19 Utah 289 | Utah | 1899
This action was instituted by the plaintiffs as stockholders, of defendant Citizens’ Bank, in behalf of themselves and all other, stockholders, creditors, ancL_others similarly jituated, against the defendants for an accounting, and for damages alleged to have been occasioned, by reason of negligence in the management of the bank, by its directors and officers. It appears that the bank was organized about August 11, 1890, with a capital stock of $150,000, and the banking business commenced soon thereafter. It failed and made an assignment for the benefit of its creditors, on December 26, 1893, and afterward a receiver was appointed. The defendants, H. A. Spencer, George Murphy, Ad. Kuhn, John Maguire, R. A. "Wells, Newall Beeman, George W. Perkins, S. S. Schramm, and W. W. Corey were directors. W. W. Corey was the first president, and Newall Bee-man was the president when the bank failed. The defendant, Theodore Robison, was vice-president and manager, and Challes M. Brough was cashier. J. C. Armstrong was receiver. The transactions, which resulted disastrously to the bank, and which, it is claimed, were made because of the negligence of the directors and officers, are of such a character as to require careful investigation. It is certainly quite startling to notice that a bank
The bank was also unfortunate in dealings with Corey Brothers & Co. Its president, W. W. Corey, was a member of that firm, and the firm borrowed money from the bank from time to time, without security, until, when it failed in business and assigned, it owed the bank $28,000. The firm had also borrowed from another bank about $70,000, but that, it seems, was secured by real estate. The evidence relating to the transactions resulting in the $28,000, yet remaining unpaid, is such, to say the least, as to raise a strong suspicion of negligence on the part of those whose duty it was to supervise the affairs of the bank; and it savors much of a violation of law.
The loan to James C. Lonergan of $700 also resulted in a loss to the bank. This loan was recommended by one of the directors, and was made without security.
So, it appears the bank lost $3,200, through loans and overdrafts, without security, except some bank stock, to Theodore Robison, its manager.
Likewise its cashier, Helfrich, made overdrafts and received loans, which resulted in a loss to the bank of $6,375. The overdrafts, it appears, he began to make in October, 1890.
Another loan which proved unfortunate and a loss to
Such are the losses complained of in this case, and, as will be noticed, they aggregate over $84,500.
At the trial, when the plaintiffs rested their case, various motions for non-suit were made, and, upon argument, granted by the court, except as to defendant W. W. Corey.
The important question presented is, Djd the plaintiffs make out a prima facie case ? To determine this, it~is necessary_to consider first the degree of care and diligence and the extent of supervision which must be exercised by directors and officers of a banking institution, so as to discharge their duty to stockholders and creditors, and then ascertain whether, under the evidence, as it now appears, all or any of the defendants exercised such supervision, skill, and diligence, as the circumstances and nature of the business required.
It is not contended that the directors knowingly permitted any violation of law in any banking transaction, or that they were dishonest in the administration of the bank’s affairs, but it is insisted that they wrongfully intrusted the exclusive management and control of the banking business, to the cashier and manager, and were negligent in the performance of the duties imposed upon them by law.
‘ ‘ To elect by its stockholders, directors from time to time, and by its board of directors, to appoint a president, a vice-president, cashier, and such other officers as shall be provided for in its articles of association, define their duties, require bonds of them, and fix the penalty thereof, dismiss such officers or any of them at pleasure; and appoint others to fill their places.
“To exercise by its board of directors or'duly authorized officers or agents, subject to law, all such incidental powers as shall be necessary to carry on the business of banking by discounting or negotiating promissory notes, drafts, bills of exchange, and other evidences of debt, by receiving deposits, by buying and selling exchange, coin, and bullion, and by loaning on personal or real security.”
No doubt the board of directors of a bank incorporated under the act, of which these provisions form a part, may appoint executive and other officers, as therein provided, and may “carry on the business of banking” through such officers, but this does not release the directors from the duties which devolve upon them. It does not follow that the responsibility of the board, or of the individual director, ends with the appointment of honest men to the executive offices. The language of the statute does not enable the directors to say that they have no duties of supervision and control. If it had been the intention of the Legislature that the officers provided for should have full control, without supervision, of the business transactions and affairs of a bank, then it would have been a useless thing to provide for a board of directors, for the stockholders could elect such officers as
Morse on Banks and Banking, Sec. 117.
