Fidelity & Casualty Co. of New York v. Brightman

• Decision Date: 07 November 1931
• Docket Number: No. 9044.,9044.
• Citation: 53 F.2d 161
• Parties: FIDELITY & CASUALTY CO. OF NEW YORK v. BRIGHTMAN et al.
• Court: U.S. Court of Appeals — Eighth Circuit

53 F.2d 161 (1931)

FIDELITY & CASUALTY CO. OF NEW YORK v. BRIGHTMAN et al.

No. 9044.

Circuit Court of Appeals, Eighth Circuit.

September 25, 1931.

Rehearing Denied November 7, 1931.

E. H. McVey, of Kansas City, Mo. (Samuel R. Freet and Lester G. Seacat, both of Kansas City, Mo., on the brief), for appellant.

Ed S. Jones, of Macon, Mo. (George N. Davis and Otho F. Matthews, both of Macon, Mo., on the brief), for appellees.

Before KENYON and BOOTH, Circuit Judges, and OTIS, District Judge.

KENYON, Circuit Judge.

This suit was brought by appellant to enjoin the prosecution of some sixty-one separate actions pending in the state courts of Missouri. Plaintiffs in these suits sought, as depositors of the defunct Citizens' Bank of Lancaster, Mo., to recover against Frank C. Millspaugh, Commissioner of Finance of said state, and appellant, as surety on his bond, amounts aggregating some $50,000. The equity jurisdiction rests on the claim that the amounts sued for, if allowed, would largely exceed the penalty of the bond, that appellant would be seriously prejudiced by the multiplicity of suits, and that no adequate remedy at law exists. Appellees (plaintiffs in the state courts) appeared and filed "answer and interplea" asking judgment against appellant and the establishment of their respective claims against the fund (appellant having offered to pay the amount of penalty of the bond; viz., $25,000, into court), and further asking the court to inquire into the matter, and to render an account between them and appellant and any other persons who might be entitled to participate in the disposition of said fund.

The matter was referred to a special master, who was authorized to take the testimony and report findings of fact and conclusions of law to the court. The master, after hearings, filed his report sustaining appellees' claims to the extent of $13,731.87. Exceptions to the report were overruled by the court, and judgment was entered for appellees for $13,731.87. The decree provided that said sum be equitably and rateably divided and paid to appellees.

The issue here is the liability of Millspaugh, as Commissioner of Finance, to the depositors of the defunct state bank. Appellant's liability depends on Millspaugh's, which in turn depends in part on the construction of certain statutes of Missouri in their relationship to the facts.

The facts are these:

Millspaugh, as Commissioner of Finance of the state of Missouri, had under his supervision some 1,590 state banks, of which the Citizens' Bank of Lancaster was one.

A. J. Stanfield was deputy commissioner in charge of examiners.

Alfred C. Martin was one of the examiners in Millspaugh's department.

Both Stanfield and Martin gave bonds to the state of Missouri for the faithful performance of their duties. The Department of Finance had charge of banks, trust companies, and general supervision of the banking business of the state. It combined several pre-existing departments, and the Commissioner of Finance took the place of the bank commissioner theretofore existing. His authority and duties were very extended and important.

In February, 1923, Martin made an examination of the Lancaster bank. Its condition was unsatisfactory. His examination which was commenced February 3, 1923, showed an impairment of the capital stock to the extent of $9,634.47, caused by carrying real estate in the name of the cashier for the benefit of the bank. He found a shortage of $4,000 of the assistant cashier, also a number of slow and doubtful notes. He went to Kirksville some miles away, and called Deputy Commissioner Stanfield on the telephone and told him the exact situation. He did not tell him the bank should be closed. Stanfield advised him that if he had a form of a bond, which it was the custom of the department to accept in order to make a bank more secure, to take it, and instructed him to either close the bank or take the bond. Martin went back to Lancaster, and had an all night meeting with the board of directors. He went over the assets and put the directors under oath, made memorandums of the various items considered doubtful, investigated the solvency of the collateral back of the loans, and, at the conclusion of his examination, took a bond signed by all the directors representing assets of $227,000, to pay all obligations of said bank. These same directors owed the bank some $52,000. He concluded his examination on February 7th, and forwarded his report and the bond to the office of the Commissioner of Finance. The part of his report which was concluded on February 7th, showed that the impairment of capital stock had been rectified, and it contained the following statements:

                  "You will notice that we reduced
                    the cash items .................  $ 6,284.83
                  Took up shortage .................   13,990.52
                  and by acquiring other real estate
                    took up doubtful notes .........    9,979.11
                

"Also notice that we kept the reserve up and reduced the bills payable $5M.

