Medford Trust Co. v. McKnight

• Decision Date: 20 September 1935
• Citation: 197 N.E. 649,292 Mass. 1
• Parties: MEDFORD TRUST CO. v. McKNIGHT et al.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

292 Mass. 1

197 N.E. 649

MEDFORD TRUST CO. v. McKNIGHT et al.

Supreme Judicial Court of Massachusetts, Suffolk.

September 20, 1935

Report from Supreme Judicial Court, Suffolk County.

Suit in equity by the Medford Trust Company against Edwin T McKnight and others. An interlocutory decree was entered denying motions to recommit the master's report overruling objections treated as exceptions thereto, and denying requests for a report of the evidence, and requests for rulings and confirming the report. On reservation and report by the single justice of all questions of law and fact appearing on the record.

Judgment in accordance with opinion.

R. T. Bushnell, J. G. Bryer, and J. Lewiton, all of Boston, for plaintiff.

C. S. Walkup, Jr., and L. G. Brooks, both of Boston, for defendant Alden W. Teel.

C. B. Rugg, F. W. Crocker, and W. F. Farr, all of Boston, for defendants John Coulson and another.

A. B. Nelson, of Boston, for defendant Clifford M. Brewer.

S. H. Lewis, of Boston, for defendants Walter F. Cushing and others.

A. C. Walton, of Boston, for defendant John E. Volpe.

A. E. Lewis, of Boston, for Catherine A. Dennison, executrix.

W. I. Nottage, of Boston, for defendant William N. Curtis.

G. B. Hayward and J. H. Powers, both of Boston, for defendants Ernest B. Moore and another.

FIELD Justice.

The Medford Trust Company was incorporated under the laws of this Commonwealth in 1908. On October 7, 1931, the commissioner of banks took possession of its property and business.

This suit in equity was brought in this court by the Medford Trust Company, hereinafter referred to as the bank or the trust company, in possession of the commissioner of banks, against twenty-five persons, who, at the time the commissioner took possession, were or had been directors of the bank, to establish and enforce liability against the defendants for losses alleged to have been caused by their improper conduct as directors. The names of the defendants and the periods during which they were directors of the bank are set forth in the margin.^[1] An interlocutory decree was entered denying motions to recommit the report, overruling objections, treated as exceptions, thereto, denying requests for a report of the evidence and requests for rulings, and confirming the report. Thereafter a single justice reserved and reported ‘ all questions of law and fact appearing on the record in this cause for the consideration of the full Court.’ The evidence before the master is not reported.

The plaintiff makes the following contentions: (a) ‘ That the defendants were negligent in making or approving a large number of loans from 1926 to the closing of the bank’ ; (b) ‘ that the defendants made or approved certain groups of loans in violation of the statute forbidding a trust company to loan more than a stated percentage of its capital and surplus to a single borrower’ ; (c) ‘ that certain of the defendants received illegal personal profits by virtue of certain loans made by the bank’ ; (d) ‘ that on several occasions dividends in the Savings Department were declared by the defendants in violation of the law, since interest not earned and bonuses not collected were included in ascertaining the amount of apparent earnings from which dividends were declared’ ; and (e) ‘ that the plaintiff has suffered substantial losses as a result of the conduct above summarized.’ Defendants, in addition to other contentions, make the contentions, (f) that the suit was brought prematurely, and (g) that there were errors in the admission or exclusion of evidence.

Since the evidence is not reported ‘ the findings of the master must be accepted as true unless they are mutually inconsistent or contradictory and plainly wrong.’ Prudential Trust Co. v. McCarter, 271 Mass. 132, 139, 171 N.E. 42, 45.

