Chesbrough v. Woodworth

• Decision Date: 05 March 1912
• Docket Number: 2,151.
• Citation: 195 F. 875
• Parties: CHESBROUGH et al. v. WOODWORTH.
• Court: U.S. Court of Appeals — Sixth Circuit

195 F. 875

CHESBROUGH et al. v. WOODWORTH.

No. 2,151.

United States Court of Appeals, Sixth Circuit.

March 5, 1912

On Motion to Modify, April 5, 1912. [Copyrighted Material Omitted]

Thomas A. E. Weadock, for plaintiff in error Chesbrough.

Morris L. Courtright, for plaintiff in error McGraw.

E. S Clark and J. C. Weadock (Gillett & Clark, on the brief), for defendant in error.

Before WARRINGTON, KNAPPEN, and DENISON, Circuit Judges.

DENISON Circuit Judge.

In October, 1902, the Old Second National Bank, of Bay City Mich., reported a capital of $200,000, a surplus of $75,000, and undivided profits of $27,000. Its total loans and discounts were about $1,000,000. Alvin Maltby, who some years before had been involved in a failure, was in 1902 doing business for his wife, but using the trade name, 'Maltby Lumber Company,' and under that name was dealing in telegraph poles, railroad ties, etc. The Maltby Company had followed the plan of shipping a car, making a draft on its customer, attaching a bill of lading and inspection certificate to draft, and discounting the draft at this bank. The railroad and telegraph companies had long been following their general rule in refusing to accept such drafts, but paying the accounts in their regular course. The so-called discounts by the bank were therefore practically loans, secured by assignments of accounts, but remittances were usually made to the Maltby Company, which was supposed then to take up the draft. On October 3, 1902, the bank held this Maltby paper to the amount of $402,000. October 21st the comptroller wrote that this paper must be considered as a direct loan to the Maltby Company, and must be reduced to the permitted 10 per cent. This line had accumulated during the several preceding years under the personal direction of Mr. Bumps, who had been the president and practically the general manager of the bank; but it does not appear that before this comptroller's letter any of the other directors knew that the line did not consist of ordinary drafts being regularly accepted and paid by the drawees.

The comptroller's letter was presented to the board. Inquiry during the next few weeks developed the general character of the paper, and that most of it was not drawn against any real debt, and, in fact, represented no liability, except Mrs. Maltby's. In November Maltby was called before the board, and presented a statement of the company's affairs, showing its net worth to be $188,000; but there were many suspicious things about the inventory, and it does not appear how much of this really primary liability to the bank was included among the debts. In January, 1903, the bank practically took over the Maltby Company's business, putting its custodian in the office, and then, or later pursuant to the arrangement then made, received conveyances of all the Maltby property, real and personal, and proceeded with general liquidation. During 1903 the bank's accountant separated the Maltby Company's apparent bills and accounts receivable into two classes, the old and the new, and this classification was preserved in monthly reports to the bank. The 'old' was mostly made up of these drafts repudiated by the drawees, and late in 1903 still amounted to $240,000. As the liquidation proceeded, the bank charged off successive amounts of this Maltby paper as follows: 1905-- February, $135,000; September, $10,000; 1906-- March, $10,000; July, $10,000; December, $5,000; 1907-- February, $30,000; March, $5,000; 1908-- January, $10,000; November, $5,000; 1909-- April, $3,000. In this way the total loss so charged off prior to the trial of this cause was $223,000. A comparatively small portion remained uncollected and not charged off. A generally similar situation existed, as to another line of paper (Brotherton) upon which $47,000 had been written off as worthless before April, 1909. The shares of stock were $100 par value, and the writing off of these two items caused a loss in book value of $135 per share.

The bank had seven directors. Chesbrough and McGraw had been two of the directors for many years. Reports to the comptroller were frequently made and published, as required by statute, and as called for by him. Continuously, until 1904, the entire Maltby line was carried at its face in the 'loans and discounts,' and was reported as part of the bank's assets. Such reports were published in the local paper in February, April, June, September, and November, 1903. Woodworth, at various dates from March to December, 1903, bought (but not from Chesbrough or McGraw) bank stock at its supposed market value, averaging about $151 per share, and aggregating $15,000 par, and $23,400 purchase price.

