the "benefit of his evidence; but, from all that is shown, he only consented to the borrowing by Hampton of a sum equal to his stock, and was wholly ignorant of the subsequent large loans. Hp to the discovery of these loans to Hampton and his partner, the directors had had few meetings, and knew little of the business of the bank. Its management was intrusted to the judgment and discretion of the cashier, with such general supervision as the president was able to give. The resolution intrusting the lending of money and discounting of paper to the discretion of the cashier did not authorize him to lend to himself. He could not represent himself and the bank at the same time, and his conduct in this matter is not to be defended, and was a clear breach of duty upon his part. So soon as these loans were discovered the directors resumed the general control and management of the bank. Hampton was in a short time superseded by a new cashier of high character and experience. Such steps were taken as resulted in obtaining security by way' of collaterals or mortgages, amply protecting the bank against loss on these loans. By sale of collaterals, and payments by the debtors, these debts were finally reduced to about $28,000. After .several extensions suit at law was brought upon the unpaid balance. This-suit was enjoined by the debtors by bill in chancery, seeking an account of usury, and claiming that the entire sum remaining due consisted of usury, which had from time to time been compounded. This suit was pending when complainants’ hill was filed; hut before the hearing the trustee. Hancock, compromised the matter by accepting $8,000 in full of the notes for $28,000 remaining unpaid. For the loss thus sustained complainants seek a decree against the defendants in office when these loans were made.

In the view we take of this matter it is unnecessary for us to consider whether the ignorance of the defendant directors of the fact of these V loans is, under the peculiar circumstances of this case, such negligence as to make them chargeable with the consequences to the corporation. Assuming their responsibility if' loss occurred, did the bank sustain any loss as the. direct consequence of the negligence of the defendants in not preventing such use of the bank’s''funds by its own cashier? We think no such loss is shown. The balance due on the notes of Hampton & Carloss was amply secure at the time the trustee compromised their liability. This compromise was not made by reason of any insolvency of the debtors or any •infirmity in the securities held by the bank. The only defense was usury. The trustee regarded the whole debt as in peril by reason of this defense. ■ The debtors claimed that; the entire balance of •$27,000 or $28,000 was ‘for usury. If this was true it was a complete answer to the demands of the bank. The compromise was urged by a majority of the share-holders. The trustee submitted to the Chancery Court his power in the premises, which being held ample, he, as for the best interest of creditors and all concerned, agreed to the proposed settlement. Defendants cannot be held liable because usury upon a well-secured debt has not been collected. The settlement is a bar to a suit against them by the corporation, and therefore a bar to complainant’s bill so far as this item is concerned. But upon another and distinct ground complainant cannot recover, and that is the bar of the statute of limitations. None of these loans were made after 1879. The negligence of defendants, if any there was, occurred prior to January 1,- 1880. This suit was begun in December, 1886, more than 'six years after the last act of negligence in this matter.' The Chancellor seems to have entertained the opinion that -because a stockholder can alone sue in equity upon such a cause of action, that therefore this was one of that class of purely equitable actions against which the statute does not operate. But, as we have before seen, this kind of suit is, at last, but the suit of the corporation for its benefit and upon its right of action. If for any reason the corporation is estopped from suing, or its action is barred, the suit by the stockholder or creditor is likewise affected. “A suit of this character,” says Mr. Morawetz, “ is brought to enforce the corporate or collective rights, and not the individual rights of the share-holders. It may therefore properly be regarded as a sui.t brought on behalf of the corporation, and the share-holder can ^enforce only such claims as the corporation itself could enforce. Moreover, the essential character of a cause of action belonging to a corporation remains the same, whether the suit to enforce it be brought by the corporation or by a share-holder. Thus a legal right of action would not be treated as' an equitable one, or become governed by the rules applicable to equitable causes of action, as to limitations, etc., because a share-holder has brought suit in equity to enforce it on behalf of the company.” Sec. 271.

Directors are not express trustees. The language of Special Judge Ingersol in Shea v. Mabry, 1 Lea, 319, that “ directors are trustees,” etc., is rhetorically sound, but technically inexact. It is a. statement often found in opinions, but is true only to a limited extent. They are mandatories; they are agents; they are trustees in the sense that every agent is a trustee for his principal, and bound to exercise diligence and good faith; they do not hold the legal title, and more • often than otherwise are not the officer of the corporation having possession of the corporate property; they are equally interested with 1 those they represent; they more nearly represent the managing partners in a business firm than a technical trustee. At most they are implied trustees in whose favor the statutes of limitations do run. Hughes v. Brown, 88 Tenn., 578; Spering’s Appeal, 71 Penn. St., 11; Morawetz on Corporations, Sec. 516.

