stockholder for neglect or mismanagement in the affairs of the bank whereby insolvency results, and the stock becomes worthless. Conway v. Halsey (1882) 44 N. J. Law (15 Vroom) 462, 28 Alb. Law J. 27. 6. Knowledge and intent.-Directors of a national bank who merely negligently participated in or assented to the false representations as to the bank's financial condition contained in the official report to the Comptroller of the Currency cannot be held civilly liable to any one deceived to his injury by such report, since the test of such liability is a knowing violation of the provisions of the title relating to national banks. Yates v. Jones Nat. Bank (1907) 27 Sup. Ct. 638, 206 U. S. 158, 51 L. Ed. 1002, modifying judgment Yates v. Jones Nat. Bank (1905) 105 N. W. 287, 74 Neb. 734. Directors of a national bank cannot be held to the common-law liability for inattention to duty as directors in not preventing a hazardous, imprudent, and disastrous loan, if such loan was made by their associates, without their knowledge, connivance, or participation. Witters v. Sowles (C. C. 1887) 31 Fed. 1. Directors held not liable for the acts of the cashier in violation of the banking law, when done without their participation or knowledge. Clews v. Bardon (C. C. 1888) 36 Fed. 617. The mere fact that a director of a national bank does not attend to his duties by reason of continued ill health or other business engagements does not necessarily relieve him from liability for losses sustained by the bank through the failure of the directors to exercise proper care and supervision over its affairs. Rankin v. Cooper (C. C. 1907) 149 Fed. 1010. Mere negligence, without proof of an intentional violation, is insufficient to create such liability. Jones Nat. Bank v. Yates (1913) 139 N. W. 844, 1135, 93 Neb. 121. 7. Acts of officers.-Members of the committees held guilty of negligence which rendered them liable for the losses resulting from the mismanagement of the cashier, but other directors not liable; it not appearing that they had knowledge of the negligent manner in which the committees, on whose reports they relied, had performed their duties. Warner v. Penoyer (1898) 91 Fed. 587, 33 C. C. A. 222, 44 L. R. A. 761, reversing decree (C. C. 1897) 82 Fed. 181. The directors are not liable for losses through malversations of the cashier, unless, by the performance of their duty of supervision such losses would have been prevented. Id. Where directors of a national bank engaged in or knowingly permitted stock speculation by the president and vice president with the bank's funds, such directors were liable for the losses sustained. McKinnon v. Morse (C. C. 1910) 177 Fed. 576. 8. False statements.-Act of directors of a national bank, including, as part of resources in report to Comptroller of the Currency, assets which they had been directed by the Comptroller to collect or remove from the bank, is an intentional violation of the bank act, rendering them liable to one purchasing stock of the bank in reliance on such report. Thomas v. Taylor (1912) 32 Sup. Ct. 403, 224 U. S. 73, 56 L. Ed. 673. A director of a national bank who participates in or approves the continued carrying on its books of worthless paper as assets in amount sufficient to affect the standing of the bank is responsible for the falsity of the statements made and published which under the general practice are merely summaries from the books. Chesbrough v. Woodworth (1912) 195 Fed. 875, 116 C. C. A. 465. An officer or director of a national bank who knowingly authorizes the making and publication of a false report is liable, under this section, to one who had purchased stock of the bank from another in reliance thereon, and has suffered loss. Id. A director of an insolvent national bank is not liable to a depositor for fraud and deceit by its officers, as at common law, unless such director had knowledge of, approved, or participated in, the fraudulent acts complained of. Jones Nat. Bank v. Yates (1913) 139 N. W. 844, 1135, 93 Neb. 121. Under this section directors who have attested to be correct an official report of the bank's condition, which included, at their full face, as part of the bank's resources, assets which they had been informed by the Comptroller of the Currency were doubtful, and for the collection, or removal from the bank, of which immediate steps should be taken, are liable to one who, on the strength of the report, bought stock of the bank, for the depreciation thereof by reason of the shrinkage in the value of the specific assets, but not for its depreciation from impairment, then unknown to the directors, of other assets. Taylor v. Thomas (1908) 108 N. Y. Supp. 454, 124 App. Div. 53, reversing judgment (1907) 106 N. Y. Supp. 538, 55 Misc. Rep. 411. Where directors of a national bank by their gross negligence permit fraudulent statements of the condition of their bank to be published, they are liable to a person misled and injured thereby, although they did not participate in the fraud. Houston v. Thornton (1898) 29 S. E. 827, 122 N. C. 365. Negligence of directors in permitting a false statement of the condition of a national bank to be published is a wrong to any person misled thereby into purchasing stock of the bank; and such directors are liable to respond to such person for the injury done, and the right of action therefor could not pass to the receiver of the bank on its insolvency. Id. 9. Negligence.