In 1908, after some years of ineffective litigation in the state courts, Woodworth brought this suit against Chesbrough and McGraw, upon the theory that they had violated section 5239, R.S. (U.S. Comp. St. 1901, p. 3515), by knowingly making or permitting false reports under section 5211 (page 3498), and by paying unearned dividends contrary to sections 5199 and 5204 (pages 3494, 3495), and that plaintiff bought the stock relying on these reports and such dividend declarations, and claiming that they were therefore liable to him for the difference between the value of such stock as so reported, and its true value. His declaration contained ten counts. The first five were based upon the five reports, respectively; the sixth, seventh, and eighth upon the continuance of regular, semiannual dividends during 1902 and 1903; the ninth, upon a violation of the 10 per cent. Limitation found in section 5200 (page 3494); and the tenth upon a combination of all the subject-matters of the previous counts. A general demurrer was overruled. Upon the trial, under pleas of general denial, plaintiff withdrew from the jury counts 3, 6, 7, and 8, and the court withdrew counts 1 and 10, submitting counts 2, 4, 5, and 9. Plaintiff recovered a verdict and judgment for the amounts he paid for his stock, less its then book value after deducting its pro rata share of the actual loss so written off on account of the Maltby and Brotherton paper, and recovered also interest from the date of each purchase until the time of the verdict-- an average total of $167 per share.

1. We will not undertake to review specifically the errors assigned. The assignments raise every question that was raised on the trial below, and present the same question many times repeated. They are inexcusably voluminous and detailed. They are 334 in number, and cover 75 pages of the printed record; and this multiplicity is, in large part, responsible for the 560-page record. The broad field covered by the trial justifies an unusual number of assignments, but only a fraction of those taken. We have concluded that in some of the particulars hereafter discussed the conduct of the trial did not conform to what we think the proper rules, and that the judgment must be reversed; but under the discretion given to this court by rule 31 (150 F. xcv, 79 C.C.A. xcv), and on account of the form in which the record is brought here, one-third of the otherwise taxable costs, of transcript and in this court, will be deducted.

We will consider the general rules which we think should govern the trial, and assume that the questions raised by the present record, and not so considered, will not arise again.

2. The general demurrer was rightly overruled. The making and publishing of the reports are not merely for the information of the comptroller, but are to guide so much of the public as may have occasion to act thereon, and he who buys from another stock in the bank, in reliance upon a false report of its condition, and suffers damage thereby, has a right of action under R.S. Sec. 5239, against any officer or director who, knowing its falsity, authorizes such report. The one suffering such damages is within the statutory description 'any other person.'

It is urged that, as the statute refers to 'the association' and then to 'its stockholders' before using the phrase 'any other person,' this last phrase, under the rule of ejusdem generis, cannot be extended to cover those who purchase bank stock in the market. This argument must be considered in connection with the cases of Yates v. Jones National Bank, 206 U.S. 158, 27 Sup.Ct. 638, 51 L.Ed. 1002, and Yates v. Utica Bank, 206 U.S. 181, 27 Sup.Ct. 646, 51 L.Ed. 1015, in which the Supreme Court seems to hold that strangers to the bank who are, by false reports, induced to make a deposit therein, are within the protection of this statute; and we are unable to find any basis of classification for applying the rule of ejusdem generis which would include those induced to become depositors and exclude those induced to become stockholders. The suggestion on the argument that the statute contemplates only those whose injury is derivative from an injury to the bank cannot be accepted, since the injury to the depositor in the Yates Case was not of that class. nor is the statute one calling for the strict application of the rule invoked. The general banking law has made a great variety of regulations and requirements, and violations thereof would injure an equally great variety of persons.

The phrase 'any other person' was especially appropriate, for the reason that detailed enumeration would have been very difficult.

The conclusion that a right of action accrues to one in plaintiff's alleged position is supported by the analogy of Prescott v. Haughey (C.C. Dist. Ind.) 65 F. 653 Mason v. Moore, 73 Ohio St. 275, 76 N.E. 932, 4 L.R.A. (N.S.) 597, 4 Ann.Cas. 240, and Smalley v. McGraw, 148 Mich. 384, 111 N.W. 1093, 112 N.W. 915, although the conclusions of these cases are modified by the Yates Case. There is analogy also in the...