An action at law lies in favor of the corporation against directors for malfeasance, misfeasance, or negligence in-.office, whereby loss or damage has resulted; and the limitation applicable to the suit of the corporation at law is equally applicable to the suit of the stockholder upon the corporate •right- of action in equity. Morawetz on Corporations, Sec. 271; Cook on Corporation Law, Sec. 701; Godbold v. Bank of Mobile, 11 Ala., 191; Williams v. Hilliard, 38 N. J. Eq., 383; Spering’s Appeal, 71 Penn. St., 11; Brinckerhoff v. Bostwick, 99 N. Y., 193.

Our statutes -of limitation operate upon all causes of action save suits between cestui que trust and •express trustee under pure technical trusts cognizable only in Courts of Equity. Hughes v. Brown, 88 Tenn., 578.

The statutes of six and three years were relied upon by defendants, both by demurrer and plea, as applicable to complainants’. entire cause of action. By § 2773 it is provided that “ actions for injuries to- personal or real property, actions for the detention or conversion of personal property,” shall be barred unless suit is brought within, three years from vfhe accruing of the cause of action. This is not a suit for either injury to or conversion of personal property, and this section is not applicable. The last clause of §'2775 provides a limitation of six years for all actions “ on contracts not otherwise provided for.” The case of Bruce v. Baxter, reported in 7 Lea at page 477, was a bill in chancery against an attorney for neglect of duty in the collection of claims in his hands, whereby they were lost. The clause we have quoted from § 2775 was held applicable to the suit.' The reasoning of Judge Eree-man, who delivered the opinion of the Court, was that the relation of client and attorney implied a contract for the exercise of reasonable skill and diligence in doing what was undertaken, and that a failure to exercise such diligence was a breach of contract rendering the attorney liable for the loss resulting, but no more. A similar ruling was made in the earlier case of Ramsay v. Temple, 3 Lea, 253, it being a suit against an attorney for negligence in failing to sue out an execution. Those cases are controlling in this. The relation of a director to a corporation . implies a contract that he will use ordinary diligence in the discharge of the duties he undertakes by accepting the office. Eor a breach of this duty an action lies, which is barred unless begun within six years from the time right of action accrued. There has been no fraudulent concealment of the cause of action by defendants, and the remedy of the corporation for any negligence in the matter of the loans to Hampton, or Hampton & Carlos's, is barred.

Hpon the pleadings and proof the Chancellor dismissed complainants’ bill so far as it was sought to fix liability by reason‘of the matters heretofore considered. As to losses claimed to have resulted from overchecks, save certain items which he held unsupported by evidence sufficient to justify a reference, and losses resulting from improvident discounts, and claims lost by neglect to collect before insolvency or barred by limitation, he ordered a reference to the Master, laying down very distinctly the grounds upon which the defendants were to be charged. Upon this report and •exceptions thereto, decrees were finally pronounced against defendants, aggregating about four thousand dollars. Errors have been assigned by both parties upon the decree of. reference as well as upon the final decree. The first error -assigned by complainant is that the Chancellor put upon complainant ■the burden not only of showing losses sustained by the corporation, but that such losses were attributable to the negligence of defendants.

Directors, by assuming office, agree to give as much of their time and attention to the duties .assumed as the proper care of the interests intrusted t'o them may require. If they are inattentive to these duties, if they neglect to attend meetings of the board, if they turn over. the management of the business of the company to the exclusive control of other agents, thus abdicating their control, then they are guilty of' gross negligence with respect to their ministerial duties; and if loss results to the corporation by breaches of trust or ■ acts of negligence committed by those left in control, which by due care and- attention on their part could have been avoided, they will be responsible to the corporation. The diligence required from them has been defined as that exercised by prudent men about their own affairs, being that degree of diligence characterized as ordinary. If a less degree of diligence is exercised, the negligence is gross, and • for losses consequent he is liable. “ What constitutes a proper performance of the duties of a director,” says Mr. Morawetz, “ is' a question of fact which must be determined in each case in view of all the circumstances; the character of the company, the condition of its business, the usual methods of managing such companies, and all other relevant facts must be taken into consideration.” Morawetz oil Corporations, Sec. 552.

