Payne v. Ostrus, 8871.

Decision Date05 June 1931
Docket NumberNo. 8871.,8871.
Citation50 F.2d 1039
PartiesPAYNE v. OSTRUS et al.
CourtU.S. Court of Appeals — Eighth Circuit

Harry B. Swan, of Atlantic, Iowa (Swan, Martin & Martin, of Atlantic, Iowa, on the brief), for appellant.

Addison G. Kistle, of Council Bluffs, Iowa (George S. Wright, of Council Bluffs, Iowa, and Russell E. Ostrus, of Des Moines, Iowa, on the brief), for appellees.

Before KENYON and VAN VALKENBURGH, Circuit Judges, and DAVIS, District Judge.

VAN VALKENBURGH, Circuit Judge.

This is a suit in equity by the receiver of the First National Bank of Cumberland, Iowa, against T. E. Ostrus, C. E. Studley, O. E. Ostrus, E. E. Wollenhaupt, and G. E. Wollenhaupt, directors of said bank. The bank closed its doors June 30, 1926. The bill of complaint is divided into three divisions, each division being subdivided into several counts, and each count into a number of paragraphs. Described generally, division 1 bases the liability of the directors upon their acts in making or approving excessive loans. This charge is thus stated: "That during the time said defendants were directors of said First National Bank of Cumberland, Iowa, and while they were in the active management of said banking association they and each of them knowingly permitted and approved loans to be made by their officers and agents in excess of 10% of their capital and surplus, and by reason of their knowing participation in and consent to such excessive loans, contrary to the United States Revised Statutes, paragraphs 5,200 and 5,239, said defendants and directors are severally liable for the items and amounts hereinafter set forth, which damage is the property of the Receiver for the benefit of the creditors, and no part of which has been paid."

Division 2 is in five counts. Count 1 seeks to hold the defendants for alleged negligence in failing to enforce the claimed liability of former directors, including T. E. Ostrus, O. E. Ostrus, and Studley, for damages resulting from excess loans made while they were directors, and for allowing the statute of limitations to bar recovery against such named directors. Count 2 also charges defendants themselves with losses resulting from excess loans made prior to April 30, 1919. Count 3 charges appellee E. E. Wollenhaupt, in violation of his oath, with failure to attend directors' meetings at which excess loans were approved. Count 4 charges negligence with respect to what is designated the Mueller farm mortgage transaction, and count 5 relates in like manner to what may be termed the Trego farm mortgage transaction. Division 3, in eight counts, charges that the directors violated section 5239, Rev. St. U. S. (12 USCA § 93), by renewing loans, which became excessive, by reason of the fact that, pending the term of the original loan, the bank's surplus had been reduced, thereby automatically reducing the loan limit. The court found the issues for appellees and dismissed the bill.

The causes of action embraced in divisions 1 and 3 fall concededly within the terms of section 5200, Rev. St. U. S., 12 USCA § 84, which, so far as pertinent, reads thus: "The total liabilities to any association of any person or of any company, corporation, or firm for money borrowed, including in the liabilities of a company or firm the liabilities of the several members thereof, shall at no time exceed 10 per centum of the amount of the capital stock of such association, actually paid in and unimpaired, and 10 per centum of its unimpaired surplus fund: Provided, however, That * * * the discount of commercial or business paper actually owned by the person, company, corporation, or firm negotiating the same * * * shall not be considered as money borrowed within the meaning of this section."

It is further well established that the liability of a director of a National Banking Corporation is defined by section 5239, Rev. St. U. S., 12 USCA § 93, as follows: "If the directors of any national banking association shall knowingly violate, or knowingly permit any of the officers, agents, or servants of the association to violate any of the provisions of this chapter, all the rights, privileges, and franchises of the association shall be thereby forfeited. Such violation shall, however, be determined and adjudged by a proper district, or Territorial court of the United States, in a suit brought for that purpose by the Comptroller of the Currency, in his own name, before the association shall be declared dissolved. And in cases of such violation, every director who participated in or assented to the same shall be held liable in his personal and individual capacity for all damages which the association, its shareholders, or any other person, shall have sustained in consequence of such violation."

