An action under Rev.Stats., § 5239, against a director of a
national bank for damages sustained by an individual in consequence
of violations of the National Bank Act, necessarily involves a
Page 244 U. S. 73
The Court finds no reversible error in the view of the evidence
or legal conclusions reached by the Circuit Court of Appeal in
sustaining a judgment recovered under Rev.Stats., § 5239.
221 F. 912 affirmed.
The case is stated in the opinion.
MR. JUSTICE McKENNA delivered the opinion of the court:
Action in ten counts charging plaintiff in error and one Joseph
W. McGraw with violating the National Bank Act, and alleging
damages resulting to defendant in error therefrom.
In description of the parties, we shall designate them
respectively as plaintiff and defendants.
In all the counts, defendant Chesbrough and McGraw are alleged
to have been at certain dates directors of the Old Second National
Bank, a national banking corporation organized and doing business
under the National Bank Act of 1864 and the amendments thereto, and
having its office in the City of Bay City, Michigan.
The following violations of the act are charged: (1) signing,
attesting, and permitting and assenting to the publication of, a
report of the conditions of the bank required to be made by § 5211
of such act, which report was false; (2, 3, 4, 5) the Comptroller
of the Currency having made a requisition upon the bank for a
report of the resources and liabilities of the bank upon a day
specified, as required by the act, the defendants permitted and
assented to a violation of the act by signing, attesting, and
permitting and assenting to the publication of a false
Page 244 U. S. 74
report of the resources and liabilities of the bank and its
condition at the close of business of such day; (6, 7, 8) violation
of the act in that defendants and each of them permitted and
assented to the declaration of the semiannual dividend, being
payable December 1, 1902, knowing that it would necessarily be paid
out of the capital stock of the bank, and not out of net profits,
and knowing that losses had theretofore been sustained equal to or
exceeding the undivided profits then on hand, and that the sums so
declared as dividends exceeded the profits then on hand, after
deducting therefrom losses and bad debts; (9) defendants knowingly
violated and permitted and assented to the violation of the act (§
5200) in that they knowingly participated in, permitted, and
assented to the creation of certain liabilities to the bank and
knowingly permitted and assented to the continuance of the
liabilities and the carrying of the same among the loans and
discounts of the bank after defendants and each of them had
knowledge of the nature and character of the liabilities, and that
they had been created and were being carried in violation of the
act; the liabilities are set out; (10) violations of the act (§§
5199, 5200, 5204, 5211, 5239), being portions of a general design
and conspiracy on the part of the defendants to deceive the public,
including plaintiff, for the purpose of giving the stock of the
bank a fictitious market value and enabling each of the defendants
and his relatives and friends to dispose of certain shares of the
stock then and there held by them at a price exceeding the value of
In each count, damage is alleged to have been caused to
plaintiff, he having purchased stock upon the faith of the action
of defendants. The total amount of damage is alleged to be
Plaintiff in error Chesbrough (the case is here on his writ of
error, McGraw not having joined) filed a demurrer to the
declaration, which was overruled. He then filed
Page 244 U. S. 75
several pleas, one of which alleged that he was not guilty of
the wrongs and injuries complained of, and gave notice that, under
the latter, he would "insist [upon] and give in evidence" certain
matters of defense.
The case was tried to a jury. The 3d 6th, 7th, 8th, 9th, and
part of the 10th counts were withdrawn from their consideration. A
verdict was returned for plaintiff in the sum of $22,662.98, upon
which judgment was entered. It was affirmed by the court of
appeals. 221 F. 912.
This case had once before been to the circuit court of appeals,
where its facts were reviewed, and we may refer to the report of
the case for them. 195 F. 875.
It there appears that, in October, 1902, the bank reported a
capital of $200,000, a surplus of $75,000, and undivided profits of
$27,000. Its total loans and discounts were about $100,000.
On October 3, 1902, the bank held as loans (so considered by the
court and the Comptroller of the Currency) the paper of the Maltby
Lumber Company to the amount of $402,000, which had accumulated
under the personal direction of the then president and practical
manager of the bank. The Comptroller required that the loan be
reduced to the permitted 10%. The Comptroller's letter was
presented to the board. Inquiry during the next few weeks developed
the general character of the Maltby paper and that most of it was
not drawn against any real debt, and in fact represented no
liability, except Mrs. Maltby's. Its net worth, shown by a
statement of Maltby, who was called before the board, was about
$188,000, but there were many suspicious circumstances about the
inventory, and it did not appear how much of this primary liability
to the bank was included among the debts. There was subsequently
liquidation of the Maltby Company's affairs, and as it proceeded,
the bank charged off successive amounts of the Maltby paper. In
this way, the total loss charged off prior to the trial of the
cause (first trial) was $223,000.
Page 244 U. S. 76
A comparatively small amount remained uncollected and not
charged off. A generally similar situation existed as to another
line of paper, of one Brotherton, upon which $47,000 had been
written off as worthless before April, 1909. The shares of stock
were $100 par value, and the writing off of these two items caused
a loss in book value of $135 per share.
