Court Opinion

ID: 8823322
Source: CourtListenerOpinion
Date Created: 2022-11-26 15:39:48.738467+00
Date Added: 2024-06-11T17:04:42.179737
License: Public Domain

Mr. Justice Barnes delivered the opinion of the court. While there are other defendants, the bill seeks recovery from Billings alone of the seven directors of the bank, on two grounds of liability, (1) his failure to give any attention whatever to his duties as a director and (2) his so-called secret agreement to abdicate his functions as such. When analyzed, however, they constitute the single charge of inattention to his official duties, for the allegations with respect to said agree-* ment do not justify the legal conclusion of an independent or different liability. They are not such as support an inference that Billings entered into the agreement for the purpose of doing an intentional wrong or 'facilitating said unlawful transactions or with actual knowledge that they were then being carried on. Such an inference does not follow merely from characterizing the understanding as “secret.” The agreement described, taken with other averments in the bill, was not inconsistent with a mere understanding that Billings would remain a director if not required to return from out of the State to attend the board’s meetings and take an active part in managing the bank’s affairs, and we fail to see that a mere understanding to that effect, unless made for an unlawful or ulterior purpose, which is not charged, aggravates or' changes the character of the negligence elsewhere charged in the bill of inattention to his official duties. In the absence, therefore, of any averments of actual knowledge of the unlawful transactions or of a positive wrong or actual misfeasance on the part of Billings— and none appears in the- bill—his liability from the facts set up in the bill rests wholly on the charge of inattention to official duties. But construing the bill most strongly against the pleader, it charges the other directors with more than mere nonfeasance and supports appellees’ contention that Billings’ inaction was not the proximate cause of the bank’s losses. Billings appears to have been a nonresident director. While the bill does not expressly so aver (unless we import into it allegations of a former bill filed herein November 21, 1910, which the bill asks to be considered with reference to continuing the receivership), still the bill shows that although elected as a director from year to year he was almost continuously absent from the State during the years it is sought to hold him liable as a director, and up to the filing of the bill, returning here only on matters of personal business. The National Banking Act unquestionably recognizes the right to elect nonresident directors. It provides “that at least three-fourths of the directors must have resided in the State, territory or district in which the association is located for at least one year immediately preceding the election, and must be residents therein during their continuance in office. ’ ’ Section 5146, U. S. Rev. St. It presumably contemplates some advantages from having some nonresident directors. But it may reasonably be inferred from the nature of the banking business and from the specific requirement that at least three-fourths of the directors shall be residents, and because of the inconveniences and obstacles attending nonresidence, that the act did not contemplate that nonresident directors should exercise the same vigilance and give the same attention to the bank’s affairs as is manifestly required of the resident directors. As stated in First Nat. Bank of Concord v. Hawkins, 174 U. S. 364, referring to said act: “One of the evident purposes of this enactment is to confine the management of each bank to persons who live in the neighborhood, and who may, for that reason, be supposed to know the trustworthiness of those who are to be appointed officers of the bank, and the character and financial ability of those who may seek to borrow its money.” But as we view it, the question is not whether Billings as a nonresident director can entirely escape liability for not attending the board’s meetings and participating in the administration and management of the bank’s business and affairs, but whether the bill shows that the failure so to do was the proximate cause of the bank’s losses for which it is sought to hold him liable. Does the bill show such a casual relation? These essential facts stand out prominently in the bill either in the form of express averments or inferences that sholild, if not true, have been negatived: (1) That the losses ensued from misuse of the funds of the bank by its president Walsh; (2) that a quorum of the bank’s directors frequently held meetings, at which Billings was not present, and thereby assumed the functions of their office and undertook in some degree, at least, to supervise and transact the bank’s business; (3) that they thus placed themselves in a position to know and must have known of the unlawful transactions which were of such magnitude as to involve loans of millions of dollars; (4) that they permitted Walsh to engage in such transactions, either by conniving at or assenting thereto; (5) that all of the bank’s officers and directors except Billings were dominated and controlled by Walsh and permitted him to exercise control of them and the bank’s affairs; and (6) that Billings had no actual knowledge of such unlawful transactions, and was guilty of no act intended to promote them. We need not refer specifically to the several averments from which these facts are deducible, when appellants ’ counsel themselves say in their brief: “The bill in this case shows that Mr. Walsh absolutely dominated all the directors of the bank, except Billings, that none of them acted except as Walsh commanded them to act, and therefore none of them exercised the functions and duties imposed upon them by law. In fact all the directors except Billings simply obeyed the commands and directions of Mr. Walsh and never exercised their individual judgments respecting any matter or thing * * * .” This statement practically admits what is above summarized and recognizes what are most palpable inferences from the bill that the other directors either had actual knowledge of such unlawful transactions and assented thereto or connived at them; and in order to place Billings in pari delicto, counsel