Bank directors are not expected to give their whole time and attention to the- business of the company. The customary method in regard to such associations is that the active management and responsible custody is left to the cashier and other agents selected by the directors for that purpose. These are paid salaries, demanding their skill and time should he .given to the duties of immediate management. As a rule the custodian of the assets is the cashier. 'The duty of directors with respect to such is to supervise, direct, and control. These agents, though usually selected by the directors, are not the agents of the directors, but agents of the corporation. Mor. Corp., Sec. 552 d seq.

The neglect which would render them responsible for not exercising that control and direction properly must depend upon the circumstances of each particular case. They are not insurers of their fidelity, and they are not liable for their acts on any principle of the law of agency.

“ Directors,” says Mr. Morawetz, “ can be held responsible for a loss resulting from wrongful acts or omissions of other directors or agents only provided the loss was a consequence of their own neglect of duty, either in failing to supervise the-company’s business with attention, or in neglecting to use proper care in the appointment of such agents.” Morawetz on Corporations, Sec. 562.

The collection of matured paper and the paying-of checks primarily pertain to the duties of the agents of the corporation having the immediate management of its business. If defendants were-liable in regard to such matters, it was for negligence in. the selection or retention of such agents,, or for neglect in the control and direction of these agents concerning their duties in such matters. It,, therefore, devolved upon complainant to show that, defendants had been neglectful in their duty in controlling or supervising these agents, and that this want of due care and attention had resulted in losses to the corporation. The ruling of the Chancellor that the burden was upon complainant not only to prove losses, but to show that such losses were the consequence of the negligence of the directors, was right. One who seeks to recover for negligence must allege and prove it. So he must show that the damage he • seeks to recover was the consequence of ''this negligence. Bruce v. Baxter, 7 Lea, 477.

Complainant’s first assignment of error must be overruled. The only remaining assignment of error by complainant is the third, which is that it was error in the Chancellor to refuse a reference as to certain losses resulting from overchecks by O. P. Bruce & Co., E. J. Gray & Co., and Caldwell & Kelso. As to the overchecks of Bruce & Co., and E. J. Gray & Co., it is enough to say that they were all made more than six years before this bill was filed, and any liability is barred. The only evidence cited to support the assignment as to the overchecks of Caldwell & .Kelso is that of the trustee, Hancock. The witness ■ does not show that this firm was irresponsible when their account was overdrawn. It is not negligence per se, in the absence of a by-law or order of a superior officer, for a cashier to pay the overcheck of a responsible customer. Such overchecking is not uncommon, and in practical banking is almost unavoidable. In effect the payment of an overcheck is a loan without security, upon the implied condition that the account shall be made the next day or upon notice. If not responsible negligence in the cashier to pay the overdrafts of responsible customers, it is clearly not a matter for which the directors can be made liable by mere proof that an account was overdrawn and a loss sustained. The assignment is overruled.

¥e come now to consider the errors assigned by defendants. The 'first is, that it was error to charge defendants with the notes of ~W. H. Moore and "W". T. Boss as discounts improvidently made. The Moore note was taken in 1882 by the president of the bank, in renewal of a balance due upon an old note. The original note, as shown by the fact that the new note was chiefly for past-due interest, was discounted more than six years before bill filed. The negligence, if any, was in discounting the original note, and any cause of action for that matter was barred. The W. T, Boss note was only for twenty-one dollars, and the cashier, Thomas, proves that a claim on Boyer & Blake, who were then regarded as responsible, was taken as collateral security. There was no negligence in this, and the first assignment is sustained.

The sixth assignment is, that it was error to charge defendants with certain small notes barred by limitations. The Master had repoi’ted that there was no proof to show any losses sustained by neglect to sue. Upon exception by complainant, the defendants were charged with these notes. The only evidence cited by complainant to support this charge is that of Mr. Hancock, who, in answer to the question as to what assets turned over to him were barred, answered and set out these notes. It is not shown that they were solvent when discounted, or at any other time. It does not follow that they were lost to the bank because barred when they came to the hands of the trustee. Complainant should have gone further and shown that they were solvent assets.. The assignment is sustained.

The fourth assignment complains that it was error to chai’ge defendants with the overchecked accounts of McCown Bros., and J. E. Caldwell & Co. The Master had reported in favor of defendants upon these items, but upon complainant’s exception they were charged to defendants. The evidence does not show that these firms were irresponsible when their accounts were overdrawn.

