Clews v. Bardon

• Decision Date: 22 November 1888
• Citation: 36 F. 617
• Parties: CLEWS et al. v. BARDON et al.
• Court: U.S. District Court — Eastern District of Wisconsin

36 F. 617

CLEWS et al. v. BARDON et al.

United States Circuit Court, E.D. Wisconsin.

November 22, 1888

Syllabus by the Court

A national bank was organized with a capital of $60,000. The promoter of the bank took 380 shares of stock in his own name, and procured the defendants to be directors, as well as a person to be elected cashier by them. The directors were not acquainted with the banking business. The proposed cashier was known to the directors, at least by reputation and was supposed by them to be competent and trustworthy, and of considerable experience in the business, and they had full confidence in his integrity and ability to take charge of the bank. The cashier acted as manager of the loan and discount business of the bank, and the directors merely as advisers when applied to. The promoter of the bank knew, and the other stockholders were presumed to know, that the directors were wholly unused to the banking business. Held, that the directors were not liable for the acts of the cashier in violation of the banking law, done without their participation or knowledge.

The cashier made loans, in excess of 10 per cent. of the capital to a manufacturing corporation supposed by him and by the public to be entirely solvent. None of the directors knew of the loans when made, but after a loan of $3,000 in excess of the lawful limit had been made, the cashier informed one of them of such loan, and was by him advised to call it in when due; and thereafter such director's advice was asked as to a further discount to the same corporation, and he disapproved of it, and it was not made. Afterwards further loans or discounts were made to the same corporation, without the knowledge or consent of any of the directors. About eight months after the bank commenced business, one or more of the debtors of the bank failed, and the directors thereupon took the active management into their own hands. Held, that none of the directors had knowingly violated, or knowingly permitted to be violated, any of the provisions of the banking law, and were not liable for such violation by the cashier.

Under the banking law, the management of a national bank may be exercised either by the directors, or by the cashier or other officers, therefore the directors are not liable for the illegal or negligent acts of the cashier or other officers by whom the bank is managed, if they have no knowledge of such acts, and do not connive at them, or willfully shut their eyes and permit them.

It seems that the liability of directors of a national bank is substantially the same under the banking law as at the common law.

Wenzell & Tiffany, (John M. Gilman, of counsel,) for complainants.

Pinney & Sanborn, for defendants.

BUNN J.

This suit is brought by the complainants as stockholders in the First National Bank of Superior, Wis., against the defendants as directors of said bank, to recover losses incurred by the bank in consequence of certain loans and discounts made by the bank, which turned out to be bad, on the ground of the alleged negligence of the said directors in permitting such loans to be made in excess of the legal limit provided by the national banking act. The charge made by the complainants is that the directors negligently allowed the cashier of the bank, one T. K. Alexander, to make loans of money to the amount of $24,000, to the Paige-Sexsmith Lumber Co. and G. W. Sexsmith & Sons, in excess of the legal limit. Complainants also allege that the defendants, as such directors, negligently settled and compromised the several claims against these firms at 20 cents on the dollar, whereby a loss was also sustained by the bank. This is the substance of the complainants' claim against the directors. The action is brought, and the jurisdiction of this court invoked, under and by virtue of the provisions of the act of congress known as the 'Banking Act;' which provisions are as follows:

'Sec. 5147. Each director shall take an oath that he will, so far as the duty devolves upon him, diligently and honestly manage the affairs of the association, and will not knowingly violate, or permit to be violated, any of the provisions of this act,' etc.

'Sec. 5200. 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 one-tenth of the capital, etc. But the discount of bills of exchange drawn in good faith against actually existing values, and the discount of commercial or business paper actually owned by the person negotiating the same, shall not be considered as money borrowed.'

'Sec. 5239. 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 title, all the rights, privileges, and franchises of such association shall be forfeited. * * * 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.'

The question to be determined is whether or not the complainants make a case against the directors, under the provisions of law. There is not much dispute about the facts. The bank was organized in February, 1882, with a capital stock of $60,000 and D. M. Sabin, of Stillwater, chosen as its president. The promoter of the bank was one C. Edgar Haupt, who subscribed 380 out of 600 shares of stock, and obtained subscriptions for most of the other shares. He solicited and induced the defendants, who resided at Superior, to become directors, and to subscribe small amounts of stock and brought from St. Paul Mr. T. K. Alexander, who had been acting as cashier of the Second National Bank of St. Paul, and recommended him as a proper person to choose as cashier of the new bank, who was chosen on the organization of the bank to act as such; the directors taking a bond from him in the sum of $30,000. Alexander was known to the directors at Superior, by reputation at least, and was supposed by all to be entirely competent and trustworthy, and of considerable experience in banking business. It appears that the directors and stockholders had full confidence in the integrity and ability of Alexander to take charge of and run the bank,...