"We have up for guarantee a deed from Cashier & wife held in escrow for any losses which may occur, this deed covers town property and a tract of land worth $10M clear and unincumbered.

"Attached to this report you will find an agreement signed by all the directors with sworn financial statements also attached."

After Martin sent his report to the Department of Finance, Stanfield dictated a letter to A. D. Morris, president of the Lancaster bank, which was placed before Millspaugh on March 9, 1923, and was signed by him calling the bank's attention to the matters found by Martin, and pointing out specifically what should be done to remedy the situation. Parts of said letter, important here, are as follows:

"The management of your Bank has been neither prudent, capable or successful, and it is believed by this Department that the management will have to be changed to become successful. * * * You have past due loans aggregating more than $43,100.00. Many of these notes are reported to be bad and doubtful. This is certainly an excessive amount of past due paper for a Bank with your volume of business, and should have attention until collected, renewed with ample security or charged from your assets.

"The following loans are considered worthless: Jack Whiteacre, $850.00, Geo. F. Warriner, $10.00 and Wm. F. Shepherd, $708.98. They should be charged from your assets without delay. * * * The total of these slow and doubtful loans is more than $21,900.00, and it goes without saying that it will be necessary for your officers and directors to give prompt attention to this feature of your business until it can be placed in a more satisfactory condition. * * * At the date of the examination, forty accounts were found overdrawn, and in addition to this, a large amount of irregular items appeared in your Cash Account.

"Last August you paid a $2,000.00 dividend. No further dividend should be paid until your Bank is placed in a more satisfactory condition.

"You pay five per cent interest on Time Certificates. This is considered to be an excessive and unprofitable rate of interest, and should be discontinued. * * * The Examiner informs me that during the examination certain discrepancies and irregularities were found but were corrected. I also find a copy of a bond signed by all the directors, guaranteeing all the liabilities. Please be informed that this bond can only be considered a temporary measure, and from the statement, it is believed by this Department that it will be difficult for you to have success, owing to your large capital, large Bills Payable and small Deposits, coupled with such a large amount of slow and doubtful and unsatisfactory assets. It is the opinion of this Department that an entirely new capital should be paid in, or arrangements should be made to have some other Bank take over your business.

"Please bring this letter before your Board, and report to me over the signatures of all the directors within fifteen days, what action is taken and what contemplated concerning each item mentioned herein."

The directors replied to this letter admitting the criticisms were just, but stating that, since Martin's examination, every effort had been put forth to get things in proper condition; that the shortage of the assistant cashier had been made good, and that he had retired from the bank; that past-due loans would be paid at once or renewed with surety; and that equities were being secured on the doubtful paper, and concluded with this sentence: "We think that in a reasonably short time, we can have things in much better condition and hope to the satisfaction of your department."

This letter was signed by all the directors. The Lancaster bank was taken over September 23, 1923, utterly insolvent.

We set forth findings 11 and 12 of the special master, as follows:

"11. I find that the Citizens' Bank of Lancaster was, on February 7th, 1923, insolvent, and that its continuance in business would jeopardize the interest of the depositors and other creditors, which was known to Commissioner Millspaugh, or by the exercise of ordinary care, should have been known to him; that Commissioner Millspaugh was unfaithful in the discharge of his official duties in allowing this bank to continue in business after March 9th, 1923, when he became advised of its condition.

"12. That neither Commissioner Frank C. Millspaugh, Deputy Commissioner A. J. Stanfield, nor Bank Examiner Alfred C. Martin were guilty of any corruption or malice, or actual fraud, in relation to the examination, supervision and regulation of the affairs of the Citizens' Bank of Lancaster, Missouri."

Also these conclusions of law:

"First: That Commissioner Millspaugh had the right and power, to close the Citizens' Bank of Lancaster on information coming to him from any source; that this authority was not affected by the recommendation of a Bank Examiner or the failure of the Examiner to recommend that the bank be closed, on...