Briggs v. Spaulding - 141 U.S. 132 (1891)
U.S. Supreme Court
Briggs v. Spaulding, 141 U.S. 132 (1891)
Briggs v. Spaulding
Argued March 3-4, 1891
Decided May 25, 1891
141 U.S. 132
The degree of care required of directors of corporations depends upon the subject to which it is to be applied, and each case is to be determined in view of all the circumstances.
Directors of a corporation are not insurers of the fidelity of the agents whom they appoint, who become by such appointment agents of the corporation; nor can they be held responsible for losses resulting from the wrongful acts or omissions of other directors or agents unless the loss is a consequence of their own neglect of duty.
A director of a national back is not precluded from resignation within the year by the provision in Rev.Stat. § 5140 that when elected he shall hold office for one year and until his successor is elected.
Persons who are elected into a board of directors of a national bank about which there is no reason to suppose anything wrong, but which becomes bankrupt in ninety days after their election, are not to be held personally responsible to the bank because they did not compel an investigation, or personally conduct an examination.
Directors of a national bank mast exercise ordinary care and prudence in the administration of the affairs of a bank, and this includes something more than officiating as figureheads: they are entitled under the law to commit the banking business, as defined, to their duly authorized officers, but this does not absolve them from the duty of reasonable supervision, nor ought they to be permitted to be shielded from liability because of want of knowledge of wrongdoing if that ignorance is the result of gross inattention.
If a director of a national bank is seriously ill, it is within the power of the other directors to give him leave of absence for a term of one year instead of requiring him to resign, and if frauds are committed during his absence and without his knowledge whereby the bank suffers loss, he is not responsible for them.
Applying these principles to this case, it is, after a review of the evidence,
(1) That the defendant Coit was guilty of no want of ordinary care in acting upon the leave of absence which had been given him, and is not to be held liable because he did not resign in spite of some circumstances shown by the evidence which might lead to a contrary conclusion.
(2) That the defendant Johnson, not having a knowledge of the business of banking when he was appointed in December, 1881, and in January, 1882, becoming, by illness, incapacitated for a proper attention to business, was not liable for the losses caused by the frauds of the president of the bank.
(3) That in the case of both the defendants Johnson and Spaulding, no negligence is shown whereby the losses can be said to have been affirmatively caused, and they are not to be held responsible simply because they did not prevent them during the short period that they were directors, or because they did not happen to go among the clerks and look through the books, or call for and run over the bills receivable.
The case was stated by the Court as follows:
Smith (subsequently succeeded by Hadley, Hadley by Movius, and Movius by Briggs) exhibited his bill, as receiver of the First National Bank of Buffalo, in the Circuit Court of the United States for the Northern District of New York, on the 4th of May, 1883, against Reuben Porter Lee, Francis E. Coit, Elbridge G. Spaulding, William H. Johnson, and Thomas W. Cushing, as directors of that bank, and Anne Vought as executrix of John H. Vought, and Frank S. Coit and Joseph C. Barnes, as administrators of Charles C. Coit, former directors. Francis E. Coit died pending the suit, and Caroline E. Coit, executrix, was made a party defendant.
The bill alleged the organization of the bank as a national banking association under the acts of Congress in that behalf, that it carried on the business of banking from February 5, 1864, to April 13, 1882; that on the 14th of April, 1882, being then insolvent, it suspended business under and by direction of a bank examiner, and that on the 22d of April complainant was appointed receiver by the Comptroller of the Currency, qualified April 26, and took possession of the bank's books, records, and assets of every description.
