Opinion ID: 1544271
Heading Depth: 1
Heading Rank: 2

Heading: Wakefield and Company Loans

Text: The question here is, whether appellants, Duncan, Durham, Clark, Callahan, Carroll, Vogt, Hickman and Liberty National Bank and Trust Company, Administrator of the Estate of Brainerd Lemon, are liable on common law principles for the decrees against them for a violation of R. S. Sec. 5200, Title 12, Sec. 84, U.S.C., 12 U. S.C.A. § 84, prohibiting excessive loans. Certain facts found by the Master were quoted and accepted by the District Court and requoted in our opinion. We set down certain additional facts. Callahan, Carroll, Duncan and Durham were directors from 1919 to the close of the Bank. Clark was a director from 1922 to its close; Hickman from 1923 to July 25, 1930; and Lemon from 1909 to July 23, 1929. In his report of November 7, 1925, Examiner Wood pointed out that loans standing in the names of Latta and Greer were for the accommodation of Wakefield and Company and when combined with the Wakefield loan exceeded the limit by more than $287,000. In his report of April 23, 1927, Examiner Sailor disclosed that notes to Greer, Harris and Meagher each for $300,000 were accommodation loans for Wakefield and Company and when combined with the Wakefield loan were $300,000 in excess of the limit. This was the same report presented to the Board on June 24, 1927. Through the pretense of faithfully reading these and other official reports, Brown, in collusion with certain of his subordinates, concealed the excessiveness of these loans. There was scarcely a time between November, 1924, and the close of the Bank, when the Wakefield and Company indebtedness standing either in the name of the Company or its owner, Mrs. Latta, or Greer, Harris, Schweitzer and Meagher, her employees, did not largely exceed the loan limit. These monthly aggregate loan balances varied from $609,012 to $1,540,000. Brown permitted these loans to be made and reborrowed large amounts thereof from Wakefield and Company for his personal use. Appellants did not know these astounding facts. Aside from whether anything had occurred to awaken suspicion, we think they should and would have known them if they had given that attention to the Bank's affairs required by ordinary care (Briggs v. Spaulding, supra, page 148, 11 S.Ct. 924) or the care commensurate with their duties as directors. Any of the common and ordinary methods of control and supervision heretofore pointed out would have been sufficient. They were not justified in disregarding all precautions and relying wholly upon the integrity of Brown and those dominated by him. On June 30, 1927, a Deputy Comptroller sent the letter hereinbefore referred to addressed directly to the Board in which he referred to the Sailor report and said: It is evident from the statement of the examiner on page 5 that the loans of the individuals included in this line were for the accommodation of Wakefield & Company, and should, therefore, be included with the direct liability, and the line reduced to the 10% limit. Jones answered this letter on July 23rd but made no mention of the Wakefield matter. On September 7th the Deputy Comptroller wrote a second letter to the Board in which he stated: Referring to the report of the last examination of your bank and of previous correspondence in regard thereto, please advise over the signatures of the available directors whether the excessive loans have been reduced to the legal limit.  (Italics ours.) The Board met on September 16th, but these letters were designedly withheld. Following this meeting and on the same date the Cashier prepared a letter addressed to the Deputy Comptroller, which stated: We beg to acknowledge receipt of your office letter under date of September 7, 1927, with reference to your last examination of this bank and to previous correspondence in regard thereto. Wish to advise that loans listed by your examiner as excessive of the legal limit have been reduced as follows, Kentucky Jockey Club.......... $530,200.00 Reduced by payment to......... 469,200.00 Consolidated Realty Company 478,400.00 C. C. Hieatt.................. 413,610.00 H. J. Scheirich, C. C. & G. Y. Hieatt...................... 30,100.83 ___________ $922,110.83 Have been reduced to: Consolidated Realty Company 435,200.00 C. C. Hieatt ................. 59,000.00 H. J. Scheirich............... 100,000.00 ___________ $594,200.00 The loan of $100,000.00 to H. J. Scheirich is secured by certificate of deposit of this bank for full amount. Loans listed under the caption of loans especially mentioned have been reduced $966,797.64 as per itemized list attached. Very respectfully yours..... Brown and Jones signed this letter as President and Cashier respectively, and Jones carried it to each of the twelve directors privately and procured their signatures. Eight of these men were non-officer directors. They or their representatives are appellants here. These non-officer directors knew that no letters of the Comptroller had been presented to the Board; that the letter which they were requested to sign had not been presented at the Board meeting just adjourned which had been attended by twenty-three directors; that it was important enough to require the signature of the available directors. A moment's consideration would have convinced them that it was a deception; that it purported to be a reply to letters which they had never seen and contained important statement of facts which they did not know to be true. Signing the Jones letter under these circumstances exhibited a lack of ordinary care. It was contrary to all prudent business methods. The circumstances would have excited the attention of cautious directors charged with heavy responsibilities  they would have demanded the letters to which they were replying, the fraud would have been uncovered, the facts disclosed and corrective measures would have been applied. The Comptroller had the right to demand the truth; it was their duty to know it (indeed they are deemed in law to have known it, Wood v. Carpenter, 101 U.S. 135, 141, 25 L.Ed. 807) and communicate it, and they were not justified in placing unsuspicious confidence in Jones, who was not their agent but that of the Bank, or in his statement that the reply was about a routine matter only. See cases above cited. We think that the decree against these appellants is supported by proof of common law negligence and is therefore affirmed. The discussion of the Wakefield & Company loans in the original opinion was from the standpoint of whether appellants had violated the statute, Sec. 5239, R.S., Tit. 12, Sec. 93, U.S.C., 12 U.S.C.A. § 93. We disagreed with the court's conclusion that the directors had deliberately refrained from investigating that which it was their duty to investigate and that the violation of the statute was in effect intentional as construed in Corsicana Nat. Bank v. Johnson, 251 U.S. 68, 71, 40 S.Ct. 82, 84, 64 L.Ed. 141; but such holding did not foreclose consideration of their common law liability for negligence in dealing with the same loans.