Curtis v. Metcalf

• Decision Date: 28 July 1919
• Docket Number: 70.
• Citation: 259 F. 961
• Parties: CURTIS v. METCALF et al.
• Court: U.S. District Court — District of Rhode Island

259 F. 961

CURTIS v. METCALF et al.

No. 70.

United States District Court, D. Rhode Island.

July 28, 1919

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

Green Hinckley & 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, Connly, 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.

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

BROWN District Judge.

This is a bill in equity against former directors of the Atlantic National Bank of Providence, R.I., charging them with responsibility for mismanagement. The defendants Connly, Smith, and Swanson had ceased to be directors more than seven years and six months before the filing of the bill, and the defendants A. W. Dennis, Fletcher, and Wellman more than six years and six months.

Though the suit is by bill in equity, it seeks to charge the defendants upon legal, as distinguished from equitable, grounds of liability. Therefore the claims of these defendants to the benefit of statutes of limitation by reason of the lapse of time between their retirement from the bank and the date of the bill must be sustained, unless the delay is sufficiently explained, and there appears reason for avoiding the running of the statute.

I have doubted whether the running of the statute was not interrupted by the action of the Comptroller of the Currency in appointing a receiver of the bank under the provisions of Rev. Stats. Sec. 5234 (Comp. St. Sec. 9821), and have submitted the question to counsel; but as counsel for the receiver, upon examination of the authorities, have concurred in the view of the defendants, at the request of all parties I shall assume, for the purposes of this case, that the statute of limitations applies to the receiver as to an ordinary plaintiff, unless the grounds stated in the bill are sufficient to avoid its application.

The receiver relies upon concealment of the cause of action to avoid the statute.

It is alleged that bad loans and investments were carried at their full value on the books of the bank; that by these overvaluations the impairment of the surplus and capital did not appear on the books of the bank, and could not be and were not discovered by the comptroller or the examiners. But the concealment which may avoid the statute is concealment by the defendants respectively. Upon withdrawal from the bank the books of the bank remained as full information as to what was carried as assets. It is not contended that the transactions were concealed, but only their true values, or the lack of values.

While it is true that 'committing a fraud in a manner that it concealed itself' precludes the defense of limitations (Exploration Co. v. U.S., 247 U.S. 435, 447, 38 Sup.Ct. 571, 573 (62 L.Ed. 1200)), yet it also is the rule that there must be reasonable diligence, and that the means of knowledge are the same thing in effect as knowledge itself (Wood v. Carpenter, 101 U.S. 135, 143, 25 L.Ed. 807, cited in Kinder v. Scharff, 231 U.S. 517, 34 Sup.Ct. 164, 58 L.Ed. 343; U.S. v. Diamond Coal & Coke Co., 254 F. 266, . . . C.C.A. . . .; Strout v. United Shoe Mchry. Co. (D.C.) 206 F. 646, 651; Id. (D.C.) 224 F. 1016, on appeal 225 F. 1022, 140 C.C.A. 609). The Rhode Island cases (Peck v. Bank of America, 16 R.I. 710, 19 A. 369, 7 L.R.A. 826; Reynolds v. Hennessy, 17 R.I. 169, 20 A. 307, 23 A. 639) do not seem to me inconsistent with these decisions.

It is necessary, of course, to distinguish between excessive valuations due to a mistaken judgment and those not due to mistake in judgment, but which were intentional, and made fraudulently with knowledge of their falsity, or recklessly without knowledge. As statements of value are to a considerable extent statements of opinion, the burden is on the plaintiff to exclude these statements from the field of honest, though mistaken, opinion, and to show them to be so greatly exaggerated that they did not express judgment as to value, but were false statements that there was value when it was well known that there was not. Seven Cases v. U.S., 239 U.S. 510, 36 Sup.Ct. 190, 60 L.Ed. 411, L.R.A. 1916D, 164.

To avoid the statute, the plaintiff must show not only fraud or recklessness equivalent to fraud in the statements of value, but also that the statements were in the nature of continuous misrepresentations.

It seems apparent that these statements were such as could not be relied upon as continuous representations.

The credit of a borrower, the value of business paper, the value of securities purchased and held, are in their nature variable from time to time. Many of the credits said to be overvalued are for short terms-- four months paper. A director resigning from the bank, and who has approved paper as good for four months, or securities as good for four months, ordinarily cannot be said to represent that they are good beyond that period, or to intend that his approval shall be relied on by subsequent directors in making renewals.

By statute Rev. St. Sec. 5204 (Comp. St. Sec. 9766), debts on which interest is past due and unpaid for six months, unless well secured and in process of collection, are to be taken as bad debts, and violations of this statute fall under section 5239 (section 9831). The bill and amendments recognize the transient character of the credits by charging that but for the lack of due diligence many of the loans might have been partially recovered. In paragraph 163 of the amendments it is alleged:

'In none of the cases, with the exceptions hereinafter set out, were the later loans made merely as a means of extricating the bank from the situation created by the earlier loans, but, on the contrary, they were made as new extensions of credit.'

The bill also charges the making of investments of the assets of the bank in stocks, bonds, and securities of kinds not permitted to national banks. Even if these were overvalued, it does not appear that this would have concealed the nature of the investment, nor that it was of a kind not permitted to national banks.

Paragraphs 27 and 28 of the bill set forth investments in stocks and bonds to an amount exceeding $400,000, with the statement that each was of a kind in which national banking associations are not permitted to invest. It does not appear that a statement of these as assets could conceal the fact that they were of a prohibited kind, even if overvalued.

There are allegations in the bill indicating that some of these stocks and bonds were originally taken as collateral.

The making of prohibited investments and the taking of insufficient security for loans are different matters. Stocks and bonds which were improper investments might be taken as a part of the security for a loan, and an inquiry into their value as security be relevant to the charge that a loan was a bad loan because insufficiently secured. But if, as charged in paragraphs 27 and 28, prohibited investments were made and carried on the books, their unauthorized character would be apparent and unconcealed irrespective of questions of their actual value.

The character of investments of the assets of the bank in respect to their pecuniary value, as we have said, is a matter involving questions of judgment and of opinion. It well may be inferred, from specific transactions alleged in the bill and from the shrinkage in value of many of the book assets, that errors of judgment and incautious management, not amounting to fraudulent or criminal misapplication of funds of the bank, had a large share in bringing about the bank's failure.

A further ground for stopping the running of the statute which the plaintiff asserts is that the bank continued under the control of those officers and directors who had participated in making the bad loans and investments, and for this reason the bank ceased to be independently represented. This contention does not seem to be based upon any direct allegations in the bill, but rather upon the language of decisions in cases where the facts showed a full control by the wrongdoers during the limitation period.

Assuming the truth of the charges of negligence of the directors, who retired from all connection with the bank before the beginning of the statutory period, can it also be assumed that they had knowledge, or reasonable grounds to believe, that the directors and officers who succeeded them would be faithless in the performance of their duties, and would willfully violate their statutory or common-law duties?

A negligent participation in making bad loans and investments a careless reliance upon the representations or opinions of officers or other directors as to values, is by no means the same thing as joining in a conspiracy to defraud the bank. While it is true that a party to such a conspiracy, upon withdrawal without disclosing it, may be held to have such knowledge of the probability of its continuance that his failure to disclose amounts to a concealment which stops the running of the statute, this is not the case where one merely participates in acts of conspirators without such knowledge of the conspiracy as makes him a party thereto. Negligent participation in acts of conspirators by one...