That on December 7, 1863 at a preliminary meeting of the subscribers to the stock of the bank, certain articles of association were duly adopted and executed, a copy of which was annexed; that these articles remained unchanged, except that the number of directors was reduced from nine to five; that bylaws were adopted by the board of directors December 13, 1863, a copy of which was annexed, and continued unaltered from thence forward, and that on January 7, 1879 at a meeting of the directors, a resolution was adopted requiring the directors to meet regularly at the bank once in each month to look after the affairs of the bank, and transact such business as might come before them. It was further alleged that defendant Lee was a director from January 12, 1877, to April 14, 1882; that defendants Spaulding and Johnson were directors from January 10 until April 14, 1882, "except as the defendant Spaulding was disqualified by the sale of his stock on April 11, 1882"; that defendant Francis E. Coit was a director from May 20, 1881, and so remained, except as disqualified
by the sale of his stock, April 11, 1882; that defendant Cushing was a director from June 7, 1879, to January 10, 1882, on which day his successor was elected; that John H. Vought was a director from January, 1865, and remained such, except as he was disqualified by the sale of his stock, January 18, 1882, and that Charles T. Coit was elected a director January 11, 1870, and continued to act as such until about December 11, 1881, when he died intestate, and letters of administration were issued to Frank S. Coit and Joseph C. Barnes as administrators. It was further averred that from June 7, 1879, to December 11, 1881, Charles T. Coit was president of the bank, and defendant Lee its cashier; that down to about October 3, 1881, Charles T. Coit continued in the active discharge of his duties as president, and on that day was given a leave of absence for one year from those duties, and the defendant Lee was made vice-president, and placed in charge of the bank; that Lee also continued to be cashier, and one McKnight was assistant cashier thereof, and that on January 10, 1882, a new board of directors was elected consisting of the defendants Spaulding, Johnson, Francis E. Coit, Lee, and Vought, who elected officers for the ensuing year, Lee as president, Francis E. Coit as vice-president, McKnight as cashier, and one Bogert as assistant cashier. The bill then charged that down to about October 3, 1881, being the date when the defendant Lee was made vice-president and placed in charge of the bank,
"the said bank was solvent, and engaged in a prosperous business; that the capital stock of said bank was one hundred thousand dollars, which was entirely paid up, and was divided into shares of the par value of one hundred dollars each, and that said shares were then salable at not less than one hundred and fifty dollars each, and were actually worth about that sum; that from the time of its organization down to said last-mentioned date, the said bank had declared and paid dividends on its said capital stock, amounting in the aggregate to upwards of 285 percent thereon; that said bank then had a surplus or reserve fund representing undivided profits of said bank amounting nominally to seventy-four thousand two hundred and seventy-seven dollars and
three cents, ($74,277.03), and had actually a large surplus;"
that on April 14, 1882, the bank was largely insolvent; that its surplus and capital stock had been exhausted; that its total liabilities to its creditors, not including the amount of its capital stock, or other liability to its stockholders as such, amounted to $1,160,763.77; that its assets were nominally not less than $1,351,199.69, not including the liability of the stockholders on their stock; that a large portion of such assets were utterly worthless, and that the deficiency then existing in the good assets as compared with its liabilities was not less than $535,163.42, or about 46 percent of the liabilities; that statements of the nominal financial condition of the bank, as shown by its own books, as of the dates October 3, 1881, January 9, 1882, and April 14, 1882, are annexed; but those of January 9th and April 14th fail to show that
"any of the bills discounted or cash items, as therein stated, were worthless or uncollectible, or that the said bank had suffered any considerable loss by reason of bad debts or wasteful management, contrary to the facts as hereinbefore and hereinafter stated."
The bill further averred that the greater part of the losses of the bank during the period between October 3, 1881, and April 14, 1882, and the consequent failure of the bank, were due to the misconduct of the officers and directors of the bank, and to the failure of the directors to perform faithfully and diligently the duties of their office, and it was particularly alleged that it was the duty of the directors,
"by reason of the nature of their office and of the principles of the common law applicable thereto, and under and by virtue of the provisions of the Revised Statutes of the United States, and of the acts of Congress relating to national banks, and of the articles of association and by laws of the said bank, hereinbefore referred to, diligently, carefully, and honestly to administer the affairs of the said bank; to employ none but honest and competent persons to serve as officers of the said bank; to take from all persons so employed sufficient security for the faithful performance of their duties; to keep correct books of account of all the affairs, business, and transactions of the said bank; to see that the business of the said bank was prudently conducted,
and that the property and effects of the said bank were not wasted, stolen, or squandered,"
It was then charged that the directors utterly failed to perform each and every of their official duties, and during all the period from October 3, 1881, to April 14, 1882, paid no attention to the affairs of the bank, failed to hold or call meetings, or to appoint any committee of examination, or to require bonds, or to make personal examinations into the conduct and management of its affairs and into the condition of its accounts, but allowed the executive officers to manage it without supervision.