The ruling made on complainant’s third assignment with reference to the overchecked account of Caldwell & Kelso applies to this, and the fourth assignment of error by defendants is sustained. The remaining assignments relate' to the overchecked accounts of the following firms and individuals, all of which were charged to the defendants: W. T. Ross and W. T. Ross & Co., $1,359.86; R. P. Hairstone, $328.59; Ship-Miles, $72.69.

The decided weight of .proof with reference to the' last two accounts is that while the drawees had little property, yet they were in business and had credit, and were accustomed to pay their debts. As to W. T. Ross, he ivas not indebted, was a man of character, was a profitable customer to the bank, and had a very large insurance business. The cashier was in the habit of indulging these parties by permitting them to overdraw, they paying interest. While it is probably true that none of these parties had property subject to execution, yet they were people of character and of business integrity demanding and receiving credit. They had often overdrawn and made their accounts good. If it were shown that these overchecks were with the consent of defendants, it would not necessarily follow that they were liable upon mere proof that the' drawees could not be coerced into payment. "We are not to try the responsibility of bank officers or bank directors by the vigorous principles regarding loans by technical trustees or guardians or executors. To lend at all is a breach of trust by some trustees who have no authority to lend. But in this case we are dealing with an institution whose business it is to lend. The law has never undertaken to rigidly define the conditions upon which banks may lend. Among business men there is found a degree of trust and reliance upon moral character, business integrity, and thrift, justifying to a business man the soundness and prudence of a transaction which to judges and lawyers engaged in applying the hard and fast rules of law would seem indefensible and reckless. The standard of diligence and prudence by which bank officers and bank directors should be tried, is that which business men have erected for themselves. Reasonable conformity to the customs and methods in vogue among prudent bankers is the degree of diligence required of such officers. Several of the overchecked accounts heretofore disposed of upon other grounds were the accounts of men engaged in buying and shipping produce. One of those now uuder consideration was that of a man engaged in buying and shipping stock. These accounts were overdrawn upon an agreement that drafts drawn against tile shipment with bill of lading attached should be turned over to the hank and the account thus made good. Advances were made in this way, and the men thus enabled to carry on their business. In some, instances losses finally resulted because of losses sustained by decline of values. In others the fund was mis-' applied. Without, however, determining the liability of defendants if it had been shown that these accounts were overchecked by permission of defendants, we decide only the case presented. The defendants did not authorize these 'overdrafts; nor did they have actual knowledge that the accounts were being overdrawn; nor is there any presumption of knowledge from the mere fact that entries upon the books of the bank would have shown that the cashier was permitting overdrafts.

A director in a suit between' himself and the corporation, or those suing upon the corporate right of action, is not presumed to have knowledge of all that is shown by -the books of the company. The presumption of knowledge attaching to a director which is referred to in the ease of Lane v. Bank, 9 Heis., 437, applies only in suits between the bank and a stranger. The doctrine has never been extended to suits between the bank and its directors. Savings Bank of Louisville v. Caperton, 87 Ky., 323; Clews v. Borden, 36 Fed. Rep., 617; In re Dunham, 25 Ch. Div., 725.

The doctrine of the Lane case is carefully limited in Martin v. Webb, 110 U. S., 8.

Whatever may he said as to the negligence of the directors in office prior to 1880, it is overwhelmingly shown that after that time, and through the entire period covered by the overchecking now under consideration, that there was no inattention to the duties of their office. Meetings were regularly and frequently held, the assets in shape of discounted paper were carefully examined, and directions given as to collections. The cashier was forbidden to allow any overchecking, and he was required to have the approval of at least, one director to the discounting of any paper. Vigilant efforts were made to save the bank by closely looking after its assets. It is true that the money in the hands of the cashier was never counted, but as no defalcation or larceny was ever committed, the fact becomes immaterial. After this renewed vigilance and attention there was no such habit or custom of permitting doubtful overchecks as to operate as notice; and under all the circumstances, we do not think defendants chargeable with the items embraced in the assignment of error now being considered.

Reverse the decree of the Chancellor, and dismiss the bill at cost of complainant.

Case Details

Case Name: Wallace v. Lincoln Savings Bank

Court Name: Tennessee Supreme Court

Date Published: Feb 14, 1891

Citation: 89 Tenn. 630

Court Abbreviation: Tenn.