It is true, the executive officers attend to and execute the details of the transactions of the institution, but it is nevertheless incumbent upon the board of directors to possess a general knowledge of the character of the transactions and of the manner in which they are made. While..s.uch„-dir.ectoxs. are not required to watch the ordi-narymzQutine.nf. .business, or observe the exact state of each day’s,.accounts, still they are bound to possess a general knowledge of the manner in which the business is .transacted, and of the character .of. ..the .transactions, and ..to., maintain ,.such a degree of ^vigilance , oyer,,»-and intimacy with, the business as will enable them .to know to whom, and upon what security, the large lines .of credit are given. Especially is this so as to large loans and discounts, or matters at once affecting the stability
The duties of officers appointed by the board are of an executive character and relate mainly to details, and doubtless the making of a loan or discount in • any considerable amount, or the transaction of other business of moment, should be preceded by an authorization from the board. The duties of directors are administrative, relate to supervision and direction, and when it is sought to hold them responsible for a dereliction of duty, because of which a loss occurred to stockholders and creditors, they can not evade liability by pleading ignorance of the affairs of the institution, incompetency, or gratuitous service, or that the management of the banking business was in the hands of the cashier or other executive officer.
11 Where there is a duty of finding out and knowing, negligent ignorance has the same effect in law as actual knowledge. While the directors of a corporation may and must, as already stated, commit the details of its business to inferior officers, this does not absolve them from the duty of maintaining a reasonable supervision, and if such inferior officers waste the assets of the corporation, it is conceded that the directors can not escape liability on the ground that they did not know of the wrongdoing, provided that it appear that their ignorance
Such is likewise the case where damages have resulted to stockholders and creditors, through unauthorized acts or omissions of duty in the management of the corporate business. Nor is such liability affected by thej technical relation existing between the directors and the ' corporation, stockholders, or creditors. It exists whether i the relation be that of trustees, to cestui que trust, or of agents to principals. Doubtless as between the bank and a director it is mainly that of principal and agent, while under some circumstances the relation of trustee to cestui que trust may exist. Whatever the technical relation may be, to determine what acts or omissions amount to actionable^ negligence is a matter of no little difficulty. . Un-; doubtedly each case must depend upon its own peculiar circumstances. The opinions of judges, respecting the degree of care, skill, and diligence which directors of a banking institution must exercise in order to avoid liability for negligence, are not all harmonious. That-they must exercise some degree of care and diligence is not subject to controversy. What degree of negligence will render them liable? What degree of care and diligence must they exercise to avoid liability ? Some of the courts have
“ I think the question in all such cases should and must necessarily be, whether they have omitted that care which men of common prudence take of their own concerns. To require more would be adopting too rigid a rule and rendering them liable for slight neglect; while to require less would be relaxing too much the obligation which binds them to vigilance and attention in regard to the interests of those confided to their care and expose them to liability for gross neglect only, which is very little short of fraud itself.”
In Spering’s Appeal, 71 Pa. St., 11, Mr. Justice Shars-wood said : ‘ ‘ They (directors) can only be regarded as mandataries — persons who have gratuitously undertaken to perform certain duties, and who are therefore bound to apply ordinary skill and diligence, but no more. ’ ’
In 3 Thompson Corp., Sec. 4101, the author says: ‘ ‘ While a class of decisions places the liability of directors under this head on a ground more favorable to them, by restraining it to cases of gross and habitual negligence, non-attendance, and inattention to their duties, yet none of the decisions exact more than reasonable business knowledge and skill, strict good faith, and a reasonable measure of care and diligence under the circumstances of the particular case.” And in Sec. 4106, he says: “ It is plain that the expression ‘ gross negligence ’ is loosely used in many of the judicial decisions, and that it is sometimes used as the mere antithesis of a want of ordinary care.” Hun v. Carey, 82 N. Y., 65; United Society of Shakers v. Underwood, 9 Bush., 609,
Bearing upon the general subject herein discussed, is the very instructive case of the Charitable Corporation v. Sutton, 2 Atk., 400, where the action was brought for relief against the defendants, committee-men, and other officers of a corporation, for breaches of trust, fraud, and mismanagement, and in which were involved questions of the liability of directors. Among the objects of the corporation was that of banking with notes payable on demand within the amount of the stock, and of lending money on pledges, etc. Among the things complained of was a method of advancing money several times upon old pledges, which were not worth more than the first sum lent, or giving credit upon imaginary pledges. Under the charge of crassa negligentia, the breaches of duty, amongst others complained of, were non-attendance of committee-men or directors upon their employment, never once inspecting the warehouse to see what number of real pledges were there, and putting the whole power into the hands of others. Lord Chancellor Hardwicke, conceding that the employment was not one affecting the government, said : “I take the employment of a director to be of a mixed nature: it partakes of the nature of a public office, as it arises from the charter of the crown. * * *
“Now if this doctrine should prevail, it is indeed laying the ax to the root of the tree. But if, upon inquiry before the master, there should appear to be a supine negligence in all of them, by which a gross complicated loss happens, I will never determine that they are not all guilty. Nor will I ever determine that a court of equity can not lay hold of every breach of trust, let the person be guilty of it either in a private or public capacity.”
