222

FEDERAL ll:EPORTER,

vot. 63.

fabt1'1'ffl:eriif.rlffustW to consider iconsolidlttion,' except' upon the terms that the Scrantons of years,bel()lil!t'to it. .As a matter of experience the Im'tlkaiWaiina C<>mpany· kne:w the disastrouse:ffeet of rivalry enSUdhrivalry must be surely absolutelyMVrOOJfor a. term, or at :eQilsl>lidatiou'would be futIle to ac:H:ence tit was made by their representatives,'8!iprerequisite to consolidation that by the obligation of a solenllloofamtntthe SCrantons'Dmst contract\to refrain from such rivalry. :11 such covenant were made, then the consolidation might ·follow.n llot,then cdntinued and bitter war..The principle of equity which isrelietlupon justifies itself on the ground that the agent's interest mus1: in 'no wise, or manner oonflict with 'or antagonize,or at least '!he of his principal. His fidelity in the discharge of the dut;r cast uponhim by therelatlonship assumed must not"be 'weakened"b;y:the detlland of a personal interest. But in the at bar the interests of the Scranton Company were not .only frilly protected by its chosen these· defel?-dants,in theiconsolidatton, but, as well, the' assertIOn ;and proteeti&nwere ·made posgible, and only so, by the consent of the ScrantOnsto accept the bonds in question as compensation for their i'etlremen'tfrom' all rivalry with, the proposed new corporation to be bo'rn o'Hhe consolidation. Had they refused:to sell their time, tMii' their kn'owledge, their ability, the stockholders of the ScriJInfunCompany;never would have had the opportunity to wire their congratulations to William Walker Scranton upon the the consolidation, and upon the great he had won for them. To quote from the exhaustive opinion.' '0£ JUdge Ac.heson in the court below:
"In no proPel."sense We1'e'the bonds in controversy a profit made out of the agency or fiduciary relationship which . They Were not a gratuity, nor were. they paid tct the Serantons because of their fiduciary position. · , . . Tb.El two contl'act,s .were distinct in parties, sUbje.ct-matter, and conside1"l)tion,"

conclusions, l;lotersely expressed,answer completely the contention of the appellants. We unhesitatingly concur in them. 'l'be result is that the jU9gment below is affirmed.

no:RINsoN T. HALL et at. (Circuit Court I!'onrth Circuit. October 2, 1894.)
PERSONAL NATIOJ:tAL BANKS-INSOLVENOY .....NEGLIGENCEOF DIRECTORS BILITY" '. .' ..:. '" .

LIA-

DIl'ect?-\1IOf a natlonlll bank leftl,ts managen;lent for more than three Yllars almhsfwholly to Its cashier, .who had but little tJroperty, and of whom they' 'required' no bond; and! iliey knowingly permitted loans to be made to individuals and firms largely. in excess of the amounts allowed by If!.w·.. IIlso,falled to record'p;lortgages given to secure large debts due t)le'J:liJ..Qk, even after they werE; of Its insolvency, and erroneously examiner who had tl1ken charge of the bank that it was not neeeSsary to record them. .Held, that the directors were personally

ROBUi'SON 't!'. HA

223

liable for the losses caused by such neglect and mismanagement, and thefraud and defalcations of the cashier. Briggs v. Spaulding, 11 Sup. Ct. 924, 141 U. S. 132, distinguished. 59 li'ed. 648, ·revel'sed.