This section affords "the exclusive rule by which to measure the right to recover damages from directors based upon a loss alleged to have resulted solely from violation by such directors of a duty expressly imposed upon them by a provision of the National Banking Act." McCormick v. King (C. C. A. 9) 241 F. 737, 743, affirmed 250 U. S. 504, 39 S. Ct. 549, 63 L. Ed. 1113; Yates v. Jones National Bank, 206 U. S. 158, 177, 27 S. Ct. 638, 51 L. Ed. 1002. That, to impose liability upon the director, the act in violation must be intentional as distinguished from one of mere negligence, is thus stated by the Supreme Court in Corsicana Nat. Bank v. Johnson, 251 U. S. 68, 72, 73, 40 S. Ct. 82, 84, 64 L. Ed. 141: "Under the rule settled by familiar decisions of this court, in order for the bank to prevail in this action it must appear not only that the liabilities of a person, company, firm, etc., to the bank for money borrowed were permitted to exceed the prescribed limit, but that defendant, while a director, participated in or assented to the excessive loan or loans, not through mere negligence, but knowingly and in effect intentionally (Yates v. Jones National Bank, 206 U. S. 158, 180, 27 S. Ct. 638, 51 L. Ed. 1002), with this qualification, that if he deliberately refrained from investigating that which it was his duty to investigate, any resulting violation of the statute must be regarded as `in effect intentional' (Thomas v. Taylor, 224 U. S. 73, 82, 32 S. Ct. 403, 56 L. Ed. 673; Jones National Bank v. Yates, 240 U. S. 541, 555, 36 S. Ct. 429, 60 L. Ed. 788)."

So far as the personal liability of the director is concerned, it is limited to loss or damage sustained by the bank as a result of the violation. Such loss or damage must be shown before recovery can be permitted.

We turn our attention first to the violations charged under division 3 of the bill of complaint. As has been said, these alleged violations consisted of the renewal of loans that had become excessive by reason of the fact that the bank's surplus had been reduced, thus reducing the loan limit. In the absence of exceptional circumstances and a course of conduct pointing unavoidably to a deliberate purpose to evade the law and to extend unwarranted lines of credit, we do not think the taking of renewal notes falls within the inhibition of the letter and spirit of the statute. No new money leaves the bank's vaults. None of the conditions which attend the making of the original notes are present. To bring these acts of directors within the purview of the statute prohibiting excess loans, the court must look beyond the mere act of renewal in any particular case "to find out what was the real and true transaction." McRoberts v. Spaulding (D. C.) 32 F.(2d) 315, 318; Curtis v. Metcalf (D. C.) 265 F. 293, 296. In Coffin v. United States, 162 U. S. 664, 677, 16 S. Ct. 943, 948, 40 L. Ed. 1109, it is held that, "if the money of a bank be misapplied by paying it out on worthless paper, it is obvious that a subsequent renewal of such paper upon which nothing was actually obtained could not have misapplied the money of the bank." So if a note be worthless when made, or become so before maturity, a renewal, in which the bank parts with no money, and upon which nothing is added but accrued interest, "would not amount to a new loan for borrowed money." McRoberts v. Spaulding supra. This likewise disposes of the same contention respecting the interest notes taken on renewal. It does not appear that the bank was damaged by the taking of these renewal and interest notes, nor is it shown that the original notes were collectible or that the interest could have been paid by the makers. Furthermore, the best interests of banks often demand that notes should be renewed, and that, on occasion, collections should not be pressed. It may be that to continue the operations of the bank at this time, and to pay operating expenses, was bad policy from a business standpoint, but that is a consideration not within the issues of this action.

A number of the charges in division No. 1 of the bill of complaint involve alleged excess loans in the form of renewals with accompanying interest notes. To such the foregoing remarks equally apply. But with respect to both divisions, 1 and 3, we find it unnecessary to go further deeply into the merits. In division 1 there are charges of the making and approval of excess loans other than by acceptance of renewals and notes for interest upon original loans. To such charges, while appellees stoutly challenge their merit, the defense of limitation is interposed. The court in finding for appellees, as appears from the record, was governed largely by its views respecting the application of the Iowa statutes of limitation. This case is governed by the applicable limitation statutes of that state. Curtis v. Connly, 257 U. S. 260, 42 S. Ct. 100, 66 L. Ed. 222; McClaine v. Rankin, 197 U. S. 154, 158, 25 S. Ct. 410, 49 L. Ed. 702, 3 Ann. Cas. 500.

It is conceded that the application of the Iowa statutes must be confined to the following paragraphs of section 11007 (Iowa Code 1924):

"3. Injuries to person or reputation — relative rights — statute penalty — setting aside will. ...

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