Ellis v. H. P. Gates Mercantile Co.

Reéd, J., delivered the opinion of the court. This is a suit in equity, brought by a number of the depositors, together with several of the stockholders, in the Magee Bank against the directors of that bank and the receiver thereof, asking from the receiver information showing the amount lost to the bank by reason of defalcations of the cashier, and as to the loans made by the bank, and for the production of the books of the bank in court so that they may be inspected, and seeking a decree against the directors requiring them to'pay to appellees, and all other stockholders and depositors, all sums which may be due them by the bank and for which the directors are liable, by reason of their neglect and mismanagement of the affairs of the bank, as averred in the bill. It is shown in the bill that’by-laws, duly adopted by the stockholders of the bank, provided for a board of directors, who were charged with the exercise of general supervision of the affairs of the bank'and the superintending of the making of loans, and the conduct of the officers in immediate control of the financial operations of the bank. The by-laws also provided that the directors should have regular monthly meetings, should, through a committee of their number, examine the condition of the bank, count the cash, compare its assets and liabilities with the ledger, and, in short, to direct the finances and general business of the bank. The. bill charges the directors failed and refused to hold regular monthly meet — 572 — ings, and failed to appoint a finance committee, as provided, and to keep full and accurate reports of the meetings. ' It is charged that it was the duty of the directors to give their personal attention to the management of the affairs of the bank, to guard it generally against fraud, misappropriation of assets, and defalcation on the part of its cashier and other officers, to require the cashier to execute a fidelity bond, to make frequent investigations of the bank, and to give notice to the public if they should find the bank insolvent, and, in such case, to refuse to receive further deposits or permit the bank to continue in business. The bill charges that the directors diregardecl their duties as shown above, and failed to make proper supervision, investigation, and report; that they employed a cashier who was wholly inefficient and incompetent to discharge the duties of his office, and was a reckless speculator; dishonest, and dissipated, all of which they knew, or could have known by the exercise of the slightest diligence ; that by his misappropriations, and his making improvident and unlawful loans, and by his general recklessness and unbusinesslike conduct, large sums of money were lost to the bank, resulting in the insolvency thereof and being placed in the hands of a receiver appointed by the chancery court to wind up its affairs. It - is also charged that by reason of the directors’’ failure in making proper examinations of books and the business of the bank, and to notify thé guaranty company of the defalcations of the cashier, the receiver was unable, in a suit brought by him, to collect anything on the penalty of his bond. The bill also contains the following charge: “Complainants further show that the said deposits were made by complainants after the said bank was really insolvent, and were received by the bank .after said officers and directors knew that the said bank was insolvent, or by the exercise of proper care, attention, and diligence should have known of its insolvency.” — 573 — It is shown in the bill that the receiver had been requested by appellees to bring suit against the directors for the amounts lost through their inattention and neglect, and that he has failed and refused to do so; also that they are entitled to a discovery from the receiver, who is now the lawful custodian of the books, of information as to the real status of the bank, and to know its condition and the amounts lost. A demurrer was filed to the bill and overruled, and an appeal taken to this court. It will be noted that this is a general bill filed by some of the depositors and stockholders on behalf of all depositors and stockholders of the bank for the purpose of charging the directors, as ■ managing officers of the bank, in a court of equity, with sums lost through their negligence and mismanagement of the affairs of the bank, to the end that all stockholders and depositors may be paid the amounts found to be due them. The suit might have been brought by the bank, to which the directors, as officers or trustees, were first liable. The bank, not being a going concern, and its business being under the control and management of the receiver appointed by a court of equity for the purpose of collecting the assets and winding up its affairs, could not bring the suit; but it would be proper for the receiver, standing in the place of the bank and administering its affairs, to bring the suit. It is shown by the bill that, if the receiver refused and failed to bring the suit, then it was entirely proper for the suit to be brought by the depositors and stockholders for the purposes stated. It was also proper, not only to join all of the directors, but under the facts, as shown in the bill, to include the receiver as a party defendant. The chief contention by appellants is that directors are not liable for losses sustained on account of their negligence in managing the affairs of the bank. The board of directors is the governing body of a bank. As such managing body, they exercise, conduct, and control — 574 — all corporate powers. To the directors is committed the general management of the affairs of the bank. In discussing the liability of directors, as measured by their relation as trustees, Mr. Thompson in his commentaries on the Law of Private Corporations, section 1268,, p. 270, says: “By accepting the position, they assume a. capacity to manage the business of the corporation, and impliedly undertake to use as much diligence and care as the proper performance of the duties of their office requires, and to give the enterprise the benefit of their best care and judgment. They are bound to manage the affairs of the company with the same degree of e’are and prudence which is generally exercised by business men in the management of their own affairs, and the fact of the service without compensation does not permit a less degree of activity. They must be diligent and careful in performing the duties they have undertaken, and imprudence and negligence cannot be excused on the ground of ignorance or inexperience or the honesty of