Appeal from the Circuit Court of the United States for the Eastern District of North Carolina. . This was a bill by W. S. O'B. Robinson, receiver of the First National of Wilmington, N. C., against B. F. Hall, James Sprunt, .D. G. Worth, G. Herbert Smith, and James H. Chadbouro, directors of said bank, to charge them with perSonal liability for certain losses caused by their negligence. A demurrer to the bill was sustained. Complainant appeals. Reversed.
This is a suit by a receiver of a national bank against its five directors to ' sllbjedthem personally to 1000ses sustained by the bank as the result of gross negligence in office on their part. The case was tried below on demurrer to the bill of complaint and amendments. The demurrer was sustained, and the question here is. whether the defendant drrectors were liable on the facts set out in the bill and amendments, which are to be taken to be true. Among the averments of the bill were the following: The bank was organized and went into business In 1866; and continued in operation until November 24, 1891, when it suspended. Up to the time of suspension It was in good credit,. and believed to be safe and solvent by its creditors and stockholders. It· was so held out to the public to be by the defendants,although the contrary was known to all of them for more than two months before its suspension. This insolvency was carefulIy concealed from all creditors of the bank except such as the defendants, from interest or favoritism, desired to protect. For some time before the failure most of the old and valuable customers of the bank. Who habitually had considerable amounts on deposit, were left in ignorance of the bank's condition, while the defendants themselves, who were engaged in large commercial operations, were carefully reducing the balances to their credit to protect themselves from loss. How successful they were in this action will appear In the sequel. Defendant Worth, through a firm of which he was head, and whose balance had been more than $12,000 a year before. had reduced the balance to$1,324. Defendant Sprunt, although engaged In extensive operations which required the use of heavy sums of money and a large bank deposit, had no balance in the bank on the day of failure, but had overchecked to the amount of $327. Defendant Smith, who, through a firm of WhiCh he was head, had had large dealings with the bank, Indlcat.ed by a deposit of $33,569 twelve mont.hs before the failure. had reduced the balance to $665 on the day of that event. Defendant Chadbourn did not keep an account with this bank, and had no funds to his credit at its failure. Defendant Hall, who was president of the banl{. and was the head of a mercantile firm which had had on deposit a year before as large a sum as $14,700, had no balance In bank to the credit of the firm on the day of the bank's failure, and its account was overdrawn for more than $150. The bill alleges that the assessment of 100 per cent. required by law to be made upon the shares of the stockholders on the failure of a national bank, together with its assets, will not meet the liabilities of the bank, and that a heavy loss will fall upon depositors and creditors. Defendant Hall, the president of the bank, was paid a salary deemed adequate to compensate him for a close, watchful, and faithful superintendence of t.he alIalrs of the bank, a fact which constituted him trustee, with compensation, as well as director, The defendants, each and all, in disregard of their official duties and trust, permitted the affairs of the bank to be conducted mainly by Its cashier, Bowden, leaving ail the moneys of the bank under his control, and its employes under his direction. The bonds, stocks, cash, special deposits, and all other personal property of the bank were left as much under the control of this cashier, Bowden, as if they had been his private property; yet no bond was required of. him for the faithful performance of his duties, either by the preslJent, Hall, or .by· the defendant directors. His bond should have been in the penal sum of not less than $15,000. This cashicr, Bowden, was largely

224

FEDERAL BEPORTER,

vol.

63.

