Frank Chesbrough v. Frank Woodworth

• Decision Date: 21 May 1917
• Docket Number: No. 179,179
• Parties: FRANK P. CHESBROUGH, Plff. in Err., v. FRANK T. WOODWORTH
• Court: U.S. Supreme Court

244 U.S. 72

37 S.Ct. 579

61 L.Ed. 1000

FRANK P. CHESBROUGH, Plff. in Err.,

v FRANK T. WOODWORTH.

No. 179.

Argued April 19 and 20, 1917.

Decided May 21, 1917.

Mr. Thomas A. E. Weadock for plaintiff in error.

Messrs. Edward S. Clark and John C. Weadock for defendant in error.

Mr. Justice McKenna delivered the opinion of the court:

Action in ten counts charging plaintiff in error and one Joseph W. McGraw with violating the National Bank Act, and alleging damages resulting to defendant in error therefrom.

In description of the parties we shall designate them respectively as plaintiff and defendants.

In all the counts defendant Chesbrough and McGraw are alleged to have been at certain dates directors of the Old Second National Bank, a national banking corporation organized and doing business under the National Bank Act of 1864 [13 Stat. at L. 99, chap. 106, Comp. Stat. 1916, § 495], and the amendments thereto, and having its office in the city of Bay City, Michigan.

The following violations of the act are charged: (1) Signing, attesting, and permitting and assenting to the publication of, a report of the conditions of the bank required to be made by U. S. Rev. Stat. § 5211, Comp. Stat. 1916, § 9774, of such act, which report was false. (2, 3, 4, 5.) The Comptroller of the Currency having made a requisition upon the bank for a report of the resources and liabilities of the bank upon a day specified, as required by the act, the defendants permitted and assented to a violation of the act by signing, attesting, and permitting and assenting to the publication of, a false report of the resources and liabilities of the bank and its condition at the close of business of such day. (6, 7, 8.) Violation of the act in that defendants and each of them permitted and assented to the declaration of the semiannual dividend, being payable December 1, 1902, knowing that it would necessarily be paid out of the capital stock of the bank, and not out of net profits, and knowing that losses had theretofore been sustained equal to or exceeding the undivided profits then on hand, and that the sums so declared as dividends exceeded the profits then on hand, after deducting therefrom losses and bad debts. (9) Defendants knowingly violated and permitted and assented to the violation of the act (U. S. Rev. Stat. § 5200, Comp. Stat. 1916, § 9761) in that they knowingly participated in, permitted, and assented to the creation of, certain liabilities to the bank, and knowingly permitted and assented to the continuance of the liabilities and the carrying of the same among the loans and discounts of the bank after defendants and each of them had knowledge of the nature and character of the liabilities, and that they had been created and were being carried in violation of the act. The liabilities are set out. (10) Violations of the act (U. S. Rev. Stat. §§ 5199, 5200, 5204, 5211, 5239, Comp. Stat. 1916, §§ 9760, 9761, 9766, 9774, 9831), being portions of a general design and conspiracy on the part of the defendants to deceive the public, including plaintiff, for the purpose of giving the stock of the bank a fictitious market value and enabling each of the defendants and his relatives and friends to dispose of certain shares of the stock then and there held by them at a price exceeding the value of the stock.

In each count damage is alleged to have been caused to plaintiff, he having purchased stock upon the faith of the action of defendants. The total amount of damage is alleged to be $35,000.

Plaintiff in error Chesbrough (the case is here on his writ of error, McGraw not having joined) filed a demurrer to the declaration, which was overruled. He then filed several pleas, one of which alleged that he was not guilty of the wrongs and injuries complained of, and gave notice that under the latter he would 'insist [upon] and give in evidence' certain matters of defense.

The case was tried to a jury. The 3d, 6th, 7th, 8th, 9th, and part of the 10th counts were withdrawn from their consideration. A verdict was returned for plaintiff in the sum of $22,662.98, upon which judgment was entered. It was affirmed by the court of appeals. 137 C. C. A. 482, 221 Fed. 912.

This case had once before been to the circuit court of appeals, where its facts were reviewed, and we may refer to the report of the case for them. 116 C. C. A. 465, 195 Fed. 875.

It there appears that in October, 1902, the bank reported a capital of $200,000, a surplus of $75,000, and undivided profits of $27,000. Its total loans and discounts were about $100,000.

On October 3, 1902, the bank held as loans (so considered by the court and the Comptroller of the Currency) the paper of the Maltby Lumber Company to the amount of $402,000, which had accumulated under the personal direction of the then president and practical manager of the bank. The Comptroller required that the loan be reduced to the permitted 10 per cent. The Comptroller's letter was presented to the board. Inquiry during the next few weeks developed the general character of the Maltby paper and that most of it was not drawn against any real debt, and in fact represented no liability, except Mrs. Maltby's. Its net worth, shown by a statement of Maltby, who was called before the board, was about $188,000, but there were many suspicious circumstances about the inventory, and it did not appear how much of this primary liability to the bank was included among the debts. There was subsequently liquidation of the Maltby Company's affairs, and as it proceeded the bank charged off successive amounts of the Maltby paper. In this way the total loss charged off prior to the trial of the cause (first trial) was $223,000. A comparatively small amount remained uncollected and not charged off. A generally similar situation existed as to another line of paper, of one 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 defendants had been two of the directors for many years, during which time reports to the Comptroller were frequently made and published, as required by the statute, and as called for by him, and 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. Plaintiff, at various dates from March to December, 1903, bought the bank stock at its supposed market value, averaging about $151 per share, and aggregating $15,000 par and $23,400 purchase price.

The case went to trial to a jury. Certain counts were withdrawn, and upon those submitted a verdict was returned and judgment entered upon it for the amounts plaintiff had paid for his stock, less its then book value, after deducting its pro rata share of the actual loss written off on account of the Maltby and Brotherton paper, with interest,—an average total of...