In Land Credit Company of Ireland v. Lord Fermoy L. R. 5, Ch. 763, Lord Hatherley said: “ I am exceedingly reluctant in any way to exonerate directors from performing their duty, and I quite agree that it is their
So, in Briggs v. Spaulding, 141 U. S., 132, 165, a case on which the respondents appear to rely, Mr. Chief Justice Fuller, speaking for the court, said: “ Without • reviewing the various decisions on the subject, we hold that directors must exercise ordinary care and prudence in administration of the affairs of a bank, and that this includes something more than officiating as figureheads. They are entitled under the law to commit the banking business, as defined, to their duly authorized officers, but this does not absolve them from the duty of reasonable supervision, nor ought they to be permitted to be shielded from liability because of want of knowledge of wrongdoing, if that ignorance is the result of gross inattention.”
In that case the law seems to be stated with much liberality in favor of directors, and it seems a very liberal application of the law to the facts was made in favor of the defendants, and four of the jurors dissented, but still the conclusion was reached that directors must exercise ordinary care and prudence, holding that the committing of the banking business by them to the officers does not absolve the directors from reasonable supervision.
In Cutting v. Marlor, 18 N. Y., 439, Mr. Chief Justice Church said: “A corporation is represented by its trustees and managers; their acts are its acts, and their neglect its neglect. The employment of agents of good character does not discharge their whole duty. It is misconduct not to do this, but in addition they are required to exercise such supervision and vigilance as a discreet person would exercise over his own affairs. The bank might not be liable for a single act of fraud or crime on the part of an officer or agent, while it would be for a
So, in Williams v. McKay, 40 N. J. Eq., 189, where the observations of Lord Chancellor Hardwicke and Hatherley were referred to with approval, Mr. Chief Justice Beasley, delivering the opinion of the court, said: “I entirely repudiate the notion that this board of managers could leave the entire affairs of this bank to certain committeemen, and then, when disaster to the innocent and helpless centuis que trustent ensued, stifle all complaints of their neglects by saying, We did not do these things, and we know nothing about them.” And again he said: “The misconduct in question was manifested in frequent, glaring instances, and it is not easy to imagine how they, or some of them, failed to be discovered by these boards of managers on the supposition which, in their favor the law will make, that they exercised their office in this respect with a reasonable degree of vigilance. The neglectful acts in question can not be regarded by the court as isolated instances, for they run through the whole period of the life of this institution, and thus evince a systematic and habitual disregard of the directions of the company’s charter, and a very striking indifference with regard to the security of the' money held in trust by them.”
In Hun v. Carey, 82 N. Y., 165, where the question of the degree of vigilance to be exercised by directors of a savings bank was involved, Mr. Justice Earl, speaking for the court, said: “Few persons would be willing to deposit money in savings banks, or to take stock in corporations, with the understanding that the trustees or directors were bound only to exercise slight care, such as
So, in 3 Thomp. Corp., Sec. 4108, with reference to the liability of directors for negligent ignorance of corporate affairs, it is said: ‘ ‘ The true theory disregards the subtile and impracticable distinction between ordinary negligence and inattention and gross negligence and inattention, and holds directors responsible for not knowing that of which they had the means of knowledge; and while relieving them from the responsibilities of insurers, ascribes liability on the ground of ignorance of that which could have been discovered by that good business diligence which is incumbent upon -them.” 1 Morse on Banks and Banking, Secs. 116, 125, 126, 128; 1 Morawetz on Priv. Corp., Secs. 552-562; 1 Reid on Corporate Finance, Sec. 181; 3 Thomp. Corp., Sec. 4113; 2 Am. & Eng. Ency. of Law, 114-116; Gibbins v. Anderson, 80 Fed. Rep., 345; Marshall v. Farmers', etc., Savings Bank, 17 Am. St. Rep., 84; Houston v. Thornton, 132 N. C., 365; Horn Silver Min. Co. v. Ryan, 42 Minn., 196;
Having thus, in the light of authority, considered the degree of care, skill, and diligence which directors, of a bank must exercise to avoid liability for acts of commis-. sion or omission which result in loss to the institution, its stockholders, or creditors, it now becomes important to ascertain whether, under the evidence m this case, as it now stands, the defendant directors are shown guilty of such negligence, as will render all or any of them liable for the losses occasioned by the transactions of which the appellants complain; and the alleged liability is such that facts must be examined as to each of them.