intention. . . . They are not permitted to evade or delegate their powers and important duties, and their supervision must be such as would enable them at all times to know the general financial condition of the corporation and to check or prevent any imprudent or dishonest conduct in officials. . . . They are bound to know the character and habits of the officers whom they employ, and they cannot be heard to say that they were ignorant of facts, the existence of which are shown by the books and papers of the corporation, and which would be known to them but for their neglect or inattention to the business; and they aré resposible for loss resulting from the wrongful acts or omissions of other directors or agents, where such loss was a consequence of their own neglect of duty, either in failing to supervise the company’s business with proper attention or in neglecting to use proper care in the appointment of such agents.” And under the subject of liability for negligent ignorance, section 1276, Mr. Thompson says: “The fact that — 575 — directors of a corporation do and must commit the details of its business to executive and inferior officers does not absolve them from the duty of maintaining a reasonable supervision,^ and, if such officers waste the assets of the corporation, the directors, ordinarily, cannot (¡scape liability on the ground that they did not know of the wrongdoing, where it is made to appear that their ignorance was the result of a want of that care which ordinarily prudent and diligent men would exercise under similar circumstances. . . . Directors are charged with knowledge, when, by the exercise of ordinary care, they might have known, as it was their duty to know, that loans were, made in excess of the statutory limit. . . . With reference to banks, at least, it' has been said that directors are conclusively presumed to know the condition of the bank, and that, if this were not true, they would be privileged to be negligent; and, the more ignorant they could manage to be about its condition, the more secure they would be from liability.” It is stated in Bolles’ Law of Banking, p. 185, that: “That tendency is to hold directors liable when they would have known the condition of their- bank, had they attended to their duty.” In the case of Delano v. Case, 121 Ill. 247, 12 N. E. 676, 2 Am. St. Rep. 81, the court held that: “The directors of a bank are trustees for depositors as well as for stockholders, and they áre bound to the observance of ordinary care and diligence, and' are hence liable for injuries resulting from their nonobservance. ’ ’ In the case of Wolfe v. Simmons, 75 Miss. 539, 23 South. 586, Terral, J., speaking for the court, said: “At common law, every person undertaking to act for others is presumed as undertaking to act with integrity, diligence, and skill, and an action on the case for damages lay for a breach of such duties. 3 Bl. Com. 165. Directors of banks are to be understood as contracting for reasonable capacity, skill, and care in the discharge of their duties — 576 — (Morse on Banks and Banking, section 125), and are consequently liable for the want of such capacity, skill, and care to all persons who have been damaged thereby.” In Union National Bank v. Hill, 148 Mo. 380, 49 S. W. 1012, 71 Am. St. Rep. 615, it was held: “The board of directors of a bank are bound to know all that is done by it, as well as the system and rules arranged for its doing ; and, what they ought to know as to the general course of the bank’s business, they will be presumed to have known, in a contest between the bank and third persons dealing in good faith with it. The directors must use ordinary care and diligence to know the conduct of their subordinate officers, as well as what the bank books show, and to carefully observe the law under which the bank is organized. And the directors are answerable for loses sustained by the bank through the acts of its cashier in.lending money, not only in excess of the limit prescribed by statute, but to insolvent persons, where they, by the exercise of ordinary care, might have known, and were therefore in duty bound to know, that this was being done; and it is no excuse, for such neglect, that they received no benefit from such loans, and that their services were gratutious.” In delivering the opinion in the case of Wallace v. Lincoln Savings Bank, 89 Tenn. 630, 15 S. W. 448, 24 Am. St. Rep. 625, Ltjrton, J., said: “Directors, by assuming office, agree to give as much of their time and attention to the duties assumed as the proper care of the interests intrusted to them may require. If they are inattentive to these duties, if they neglect to attend meetings of the board, if they turn over the management of the business of the company to the exclusive control of other agents, thus abdicating their control, then they are guilty of gross negligence with respect to their ministerial duties; and if loss results to the corporation by breaches of trust or acts of negligence committed by those left in control, which by due care and attention on their part — 577 — could have been avoided, they will be responsible to the corporation.” The bill in this case sufficiently charges that the directors' failed to use proper care and diligence in the management of the affairs of the bank, and that they neglected to perform the duties imposed upon them by the bylaws; that they ought to have known, and by the use of ordinary care, such as it was their duty to exercise, could have known, the condition of the bank, the defalcations, and improvident and reckless conduct by the cashier Avhom they employed, and finally its insolvency; that their neglect to carry out the plain requirements of the by-laws resulted in the failure of the bank, and loss to the depositors and stockholders. The directors were elected by the stockholders and were surely directly responsible to them for the proper management of the bank. The relation of the depositors to the bank, growing out of their placing their money with that institution for safekeeping, and to be at their convenience .drawn out for their use, is such that the directors, as the officers charged Avith the management of the bank, are required to be diligent and careful in conducting the bank’s business, and are liable to the depositors for losses sustained by the bank from negligence in performing the duties of their office. It is the duty of a director to know the condition of his bank and to see that its affairs are honestly and properly managed. He cannot shirk this duty and avoid liability. The chancellor did not err in overruling the demurrer. Affirmed.