Opinion ID: 1544271
Heading Depth: 1
Heading Rank: 4

Heading: Loans on Shares of the Banco Kentucky Company

Text: The plan for the organization of the Banco Kentucky Company (herein called Banco) is set out in the original opinion. For present purposes the history of the sale of its stock is sufficiently detailed therein. The District Court entered a decree against certain directors in the sum of $1,636,613.14, upon the ground that they had knowingly assented to making loans secured in whole or in part by collateral of Banco stock in violation of Sec. 83, Tit. 12 U.S.C., 12 U.S.C.A. § 83. We reversed that portion of the decree. Our question of course is, whether it is supported by evidence of common law negligence. The basis for the claim of negligence is that these loans involved too great concentration of Banco stock in the Bank; that appellants should have anticipated the necessity of selling at least some substantial part of the collateral to satisfy the loans and that such sales would inevitably depress or destroy the value of the remaining collateral as security as well as all other outstanding Banco stock. There were 468 separate loans secured by Banco stock. The law will presume that the makers of these notes were solvent when they were made. Appellee questioned the solvency of only 42 of those whose loans aggregated $729,301.31. After hearing the evidence the Master found that it failed to establish that 16 of these borrowers to whom the Bank had loaned $502,178.72 in the aggregate were insolvent when the loans were made, leaving out of consideration the worth of the collateral Banco stock; but he found that 26 borrowers whose loans totalled $227,122.58 collateraled by 9084 shares of stock, were insolvent when their notes were made. Appellee excepted to these findings. The court did not expressly overrule these exceptions but we think that the effect of the three separate opinions of the court, its finding of fact and the decree was to confirm this feature of the report. The standard of duty required of directors in approving collateral security for the payment of a bank loan is that of due care under the circumstances. Much depends upon the financial worth and moral character of the borrower. He might unquestionably be solvent and if so there is no absolute duty to take collateral because there is no necessity for it (opinion of Circuit Judge Denison sitting by designation in the early stages of the case). Upon the findings of the Master which we see no reason to disregard, our question seems to be narrowed to whether the concentration of the 9084 shares of Banco stock as collateral on $227,122.58 of debts was negligent. We do not find as a matter of law that it was. The directors might reasonably have anticipated the necessity of selling some of these shares to satisfy debts which they secured but it does not follow that they might have apprehended that such sales would weaken all other Banco collateral. These 26 loans were made on October 1, 1929. The market price of Banco stock was then around $25 per share and was never lower than $25 until October 29th, when it closed at $23¼. The Master reported: It continued above 25 until November 16, 1929. On March 24, 1930, it sold on the market at 24. It went up to 25 by April 1st, and continued a little bit in excess of 23 until June 14th. On August 6, 1930, it sold at 20, and it continued between that and the middle of September at approximately 17. It sold at 16 on September 24, 1930, and at 16½ on October 9, 1930. This is a much better record than many other stocks during the same period. We think the proposition that the Bank lost because the directors feared to sell Banco collateral lest such sales would disparage the value of its remaining Banco collateral or of outstanding Banco stock, which at that time amounted to about 2,000,000 shares, is highly speculative. It has no satisfactory probative force to sustain it. Our conclusion is that the decree against appellants dealing with loans on Banco shares is not supported by satisfactory evidence of negligence of excessive concentration of Banco collateral. Appellant C. C. Hieatt is made liable by our holding touching the Kentucky Wagon Manufacturing Company and Murray Rubber Company matters unless he is protected by his discharge in bankruptcy. This bill was filed on March 30, 1931. Hieatt jointly with other directors answered the bill and joined in the defense. On June 23, 1932, he filed a petition in bankruptcy and was adjudged bankrupt on the following day. He inserted in his schedule of unsecured liabilities the identical claims prosecuted against him here. He was granted a discharge on May 24, 1934. On July 27, 1934, the District Court, in its original opinion, held Hieatt liable as a director. His position then was, and now is, that the claims set up against him in the bill were discharged in bankruptcy because they were provable under Sec. 63 (a) (4) of the Bankruptcy Act, 11 U.S. C.A. § 103 (a) (4). The sole question is, whether Hieatt's liability as a director was founded    upon a contract express or implied;    We need not enter into a discussion of the interesting question whether the relationship between a national bank and its director is contractual or otherwise. One of the grounds upon which the bill sought relief against Hieatt in common with other directors was that they failed to exercise ordinary care, prudence and diligence in the management, conduct and direction of the affairs of the bank.    This did not aver a breach of a contract express or implied. It was an allegation of negligence at common law. But, upon the assumption that the claims against Hieatt were founded   ; upon a contract, express or implied    we think they were not provable in his bankruptcy proceedings because they were not fixed liabilities as evidenced by a judgment absolutely owing at the time of the filing of the petition. See In re Roth & Appel, 2 Cir., 181 F. 667, 673, 674, 31 L. R.A.,N.S., 270, and cases cited; Haynes Stellite Co. v. Chesterfield, 6 Cir., 97 F. 2d 985. A special defense is made for certain directors who were directors of the Louisville Trust Company and who became members of the Board in June, 1927, as a result of the unification of the two institutions. They say that the merger itself was induced by the misrepresentations of Brown and other executive officers of the Bank of the actual condition of both the Wagon Company and the Murray Rubber Company accounts; that the overdrafts of the Wagon Company were not only concealed from them in common with other directors but that they were never advised that the Bank owned $330,000 of the bonds of the Rubber Company. But as heretofore pointed out, this character of defense is not available upon the issue of whether during the period of their directorship they were chargeable with negligence at common law. It is urged that the substantial averments of the bill were that appellants had violated the National Banking Act (Title 12 U.S.C. § 21 et seq., 12 U.S.C.A. § 21 et seq.), first, by participating in or assenting to the continued operation of the Wagon Company business as a speculative venture; second, by approving the Wagon Company and the Murray Company loans in excess of the allowable limit under Sec. 84, Tit. 12, 12 U.S.C.A. § 84; and third, by approving loans on Banco shares prohibited by Sec. 83, Tit. 12 U.S.C., 12 U.S. C.A. § 83. We held in the original opinion that the operation of the Wagon Company business as a speculative venture was ultra vires but that no liability was imposed upon appellants for a violation of the statute because they did not knowingly permit such violation or participate in or assent to the advancements to the Wagon Company through the overdrafts; and did not knowingly permit or participate in or assent to the Wakefield and Company loans; that the Murray Company loans were not excessive, and that the loans on Banco shares did not violate Sec. 83 of the Act. It is said that if there was no violation of the statute at all or if there was and yet appellants did not knowingly permit it or participate in it, or assent to it, as provided by Sec. 93, Tit. 12 U.S.C., 12 U.S.C.A. § 93, they incurred no liability whatever because the liability imposed by the statute was exclusive. We do not so understand the law. Section 93, Title 12 U.S.C., 12 U.S. C.A. § 93, provided a rule by which liability of directors for the violation of certain provisions of the Banking Act was to be determined. This rule was exclusive of all other rules (see Yates v. Jones Nat. Bank, 206 U.S. 158, 27 S.Ct. 638, 51 L.Ed. 1002; Bowerman v. Hamner, 250 U.S. 504, 511, 39 S.Ct. 549, 63 L.Ed. 1113; Ringeon v. Albinson, D.C., 35 F.2d 753), but it does not modify or change the common law defining the duties of bank directors or the judicial methods by which the performance or non-performance of such duties may be determined. The cause is remanded to the District Court with directions to enter a decree consistent herewith.