Prudential Trust Co. v. Brown

• Decision Date: 04 April 1930
• Citation: 171 N.E. 42,271 Mass. 132
• Parties: PRUDENTIAL TRUST CO. v. BROWN et al.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

271 Mass. 132

171 N.E. 42

PRUDENTIAL TRUST CO.

v.BROWN et al.^*

Supreme Judicial Court of Massachusetts, Suffolk.

April 4, 1930.

Case reserved from Supreme Judicial Court, Suffolk County.

Suit in equity by the Prudential Trust Company against Reginald W. P. Brown and others to establish and enforce liability against directors for losses alleged to have been caused by their failure to perform the duties resting on them as directors of bank. Bill was dismissed as to two defendants, and covenants were entered into not to sue some others, and case was reserved for determination by the Supreme Judicial Court after report of master.

Case remanded to county court for further proceedings consistent with opinion.

J. Hannigan and J. E. Hannigan, both of Boston, for plaintiff.

R. G. Dodge and H. S. Davis, both of Boston, for defendant Hennessy.

A. M. Beale and P. E. Troy, both of Boston, for defendants McCarter and another.

RUGG, C. J.

This suit in equity is brought by the Prudential Trust Company (hereafter described as the bank), now in the possession of the commissioner of banks, to establish and enforce liability against the defendants for losses alleged to have been caused by their failure to perform the duties resting on them as directors of the bank. The bill has been dismissed as to two defendants, and there are covenants not to sue others of them.

The bill has been taken pro confesso as to still other defendants. The truth of the allegations of the bill thus is established as to such defendants. Those allegations are sufficient to impose liability on them. McArthur v. Hood Rubber Co., 221 Mass. 372, 374, 375, 109 N. E. 162;Boston Safe Deposit & Trust Co. v. Stratton, 259 Mass. 465, 476, 477, 156 N. E. 885. The master sets forth in his report the losses for which each is responsible. The precise amount of their liability may be determined by the single justice on the basis of these findings.

There were eight active defendants before the master. Three only of these have caused briefs to be filed and arguments to be made in their behalf in this court. This group of eight directors will be described hereafter as defendants.

[2][3][4][5][6][7][8][9][10][11][12][13] The standard of duty for directors of a trust company with both commercial and savings departments has been recently examined and stated in general 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.’ Greenfield Savings Bank v. Abercrombie, 211 Mass. 252, 256, 97 N. E. 897, 900,39 L. R. A. (N. S.) 173, Ann. Cas. 1913B, 420;Cosmopolitan Trust Co. v. Mitchell, 242 Mass. 95, 118-121, 136 N. E. 403;Cunningham v. Commissioner of Banks, 249 Mass. 401, 428, 429, 144 N. E. 447. In each of these decisions is a somewhat extended collection and review of relevant and supporting decisions, which need not be again cited. See, also, Prudential Trust Co. v. Moore, 245 Mass. 311, 315, 139 N. E. 645; In re City Equitable Fire Ins. Co. [1925] Ch. 407, 426-430; Hallmark's Case, 9 Ch. Div. 329; Kimball v. Whitney, 233 Mass. 321, 331, 332, 123 N. E. 665. These statements are necessarily somewhat general in terms. Within the limitations thus established, each case must depend to a considerable extent upon its own facts. Ordinarily, whether a director of a bank has conformed to this standard of duty in a given instance must be a question of fact.

[14] In substance and effect the cause of action in the case at bar rests on the breach of duty arising from acceptance of the office of director. It must be supported by proof of failure to exercise ordinary care and prudence in managing the affairs of the bank. The burden of proof is on the plaintiff to establish misconduct of directors notwithstanding the heavy fiduciary obligation resting upon them. This is the implication of our own decisions. Cunningham v. Commissioner of Banks, 249 Mass. 401, 429, 144 N. E. 447;Commissioner of Banks in re Cosmopolitan Trust Co., 249 Mass. 144, 147, 144 N. E. 73;Cosmopolitan Trust Co. v. Mitchell, 242 Mass. 95, 122, 136 N. E. 403. See Smith v. Smith, 222 Mass. 102, 106, 109 N. E. 830. The point has been expressly decided in other jurisdictions. Wallace v. Lincoln Savings Bank, 89 Tenn. 630, 654, 15 S. W. 448,24 Am. St. Rep. 625, where the opinion was written by Judge Lurton. Warner v. Penoyer, 33 C. C. A. 222, 229,91 F. 587, 44 L. R. A. 761; In re City Equitable Fire Ins. Co. [1925] Ch. 407, 477.

The case was referred to a master under a rule which as amended required him to hear the parties and their evidence, to find the facts and report the same to the court together with such portions of the verbatim testimony of any of the defendants as either party might request and photostatic copies of the audits of the bank made by the commissioner of banks for 1917, 1918, 1919 and 1920. The report of the master is comprehensive and voluminous. Annexed to it are about fifty printed pages of excerpts from the testimony of some of the defendants. Manifestly only a small part of the evidence taken by the master is in the record. It is plain also that the master has not and was not required to set out in his report all the subsidiary facts and circumstances upon which his general conclusions rest. Smith v. Lloyd, 224 Mass. 173, 176, 112 N. E. 615. In these conditions, the findings of the master must be accepted as true unless they are mutually inconsistent or contradictory and plainly wrong. Tripp v. National Shawmut Bank, 263 Mass. 505, 511, 161 N. E. 904. The power and duty of this court to make additional or different findings of fact by inference from the facts reported by the master are settled. American Circular Loom Co. v. Wilson, 198 Mass. 182, 200, 84 N. E. 133,126 Am. St. Rep. 409;Glover v. Waltham Laundry Co., 235 Mass. 330, 333, 334, 127 N. E. 420;Commissioner of Banks v. Cosmopolitan Trust Co., 253 Mass. 205, 214, 148 N. E. 609, 41 A. L. R. 658.

The facts relevant to the grounds of this decision as displayed in the master's report may be summarized. The bank was organized and started business in Boston on June 1, 1915. From the beginning it had both commercial and savings departments. It began business with a capital of $200,000 and a surplus of $50,000. No change in its authorizedcapital was ever made. It carried on business until September 10, 1920, when its banking rooms were closed and its business and assets taken by the commissioner of banks under St. 1910, c. 399 now G. L. c. 167. It has done no business since that date and its affairs and business have been and are yet in the hands of the commissioner of banks and are being liquidated.

The bank adopted by-laws whereby it was provided that there should be a board of directors of not less than seven nor more than fifty, such board as a whole or by committees to have the general management, control and direction of all the business and affairs of the bank. The number of directors varied from twenty-four to thirty-five during the period of its operation. Monthly meetings of the directors were required and were held, with occasional additional special meetings. The by-laws also...