The testimony shows that the defendant Beeman was elected director and president of the bank in January, 1893. But one of the loans complained of was made during his term of office, and that was the one to the Cache Valley Land and Canal Co., which was made without his knowledge or consent. After he became director and president, he was for some time necessarily absent from the State. He attended various meetings of the board, advised with the manager and cashier, examined the books, notes, accounts, bills receivable and payable, and about the middle of August discovered the $10,000 loan of the Canal Company. Thereupon, it appears he required a statement of the affairs of the bank from the manager, and upon receiving the same and making an examination of it, and submitting it to another banker for advice, he, on August 23, 1893, wrote a letter to the manager in which he in effect deplored the condition of
We are further of the opinion that the plaintiff failed to make out a prima facie case as to defendant Armstrong, the receiver. The defendant, Eobison, it appears, was not properly before the court, hence, his case calls for no consideration from us. Eespecting the remaining defendants, the ruling of the court, in granting the non-suit, presents a much more serious question, under the evidence. As to them, the testimony appeal’s to show a
The witness was on Helfrich’s bond, but did not know that he had overdrawn, and said they gave the privilege to overdraw accounts to no one. Matters of loans were generally left with the manager and cashier.
Defendant Murphy became director in 1891, and, as a witness, said: “ I know most of the loans complained of in this case, I had-nothing to do with them at the time
Defendant Kuhn assumed the duties of director in January, 1891. As a witness, he, in part said: “I was one of the executive board of the bank. I don’t believe that, as a member of that board I passed upon the Anderson Pressed Brick Co. loan. I was in the bank quite often; I very seldom looked at the books. I had an opportunity of looking at them at any time. I looked at the daily blotter once in a while. During all the time I was a director I was a member of the executive board. I remember that Corey got some money there. I passed upon the loan at the time. I think it was $2,500 that he wanted. I have been in business here sixteen or eighteen years. I have a man to keep our books. I do not understand bookkeeping. I could probably find an account if I took time for it. I knew that the bank was discounting paper and making loans. I knew its general class of business.”
He was aware of the Barbour shortage and other transactions of which complaint is made. The loan, to the Cache Valley Land and Canal Company was made while he was absent from the State. Sometimes he was absent on business two or three months at a time. He heard of and noticed nothing to arouse suspicion, and had confidence in the manager.
So, the defendant Wells, testified: “I don’t know about the Cache Valley note transaction. I never looked it up or had anything to do with it. I never examined the books of the bank, or counted the cash, I remember
On cross-examination the witness said: “I was one of the first directors, and was appointed upon the executive board to pass upon the sufficiency of securities and such as that. I attended meetings and had stock in the bank. We did not have the list of notes, or the note pouch placed upon the table. The books were there, but I never was at a meeting where they examined any of the notes. I knew what my duties were and understood the purpose of my appointment. I knew that the stockholders were looking to me to’protect their interests; but T ,did At do it. I just let it go by default. I don’t suppose the other members of the board were as derelict as I was.”
The testimony of defendant Corey is in part, as follows: “ I was the first president of the Citizens’ Bank. I do not think that J. R. Barbour, the first cashier, gave a bond while acting as such. I did borrow money in March, 1893, and at different times from the bank, while president. I do not remember how much. I did not give any security at that time. Robison passed on the
The defendant Schramm, another director, gave testi
The witness knew of the.various transactions complained of, and had confidence in the manager and cashier.
The defendant Brough was cashier, and some of his statements in his testimony are as follows: “ I was nomi
When the bank made its assignment, the witness became the assignee.
The evidence presented in the record is quite voluminous, and further reference, in detail, is not deemed necessary. A careful examination of all the proof impels the conclusion that at least some of the transactions, of which the plaintiffs complain, are, to say the least, not
Mr. Morawetz, in his Treatise on the Law of Private Corporations, in Section 554, says: “Directors are not merely bound to be honest; they must also be diligent and careful in performing the duties which they have undertaken. They can not excuse imprudence on the
We do not herein assume to determine the ultimate rights of the plaintiffs. Whether or not they will-finally be able to recover, for any of the transactions complained of, will perhaps depend largely upon the question whether or not they themselves have been guilty of such acts and conduct respecting these transactions, and the management of the bank, as will prevent a recovery by them. We simply hold that the plaintiffs have established a. grima fade case againstthe defendants'"Brough, Spencer, Murphy, Kuhn, Wells, Schramm, and Corey; and as to them the judgment of the court, must-be set aside, costs"to “abide the result of the action. As to defendants Bobison, Maguire, Beeman, Perkins, and Armstrong, the judgment of non-suit is affirmed, with costs against the plaintiffs. The cause must, therefore, be remanded to the court below with directions to proceed in accordance herewith. It is so ordered.