-The directors of a national bank which has become insolvent by reason of losses caused by the discount from time to time of paper not properly secured, indorsed by a director who is a man of wealth and the largest stockholder in the bank, and in whom the other directors have reason to place confidence, cannot be held liable for the mere failure to discover the illegal transactions, and to prevent such director from continuing therein. Movius v. Lee (D. C. 1887) 30 Fed. 298, decree affirmed Briggs v. Spaulding (1891) 11 Sup. Ct. 924, 141 U. S. 132, 35 L. Ed. 662. Where the affairs of a bank are managed by its president, who was represented to be trustworthy and efficient, and owned the greater part of the stock, and the bank was generally considered to be prosperous, directors cannot be held liable for losses through mismanagement on the ground that they were negligent in not, within 90 days, compeling the board of directors to make a thorough investigation of the books and condition of the bank; nothing in this section or sections 9661, 9685, or 9774, ante, relating to the duties of directors, etc., imposing such liabilities. Briggs v. Spaulding (1891) 11 Sup. Ct. 924, 928, 141 U. S. 132, 35 L. Ed. 662. Directors of a national bank left its management for more than three years almost wholly to its cashier, who had but little property, and of whom they required no bond; and they knowingly permitted loans to be made to individuals and firms largely in excess of the amounts allowed by law. They failed to record mortgages given to secure large debts due the bank, after they were aware of its insolvency, and erroneously advised an examiner who had taken charge of the bank that it was not necessary to record them. Held, that the directors were personally liable for the losses caused by such neglect, and the fraud and defalcations of the cashier. Robinson v. Hall (1894) 63 Fed. 222, 12 C. C. A. 674, distinguishing Briggs v. Spaulding (1891) 11 Sup. Ct. 924, 141 U. S. 132, 35 L. Ed. 662, and reversing (C. C. 1894) 59 Fed. 648. A director of a national bank may make himself personally liable for the failure of the board to charge worthless paper off on the books by failing to make reasonable personal effort to in duce proper action. Chesbrough v. Woodworth (1912) 195 Fed. 875, 116 C. C. A. 465. A receiver of national bank may sue the directors for malfeasance of officers when they were so negligent as to make practically no examination of its affairs, and to hold meetings only at rare intervals, and then to limit their business to the election of directors and the declaration of dividends. Gibbons v. Anderson (C. C. 1897) 80 Fed. 345. The court can only charge directors with liability for losses shown to have resulted from their negligence. Warner v. Penoyer (C. C. 1898) 91 Fed. 587, 33 C. C. A. 222, 44 L. R. A. 761, reversing decree (C. C. 1897) 82 Fed. 181. The provisions of the national banking act defining the duties of the directors do not relieve them from their common-law liability for a failure to diligently and honestly discharge their trust. Allen v. Luke (C. C. 1908) 163 Fed. 1018. Directors of national banks must exercise ordinary care and prudence and reasonable supervision, and are not shielded from liability by ignorance of wrongdoing resulting from gross inattention. Williams v. Brady (D. C. 1915) 221 Fed. 118. Action may be maintained against directors of a bank for negligence in management of its affairs resulting in loss. Flynn v. Third Nat. Bank (1900) 81 N. W. 572, 122 Mich. 642, 6 Detroit Leg. N. 877. Directors of a national bank are only required to exercise a reasonable supervision over its affairs, and where they appoint from their number a discount committee and an examination committee they shift the responsibility to such committees, and when during three years such committees permit the cashier of the bank to discount notes for a mere dealer in cheap musical instruments, taken by him from parties not shown to be responsible, which notes are frequently protested or renewed to such an extent that his discounts finally cover two-thirds of the bank's capital, the directors forming such committees are guilty of such negligence and misconduct as would render them liable to stockholders injured thereby. Hanna v. People's Nat. Bank (1901) 71 N. Y. Supp. 1076, 35 Misc. Rep. 517; Id. (1902) 78 N. Y. Supp. 516, 76 App. Div. 224, modified Same v. Lyon (1904) 71 N. E. 778, 179 N. Y. 107. 10. Excessive loans.-A loan by a national bank in excess of the restriction is not void; but making such a loan subjects the bank and its officers to the forfeitures and penalties prescribed in this section. Stewart v. National Union Bank (C. C. 1869) Fed. Cas. No. 13,435; Shoemaker v. National Mechanics' Bank (C. C. 1869) Fed. Cas. No. 12.801. Directors of a national bank who make or assent to the making of a loan to any one person of a sum exceeding one-tenth of the capital stock of the bank becomes personally liable for all loss sustained thereby. Witters Sowles (C. C. 1887) 31 Fed. 1, 3. Where the directors of a national V. bank assent to a loan, in excess of the limit prescribed by section 9761, ante, and subsequently retire paper representing a part of this loan, by charging it against an illegal dividend, declared when the bad paper reckoned