Curtis v. Metcalf

• Decision Date: 15 May 1918
• Docket Number: 70.
• Citation: 265 F. 293
• Parties: CURTIS v. METCALF et al.
• Court: U.S. District Court — District of Rhode Island

265 F. 293

CURTIS v. METCALF et al.

No. 70.

United States District Court, D. Rhode Island.

May 15, 1918

Mumford Huddy & Emerson, of Providence, R.I., for complainant.

Green Hinkley & Allen, of Providence, R.I., for defendant Smith.

Tillinghast & Lynch, of Providence, R.I., for defendant Boyden.

Waterman & Greenlaw, of Providence, R.I., for defendant Chase.

Fitzgerald & Higgins, of Providence, R.I., for defendant Sullivan.

Gardner Pirce & Thornley, of Providence, R.I., for defendants Jones Wellman, Dean, Sherwood, Houlihan, Conley, Harvey, and Whipple.

Murdock & Tillinghast and Percy W. Gardner, all of Providence, R.I., for defendants Dennis and Eddy.

Edward A. Stockwell, of Providence, R.I., for defendant Swanson.

Edwards & Angell, of Providence, R.I., for defendant Fletcher.

Barney, Lee & McCanna, of Providence, R.I., for defendant Tinkham.

BROWN District Judge.

The bill of complaint by the receiver of the Atlantic National Bank of Providence, R.I., against 21 former directors and the administrators of James S. Kenyon, a deceased director, prays an accounting for losses sustained by said bank, and that each of said respondents be required to pay to the receiver, 'so much of said loss as the said respondent is liable for upon the facts set forth in this bill of complaint.'

By motions to dismiss and to strike out, the defendants, respectively, make many objections to the bill, which charges violations of the National Bank Act (Act June 3, 1864, c. 106, 13 Stat. 99), and also violations of the common-law duties of directors.

As questions of the latter kind were pending before the Circuit Court of Appeals for the First Circuit in Dresser v. Bates, Receiver, 250 F. 525, 162 C.C.A. 541, decided March 5, 1918, it seemed desirable to defer a consideration of this case until a decision by that court.

The present bill, filed August 3, 1916, covers a period from June 15, 1906, to April 12, 1913, the date of the close of the bank's business. As it covers so long a period and relates to so many transactions, the complainant naturally has sought to frame general allegations applicable to many persons and to many transactions. On the other hand, apparently out of excessive caution, he has set forth in great detail particular items of loans to a large number of borrowers.

As the different defendants were directors during different periods of time, and as they are charged, not only with making loans to persons not entitled to credit, and loans which exceeded the statutory limit of 10 per cent., but also with improper renewals of former loans, and with neglect to use due diligence in realizing upon former loans, and to enforce the statutory liability of former directors, the various transactions are so bound together by the general allegations of the bill that it is practically impossible for many of the defendants to determine the particular losses with which the bill seeks to charge them, or the special grounds of liability applicable to each loss.

Furthermore, it is objected that paragraph 20, which sets out in 150 printed pages the various transactions, does not disclose the nature of the obligations of the so-called 'borrowers'-- whether it is as direct borrowers or as indorsers.

Though the plaintiff contends that it is not material whether the 'borrower' executed a note as maker or indorser, it would seem quite material in respect to the charge of a violation of the statute by a loan in excess of the statutory 10 per cent. (Rev. Stats. Sec. 5200, as amended (Comp. St. Sec. 9761)), that it should appear whether or not the defendants are charged in paragraph 20 by reason of the indorsement or discount of commercial or business paper, or by reason of direct borrowing. The heading 'others liable' is equivocal, and does not show whether they are liable as makers or indorsers; a difference which may be quite material in the preparation of a defense to a charge of the violation of the statute as well as to a charge of making a bad loan, the defense to which might involve questions of fact as to the apparent financial ability of either maker or indorser, or of both.

Paragraph 16 sets up eight distinct grounds of liability-- six kinds of acts of misfeasance, and two kinds of nonfeasance. Some are violations of statute law; others violations of common-law duty. This is in terms a general charge against all defendants, though by reading it in connection with paragraph 10, which sets forth the period of time when the defendants were respectively in office, and also with paragraphs 18, 19, 20, and 21, and with the prayer of the bill, it is apparent that all defendants are not charged with liability upon the same transactions nor to the same extent.

