Gamble v. Brown

• Decision Date: 15 November 1928
• Docket Number: No. 2720.,2720.
• Citation: 29 F.2d 366
• Parties: GAMBLE v. BROWN et al.
• Court: U.S. Court of Appeals — Fourth Circuit

29 F.2d 366 (1928)

GAMBLE v. BROWN et al.^*

No. 2720.

Circuit Court of Appeals, Fourth Circuit.

November 15, 1928.

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Connor Hall, of Huntington, W. Va. (D. C. T. Davis, Jr., of Charleston, W. Va., on the brief), for appellant and cross-appellee.

W. E. Haymond and Van B. Hall, both of Sutton, W. Va. (Haymond & Fox, of Sutton, W. Va., on the brief), for appellees and cross-appellants.

Before WADDILL and NORTHCOTT, Circuit Judges, and SOPER, District Judge.

SOPER, District Judge.

On August 26, 1914, the first National Bank of Sutton, W. Va., closed its doors. It was found to be insolvent by the Comptroller of the Currency, who appointed a receiver to wind up its affairs and enforce the personal liability of its stockholders. It was discovered that the condition of the bank was due in large measure to acts of embezzlement and fraud committed by Homer H. Dean, the vice president, and to excessive and unwarranted loans made to him, to members of his family, and to a corporation of which he was the principal owner. He also owned or controlled a majority of the capital stock of the bank, which amounted to $50,000.

It transpired that the directors of the bank had taken little or no interest in its affairs, but had left its management almost exclusively to Dean himself. Accordingly, a bill of complaint was filed by the receiver on March 8, 1917, against the directors in office when the bank closed, and certain other defendants who had been directors in former years, charging that the bank's failure was due to their neglect. Answers denying liability were filed by most, if not all, of the defendants, except H. H. Dean himself, who had absconded. The case was referred by the District Judge to a special master, who took a great mass of testimony, which shows quite clearly that the directors were so negligent that it was easily possible for Dean to accomplish his unlawful designs without detection.

The evidence will be later dealt with in detail; but it may be said at this point that the directors were negligent in the following respects: (1) They failed to hold or attend monthly meetings of the board, as prescribed by the by-laws of the bank. (2) They failed to cause the affairs of the bank to be periodically examined and audited by a committee appointed by them under the by-laws. (3) They failed to cause the loans discounted by the bank to be passed upon by a discount committee, as required by the by-laws, and failed to pass upon the loans as a board. (4) They failed to require of H. H. Dean a bond for the faithful performance by him of his duties as vice president of the bank.

The special master filed a carefully prepared opinion to the effect that the losses sustained by the bank were directly caused by the failure upon the part of the directors to exercise proper care and prudence in the management of its affairs. In respect to attendance upon meetings of the board, he said:

"It plainly appears from the testimony that in the matter of holding meetings the directors were grossly negligent, and that notwithstanding the frequent admonition of the bank examiner, they failed and neglected to perform their duty in this respect. * * * Regular monthly meetings were prescribed by section 12 of the by-laws, which further provided that upon failure of a quorum to attend, there should be an adjournment from day to day until a quorum could be had. The directorate consisted of nine directors. At only one time during the period from January 10, 1911, to August 26, 1914, when the bank was closed, was there in attendance at a meeting more than six directors, and at that time the number present was seven. And at 18 of the 28 meetings held only a bare quorum was present. And of those meetings five were held in August, 1914, when the bank's affairs had reached a crisis terminating in its suspension, and too late to remedy conditions resulting from inattention to its affairs."

There were only two meetings of the board between January, 1914, when Dean took charge of the bank, and August, 1914, when his defaults were discovered. They were held in May and June, respectively. At neither was there a report of the loans made or business done by the bank, or an account of its assets and liabilities submitted.

The master found that the losses chargeable to the directors, with interest to December 1, 1921, amounted to the sum of $65,619.17. Three of the directors having made settlement in the aggregate sum of $11,850, the master recommended that a decree be passed, adjudging that certain of the directors were liable to the bank for the balance of $53,769.17. Exceptions were filed to the master's report in December, 1921, by the receiver, and by certain of the directors. The final decree of the District Court was rendered on November 26, 1927. It was not accompanied by an opinion.