to make up an apparent surplus more than exceeds the capital stock, the transaction is invalid, and, for the amount of the paper thus retired, the directors are personally liable, as provided by this section, for damages sustained in consequence of excessive loans. Witters v. Sowles (C. C. 1890) 43 Fed. 405. Where the directors of a national bank became aware, through the report of a committee of their number, and also by notices sent them individually by the Comptroller of the Currency, that the bank had been making excessive loans to its president and to other persons, firms, and corporations with which he was associated, but took no effective steps to reduce such loans, or to prevent their increase, which continued until the bank became insolvent, they will be held jointly and severally liable for all losses which the bank sustained through subsequent transactions and which could have been prevented by a proper discharge of their duties. Rankin v. Cooper (C. C. 1907) 149 Fed. 1010. Where a bank director was not acting as a director in obtaining discount of certain notes belonging to his father by the bank, he cannot be held liable because he induced or permitted the bank to extend credit to his father in excess of the legal limit fixed by this section. Hicks v. Steel (1905) 105 N. W. 767, 142 Mich. 292, 12 Detroit Leg. N. 706, 4 L. R. A. (N. S.) 279. Directors of a national bank cannot be made to respond to damages or to pay excessive loans, unless some injury was done to the bank or loss sustained by reason thereof. Emerson v. Gaither (1906) 64 A. 26, 103 Md. 564, 8 L. R. A. (N. S.) 738. 11. Unlawful operations.-Where a national bank acquired certain mill property, in satisfaction of a debt, and the directors organized a corporation among themselves for the purpose of operating the mils as the bank's agent, using its funds, and operated them for the bank at a loss of $23,000, the directors of the bank participating are liable to the creditors for the loss. Cockrill v. Abeles (1898) 86 Fed. 505, 30 C. C. A. 223. 12. Unlawful increase of capital stock. -The increase of the capital stock of a bank based on a fictitious value of assets, and on notes given by the directors, with an understanding that they were not to be paid, is in violation of this section, and the directors of the bank participating are liable for all losses resulting to the creditors. Cockrill v. Abeles (1898) 86 Fed. 505, 30 C. C. A. 223. 13. Unlawful dividends.-Bank directors cannot be held personally liable for money paid out for dividends "to a greater amount than net profits after deducting losses and bad debts" (R. S. § 5204, ante, § 9765), because there were debts bad in fact, but supposed to be good, when the dividends were declared and paid. Bad judgment on the part of the directors, as to the condition of the assets, without bad faith, does not make them individually liable. Witters v. Sowles (C. C. 1887) 31 Fed. 1. 14. Measure of damages.-The measure of damages recoverable stated in an action against directors of a national bank under this section, by one who purchased stock of the bank in reliance on the published statements of its condition which were false, in that they included as assets a large amount of worthless paper. Chesbrough V. Woodworth (1912) 195 Fed. 875, 116 C. C. A. 465. IV. ACTIONS AGAINST DI RECTORS 15. Conditions precedent.-The forfeiture of the bank's charter in a suit brought by the comptroller of the currency is not a condition precedent to the maintenance of a suit against its directors for excessive loans. Cockrill v. Cooper (1898) 86 Fed. 7, 29 C. C. A. 529. Under this section the comptroller cannot authorize the receiver to bring suit, under section 9821, to enforce personal liability of directors until it has been adjudged by a proper court that such acts have been done as authorize a forfeiture of the charter. Welles v. Graves (C. C. 1890) 41 Fed. 459. The right to maintain an action under this section to recover of a bank director the damages sustained by his bank in consequence of excessive loans made by him while serving in the capacity of director, is not affected by the fact that the comptroller has or has not procured a forfeiture of the bank's charter. Stephens v. Overstolz (C. C. 1890) 43 Fed. 771. Liability can be enforced only after the violation of the statute has been judicially determined, and a forfeiture declared. Hayden v. Thompson (C. C. 1895) 67 Fed. 273, decree reversed (1895) 71 Fed. 60, 17 C. C. A. 592. A national bank may maintain a suit against its directors to enforce their liability under this section for losses resulting from a violation of the statutory requirements in conducting the business of the bank. A suit by the comptroller for dissolution of the association and an adjudication of such violations is not a condition precedent to the enforcement of such liability. National Bank of Commerce v. Wade (C. C. 1897) 84 Fed. 10. A receiver of a national bank may maintain a suit against the directors in behalf of creditors and stockholders to Action against directors of insolvent The directors of a bank being negli- Where the directors of a national 16. Remedies available.