McRoberts v. Spaulding

• Decision Date: 29 March 1929
• Docket Number: No. 4346.,4346.
• Citation: 32 F.2d 315
• Parties: McROBERTS v. SPAULDING et al.
• Court: U.S. District Court — Panama Canal Zone

32 F.2d 315 (1929)

McROBERTS v. SPAULDING et al.

No. 4346.

District Court, S. D. Iowa, Central Division.

March 29, 1929.

John H. Patton, of Grinnell, Iowa, Frank Bechly, of Montezuma, Iowa, and Robert J. Bannister, of Des Moines, Iowa, for plaintiff.

Parsons & Mills and Carr, Cox, Evans & Riley, all of Des Moines, Iowa, Thos. J. Bray and Byron W. Preston, both of Oskaloosa, Iowa, and Chas. Hutchinson, of Des Moines, Iowa, for defendants.

DEWEY, District Judge.

This is a suit brought against certain directors of the Merchants' National Bank of Grinnell, Iowa, seeking recovery for loss alleged to have been sustained by the bank on account of negligently loaning money of the bank to parties claimed to have been insolvent at the time of such loans, and to recover on the alleged charge of loans made which were excessive under the prohibition of section 5200, U. S. R. S. (12 USCA § 84).

The bank was incorporated in the year 1883, and, at the time the loans complained of were made, had a paid up capital stock of $100,000, and an unimpaired surplus of $100,000. And as far as the excess loans were concerned, the case was tried upon the theory that the largest amount which the bank could legally loan to any one person was $20,000. The bank was taken over by the Comptroller of the Currency November 1, 1924.

The common-law negligence, as charged against the defendants, is based, as has been said, upon the claim that the parties to whom money was loaned were insolvent. The difficulty in the claim of the plaintiff in this regard is the uncertainty of values during the years from 1921 to 1924, which was the very heart of a period of deflation of farm land values and values of all kinds in Iowa.

The evidence shows, and the court will take judicial notice of, the banking situation, and the method and manner of its conduct prior to the deflation period, which started about the year 1920. The surety for country banks in Iowa and the basis of credit is real estate. From the time of the Civil War up to the year 1920, real estate in Iowa had a standard and fixed valuation, increasing gradually, and a person engaged in farming in Iowa prior to 1920, if honest and industrious, was worthy of credit. And the banks in Iowa generally loaned such individuals money or extended them credit, based upon the amount of property which they owned; and if the borrowers had real estate, upon the amount or equity in the real estate owned by such individual borrower.

At about the time of the breaking out of the World War in 1914, farming operations in Iowa became very profitable, and during the period of the war there was a gradual advance in prices, and Iowa was rich and prosperous. After the close of the war this prosperity took on a turn of speculation, which continued to grow and expand until the Federal Reserve Bank finally decided to stop the speculation by demanding the withdrawal of its loans. From this time there was started in Iowa a period of depression and panic which depreciated the value of all property and caused real estate values to decline, making their true value uncertain, and so reduced, that farms were considered as having the value of a conservative first mortgage.

As shown by the evidence, when this period of depression started in 1920, and during the time until the closing of this bank, November 1, 1924, it was generally thought by bankers and business men that the period of depression was temporary, and that values of real estate, which during that time were uncertain, would soon reach a stability that would enable business to again be transacted as before upon sound real estate values.

In retrospection it is easy to criticize the actions of the officers of the two or three hundred banks in Iowa that failed, with being derelict in their duties and making improvident loans, and yet, during all of the period in which it is charged that these defendants were negligent in making loans to individuals that were insolvent, the banking department of the state of Iowa was encouraging banks to remain open, having their directors sign guaranties of bank loans, and using every effort to maintain the former business relations, in the hope and expectation that such values would again become sound and substantial, and thus prevent the closing of banks with resultant loss to stockholders and creditors.

