Marshall v. Farmers' & Mech.S' Sa

• Decision Date: 24 January 1889
• Citation: 8 S.E. 586,85 Va. 676
• Court: Virginia Supreme Court
• Parties: Marshall v. Farmers' & Mechanics' Sav. Bank.

8 S.E. 586

(85 Va. 676)

Marshall

v.Farmers' & Mechanics' Sav. Bank.

Supreme Court of Appeals of Virginia

January 24, 1889

Banks and Banking—Savings Banks—Liability of Directors.

The president of a savings bank misappropriated its funds and overdrew his accounts, and a brother of the president, and corporations of which the officers and directors were also officers, largely overdrew their accounts, and were loaned large sums by the bank with little or no security, though such borrowers were irresponsible, and another borrower was permitted to withdraw his security. The directors, though required to meet weekly, met but once, twice, or three times a year, and never caused the books to be examined, nor called for statements of accounts with other banks. The capital of the bank was small, and much of it was not paid up, and the paid-up portion was treated as a loan. The bank, on suspension, was able to pay but 10 per cent. on the deposits. Held, that though the directors were ignorant of the affairs of the bank, and were not guilty of bad faith, they were guilty of such negligence as rendered them liable to the depositors. Lewis, P., and Richardson, J., dissenting.

Appeal from circuit court of city of Alexandria.

Francis L. Smith, for appellant. S. Ferguson Reach, Chr. E. Stuart, George A. Mushbach, and John M. Johnson, for appellees.