indebted to the bank, though he was not possessen of any considerable propet/:y.;Hispaper had been carried by the bank for years, and his indebtedness to it had been .incl'eased ·fromyear to year; all of which had been known to the defendants. who had not required from him II, bond at any time. In tl:\1th. this cashier, Bowden,' was a. hopeless insolvent, tmd :immediately upon the suspension of the bank fied the country, and bllPame and remains a fugitive fromjustlce, .andn(l jUdgment which could ,bE! recovered against him wouldbe'of any value.:' amount of the which this cashier, took from the 'bll.b:k.·and fraUdulently converted to his own use, was. $9,1188,' ,lie waSCMIlIler: from 28th January, 1887, to November 24, 189.1;,-.-nearly years. ·. : .. TJi,e biD gives in detail the methods by which this :cashier defrauded the bank of se'verlil sums of money Which were parts of' the aggregate default above stated; the fraudulent transactions beginning ib.February, 1888, and 1889. ;1.89Q, l.\l1d 1891. Qna of these transactions is described; iHe toOk from the bl.\l1k. and applied to his own use,. $1,312.79, effectiAg the scheme In the following mapner: Smith:& Gilchrist being the firm of Which defendant .f!IIlith]\Vas the head, Bowden received this firm's check on thebll.nk for $1&,719.79, and charged its .account with it. He received the with the understanding that it should' be applied to the Pll.YJOent of a judgment held by the bank against a manUfacturing corporation for $14,000, and the reDlll.1ning sum of $1,312.79 was to pay an overdraft of the COmp!iUly for the Instead of applying the whole amount of. Smith· & Gilchrist's. check. to the credit. of the manufacturing company, Bpwden appUed only $14,0Q0 to the judgment against that company, drew out of bank· 1:4e amount remaining due on the check, applied. thill to. hl$ own use. and left .1:4e company still overchecked to the amount he hU-d:approprill,ted to himself, to wit, $1,312.79. This wastn May. 1891, six months. before the failure of the panko The defendant directors had in theirofliciaJ. possessi()n·a mortgage, executed by one Mitchell, a debtor of the bank., which had n<>:t been recorded at the time of. its failure on the 24th November, 1891. The mortgage was given by Mitcb.ell to secure a dAht he owed the .·'bank, with an understanding with defendants that it should not be registered so long astha interest on the debt should be paid as it accrued, and as ex1;raordinary should occur to make its registration necessary. fOr the. protection of the bank. This was never registered by the defendants, even after the fallure, and Mitchell made away with the property it covered by putting a second mortgage on it, and his <1ebt to the bank was lost.. So, also, the defendants had in possession on the day of the bank's suspension a chattel mortgage which had been. given by a certain firm of Northrops as security for a large indebtedness to the bank, pledging property to the value of $15,000. The defendants, instead of registering this chattel mortgage on or after the day of the bank's failure, omitted and neglected to do so, and left the Northrops in full possession of the property covered by It, who did sell and dispose of the property to sucb an extent that the receiver was not able to realize from the security more than the sum .1:4e loss of the bank from the failure of defendants to register being. $9,000. The defendants were guilty of similar negligence in regard to a mortgage held by them of one Boatwright, executed to secure a debt originally 9! $1,000 due to the bank, but which had been reduced to $600. The defendants failed to record this mortgage when the bank suspended, and thereby enabled Boatwright to dispose of property covered by it to purchasers for value to such an extent that the bank realized only $300 from the debt, and lost the rest. Not only did the defendants fail themselves' to record the Mitchell, Northrop, .tad Boatwright mortgages at or after the failure of the bank, but defendant Hall, who was its president, advised the examiner who first took charge of its atrairs under the orders of the comptroller of the currency that it was unnecessary to do so, and thereby caused such' delay in the registration that heavy losses resulted to the assets of the bank. Although this bank, in respect to the amount of its capital stock, was pro. hibitel1 by law from lending more than $25,000 to anyone individual or firm, yet these defendants, contrary to law, did lend of the funds of the bank to the Northrops,. who have been mentioned, to the amount of $45,000,. and to one Kerchner an amount of not less than $40,000. from which excess of loans the

ROBINSON fl. HALL.

225

bank sustained heavy losses in consequence of the insolvency of these debtors, and the insufficiency of the securities held for their indebtedness; these losses being not less than $40,000. The defendants, in pursuance of their duty, of which they were fully aware, did exact bonds of two of the officers of the bank: who had custody of and access to its funds, and whose names were Burruss and Ford; but failed and neglected to perform this recognized duty in respect to the cashier, Bowden, from whom they required and obtained no bond whatever during his service of nearly five years. The bank was declared to be insolvent, and was put into the hands of an examiner by the comptroller of the currency, on the 26th of November, 1891, the 25th having been Thanksgiving day, and dies non, and the suspension having occurred on the 24th.

D. L. Russell, for appellant Sol. O. Weill and E. S. Martin, for appellees. Before GOFF and SIMONTON, Circuit Judges, and HUGHES, District Judge. HUGHES, District Judge (after stating the facts). The foregoing were the principal averments of the bill of the receiver of the bank. To this bill the defendants demulTed, and the court below sustained the demurrers. The original bill was defective for lack of precision in several of its clauses charging negligence; but this defect seems to have been cured by two amended bills, filed by leave, and does not seem to have been made by the court below the ground on which the demurrers were sustained. The appeal to this court is from the decree below sustaining the demurrers. The case is here, therefore, on the question whether the president and directors of this bank were liable, and should be held responsible, for the losses sustained by the bank through their negligence in the particulars set out in the bill of complaint and its amendments. Counsel for the defendants rely, in their contention that the directors of the bank should be exonerated from blame and exempted from liability, chiefly on the decision of the supreme court of the United States in the case of Briggs v. Spaulding, 141 U. S. 132-174, 11 Sup. Ct. .924. That decision is a valuable contribution to the law of the perplexing question, how far, in what cases, and under what circumstances directors of national banks should be held liable for losses sustained by these banks as the result of neglect of du(y on their part. These officers receive no compensation. They are under no compulsion to give regular attendance to directors' meetings, and to their official duties. They are chosen for their exceptional character and standing in· the community, and for their supposed knowledge of its business, and of the pecuniary responsibility of those who borrow from the bank. The most valuable directors are those who are indifferent to any advantage or prestige which the position may give them, and who serve the bank from motives which could not be compensated by money. The courts, therefore, in dealing with instances of gross and glaring negligence on the part of directors of banks, are under perplexing restraint lest they should, by severity in their rulings, make directorships repulsive to the class of men whose services are most needed; or, by laxity in dealing with glaring negligences, render. worthless the supervision of directors over national banks, and leave these institutions a prey to dishonest v.63F.no.2-15

226:

FEDERALBEPOR'l'ER ,

vol. 63.

