Rankin v. Cooper

• Decision Date: 16 January 1907
• Docket Number: 1,162.
• Citation: 149 F. 1010
• Parties: RANKIN v. COOPER et al.
• Court: U.S. District Court — Eastern District of Arkansas

149 F. 1010

RANKIN v. COOPER et al.

No. 1,162.

United States Circuit Court, E.D. Arkansas, Eastern Division.

January 16, 1907

[Copyrighted Material Omitted]

John M Moore, for complainant.

Rose Hemingway & Rose, John McClure, and Morris M. Cohn, for defendants.

FINKELNBURG District Judge.^[1]

This suit was originally brought on the 19th day of June, 1895, by Sterling R. Cockrill, the predecessor of George C. Rankin, the present receiver of the First National Bank of Little Rock, against 16 directors of said bank, to recover losses alleged to have been sustained by said bank by reason of alleged negligence and violations of the laws of the United States governing the management of national banks. In the course of its prolonged history four of the original defendants have dropped out of the case by deaths and failure to revive, and by dismissals for other causes, so that at present there are but 12 left, who are as follows: Gus. Blass, John W. Goodwin, H. G. Fleming, James Joyce, Mark M. Cohn, Charles T. Abeles, P. K. Roots, and the estates of Nick Kupferle, Henry M. Cooper, William Farrell, Logan H. Roots, and C. M. Taylor. The case has been prolonged by the interposition of numerous motions and demurrers, and by an appeal from a decision sustaining one of those demurrers, which decision was afterwards reversed by the Circuit Court of Appeals, as will more fully appear from the report of that decision under the name of Cockrill v. Cooper, 86 F. 7, 29 C.C.A. 529, to which reference is hereby made for further statements of facts. In 1900, after the case had been reversed and remanded, the taking of testimony was begun before a master in chancery under an order of reference, and the case was finally heard and submitted on the merits in February, 1906. The testimony is very voluminous, embracing several thousand pages, there are over 100 exhibits, and the questions involved are complicated. I have given the matter much consideration-- all the consideration which other pressing duties would permit since the case was submitted-- and I realize now that a decision ought not to be delayed any longer

At the threshold of this case it must be said that the testimony does not show that any of the defendants in this proceeding gained or intended to obtain any pecuniary advantage or to make any improper personal gain out of the various transactions involved. So far as the evidence shows, the defendants were men in good standing in the community, and many of them active business men of high standing. Nor does it appear that they were guilty of knowingly assenting to or participating in the malversations of funds by the president of the bank which wrecked this one-time flourishing financial institution. The question rather is whether they were guilty of neglect in not knowing or ascertaining these things and in not taking steps to prevent or remedy them-- such culpable neglect as would make them liable under the general principles of the common law governing the duties of bank directors which apply to national banks as well as all other banks, and also under section 5145, Rev. St. (U.S. Comp. St. 1901, p. 3463)-- the national bank law-- which provides that the affairs of such banks shall be managed by not less than five directors, and section 5147, which makes it incumbent on every such director to diligently administer the affairs of such banks.

