Atherton v. Anderson, 7298.

• Decision Date: 16 November 1938
• Docket Number: No. 7298.,7298.
• Citation: Atherton v. Anderson, 99 F.2d 883 (6th Cir. 1938)
• Parties: ATHERTON et al. v. ANDERSON.
• Court: U.S. Court of Appeals — Sixth Circuit

99 F.2d 883 (1938)

ATHERTON et al. v. ANDERSON.

No. 7298.

Circuit Court of Appeals, Sixth Circuit.

November 16, 1938.

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W. W. Crawford and John C. Doolan, both of Louisville, Ky. (Newton D. Baker and Howard F. Burns, both of Cleveland, Ohio, and Wm. W. Crawford, Henry E. McElwain, John C. Doolan, T. Kennedy Helm, Allen P. Dodd, A. C. Van Winkle, Graddy Cary, Herman H. Nettelroth, J. Wheeler Campbell, Huston Quin, Herman G. Handmaker, Thomas A. Barker, David R. Castleman, Henry J. Tilford, Charles G. Middleton, and Churchill Humphrey, all of Louisville, Ky., on the brief), for appellants.

John G. Heyburn, of Louisville, Ky., and E. B. Stroud, Jr., and E. P. Locke, both of Dallas, Tex. (Eugene P. Locke, E. B. Stroud, Jr., and Maurice E. Purnell, all of Dallas, Tex., Arthur Peter and John G. Heyburn, both of Louisville, Ky., Locke, Locke, Stroud & Randolph, of Dallas, Tex., and Peter, Heyburn, Marshall & Wyatt, of Louisville, Ky., on the brief), for appellee.

Before HICKS, SIMONS, and ALLEN, Circuit Judges.

HICKS, Circuit Judge.

Our first opinion is found in 6 Cir., 86 F.2d 518. The Supreme Court remanded the cause for a determination of the question whether the common law liability of appellants for negligence would support the decree of the District Court. 302 U.S. 643, 58 S.Ct. 53, 82 L.Ed. 500.

The controversy is reduced to: (1) Loans to and overdrafts by Kentucky Wagon Manufacturing Company; (2) loans to Wakefield & Company; (3) loans to Murray Rubber Company; and (4) loans collateraled by Banco-Kentucky stock.

Kentucky Wagon Manufacturing Company

The District Court found that the loss to the Bank between March 30, 1926, and November 16, 1930, resulting from money supplied by it to Kentucky Wagon Manufacturing Company, herein called Wagon Company, was $991,283.57. This finding is undisputed.

The Master found in substance that the expenditure of this large sum was improvident. He said: "The amounts expended got to be enormous in comparison with the debts to be saved." He found that between August 8, 1924, and November 16, 1930, the Bank advanced $1,215,419.27 in excess of what it had received from the operation of the property. It cannot be doubted that these expenditures were improvident and wasteful. Appellants, directors of the Bank, during the period involved, do not contend otherwise. The District Court found that they made no effort to terminate these expenditures and this is true. Their defense was that they did not know that these overdrafts were being allowed; that Brown, the President of the Bank, Jones, the Cashier, and certain other executive officers concealed this information from them.

We held that the overdrafts were so concealed. This was true in the sense that the directors trusted in the integrity of these men and were deceived, but this does not necessarily foreclose the question whether appellants were chargeable with common law negligence.

In Briggs v. Spaulding, 141 U.S. 132, 11 S.Ct. 924, 35 L.Ed. 662: the court said, at page 152, 11 S.Ct. at page 931, "In any view the degree of care to which these defendants were bound is that which ordinarily prudent and diligent men would exercise under similar circumstances, and in determining that the restrictions of the 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." This statement of the law was approved in Bowerman v. Hamner, 250 U.S. 504, 39 S.Ct. 549, 63 L.Ed. 1113.

It is unnecessary to recite the history of the Wagon Company prior to 1924. This is set forth in the original opinion. It is enough to say that at that time over $900,000 of the Bank's money loaned to the Wagon Company was endangered. The directors then on the Board knew this and those who became members in 1927 as a result of the unification with the Louisville Trust Company knew that this indebtedness, after large charge-offs for worthlessness, was then at least around $440,000. It was their duty to salvage this money and the care required of them was commensurate with the danger of its loss. After the Bank had acquired ownership of the Wagon Company the directors knew that it was without operating funds and yet these large overdrafts were permitted.