Numerous items in which the master had found that the bank had suffered losses through the negligence of the directors were disregarded; but it was decreed that certain directors of the bank were liable to the extent of $10,000 for negligence in failing to require a fidelity bond from the vice president, and that there should be credited against this amount one-sixth of $10,600 paid by two directors in settlement of their liability, leaving a principal liability of $8,233, to which was added interest from the date of the institution of the suit until November 1, 1927, making a total of $13,402.82. The costs of the suit were divided equally between the receiver and said directors.

There is little difficulty in this case as to the proper rules of law to be applied. The directors are charged in the first place with the violation of certain statutory duties imposed upon them by acts of Congress. It is alleged (1) that they failed to observe the provisions of R. S. § 5200, as amended (12 USCA § 84), which provides that the total liabilities to a national bank of any person for money borrowed shall at no time exceed one-tenth part of the amount of the capital stock and surplus of the bank; and (2) that they failed to observe the provisions of R. S. §§ 5136, 5137 (12 USCA §§ 24, 29), in so far as they forbid a national bank to hold the possession of any real estate under mortgage. In addition to violation of statutory duties, it is also charged that the directors failed to perform their common-law duty to diligently administer the affairs of the bank. Indeed the greater part of the case is concerned with the failure of the directors to perform their duties as prescribed by the common law rather than duties imposed by statute.

The law applicable to this situation is clearly set out in Bowerman v. Hamner, 250 U. S. 504, 39 S. Ct. 549, 63 L. Ed. 1113, in which the Supreme Court held that in a suit against bank directors, based solely upon a violation of duty imposed by the National Bank Act (12 USCA § 21 et seq.), it is not enough to show a negligent violation of the act, but in effect an intentional violation must be shown in order to justify a recovery. At the same time, it was explained, the act does not relieve the directors from the common-law duty to be honest and diligent, and the degree of care required in this respect is that which ordinarily prudent men would exercise under similar circumstances. The court said (250 U. S. 513 39 S. Ct. 552):

"That ordinarily prudent and diligent men, accepting election to membership in a bank directorate, would not willfully absent themselves from directors' meetings for years together as Bowerman did cannot be doubted; that a director who never makes, or causes to be made, any examination whatever of the books or papers of the bank, to determine its condition and the way in which it is being conducted, does not exercise ordinary care and prudence in the management of the affairs of the bank is equally clear; and that Bowerman, when guilty of neglect in both of these respects, did not exercise the diligence which prudent men would usually exercise in ascertaining the condition of the business of the bank or a reasonable control and supervision over its affairs and officers is likewise beyond discussion. He cannot be shielded from liability because of want of knowledge of wrongdoing on his part, since that ignorance was the result of gross inattention in the discharge of his voluntarily assumed and sworn duty."

With these principles in mind, it is necessary to examine in detail the various specifications of loss for which the receiver seeks to recover. Certain of the items which entered into the total amount found by the master against the directors have been abandoned by the receiver on this appeal, and we shall limit the inquiry to the items which remain.

For most purposes, the period under investigation begins on January 15, 1914, and ends on August 26, 1914. On the first date, the First National Bank of Sutton, W. Va., entered into an agreement with the Farmers' Bank & Trust Company of the same place, whereby the bank took over the business of the trust company and agreed to assume its liabilities in the amount of $203,970.32. In consideration thereof, the bank received, amongst other assets, certain notes payable to the trust company, aggregating $169,619.71, a list of which was made up and was intended to be annexed to the agreement. The transaction was an important one, outside the ordinary routine of banking business. Moreover, in a sense Dean was on both sides of the transfer. On the one hand, he had acquired control of the stock of the bank, and had been chosen to manage its affairs; and, on the other, he was an interested party, because he had been the treasurer and active officer of the trust company, which was then about to retire from business. It needs no argument to show that, under these circumstances, the dictates of ordinary care required a careful examination of the assets which were offered to the bank as consideration for its assumption of substantial liabilities. The...