While some limitation of the charges against a particular defendant may be worked out by a proper construction of the bill, I am of the opinion that, as framed, the bill imposes upon the defendants the burden of making classifications and separations which should properly be made by the plaintiff.

No mode of pleading is just to a defendant which charges him with more than is intended to be proved against him.

While it is proper to charge a defendant with several grounds of liability for a particular loss, it is evident that a charge of making a bad loan is inapplicable to one who found such a loan in the bank when he became a director, and that a renewal of such a loan may or may not be a cause of loss, or amount to actionable negligence, according to the circumstances at the time of renewal. 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. Coffin v. U.S., 162 U.S. 677, 16 Sup.Ct. 943, 40 L.Ed. 1109.

It also seems insufficient to charge in general terms, as in paragraph 37, that a large part or the whole of said loss might have been saved by action with reasonable promptness.

A defendant is entitled to be particularly informed of what losses on old accounts are charged to him by reason of his inaction or negligence; and the bill, in order to show that such loss resulted from his negligence, should allege the possession by the particular debtor, at the time of the alleged negligence, of assets which could have been realized for the bank by prompt action taken at that time.

Furthermore, the defendants are charged with violations of the National Bank Act in making loans for a sum in excess of one-tenth part of the unimpaired capital stock and unimpaired surplus fund of the bank, called excessive loans. R.S. Sec. 5200. The liability for such violation is fixed by R.S. Sec. 5239 (Comp. St. Sec. 9831), and applies only to such directors as knowingly violated the act and participated in or assented to the violation, and gives damages 'sustained in consequence of such violation. ' The limitation of the amount of a loan to a single person is imposed by statute, and the measure of responsibility for violation of that provision is exclusively governed by section 5239, which requires proof of something more than negligence; i.e., that the violation must be in effect intentional. Yates v. Jones Nat. Bank, 206 U.S. 158, 27 Sup.Ct. 638, 51 L.Ed. 1002; Chesbrough v. Woodworth, 244 U.S. 72, 78, 37 Sup.Ct. 579, 61 L.Ed. 1000.

This raises questions of the liability of directors for conduct governed by the federal act for which Congress did not make negligence the test of liability. Jones Nat. Bank v. Yates, 240 U.S. 541, 550, 555, 36 Sup.Ct. 429, 60 L.Ed. 788.

I am of the opinion that each defendant is entitled to be informed as to the extent of the charge of liability under the statute for loans in excess of 10 per cent., so that it will appear whether he is charged for the entire amount of the loans to a particular borrower, or only for the amount by which said loans exceeded the statutory limit, and so that he may raise an issue as to his liability under the statute distinct from the issue as to his liability upon grounds other than those fixed by statute. Though section 5239 furnishes the exclusive rule applicable to a loss resulting solely from a violation of the Banking Act, it does not follow that a defendant may not be liable on common law principles for the entire amount of the aggregate loans to a borrower, including the excess over the statutory limit. Allen v. Luke (C.C.) 163 F. 1018, 1020; McCormick v. King, 241 F. 737, 743 et seq., 154 C.C.A. 439; Williams v. Brady (D.C.) 232 F. 740. But the two grounds of liability are distinct, and raise distinct issues of fact and law.

It seems to have been held that the liability under section 5239 is applicable only to the amount of damages resulting from the excess of a borrower's obligations over the statutory limit and is inapplicable to that portion of the gross indebtedness which did not exceed the specific limit. Witters v. Sowles (C.C.) 43 F. 405; Rankin v. Cooper (C.C.) 149 F. 1010, 1017; Stephens v. Overstolz (C.C.) 43 F. 771, 775. The bill should show clearly whether the defendant is charged with the whole loan or only with the excess.

As was said in Allen v. Luke (C.C.) 141 F. 694, 696, the defendants 'are entitled to know the kind of alleged negligence upon which the complainant will rely. * * * The complainant must specify the action or inaction relied on. ' So, also, the defendants are entitled to know, respectively, which specific transactions are charged against them as violations of the statute involving liability under section 5239.

As a basis of the charges of statutory liability it will be necessary for the plaintiff to show the amount of the bank's unimpaired capital stock and unimpaired surplus fund from time to time, in...