McCormick v. King

• Decision Date: 09 April 1917
• Docket Number: 2742.
• Citation: 241 F. 737
• Parties: McCORMICK v. KING et al.
• Court: U.S. Court of Appeals — Ninth Circuit

241 F. 737

McCORMICK v. KING et al.

No. 2742.

United States Court of Appeals, Ninth Circuit.

April 9, 1917

Rehearing Denied June 4, 1917.

Jesse R. S. Budge, of Pocatello, Idaho, J. M. Stevens, of Salmon Idaho, and Carl Barnard, of Pocatello, Idaho, for appellant.

Richards & Haga and McKeen F. Morrow, all of Boise, Idaho, for appellee Bowerman.

E. W Whitcomb, of Salmon, Idaho, for appellees King and Andrews.

Before GILBERT, ROSS, and HUNT, Circuit Judges.

HUNT Circuit Judge.

This suit was brought by McCormick, as receiver of the First National Bank of Salmon, Idaho, against defendants King Andrews, Buck, Bowerman, Haveman, Lottridge, and Edwards, to obtain an accounting of the affairs of the bank, and to determine the liability of the respective defendants, and for judgment against the defendants, respectively, according to their respective liabilities, and to recover money alleged to have been negligently wasted and lost and illegally received by the directors, and for general relief. After trial to the court, decree was entered against the defendants King and Andrews, and in favor of the defendants Bowerman and Edwards, and suit was dismissed for lack of service upon defendants Buck, Haveman, and Lottridge. McCormick, as receiver, appeals.

The bank, which had done a general banking business from January, 1906, to June, 1911, suspended business on June 8, 1911, and in August, 1911, was put into the hands of a receiver. The original capital of the bank was $25,000, divided into 250 shares, of $100 each, but about February, 1910, the capital stock was increased to $50,000, divided into 500 shares, of the face value of $100 each. In January, 1912, after suspension, the Comptroller of the Currency assessed the stockholders to the full face value of the shares of stock of the shareholders, respectively, amounting to $50,000, of which amount $20,000 was paid to the receiver, but owing to the insolvency of a number of the shareholders the receiver will be unable to collect approximately $20,000 of the assessment, and after realizing on the assets of the bank there will be a deficiency of approximately $20,000 of unpaid obligations. The defendants King, Andrews, and Bowerman were members of the board of directors at the time of the organization of the bank, and continued to be directors until the receiver took charge. King was president, except during the year 1908, when he was cashier and general manager. Andrews was vice president from January, 1908. Buck and Lottridge (not served) were directors from and after November 17, 1909, and up to the suspension of the bank; Lottridge having been acting cashier from January 1, 1910, until June 8, 1911. Haveman was a director and assistant cashier from January 18, 1910, until the failure of the bank. Edwards was a director from May 15, 1906, until January 18, 1910.

The complaint is that the defendants, as directors, knowingly permitted the making of loans by the officers of the bank in excess of the limit provided by section 5200 of the Revised Statutes of the United States, whereby large sums were lost to the bank, and that they mismanaged the affairs of the bank, and negligently permitted overdrafts whereby loss to the bank will accrue. The answering defendants denied any liability.

The receiver assigns as error the adjudication that the defendants King and Andrews are liable in the sum of only $14,700, that sum being the liability measured by sections 5147, 5200, and 5239 of the Revised Statutes of the United States (Comp. St. 1916, Secs. 9685, 9761, 9831), and not by the common law; also the action of the court in dismissing the complaint as against Bowerman, whom the court found to be not guilty of such neglect of duty as a director of the bank as to render him liable, either under the sections of the United States statutes heretofore quoted or at common law. For convenience we quote, so far as material, sections 5147, 5200 and 5239:

'Sec. 5147. Each director, when appointed or elected, shall take an oath that he will, so far as the duty devolves on him, diligently and honestly administer the affairs of such association, and will not knowingly violate, or willingly permit to be violated, any of the provisions of this title,' etc.