The bill further charged that the defendants permitted the reserve of the bank to remain below the amount required by § 5191, Rev.Stat., and that a large part of the losses of the bank arose from the unlawful extension of its line of discounts, and would have been prevented if the directors had performed their duty and prevented the increase; that on or about November 7, 1881, the surplus and undivided profits had been exhausted, and the capital stock impaired, and this should have been reported to the Comptroller, whereby the capital would have been made good, or the said bank would have necessarily been put into liquidation, and further losses thereafter incurred by continuance of its business would have been stopped.
It was also asserted that, independently of the provisions of the acts of Congress, the directors were trustees for the bank and its stockholders and creditors, and it was their duty to have ascertained whether the bank had sustained losses, and made known the facts and the general condition of the bank and the methods of its management, which duties they neglected and failed to perform, and by reason thereof the bank sustained great losses, amounting in the aggregate to at least $685,163.42.
It was further alleged that it was unlawful for the bank to allow any one person, company, corporation, or firm to become indebted to an amount exceeding one-tenth of the capital stock, excepting by a discount of bills of exchange drawn in good faith, and of business or commercial paper actually owned by the person negotiating it; but that the directors,
from October 3, 1881, to April 14, 1882, permitted this to be done, and thereby a loss of at least $556,215.62 was occasioned; that it was the duty of the directors and officers of the bank to make accurate reports to the Comptroller, and they did October 1, 1881, submit a report, and on December 31, 1881, and March 11, 1882, further reports, but the reports dated December 31, 1881, and March 11, 1882, were false and misleading, and particularly in representing that the bank had a surplus fund and undivided profits, amounting to large sums, and an unimpaired capital, and failing in any way to show that the bank had sustained heavy losses; whereas the bank had not at either of the dates any surplus or undivided profits, and its capital stock was exhausted, or largely impaired, on December 31, 1881, and on March 11, 1882, entirely exhausted, by reason of improvident and careless management, etc.; that by reason of the false and misleading character of the reports the Comptroller and stockholders and creditors of the bank were not informed of its actual condition, and failed to take steps to repair the losses or put the bank in liquidation, by reason of which the bank incurred further losses. And further, that it was the duty of the directors who were such from October 3, 1881, to April 14, 1882, to appoint only honest, faithful, trustworthy, experienced, and competent persons as officers of the bank, and to require bond or other security, and remove them if they were incompetent or untrustworthy in the performance of their duties; that during all that period of time, the directors then in office elected and appointed to the positions of president, vice-president, and cashier persons who were unfit, untrustworthy, incompetent, and unfaithful, and more particularly in the appointment, McKnight vice-president and president, McKnight and Bogert being mere clerks of the bank, and subject absolutely to the control and direction of Lee; that Francis E. Coit never actually assumed or performed any of the duties properly appertaining to the office of vice-president, and was of no value to the bank as one of its executive officers; that, by reason of the foregoing, Lee, was during all the period from October 3, 1881, down to the stoppage of the bank, in absolute control thereof, without any
check, oversight, or supervision whatever, which fact was at all times known to the directors of the bank; that Lee was a person of inconsiderable financial responsibility and of insufficient age and experience to qualify him for the position, and it was an act of gross negligence on the part of the directors to trust the entire management of the bank, or even the proper performance of the duties of president, to Lee; that under Lee's management, the line of discounts was increased by lending large sums of money on accommodation paper to Lee personally and to members of his family and his personal friends, and to other persons with whom the said Lee was engaged in speculations, all of whom were of little or no financial responsibility, many of the loans being in excess of the amount allowed by the acts of Congress; that Lee failed to take sufficient security for the loans, and in many cases none at all; that Lee himself borrowed large sums of money upon his own notes and by overdrawing his account, and an examination of the books would have disclosed the fact, and that Lee was lending the funds of the bank to individuals of insufficient responsibility, and otherwise improperly managing the affairs of the bank and demonstrating his unfitness for the position, and transactions with one Hall were set forth at length, and other improvident transactions, and it was charged that by reason of Lee's reckless, improvident, and criminal conduct the bank,
"which had been solvent and in a fair financial condition on the said 3d day of October, 1881, became insolvent, and was compelled to go into liquidation on the 14th day of April, 1882, as hereinbefore alleged;"
that all of his acts in effecting the loans appeared on the books, and might have been discovered by the directors by a proper examination, and it was owing to their negligence and inattention to duty that Lee was permitted to continue in office and to continue his mismanagement of the bank's affairs until it had become insolvent. Therefore the complainant insisted that the directors were responsible for all losses sustained by the bank through the negligence and wrongful conduct of Lee.
