Opinion ID: 1544271
Heading Depth: 1
Heading Rank: 3

Heading: Murray Rubber Company Loans

Text: These loans were made in various amounts between May 12, 1928, and the closing of the Bank, and aggregated $421,249.87. The court fixed the loss at $409,630.04 and entered a decree against each director for the amount of each note approved by him which represented a portion of the total loss, these decrees however to be credited by proportional amounts received by appellee from the assets of the Murray Rubber Company being liquidated in receivership proceedings against that company. These decrees were based upon a finding that the notes constituted excessive loans and were in violation of R.S. Sec. 5200, Tit. 12, Sec. 84 U.S.C., 12 U.S. C.A. § 84. We reversed that holding. Our question here is whether the decrees are supported by common law negligence of appellants, non-officer directors. The Master failed to find that they were negligent and the District Court did not pass upon the question. When the lists of loans, including the notes here involved, were presented at the weekly board meetings these loans were approved by the directors present. The same general administrative system of the Bank as hereinbefore set out continued from May, 1928, until its close. There was no examining committee; the auditor was not required to report to the Board; the loan committee was not required to submit the list of loans over their signature; the directors themselves did not read the reports of the Examiners or Humphrey Robinson & Company or cause them to be examined and reported upon by a committee, according to the original practice of the Bank, and of the Trust Company, prior to the merger. On May 12, 1928, the Rubber Company owed the Bank $606,346.72. $330,000 of this amount was represented by first mortgage bonds and the remainder by notes. Appellants knew that the Rubber Company was then in a serious financial condition. It had on September 1, 1925, contracted its entire output of tires and other rubber products to Sears, Roebuck & Company. On April 1, 1926, this contract was cancelled and the Rubber Company had no sales outlet. The Company brought suit against Sears, Roebuck & Company and on March 10, 1927, received $375,000 in settlement but the Bank, then a large creditor, received no portion of this money,  it went to the payment of other creditors. The Company lost $254,276.68 in 1926 and $225,006.86 in 1927. The losses continued until in April, 1928, when, the situation becoming alarming, the Company and those interested made an agreement with the Bank and the Third National Bank of Scranton, Penna., another large creditor. It is unnecessary to develop the details of this arrangement. It is sufficient to say that the Bank agreed upon certain considerations set out therein to lend the Company $250,000 on open account with an additional $150,000 to be secured by the assignment of accounts receivable. The Scranton Bank agreed to lend it $150,000 on open account and an additional $150,000 on good security. These commitments included all outstanding loans and were made after many conferences. We cannot say that this arrangement was inconsiderate. If it was, it was inconsiderate upon the part of the Scranton bank also. While the Company was losing money it had a net worth of $1,345,000 and was a going concern. It was the duty of the Bank to determine what course to pursue under the circumstances. To protect itself it decided to advance the additional money and we cannot say that it acted otherwise than upon sound judgment. See our former opinion, 6 Cir., 86 F.2d 518, 525. Between May 12, 1928, and November 3, 1928, appellants, non-officer directors, approved loans to the Company amounting to $25,587. We think that these loans might be justified under the circumstances then existing and that any decree for the amount thereof, based upon negligence, is unwarranted and the amount of the decree against these appellants on the Murray Rubber Company loans is reduced accordingly. However, on November 23, 1928, President Brown submitted to the Board the report of Examiner Wood as of October 13th. This report disclosed that the Company was in a deplorable condition and that during the first half of 1928 it sustained an operating loss of $227,019.00 and that $130,325 of its receivables were from six months to more than one year old. The report continued: The statement presents about as gloomy a picture as can be imagined. One more year with operating results even approximating results for the first half of 1928 would render it impossible for the bank creditors of the company to continue to carry the unsecured obligations of the company at book value. Indeed, it is a very serious question now whether the loan and bonds of the company should be carried at par.    The next report of Examiner Wood as of May 25, 1929, presented to the directors' meeting on August 23rd, was, if possible, more alarming. It revealed that the Company's statement of April 30th showed an indebtedness of $2,049,884 against a net worth of $862,582; that its debts were two and one-half times greater than its net worth and that it had a net operating loss for April of $29,883. Pretending to read these reports, Brown concealed their important features. The reason for the concealment, whether at the instance of Angermeier (the Vice-President of the Company and also allied with Brown in the mismanagement of the Bank), or otherwise, does not appear. It was the duty of the directors to acquaint themselves with these reports. They could readily have done so through any of the ordinary modes of procedure hereinbefore pointed out. The conditions disclosed would naturally have led to further inquiry (Curtis v. Connly, 257 U.S. 260, 264, 42 S.Ct. 100, 66 L.Ed. 222) and revealed the severely critical letters of the Comptroller addressed directly to the Board concerning the Rubber Company account as well as the condition of the Bank in general. Any reasonable follow up would have disclosed that the Comptroller's letters were withheld from the Board by Brown and Jones; that many of them remained unanswered; that others were replied to only after the Comptroller had repeatedly called attention to the delay; and that many of the answers dealt in excuses and subterfuges. For a case wherein a director misread to his fellow directors the discount register of the bank and failed to read out the large indebtednesses due by him to the bank, see Boyd v. Applewhite, 121 Miss. 879, 84 So. 16. We think under the circumstances that ordinary care would have forbidden these loans, except as indicated, or would have salvaged at least some of them, and that the decree thereon, except as indicated, is supported by proof of common law negligence. It is urged that the Comptroller should have taken corrective measures but appellants cannot thus justify their own ignorance of conditions or shift their responsibility.