The plaintiff had both a commercial and a savings department. The standard of duty for directors of such a trust company has been stated recently in these terms: ‘ Directors are bound to exercise ordinary prudence and skill to care for and invest the money entrusted to the bank, in accordance with its charter and the governing statutes. They must be animated by the utmost good faith. They hold themselves out as having the superintendence and management of all the concerns of the bank. They thereby engage to conduct its business as men of reasonable ability, necessary intelligence and sound judgment ought to conduct it. They must be diligent in ascertaining and in keeping informed as to the condition of its affairs; they must to a reasonable extent control and supervise its executive officers and agents; they must display understanding and insight proportionate to the particular circumstances under which they act. They need not exhibit greater wisdom and foresight than may be fairly expected of the ordinary man in similar conditions. They invite the confidence of the depositing public and must afford the protection thereby implied. They are not bound to give continuous attention to the business of the bank; they are bound only to be present, so far as rationally practicable, at stated meetings of the board and of its committees. They are not required to be expert accountants or familiar with the details of bookkeeping or to know everything disclosed by the books of the bank. Having regard to the nature and extent of the affairs of the bank and the customs of banking, directors are justified in committing the conduct of the main business to officers and subordinates and, in the absence of grounds for distrust, to assume that such persons will be upright in the performance of their duties. They are entitled to rely upon the information and advice given them by executive officers whose probity and competency are not under just suspicion, but they cannot surrender to them the responsibilities resting on directors. They are liable for negligence in the performance of those responsibilities even though they have acted in good faith. Impracticable obligations are not imposed on them. But they must direct and not be led. They must heed warnings from responsible sources. They must do something to see that statutes established for the protection of depositors are observed and followed. Each individual director is liable only for the results of his own misconduct although such results may be magnified in some instances by the concurring misconduct of other directors. For errors of judgment while acting with integrity, ‘ skill and prudence, measured according to the demands of the duties or business which they have taken upon themselves, they are not to be held liable; but they cannot excuse themselves from the consequences of their misconduct or of their ignorance or negligence by averring that they have failed merely to exercise ordinary skill, care and vigilance.’ ‘ In other words [such directors] are held to the same duty as ordinary trustees of a direct trust.’ ' Prudential Trust Co. v. McCarter, 271 Mass. 132, 137, 138, 171 N.E. 42, 44. See, also, Cosmopolitan Trust Co. v. Mitchell, 242 Mass. 95, 118-120, 136 N.E. 403. The bank is entitled to recover from such directors the amounts of money lost by it through their breaches of duty as directors. Greenfield Savings Bank v. Abercrombie, 211 Mass. 252, 259, 97 N.E. 897,39 L.R.A. (N. S.) 173, Ann.Cas. 1913B, 420; Prudential Trust Co. v. McCarter, 271 Mass. 132, 157, 171 N.E. 42. For reasons which appear later it is unnecessary to consider whether recovery in a suit like the present suit is limited to an aggregate amount sufficient to liquidate the unpaid obligations of the bank. Compare Prudential Trust Co. v. McCarter, 271 Mass. 132, 157, 171 N.E. 42.

The master made the following general findings: The by-laws of the bank provided that the directors should choose a finance committee of their own members and that this finance committee should ‘ supervise all the financial transactions of the Company and * * * have authority to act concerning the same, and give such direction to the officers in regard thereto as the interests of the Company from time to time seem to them to require, except when otherwise provided in these by-laws or by vote of the Directors.’ Prior to January, 1928, the finance committee consisted of the directors McKnight, Coulson, Senior, and Lewis H. Lovering. On January 24, 1928, the defendants Frank W. Lovering and Daly were added to the committee, and on July 22, 1930, the defendant Coulson resigned and was succeeded by the defendant Teel. The investment committee of the savings department consisted of the entire board of directors with the exception of the defendant Dennison. See G. L. (Ter. Ed.) c. 172, § 60.

‘ Some members of the Finance Committee were present at the Bank every day and the Committee met regularly about twice a week. The Board of Directors and the Investment Committee of the Savings Department met regularly twice a month, except in the summer when the meetings were usually monthly. All members of the Board of Directors were faithful in attendance at meetings. Except in case of illness no Director was absent for more than a few meetings a year * * * The meetings of the Directors and the Investment Committee were held following one another, the exact order varying at different periods but the meetings were distinct and independent. Although the defendant, Dennison, was sometimes present at the meetings of the Investment Committee, he took no part in them. Down to the summer of 1931 no records were kept of the meetings of the Finance Committee except in one or two instances. Members of the Finance Committee testified without contradiction that no loan was passed by that Committee if any of its members opposed. No attendance records were kept, however, and except where mortgage...