The Wagon Company account was primarily in charge of Brown who authorized the overdrafts. They were made in the form of checks approved either by Jones or Angermeier, both of whom were on the Board of the Wagon Company, placed there by Brown and controlled by him. These checks in varying amounts were honored, almost daily, from August, 1924, until the Bank closed. The amounts thus advanced averaged about $200,000 yearly and were settled semi-annually by unsecured notes of the Wagon Company just before the due date of the Bank's report to the Comptroller. By this method the Bank advanced $1,210,360.33. The Wagon Company account was discussed and considered by the Board at its weekly meetings and Brown, Jones and Angermeier would report that the Company was making its way or breaking even or making a little money or losing a little and that no new money was being invested.

Under the facts as stated and presently to be stated we do not think that appellants are justified in saying that they were uninformed of what was taking place. Directors of a national bank are not required to maintain a system of espionage over the acts and conduct of its officers. Briggs v. Spaulding, supra, 141 U.S. 132, at page 162, 11 S.Ct. 924, 35 L.Ed. 662. The business of a bank may be entrusted to them upon the assumption that they are honest and faithful but they are not to be regarded as infallible. Warner v. Penoyer, 2 Cir., 91 F. 587, 590, 592, 44 L.R.A. 761. As pointed out in Gibbons v. Anderson, C. C., 80 F. 345, 349, it is not unusual for banks to meet disaster through the malfeasance of trusted officials. This is one of the dangers to be apprehended and guarded against. For this reason the law requires and depositors have a right to expect that directors should retain and maintain a reasonable control and supervision over the affairs of the Bank, especially its larger and more important ones, to the end that they may keep themselves informed of its condition. Briggs v. Spaulding, supra; Bowerman v. Hamner, supra; Gibbons v. Anderson, supra; Warner v. Penoyer, supra; Wheeler v. Aiken County Loan & Savings Bank, C.C., 75 F. 781. In the discharge of this duty the directors are required not only in the observance of their official oath but by common law (Martin v. Webb, 110 U.S. 7, 15, 3 S.Ct. 428, 28 L.Ed. 49) to use ordinary diligence; and by ordinary diligence is meant, that degree of care demanded by the circumstances. They have their own responsibilities which they may not put aside. They must keep in mind that a national bank is not a private corporation in which stockholders alone are interested. It is a quasi governmental agency (Farmers' & Mechanics Nat. Bank v. Dearing, 91 U.S. 29, 23 L.Ed. 196), and one of its principal purposes among others is to hold and safekeep the money of its depositors. We think it may be fairly assumed, that if appellants had maintained any reasonable method of supervision over the Wagon Company account or over the general affairs of the Bank, these large and wasteful overdrafts occurring almost daily over a period of six years and periodically converted into unsecured notes which were in turn periodically renewed, would certainly have been discovered. See Williams v. McKay, 40 N.J.Eq. 189, 53 Am.Rep. 775; and Williams v. McKay, 46 N.J.Eq. 25, 18 A. 824.

But, this inference aside, there are certain undisputed facts which confronted appellants in 1919.

The by-laws of the Bank provided that there should be a Chairman of the Board who should be the principal executive officer of the Bank. Mr. Fenley was Chairman until his resignation in January, 1921. The position was then abolished and its duties combined with those of President Brown. This naturally increased the hazard of one-man control and was a well recognized danger to be guarded against.

In 1919, that the Board might have a clearer insight into the Bank's affairs, it appointed an examining committee consisting of three non-officer directors. A similar committee was appointed for the years 1920, 1921 and 1923. These committees functioned efficiently and made valuable and comprehensive reports but were discontinued in April, 1923, and thereafter no such committee was ever appointed and no representative of the Board ever examined the affairs of the Bank or audited the business. As late as May, 1930, when the directors were confronted with a true picture of the Bank's deplorable condition, they passed a resolution to appoint such committee but it was never appointed.

In 1922, the Board provided an Auditor but he was not a director. Brown employed him and fixed his salary. His duties in a Bank of its size where at least 150 bookkeepers were making daily records were of course important. These duties were "to audit all the records of the Bank, see that the proper records were kept, make annual checks, quarterly checks of all accounts, make reports and checks of General Ledger items, etc." He served as Auditor until January 15, 1930, and from that time as Cashier and Auditor until the close of the Bank. He made an audit of some of the departments monthly and all of them quarterly. He was required to and did report to the Cashier only. The Board never called upon him to report and it does not appear that any director ever saw a report.

The discontinuance of the Examining Committee standing alone was negligence. It was the duty of the Board in the management of the affairs of the Bank to cause examinations to be made of its books and papers. Bowerman...