Williams v. Brady

• Decision Date: 16 January 1915
• Parties: WILLIAMS v. BRADY et al.
• Court: U.S. District Court — District of New Jersey

221 F. 118

WILLIAMS v. BRADY et al.

United States District Court, D. New Jersey.

January 16, 1915

[Copyrighted Material Omitted]

Stuart G. Gibboney, of New York City, for complainant.

Robert H. McCarter, of Newark, N.J., for defendants Brown and others.

Robert S. Hudspeth and Elmer W. Demarest, both of Jersey City, N.J for certain other defendants.

Pierre P. Garven, of Jersey City, N.J., for defendant Eggleston.

HUNT Circuit Judge.

As I understand the complaint, it shows the insolvency of the First National Bank of Bayonne and names the defendants as having been directors and officials at different specified times. It charges that the bank, through its officers and agents, violated certain laws (sections 5147, 5199, 5200, 5204, and 5211, R.S.U.S. (Comp. St. 1913, Secs. 9685, 9760 9761, 9766, 9774)), and that by reason of certain specified acts of the defendants the bank has sustained large losses, the extent of which is to the receiver unknown, but which he prays may be ascertained by a proper accounting, to be made in this action. With great detail the receiver sets up:

(1) That at different times loans were made in excess of one-tenth part of the unimpaired capital and surplus of the bank. Specification of the names of the borrowers and the dates of the loans is made, and the names of the directors who participated actively in the meetings when the loans were made are given.

(2) That the directors and officers conspired to violate the law (section 5200, R.S.U.S.) by means of taking accommodation paper executed by certain persons financially irresponsible, and that the proceeds of the loans so made would be put to the credit of the original borrower, and would exceed one-tenth part of the unimpaired capital and surplus of the bank. Names and dates are set forth and the means are detailed.

(3) That the directors approved of large loans to persons lacking in financial responsibility and financial assets, and that by means thereof there was a depletion of the capital stock and surplus. The names of such borrowers are given, together with the dates of the loans made to them.

(4) That the directors defendants and officers negligently permitted overdrafts by persons financially irresponsible, and that the directors illegally allowed the funds of the bank to be misinvested. The overdrafts are pleaded in name and amount, as are certain alleged misinvestments.

(5) That the directors and officers negligently permitted checks to be drawn upon the bank, and to be improperly and illegally certified against accounts, when the drawers of the checks had no funds on deposit, in violation of section 5208 of the Revised Statutes of the United States (Comp. St. 1913, Sec. 9770); and in detail the dates of such checks, the names of drawers, and the amounts are given.

(6) That dividends, which are set forth in detail, were declared by the directors when there was no net profit or surplus out of which such dividends could have been lawfully declared, and that defendants illegally appropriated such dividends.

(7) That defendants failed to exercise ordinary care in ascertaining as to the fitness of the individuals who were the president and vice president, respectively, of the bank.

(8) That four of the defendants, who are named, directly failed honestly and diligently to administer the affairs of the bank.

The pleader has set forth the names of three directors who have died. It is shown that the stockholders have been assessed under the law and that the assets are being sold in the liquidating of the affairs of the bank. Throughout the complaint, and following each specific averment of negligence or illegality by certain named directors, it is alleged that certain others, directors, were negligent because of their unreasonable neglect and failure to attend the meetings at which the alleged improper and unlawful and negligent acts were done.

Accepting the rule enunciated by the Supreme Court in Briggs v. Spaulding, 141 U.S. 132, 11 Sup.Ct. 924, 35 L.Ed. 662, Yates v. Jones National Bank, 206 U.S. 158, 27 Sup.Ct. 638, 51 L.Ed. 1002, and Thomas v. Taylor, 224 U.S. 73, 32 Sup.Ct. 403, 56 L.Ed. 673, it is enough to say for the purposes of the present motion that directors of national banks must exercise ordinary care and prudence in the administration of the affairs of their institutions. They are required, however, to do more than be mere figureheads, and may reasonably be expected to exercise reasonable supervision, and they are not to be permitted to be shielded from liability because of want of knowledge or wrongdoing, if that ignorance is the result of gross inattention. These general principles harmonize with the forcible expressions of Vice Chancellor Pitney in Campbell v. Watson, 62 N.J.Eq. 396, 50 A. 120, and are in line with Chancellor McGill's views in his very able opinion in Williams v. McKay, 46 N.J.Eq. 25, 18 A. 824. In Rankin v. Cooper (C.C.) 149 F. 1010, Judge Finkelnburg made a clear summary of the relationship of directors to national banks. I quote 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

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