Wheeler v. Aiken County Loan & Savings Bank

• Decision Date: 01 July 1896
• Citation: 75 F. 781
• Parties: WHEELER v. AIKEN COUNTY LOAN & SAVINGS BANK et al.
• Court: U.S. Court of Appeals — Fourth Circuit

75 F. 781

WHEELER v. AIKEN COUNTY LOAN & SAVINGS BANK et al.

United States Circuit Court, D. South Carolina.

July 1, 1896

Mitchell & Smith, for complainant.

Henderson Bros. and Buist & Buist, for defendants.

BRAWLEY District Judge.

The main question upon the final hearing of this cause was the liability of the defendant directors for losses upon loans made by the bank to the directors Hall and Warnecke. Hall is indebted to the bank in the sum of about $2,000 one-half of which is upon a note for his original subscription to the capital stock, and the remainder for moneys advanced from time to time, for which the bank holds collateral security. There is no proof of Hall's insolvency, or that he will be unable to pay the amount due by him. Warnecke's indebtedness at the time of the hearing amounted, with interest, to about $18,000; and, as all of his property has been sold since the commencement of these proceedings, it is assumed that this will be a total loss,-- the testimony showing that he is insolvent, and that the collateral securities, consisting mainly of farmers' notes, and chattel mortgages and insurance policies, will realize but little.

The Aiken County Loan & Savings Bank was a banking corporation organized under the General Laws of the State of South Carolina in August, 1888, and doing business at Aiken. The bill was filed March 21, 1894, by Godfrey Wheeler, a stockholder, alleging insolvency, the wasting of assets illegal and improvident loans made to directors, and the futility of applying to the directors to redress injuries committed by themselves. A temporary restraining order, and a rule to show cause why a receiver should not be appointed were issued. Upon the return to the rule, and before any determination of the questions arising, there was a suspension of proceedings, by consent of parties, with a view to a reorganization. The negotiations with that intent not proving successful, it was determined by the parties that the winding up of the affairs of the bank would be to the interest of all concerned; and an order was entered, by consent, appointing a receiver. The receiver has paid the creditors in full, and estimates that there will be a sufficient fund to pay to the stockholders a dividend of from 20 to 25 per cent. of the par value of their stock.

Upon the issue made as to the liability of the directors for the alleged improvident and illegal loans, it is claimed by counsel for G. W. Williams, Jr., one of the directors, that the bill, as to him, should be dismissed for want of equity that it is obnoxious to the ninety-fourth rule in equity, respecting suits brought by stockholders against a corporation and other parties, founded on rights which might be properly asserted by the corporation itself. It is further contended in behalf of Williams that, being a resident of Charleston, it was understood at the time when he accepted a directorship that his duties did not require of him personal attention to, and supervision of, loans made by the bank; that, in the nature of things, a nonresident director could not be expected to have that knowledge of persons and credits which was demanded in order that such function should be judiciously exercised; and that his duty as director was fully performed by assisting the bank to secure satisfactory connections and correspondents at the money centers, and by such advice and counsel in the general conduct of the banking business as his greater experience enabled him to give, and by an occasional visit. In behalf of Burckhatter, it was contended that he was a plain farmer, entirely unacquainted with the banking business; that finding himself upon a board with such magnates as Mr. Phinizy, a wealthy banker of Augusta (not within the jurisdiction, nor served with process), and Mr. Williams, he supposed that everything would be correctly done. He attended all meetings of the board to which he was summoned, and his confidence in the management of the bank is attested by the fact that he was a constant depositor. He deposited with it a large sum of money only a few days before the commencement of these proceedings. His death has since supervened, and it is contended in behalf of his administrator that the action against him must abate, being in the nature of tort, under the principle of the maxim, 'Actio personalis moritur cum persona.' The conclusion reached by us renders it unnecessary to consider the special pleas set up by Williams and Burckhatter's administrator; for we are of opinion that the facts proved do not entitle the complainant to a decree against the directors, or any of them.

It appears from the testimony that Woolsey, the president, and Ashhurst, the cashier, were intrusted with the management of the bank (under section 1541 of the Revised Statutes of the state, under which the bank was organized, the directors had power to appoint such officers for the general conduct of its business); that they were men of character and standing in the community; that Ashhurst had been connected with another bank, and had had large experience as a bookkeeper; that each of them held stock in the bank to the amount of $10,000, the two owing two-fifths of the entire capital stock; that Warnecke was a merchant doing a large business (the largest in fact) in the town of Aiken; that he was the largest depositor in the bank; that he had enjoyed good credit; that he was the agent of the Farmers' Alliance in Aiken county, at that time a large organization; that, besides doing a general mercantile business, he made advances to farmers, taking liens and chattel mortgages. At the time when he began doing business with this bank, there can be no doubt that he would have been considered a desirable customer by any person or corporation doing a banking business in the community in which he lived; and it has been proved, and not controverted, that loans to farmers upon liens and upon chattel mortgages was considered a safe and proper business for banks in Aiken, which was the county seat of an agricultural community. The lending of an amount exceeding one-third of the entire capital of the bank to any individual would seem unwise and hazardous. The event has proved it to have been disastrous. In determining the question of legal responsibility therefor, as presented here, the circumstances under which this money was advanced must be considered, not as looked back upon from our present standpoint, but as they were at the time, and as looked forward to. Warnecke was, as has been stated, the chief merchant of the town. His place of business was very near the bank, where he kept a running account; making daily deposits of his cash receipts, and drawing thereon. At the end of each month his overdrafts would be settled by notes with collaterals as described. When the indebtedness had gradually increased to an amount between $6,000 and $10,000, the cashier became concerned; and, the president being consulted, additional security was demanded. A chattel mortgage on his stock of merchandise was taken, and later a mortgage on all of his real estate, which was not recorded, under the apprehension that it would injure his credit,-- already impaired, as is claimed, by reason of the fall in the price of cotton. Such moneys as were advanced after this period were for the purpose of postponing impending failure. The extreme financial stringency and panic of the summer and fall of 1893, which prevailed over the whole country, are circumstances to be taken into account. The final crash came to Warnecke with the proceedings in this cause. Whether it could have been averted by further advances or indulgence, or whether such postponement of the evil day would have resulted in greater disaster to the bank, is a question which cannot be answered. There is no charge, insinuation, or suspicion that the president or cashier of the bank were in any wise interested in business with Warnecke. There was no apparent object in increasing his accommodations, apart from the desire to serve the interest of the bank, in which they were the largest stockholders. In view of the liabilities he was already under, and the condition of his business, as they then understood it, of the fact that they would be the largest sufferers by his failure, and that they appear to have acted in good faith, with the desire to protect the interests of the bank, there does not seem to be any just ground upon which any of the directors can be properly charged for this indebtedness. That this was not good banking may be admitted. That it would not stand the test of those rigorous principles applicable to technical trustees may also be conceded. The law has not defined, and, in the nature of things, cannot define rigidly, the rules and conditions under which banks may lend money. In such business much depends upon trust,-- upon reliance upon character, and business integrity, thrift, and capacity, which may often justify the prudence of a transaction which to lawyers, seeking to apply hard and fast rules, might seem indefensible and reckless. The customs and methods of the community in which the business is done are, for such community, a standard of prudence and diligence by which the...