,the case of v. Spaulding' iscp,W!y ,valuable as furnlshuigexamples of dIrectors ,whom the conrt$' should not hold to, account, for neglect of duty. That case went in the court below beyond the demurrer, and was heard on the merits"and on full pro.ofs. It wal;lone, of the allegations of the bill that the bank was entirely solvent I in sound condition on the 3d October, 1881. Itfailed on the,14thApril, 1882. Other facts in the follows: Onthel.Oth January, 1882, a board of . directors was elected, composed of SpaUlding, J obnson, Francis Coit, Lee, and Vought; Spaulding and Johnson for thellrst time. Lee was elected president, and, thereupon ce,ased to be, casbier, an office he had held for many years. The of the blink's suspension Apri114thwaarecklessness of by Lee while cashier, and after he became president. ' It was not contended that the dehad knowingly violated, or permitted to be,violated, any of of the national banking act, or that 'they were guilty of any personal dishonesty in administering the alIairs ()f the bank; but charged that they were lacking in diligence in the performance: of duties enjoined upon them by the act. The suit was against 'Lee, Francis Spaulding, Johnson" Cushing, the exec· utrix of' and the administrators of Charles Colt. The last named had been president and director for several years until his death, in pecember, 1881., Except this Charles Coit and Cushing, the men sued were those who had been elected directors on the 10th Two of the defendants-Spaulding imd Johnsonwere elected then for the,m'st time. " The bank had lost its capital of $250,000 and also a surplus of '74,000, and had incurred liabilities in excess of.assets to the amount of$535,000. All this had occurred between October 3, 1881, ,and '14, 1882, when the bank suspended; all directly through the wrongful conduct of Lee, and indirectly, as,charged, through the negligence of the directors. The bill was taken.for confessed as to :tee and as to the executrix of Vought. , Asto Cushing, it was proved that he had resigned as director, .sold all his stock in the bank, on the 24th September, 1881, and was never a qualified director afterwards, or capable of negligence. 'Oharles Coit had obtained leave of absence on the 3d October, 1881, on account of severe illness, of which he died December 11, i881. " Johnson was newly elected in January, 1882; very soon which time his wife became severely ill, and he himself, in consequence, fell into' such merita.l and physical infirmity as to be incapacitated for business. Spaulding was 72 years of had retired from business, was elected for the first time on the 10th JanuarY,1882, was wholly unacquainted with the business of the bank, and, not expected, when 'elected, to give close attention to its affairs: He had been author of the nationalhanking act as a member'pfeongress, and was put on the board of this bank on account of 'his high character and wide popularity. In his answer he stated 'numerous circumstances tending to exonerate him from blame for inattention to the active duties of a director, which need not be detailed here. He and J ohhs'on had been directors for the periM of oniy three months; and in regard to the mental and

'ROBINSON V. HALL.