It was further alleged that on January 18, 1882, Vought sold his stock in the bank, and that Spaulding and Francis E.
Coit sold their stock on April 11, 1882, and that thereby each of them became disqualified to act as a director, but none of them resigned. That on April 14, 1882, the stock was held as follows: Lee, 170 shares; Hall, 578 shares, purchased April 11, 1882; Prosser, 50 shares; Barnum, 30 shares; Marshall, 10 shares; Mr. Rochester, 10 shares, and Mrs. Rochester, 12 shares, all purchased in January, 1882; Gluck, 20 shares, purchased in December, 1881, and 10 purchased in January, 1882; Mrs. Stagg, 100 shares, held since 1864, and defendant Johnson, 10 shares, purchased January 9, 1882. That all the stockholders, except Lee, Hall, and Johnson, were ignorant of the bank's condition, and innocent of all participation in the negligent and wasteful management of the bank, and have been subjected by reason of the negligence, inattention to duty, and wrongful acts of the directors to a loss equal to double the amount of the par value of their shares of stock, together with the amount of their proportionate interest in the surplus and undivided profits, which their respective interests in the stock of the bank would have brought them if the bank "had continued in the condition in which it was on the said 3d day of October, 1881."
And complainant claimed to be entitled to sue for and recover all the losses and damages which the bank, its stockholders, and creditors had sustained in the premises.
The bill prayed for answers, the oath not being waived, and for general relief, and was taken as confessed against the defendants R. P. Lee and Anne M. Vought, as executrix of John H. Vought.
Spaulding, Johnson, Cushing, the executrix of Francis E. Coit, and the administrators of Charles T. Coit answered severally.
These answers denied the jurisdiction of the court and denied that the receiver could maintain the action as one for equitable relief, and insisted that the remedy, if any, was at law.
The answers of the executrix and the administrators denied that the cause of action survived. Cushing claimed that his responsibility, if any, terminated upon the sale of his stock September 24, 1881.
The defense was set up on behalf of Charles T. Coit that he could not be held responsible from October 3 to December 11, 1881, when he died, because of his ill health and absence on the leave granted to him on October 3, and it was insisted on behalf of Francis E. Coit that he should be excused for failure to attend to the business of the bank by reason of his ill health, so far as he did not attend to it, if responsible at all.
The same defense was made on behalf of Johnson, with the added fact of serious illness in his family, and the age and practical retirement from business of Mr. Spaulding were also set forth.
All denied any intentional wrongdoing or omission of duty or legal responsibility for the losses. All asserted their confidence in Lee's capacity and integrity and their belief in the sound financial condition of the bank. All denied any neglect of duty in the premises, and it was denied that any special losses occurred from January 10, 1882, to the stoppage of the bank, and asserted on behalf of Spaulding and Francis E. Coit that if any loss happened between the 11th of April and the 14th they could not be held responsible under the bill as framed, as they had parted with their stock and thereby ceased to be directors.
Voluminous evidence was taken, and upon the hearing of the cause the bill was dismissed as to defendants Spaulding, Johnson, and Caroline E. Coit, executrix, without costs, and as to defendants Cushing and the administrators of Charles T. Coit, with costs.
From this decree an appeal was prosecuted to this Court. The opinion of the circuit court will be found in 30 F. 298.
The circuit court held that defendant Cushing ceased to be a director of the bank prior to the occurrence of the losses as alleged, and owed no duty in that behalf; half, and that Charles T. Coit's absence on leave from October 3, 1881, to his death, December 11, 1881, exonerated him, and that defendants Spaulding, Johnson, and Francis E. Coit were not liable under the statute, because they did not come within its provisions, nor by the common law, for by that each was liable only for his own miscarriages, and none were shown.