The defendants had been two of the directors for many years,
during which time reports to the Comptroller were frequently made
and published, as required by the statute, and as called for by
him, and continuously until 1904, the entire Maltby line was
carried at its face in the "loans and discounts," and was reported
as part of the bank's assets. Plaintiff at various dates from March
to December, 1903, bought the bank stock at its supposed market
value, averaging about $151 per share, and aggregating $15,000 par
and $23,400 purchase price.
The case went to trial to a jury. Certain counts were withdrawn,
and upon those submitted a verdict was returned and judgment
entered upon it for the amounts plaintiff had paid for his stock,
less its then book value, after deducting its pro rata
share of the actual loss written off on account of the Maltby and
Brotherton paper, with interest -- an average total of $167 per
The following were the rulings of the court:
(1) The general demurrer was rightly overruled. The making and
publishing of the reports are not merely for the information of the
Comptroller, but are to guide the public, and he who buys stock in
a bank in reliance upon the reports has a right of action under §
5239, Rev.Stats., against any officer or director who, knowing its
falsity, authorizes such report. "The one suffering such damages is
within the statutory description any other person.'" The
conclusion was deduced from Yates v. Jones National Bank,
206 U. S. 158, and
Yates v. Utica Bank, 206 U. S. 181, and
other cases in the state and federal courts.
Page 244 U. S. 77
(2) The damages in such a case are personal to the plaintiff. He
sues in his own right, not for the association.
(3) Such action involves no direct showing of negligence; the
sole primary issue is whether defendants caused or permitted to be
made a statement of the bank's condition upon which statement
plaintiff relied to his injury, and which statement defendants knew
was materially false. And, in the trial of this issue, the detailed
history of the entire transaction is admissible as tending to show
whether the loans were in fact bad, and whether defendants knew
that fact. This scienter
is the material condition, and
plaintiff can select one of the directors as sole defendant, or
join others with him.
(4) Considering the evidence, the court concluded that it
justified a finding of liability against the defendants, but not to
the extent of the judgment. The court was of opinion that the basis
of loss to the bank -- that is, the amount which should have been
charged off -- was taken in the verdict and judgment at the sum of
$223,000, and should not have been greater than $135,000, excluding
entirely, as not sustained by the evidence, the Brotherton debts.
The court therefore reversed the judgment and remanded the case for
a new trial.
Plaintiff moved to modify the opinion and judgment in such
manner as to permit him to remit such part of it as the court
thought was not supported by the evidence, and that, as modified,
the judgment be affirmed. The motion was denied.
The second trial resulted again, as we have said, in a verdict
and judgment for plaintiff. In reaching them, a basis beyond
$135,000 was taken, and the circuit court of appeals held this was
error, but gave to plaintiff permission to file within thirty days
from the filing of the opinion in the trial court a written
election to reduce the judgment by the sum in which it exceeded the
This was done, and judgment entered accordingly.
Page 244 U. S. 78
The case on the facts involves two simple propositions -- the
of defendant when he attested the report to the
Comptroller and the circumstances under which two dividends were
declared. Upon these propositions twice have juries held against
defendant, and twice has the circuit court of appeals held that
there was sufficient evidence to sustain their verdicts, modifying
only as to certain items of damages. In consideration of our
reviewing power, and without reciting the testimony, it is enough
to say that the findings on these propositions have substantial
evidence to support them.
But it is urged that the plaintiff brought this action under §
5239, Rev.Stats., in the Circuit Court of the United States for the
Eastern District of Michigan, in which all of the parties resided,
and that not that court, but the state court, had jurisdiction.
The cited section provides for a forfeiture of the franchise of
a national bank if its directors knowingly violate or knowingly
permit the violation of any of the provisions of the National Bank
Act, and further provides that, in case of such violation,
"every director who participated in or assented to the same
shall be held liable in his personal and individual capacity for
all damages which the association, its shareholders, or any other
person, shall have sustained in consequence of such violation."
This section was considered in Yates v. Jones Nat.
Bank, 206 U. S. 158
206 U. S. 179
and it was held that the rule expressed by it is exclusive, and
precludes a common law liability for fraud and deceit. To the same
effect are Thomas v. Taylor, 224 U. S.
, and Jones Nat. Bank v. Yates, 240 U.
. Necessarily. a federal question is involved, and
there was jurisdiction in the courts below. § 5198, Rev.Stats.; § 4
of the Act of August 13, 1888, 25 Stat. 436. Herrmann v.
Edwards, 238 U. S. 107
not opposed to this view. It was there held only that the federal
cause of action should be, in the absence of diverse
Page 244 U. S. 79
citizenship, stated in the bill to give the federal court
jurisdiction -- a condition that is complied with by the
declaration in the present case.
Defendant attempts to distinguish the present case from the
cases cited above, and, in 77 assignments of error, concentrated
into 18 points, urges the contentions we have noted, and
contentions based on the rulings of the trial court in the
admission and rejection of evidence and charges to the jury and the
rulings of the circuit court of appeals, and attempts to support
them by an elaborate and minute argument. Indeed, the whole case is
reviewed, and all of the deductions made by the lower tribunals
from the evidence combated and the contentions reviewed which were
disposed of by the circuit court of appeals, in whose decision we
concur. To answer it in detail would extend this opinion to
repellent length. It is enough to say of them that they show no