Lacy, J. The suit was brought by the appellant, James A. Marshall, for himself and on behalf of the other creditors of the appellee corporation, the Farmers' & Mechanics' Savings Bank of Virginia, a broken bank, to reduce into possession and distribute among said creditors the assets of the said bank, and to charge the individual defendants, who were the officers and directors of said bank, with the difference between the assets and liabilities of the said bank, upon the ground that the said directors had not had a meeting for at least one year prior to the 1st day of December, 1876, the date of the suspension and failure of the said bank, and for at least one year prior to the ascertainment of the embarrassed condition of said bank, which occurred some time before its said suspension, and that they did not give that care, supervision, and attention to the business affairs of said corporation which the duties of the office and the nature of the trust reposed in them required; but, on the contrary, neglected the same, and intrusted entirely the business concerns of the bank to the president and one, and possibly two, directors, who recklessly and improvidently loaned the money and securities of the said defendant corporation to various embarrassed and insolvent corporations, firms, and individuals, without taking proper and sufficient security for the protection of the depositors and creditors of the said bank, and being themselves connected with or interested in said embarrassed and insolvent corporations; by reason of which said conduct upon the part of said directors the appellantinsists that heavy losses have fallen upon the bank, and that the said directors are individually and personally liable to the depositors and creditors of the said bank for the losses so occasioned by the neglect of the duties of their office as directors. The bank answered the bill of the plaintiff through its president, and the directors answered individually, wherein negligence is denied; and it is also denied that the business of the bank was intrusted wholly to the president; but it is admitted that, "instead of regular formal weekly meetings of the board as prescribed by the by-laws of the bank, informal meetings were substituted, —it being proved soon after the bank went into operation that formal weekly meetings were unneccessary. " The questions involved were referred to a commissioner in chancery for examination and report. The commissioner reported that the said directors not only did not exercise ordinary care and diligence, but that they were guilty of gross negligence. First. That the board of directors only met in 1878 three times; in 1874 twice; in 1875 once; in 1876 twelve times; in 1877 five times; in 1878 once. Secondly. That from the organization of the bank, down to its suspension, December 1, 1876, there never was an examination made by the board of directors, or by any committee appointed by them, of the books, papers, funds, stocks, or bonds of the bank, or statement called for from other banks of the account of the said the Farmers' & Mechanics' Savings Bank with them. Thirdly. That, notwithstanding the fact that a committee was twice appointed for the purpose, an examination was never made of the books, and no report ever made or called for from the committees appointed. Fourthly. That the president, without authority, took from the cash drawer, from time to time, sums of money aggregating $2,187. 33, leaving nothing but tickets for the said sums of money; that in 1874 the said president caused McKim & Co., of the city of Baltimore, to sell the coupon bonds issued by the said the Farmers' & Mechanics' Savings Bank, and deposited with the said McKim & Co., and appropriated the proceeds to his own private use, and never made any entry on the books of the bank prior to September, 1876, overdrew his account $341. 64, and in other ways converted to his own use the property of the bank, —said several sums aggregating $11,713. 97; that the directors negligently failed to look at the books, into the cash drawer, or exercise any care whatever to discover these things, and when at last the facts did come to their knowledge they did not remove, but continued, this president, and allowed him to manage the books of the bank almost alone. Fifth. The account of the Alexandria Passenger Railway Company, which had this same president of the bank for its president for a time, and a director of this bank for its president afterwards, and whose treasurer was the cashier of this bank, was overdrawn $11,341. 91, which was decreased, crediting notes aggregating $6,500 which were neither paid nor renewed, and the overdraft continued to increase until the suspension of the bank, which was at that time $7,530. 45, but was manipulated so as to make it appear to be only $674. 53. Sixth. That one P. B. Stilson borrowed $2,000, by depositing the notes of one J. A. Clark for $4,000, secured by a deed of trust in Maryland, and also the notes of one B. G. Daniels. The Clark note was perfectly good, and in November, 1873, Stilson was allowed to withdraw it, and only leave the Daniel notes, which were perfectly worthless. Seventh. That the Washington & Ohio Railroad Company, whose president was for some years one of the directors of this bank, was loaned on May 8, 1872, $5,000, without a meeting of the board, and when the whole balance on hand was $9,373. 98; July 5, 1873, $3,000 were lent, when only $6,396. 71 were on hand; and on July 17, 1872, $5,000 were lent, when only $3,238. 49 were the balance on hand. That nothing was ever paid on these notes until the appointment of a receiver. There were numerous other notes, aggregating large sums, for the security of which the bank held second mortgage bonds of the road, which proved to be worthless. The commissioner says that from the testimony it may be possible to class the originaltransaction of making the loan to this company as an error of judgment, but it was more than an error of judgment to sit idly by when the said company did not have the means to pay its renewals, nor take the trouble to renew the notes when they became due, and make an effort to collect the debt, or to require additional security; especially when the testimony discloses that nearly every one else who had loaned money to the road was demanding and receiving additional security, and that the said the Farmers' & Mechanics' Savings Bank was almost the only holder of the notes of the said company, and that the dividends on the collaterals were not sufficient to pay the notes. The evidence shows that the bonds of the company were sold to pay interest, and that the published statements of the condition of the company disclosed the fact that the earnings of the company were not sufficient to pay the operating expenses and interest on the debt. Eighth. That Jameison & Collins owed the bank at suspension $3,311. 62, for which there were no security, and no indorser except one of the makers, and that a new note was discounted for them amounting to $1,211. 62, a few months before the suspension of the bank, to-wit, on the 30th of August, 1876; this Jameison being the brother of the president. Ninth. Robert Jameison, himself not solvent, and the brother of the president, with indorsers, both worthless, was loaned thousands of dollars, and at the suspension owed $2,300, —some of his paper being altogether without an indorser; and the books of the bank showed that a note of Jamei-son's for $500, deposited for collection by W. F. Vincent, was protested November 8, 1873; and he reports the names of the directors, and their several periods of service. The capital stock of this bank was only $10,000, and of that only $6,200 were paid at the time of the suspension of the bank. The bank closed its doors and ceased to do business December 1, 1876. An assignment of assets was made September 18, 1877. A receiver was appointed May, 1878. The commissioner classifies the directors and their periods of service, and ascertains the amount for which the several classes are in his judgment liable. He ascertained that Robert Bell, Jr., Emanuel Francis, William Cogan, Andrew Jameison, and the estate of John W. Stewart are severally liable for principal and interest to March 15, 1886, $38,574. 32; that said Robert Bell, Jr., Emanuel Francis, William Cogan, Andrew Jameison, and John W. Stewart were directors of the bank from its organization to the appointment of a receiver; that Lewis Stein's, John P. Agnew's, and John C. Graham's estate are severally liable for the amount of $35,917. 09, —the said Lewis Stein, John P....