-Action by The personal liability of directors of The right of action against the di- The provisions of the national bank- This section excludes banking associ- den v. Thompson (1895) 71 Fed. 60, The liability of directors of a na- But see Jones Nat. Bank v. Yates The receiver of an insolvent national 17. Jurisdiction. The statute does The express denial of an immunity State courts may enforce, against di- Equity has jurisdiction of a suit against national bank directors for excessive loans, when the directors are numerous, their terms of service not identical, and the misdoing has continued over the terms of more than one set of directors. Cockrill v. Cooper (1898) 86 Fed. 7, 29 C. C. A. 529. An action by a receiver of a bank whose charter has been forfeited against a director, is properly brought at law; there being no necessity for invoking the aid of a court of chancery either because of the nature of the issues involved or to avoid a multiplicity of actions. Stephens v. Overstolz (C. C. 1890) 43 Fed. 771. An allegation that a director withdrew a specific sum from the bank, after knowledge of its insolvency, and immediately before its suspension, states a matter for an action at law, and is not cognizable in equity. Robinson v. Hall (C. C. 1894) 59 Fed. 648, decree reversed (1894) 63 Fed. 222, 12 C. C. A. 674. A suit by a national bank against its former officers and directors, under this section, to recover for losses resulting from their mismanagement in violation of the provisions of the national banking law, is cognizable in equity, where the transactions involved are complicated, and the conversion of securities into money is required before the extent of the liability can be ascertained, and when, therefore, the remedy at law is not complete or adequate. National Bank of Commerce v. Wade (C. C. 1897) 84 Fed. 10. Where a national bank suffered losses through the continued negligence of its directors, which was unknown to its creditors, and such directors remained in control until the appointment of a receiver on the bank's insolvency, a court of equity will entertain a suit to charge them with personal liability, notwithstanding the fact that an action at law to recover for their wrongful acts would be barred by limitation under the laws of the state. Rankin v. Cooper (C. C. 1907) 149 Fed. 1010. A suit by a stockholder of a national bank for its benefit against the bank and its officers having charge of its assets individually, alleging that they had made excessive loans of funds to irresponsible and insolvent borrowers without adequate security in violation of the act, and that the bank after proper notice and demand had failed to bring the action, involved the construction of the national bank act, and was therefore a suit arising under the laws of the United States of which the federal courts had jurisdiction, though there was no diversity of citizenship. Huff v. Union Nat. Bank of Oakland (C. C. 1909) 173 Fed. 333. Where a stockholder's agent of a national bank sought to recover from directors losses sustained by stock speculations of the president and vice president with the directors' knowledge and participation, a bill in equity for an accounting was sustainable, though a recovery at law could be had as to some of the transactions pleaded. McKinnon v. Morse (C. C. 1910) 177 Fed. 576. An action by a stockholder of a national bank against its directors for damages for their gross negligence may be brought in a state court. Brinckerhoff v. Bostwick (1882) 88 N. Y. 52, reversing (1880) 23 Hun, 237. Equity has jurisdiction of a suit by a stockholder of a national bank, in behalf of himself and other stockholders, against the bank, its receiver and directors, to recover of the latter damages to the stock of plaintiff and other uniting stockholders, caused by their negligence. Sayles v. White (1897) 46 N. Y. Supp. 194, 18 App. Div. 590. 18. Limitation of actions.-The provisions of a state statute of limitations do not apply to the liability of directors of a national bank for violation of the national banking law, created by this section. Welles v. Graves (C. C. 1890) 41 Fed. 459. If the personal liability imposed by this section upon directors for violation of the provisions of the banking act, in favor of any one injured thereby, can be enforced without reference to whether the charter has been forfeited or not, it is not a penalty within the meaning of section 1712, ante, limiting actions for penalties to five years. Id. That a suit by the comptroller for the forfeiture of the charter of a national bank for violations of the banking statutes is barred by limitation does not bar a suit by the bank against its officers and directors, under this section, to charge them with losses resulting from such violations. National Bank of Commerce v. Wade (C. C. 1897) 84 Fed. 10. The statute does not commence to run against a suit by a national bank against its managing officers to enforce their liability under this section for losses resulting from acts in violation of the national banking law, until such officers have surrendered control of the bank to their successors. Id. 19. Survival of action.-An act of congress imposing a legal liability on the directors of a national bank for certain things which they may do which shall result in an injury to the bank, its stockholders or creditors, and making them liable for the amount of the damage, is a remedial, and not a penal, statute, and therefore an action under it survives against the estate of a director. Stephens v. Overstolz (C. C. 1890) 43 Fed. 465. |