Briefly summarized, I understand the law on this subject to be as follows: (1) Directors are charged with the duty of reasonable supervision over the affairs of the bank. It is their duty to use ordinary diligence in ascertaining the condition of its business, and to exercise reasonable control and supervision over its affairs. (2) They are not insurers or guarantors of the fidelity and proper conduct of the executive officers of the bank, and they are not responsible for losses resulting from their wrongful acts or omissions, provided they have exercised ordinary care in the discharge of their own duties as directors. (3) Ordinary care, in this matter as in other departments of the law, means that degree of care which ordinarily prudent and diligent men would exercise under similar circumstances. (4) The degree of care required further depends upon the subject to which it is to be applied, and each case must be determined in view of all the circumstances. (5) If nothing has come to the knowledge to awaken suspicion that something is going wrong, ordinary attention to the affairs of the institution is sufficient. If, upon the other hand, directors know, or by the exercise of ordinary care should have known, any facts which would awaken suspicion and put a prudent man on his guard, then a degree of care commensurate with the evil to be avoided is required, and a want of that care makes them responsible. Directors cannot, in justice to those who deal with the bank, shut their eyes to what is going on around them. (6) Directors are not expected to watch the routine of every day's business, but they ought to have a general knowledge of the manner in which the bank's business is conducted, and upon what securities its larger lines of credit are given, and generally to know of and give direction to the important and general affairs of the bank. (7) It is incumbent upon bank directors in the exercise of ordinary prudence, and as a part of their duty of general supervision, to cause an examination of the condition and resources of the bank to be made with reasonable frequency. I have drawn the foregoing propositions largely form the leading cases of Briggs v. Spaulding, 141 U.S. 132, 11 Sup.Ct. 924, 35 L.Ed. 662, Gibbons v. Anderson (C.C.) 80 F. 345, Martin v. Webb, 110 U.S. 7, 3 Sup.Ct. 428, 28 L.Ed. 49, Warner v. Penoyer, 91 F. 588, 33 C.C.A. 222, 44 L.R.A. 761, Cockrill v. Cooper, 86 F. 7, 29 C.C.A. 529, and the recent decision of the Supreme Court of Ohio in the case of Mason v. Moore, 76 N.E. 932.

In applying the foregoing rules to the present case, I will first speak of the directors collectively, leaving any discriminations to be made between them for subsequent consideration. Briefly stated, it appears from the evidence that up to June 19, 1890, when H. G. Allis was elected president of the First National Bank of Little Rock, it had been a successful and prosperous institution; that soon after Allis assumed charge of its affairs he began to divert the proceeds of the bank partly in the form of improvident, excessive, and improper loans to himself, and partly in the shape of improvident, excessive, and improper loans to other persons and corporations with whom he was affiliated and engaged in speculative enterprises, notably the City Electric Street Railway Company of Little Rock, the McCarthy-Joyce Company, a mercantile company of Little Rock, the Press Printing Company, a corporation of Little Rock, and a number of other corporations and individuals which will be hereafter more particularly referred to. This diversion and misappropriation of the funds of the bank continued from June 19, 1890, until February 1, 1893, when the bank closed in an utterly insolvent condition, and a receiver was appointed to wind up its affairs. It appears that after realizing what could be realized on the assets of the bank, and after an assessment on the stockholders, there still remained a balance of $300,000 due and unpaid.

It further appears from the evidence that during the excellent administration of the affairs of this bank by Col. Logan H Roots, the predecessor of Allis, the directors gradually fell into the habit of permitting the executive officers to manage the business of the bank with very little, if any, supervision on their part. There were no periodical examinations made by examining committees such as were customary in other banks at Little Rock and banks generally. The directors simply trusted Col. Roots and the executive officers acting under him. It appears that this policy of trusting and relying upon the president, cashier, and their assistants was tacitly transferred to Mr. Allis and his staff when he came into office in June, 1890, and the business of the bank was carried on in the traditional way, without any disturbing cause calculated to arouse suspicion or inquiry on the part of the directors until about the month of July, 1891, when rumors began to circulate in and about Little Rock unfavorable to Allis' management of the bank's affairs, and at the request of Dr. G. M. Taylor, one of the directors, a committee was appointed to examine the affairs of the bank, which committee made an elaborate report on the 25th day of November, 1891. In this report the attention of the board is directed to the large indebtedness of Mr. Allis and of his 'immediate associates and enterprises,' and that 'they merit more careful consideration.' It is also stated in this report that the committee does not think that the securities in the case of the City Electric and Belt Railways would sell for enough at that time to liquidate the indebtedness, and it is suggested that an early liquidation or payment in full of these accounts, together with a large reduction of Mr. Allis' personal indebtedness, is deemed desirable. It seems that about the same time a government examiner made an examination which led to a letter from the Comptroller of the Currency, dated November 28, 1891, addressed to the cashier, and to which personal attention was also called by an individual notice from the Comptroller mailed to each director. In this letter, which is lengthy, the Comptroller calls attention to the loans to Mr. Allis, the City Electric Railway Company, the Belt Line, Bradford & Brown, and alludes to Allis' connection with those parties and companies, and reminds the directors that the 'use of the funds of a bank by...