We are not here considering an ordinary bank failure caused by the mismanagement of the directors, but a situation that was caused by extraneous circumstances and conditions that could not be foreseen and the extent of which reasonable men could not at the time anticipate. And where bank officers, as in this case, made every reasonable effort to prevent the failure of their bank, they should not be criticized.

As shown by the testimony, other banks were following the same procedure as followed by the directors and officers in this case. It is stated in the case of Lyon v. Featherman, 80 Mont. 504, 512, 261 P. 268, 271: A director "cannot be held liable for losses on loans made in good faith at a time when any reasonably prudent banker would consider" them "for the best interest of the bank," even though in looking back they appear not to have been so. Directors are not liable for lawful loans made in good faith, although the making thereof was an error in judgment. 7 C. J. 790; Curtis v. Metcalf (D. C.) 259 F. 963.

The question of improvident loans is not what some one else might think about a loan, but the question is what the directors in making the loans thought, and the method and motive by which they were controlled in their actions.

Testing the actions of the directors in this case by the above rules, and the facts and circumstances surrounding them at the time, this court cannot say that the directors were negligent in making the loans that they did make, and which are charged in the petition as having been made improvidently and carelessly by such directors.

The difficult question involved in the case is not that of common-law liability for negligence, but the charge that the defendants had knowledge of and assented to certain loans to individuals and a partnership which, in each case, were in excess of the limit which the banking laws of the United States permit any bank to loan to a person or partnership.

The loans which are charged to have been excessive and made in violation of section 5200, U. S. R. S., are as against five lines: (1) The J. E. Stewart and Louella Stewart loans; (2) the M. E. Sturgeon and Sadie Sturgeon loans; (3) the Ralph Sherman loans; (4) the John Puls loans; (5) the loans to the McFate and Roberts partnership, composed of Harvey McFate and Glenn A. Roberts.

The charge here is that the directors knowingly and willfully permitted loans to be made in each of the lines above enumerated in excess of that permitted by the laws relating to national banks. The National Bank Acts in force at the time of the transactions herein involved, section 5200 U. S. R. S. (12 USCA § 84), provides: "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 ten per centum of the amount of the capital stock of such association, actually paid in and unimpaired, and 10 per centum of its unimpaired surplus fund."

And the statute then provides that the discount of certain paper by such association, where such paper is secured by certain existing values, shall not be considered as money borrowed within the meaning of the statute.

And Revised Statute 5239 (12 USCA § 93) provides: "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 chapter * * * 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."

In accordance with the plain provisions of these sections, a director who participates in, or knowingly assents to an excessive loan, in this case over $20,000, is personally liable for the damages suffered thereby. And under the decisions of the federal Supreme Court, in order to recover from a director for losses on an excessive loan, it must be shown that the defendant while director participated in or assented to the excessive loan; not through negligence merely, but knowingly, and in effect, intentional. Corsicana National Bank v. Johnson, 251 U. S. 68, 40 S. Ct. 82, 64 L. Ed. 141.

So if a director has no actual knowledge of an excessive loan and has no knowledge of facts which would put him on inquiry, he cannot be held for the resultant loss. First Nat. Bank of Fairbanks v. Noyes (C. C. A.) 257 F. 593.

And it has been held that directors are not constructively chargeable with knowledge of the cashier to whom the business of the bank has been intrusted by the directors who have acted with proper precaution. Clews v. Bardon (C. C.) 36 F. 617; Cooper v. Hill (C. C. A.) 94 F. 582; First Nat. Bank of Fairbanks v. Noyes (C. C. A.) 257 F. 593.

But the absence of any improper motive or desire for personal profit on the director's part is no defense to an action for violation of the statute. Corsicana Nat. Bank v. Johnson, supra.

In this case the plaintiff seeks to recover the full amount due from the borrower as shown by the books of the bank at the time it closed its doors on November 1, 1924. But the defense claims, and the court feels rightfully so, that a renewal and consolidation of former loans does not constitute a new and single transaction.

It is held in the case of the Corsicana National Bank v. Johnson, supra, that the entire sum loaned, plus the interest and less salvage, should be...