227

:of Spaulding, it was a question whether they C<luld reasonably be

physical condition of Johnson; and the. age and other circumstances

expected to have familiilrizedthemselves with the affairs of the bank within thilttime. As to Francis Coit, he had been elected tore· place another director on May 20, 1881, when in very feeble health, and unable to transact any business. He was re'elected in January, 1882. Under the affliction of rheumatism, finding himself unable to give aftention to his duties, he had sold all his stock in the bank 011 the 11th April, 1882, three days before its suspension, in ignorance of its unsound condition. The supreme court decided that Cushing, the two Coits, Spaulding, and Johnson could not reasonably be held liable in their personal estates for the losses the bank sustained duro ing their tenures of office as directors. It held that the degree of care to which those directors were bound was that "which ordinarily prudent and diligent men would exercise under similar circum· stances; and in determinit:lg that, the restrictions of statute and the usages of business should be taken into account. What may be negligence in one case may not be want of ordinary care in another, and the question of negligence is, therefore, ultimately a question of fact, to be determined under all the circumstances" of each case. To this decision of the supreme court exonerating Cushing, Coit's estate, SpaUlding, Johnson, and Francis Coit there was a strong and imposing dissent. The justices were Harlan, Gray, Brewer, and Brown, whose objections are stated in an extended and very cogent opinion written by Mr. Justice Harlan. Such a dissent admonishes the federal courts which, in the course of duty, have to deal with this question, very strongly against exceeding the limits of leniency exhibited by the supreme court towards the directors with whoIil it dealt in the case of Briggs v. Spaulding. In the case at bar we have an essentially different state of facts to consider. The frauds and irregularities which resulted in the ruin of the bank went on through a period of more than three years, during a,ll of which time the defendant directors were in office. Many of these irregularities were not things of secret occurrence and sudden development. They were such as must have been known to the defendants, if they gave even the most casual attention to the affairs of the bank. The embezzlement of Bowden, the $45,000 loans to the Northrops alld to :Kerchner, and the losses resulting, were facts that could not have eluded the most cursory attention of the directors to their duties. In respect to their omission to register the mortgages, it is a mistake to suppose that the directors of national banks cease to be such, and that their duty to the bank -lapses, when an examiner is put in charge of its funds, properties, and books by the comptroller of the currency. It is incumbent upon them to give attention to these affairs even more specially after ,the examiner takes charge than before. In the case at bar it was especially their duty to register the mortgages he.ld by the bank from Mitchell, Boatwright, and the Northrops., ,Their duty was the more special and urgent in respect to these securities in consequence of the fact that the management of the affairs of the bank had been taken from its own executive officerS and committed to a temporarJ

228

FEDERAL REPORTER,

vol. 63.

by the comptroller, who in aU probability was unfampiftJl:with the registration laws of North Carolina. They were the advisers of the bank examiner as they had been of the cashler,·t1.otwithstanding they were not invested by law with the control over him, which they were empowered to exercise over the cashier. .It. was especially the duty of the defendl:l,nt directors, acquainteda,s,they were with the local laws of registration, to see to andmakeeertain the prompt registration of the three mortgages. Their chties as directors did not cease in these respects until after the apP(llintment of the receiver of this bank. Inrespeot· to the action of the defendants, or some of them, in checking ,ont· their deposits two months before the suspension, in fuU knQwledge that such an event must occur, there could be no adju.dieatiQn except after plenary proofs. That depositors generally are at liberty to check outth.e entire funds at their credit before suspensiQnrt1sclear; but even they, after suspension, are entitled only 1;Q, such .percentage of their deposits as the assets of the bank wiU If directors are depositors, and know two months or morebe!ore suspension that that event is inevitable, and that the bankca:n pay only a percenmge of its deposits, and yet check for the whole Qf their own balances, thereby diminishing the percentage to which other creditors would be entitled,. they certainly defraud, to the extent of the diminution, the creditors whose interest they relied upon to protect, and should be held to strict accountability. In the present stage of this case the incident is of importance only in showing that the defendant· directors were not prevented by any special circumstances from giving close attention to the affltirli!! of the bank when their own personal interests were seriously involved. On the whole case as shown by the record, we are of opinion that the court erred in sustaining the demurrers to the bilI as finally amended, on the grounds stated in the opinion of the learned judge below, and that the decree must be reversed. The case must go back to the court from which it came, the demurrers there filed must be overruled, and the case proceeded in on plenary proofs to a decree on the merits.
RICHMOND & D. R. CO. v. FINLEY.

(Circuit Court of Appeals, ,Fourth Circuit.
No. SO.

October 2, 1894.)

1.

MASTER AND SERVANT-RAILROAD COMPANy-RULES,-WAIVER BY ENGINEER OR CONDUCTOR. .

An engl.neer In temporary charge of a train, In the absence of any conductor,cannot waive a rule, well known to a brakeman, absolutely prohibiting brakemen from coupling and uncoupling cars except with a stick. by orderillg bralteman to go between cars, and place in position, by hand, abElht coupling link, which cannot be contrOlled with coupling sticks. 59 Fed. 420, reversed.

2. SAME-AssUMPTION OF RISK.

Where a brakeman goes between the cars to couple or uncouple them by hand, in obedience to an order of an engineer or conductor, but in Viola-