'Sec. 5200. The total liabilities to any association, of any person, or of any company, corporation, or firm for money borrowed, including, in the liabilities of a company or firm, the liabilities of the several members thereof, shall at no time exceed one-tenth part of the amount of the capital stock of such association actually paid in. But the discount of bills of exchange drawn in good faith against actually existing values, and the discount of commercial or business paper actually owned by the person negotiating the same, shall not be considered as money borrowed.'

'Sec. 5239. If the directors of any national banking association shall knowingly violate, or knowingly permit any of the officers, agents, or servants of the association to violate any of the provisions of this title, all the rights, privileges, and franchises of the association shall be thereby forfeited. Such violation shall, however, be determined and adjudged by a proper circuit, district, or territorial court of the United States, in a suit brought for that purpose by the Comptroller of the Currency, in his own name, before the association shall be declared dissolved. And in cases of such violation, every director who participated in or assented to the same shall be held liable in his personal and individual capacity for all damages which the association, its shareholders, or any other person, shall have sustained in consequence of such violation.'

The by-laws of the bank, adopted October 9, 1906, contained, among other things, provisions requiring the directors to hold regular meetings on the first Tuesday of each month and special meetings as the president, cashier, or any three or more members might require. There was a provision for a loans committee, consisting of the president, one director, and the cashier, with power to make loans, discount bills, buy and sell bills of exchange, and whose duty it was to report at each regular meeting of the directors concerning all bills and other evidences of debt discounted and purchased by them for the bank since their last previous report. Section 19 of the by-laws forbade any officer or clerk to pay any check drawn, or to pay out money on any order, unless the drawer of such check or order, at the time of the presentation thereof, had money on deposit sufficient to meet such check or order. Section 29 provided for the appointment by the board of directors of a committee of three members to examine each month the affairs of the bank, compare its assets and liabilities with the accounts of the general ledger, ascertain if the accounts are correctly kept, the condition of the bank, whether in sound and solvent condition, and to recommend to the board such changes in the method of doing business as might seem desirable, the result to be reported to the board at its next regular meeting. Thereafter, on January 18, 1910, the by-laws were amended so as to require the board of directors at each monthly meeting of officers to examine and approve all loans and discounts, and provided that such approval should be kept in a book for that purpose. King and Andrews were present at the meeting.

Three matters became important upon the trial and are specially dwelt upon in the briefs of counsel. The Salmon Lumber Company was a corporation, the controlling interest in which was owned by the relatives of defendant King. Commencing back in 1910, it had borrowed money from the bank at various times, and was permitted to overdraw its account in large sums. The amounts of the overdrafts were put into notes, and when the bank suspended the lumber company owed notes to the bank for about $13,629.20 and accrued interest, amounting to $5,408.62 at the time of the trial of this suit in 1915. The District Court found that the loss on these loans would be $7,000. Loans to Harry Brown amounted to $11,760.25 and $5,234.81 interest. Brown was an old customer of the bank, and, like the Salmon Lumber Company, was in the habit of making overdrafts, which were covered by notes taken in January, 1911. Brown was a lumber merchant, and co-operated with the Salmon Lumber Company and others in trying to control the lumber business in the Salmon section of Idaho. After suspension of the bank the receiver brought action and obtained judgment against Brown for $18,498.39 due to the bank, but execution upon the judgment was returned unsatisfied. The District Court found that the loss upon the debt of Brown would be $11,760.

There were loans to F.M. and S. A. Pollard, evidenced by two notes-- one for $6,250, dated June 29, 1910; the other for $1,700, dated July 11, 1910. The interest on the notes aggregated $3,626.42. The receiver recovered judgment, but only $150 was realized on execution. The District Court found that the loss on account of these notes was $7,800. The total amount of the losses, as found by the District Court, aggregates $26,374.85, exclusive of interest and some costs. With interest, the amounts are brought up to $40,644.70 as of the date of the trial. There were also losses of about $3,900 from overdrafts by different persons, but the District Court took no account of them, and we shall not.

King and Andrews were present at nearly all the board meetings and in 1910 Andrews was paid a salary for aiding the board in passing upon loans. They both knew of the large amount of overdrafts, which in the last half of December, 1910, had increased to $23,805.63, and on January 10, 1911, exceeded $28,657.91, although at the time the bank suspended...