added to their statement, “and Mr. Billings failed to do so under this secret agreement with Mr. Walsh.” But, as before stated, no such effect can be given to said agreement. The bill does not charge Billings with actual knowledge of such transactions, and significantly fails to charge that the other directors did not know of, or connive at, or assent to them. In fact it is difficult to understand how resident members of the board sitting around the directors’ table could have been ignorant of them. The bill attempts to charge Billings with such knowledge by averments that he “knew or by the exercise of ordinary care would have known” of particular facts including the fact that the other directors “permitted, suffered and allowed” Walsh to operate the bank and carry on its business and affairs, and “did his bidding without question.” But averments in this alternative form do not charge Billings with actual knowledge (Babcock Bros. Lumber Co. v. Johnson, 120 Ga. 1030; Southern Bell Telephone & Telegraph Co. v. Starnes, 122 Ga. 604; Durell v. Hartwell, Williams & Kingston, 26 R. I. 125), and without knowledge, connivance or assent on his part, he cannot, in our opinion, be placed in the same category as the resident directors who were chargeable therewith as well as with a greater degree of vigilance and activity, and whose conduct either by voluntary co-operation or connivance enabled Walsh to engage without restraint in such unlawful transactions and thus became the direct and proximate cause of the losses ensuing therefrom. It is charged that Billings did not watch and restrain them. “But,” as said in Movius v. Lee, 30 Fed. 298, “it is nowhere adjudged that all (directors) must always act, or that they must not trust one another to act, or that they are liable for the mere omission to watch and restrain the others, without wrong intention on their own part, or actual knowledge of the wrong on the part of others. ’ ’ It has been held, too, that a direct- or is not liable for the misconduct of codirectors not participated in as a wrongdoer by bim. Briggs v. Spaulding, 141 U. S. 132; Fisher v. Graves, 80 Fed. 590; Commercial Bank of Bay City v. Chatfield, 121 Mich. 641. “Even trustees,” says Chief Justice Fuller in the Briggs case, supra, “are not liable for the wrongful acts of their co-trustees unless they connive at them or are guilty of negligence conducive to their commission." To avert the consequence of the mismanagement of the bank, the bill avers that Billings might have done various things therein set forth. But so far as they relate to any steps he might have taken in the ordinary exercise of his functions as a director, it is not apparent that, being the only director not dominated and controlled by Walsh, Ms suggestions would have been of any avail, and what he might have done to stem the disaster does not appear to have been the direct cause of it. It might have occurred just the same. The bill charges Billings with passive negligence, but it supports the inferences of connivance or assent as aforesaid on the part of the other directors. It was brought upon the theory of liability to the bank. But to quote again from the opinion in the Briggs case, supra: “Treated as a cause of action in favor of the corporation, a liability of this kind should not lightly be imposed in the absence of any element of positive misfeasance, and solely upon the ground of passive negligence ; and it must be made to appear that the losses for which defendants are required to respond were the natural and necessary consequences of omission on their part.” The same doctrine has been recognized in other cases where it has been sought to hold directors of a bank liable for the negligence either of themselves or the bank’s agents. (Warner v. Penoyer, 91 Fed. 587; Wallace v. Lincoln Sav. Bank, 89 Tenn. 630; Bloom v. National United Ben. Sav. & L. Co., 152 N. Y. 114; Kavanaugh v. Gould (App. Div.) 131 N. Y. Supp. 1059.) It is difficult, therefore, to escape the conclusion that the direct and proximate cause of the losses for which it is sought to hold Billings was Walsh’s unlawful transactions aided by the connivance, or assent, or voluntary co-operation 'of some if not all the other directors, and not Billings’ inaction, whatever may have been his duty in the premises. This conclusion obviates the necessity of considering any other grounds for dismissing the bill. We agree with appellees, however, that if the bill was not demurrable on the ground considered, it would be for the want of necessary parties, on the ground that Billings would be entitled to the right of contribution and they should be bound by the decree. Appellants urge that the question cannot be raised on general demurrer. But as stated in Johnson v. Huber, 134 Ill. 511: “It is true, that by the rules of correct practice the objection to the bill for want of proper parties should have been raised by demurrer, plea or answer; but where the omitted party is not only a proper but a necessary one, so that a final decree cannot be recovered without affecting his or her interests, the objection may be taken at the hearing, or on appeal or writ of error.” We have no doubt that whether the case be regarded as sounding in tort or contract the right of contribution would exist, for, in the. former case, Billings not being charged with any intentional wrong and with a lesser degree of delinquency than the others, would have such right though a tort feasor (7 Am. & Eng. Encyc. of Law (2nd Ed.), 364; Wanack v. Michels, 215 Ill. 87; Farwell v. Becker, 129 Ill. 261; Pennsylvania Steel Co. v. Washington & B. Bridge Co., 194 Fed. 1011-1013; Vandiver v. Pollak, 107 Ala. 547; Lowell v. Boston & L. R. Corporation, 23 Pick. [Mass.] 24-32); and, in the latter case, on appellants ’ theory that directors are liable as trustees of the corporation or the body of the stockholders (Hooker v. Midland Steel Co., 215 Ill. 444; Thompson on Corporations, par. 1269), all the directors were equally guilty of a breach of duty in not attending to the bank’s affairs and would be bound to contribute. (Machen on Modern Law of Corporations, par. 1685.) That the other directors ought on such ground to have been made parties defendant is supported by unquestioned authority. The reason of the rule is well stated in Mandeville v. Riggs, 2 Pet. U. S. 482, and Perry on Trusts. (2nd Ed.), sec. 876, and recognized in Hutchinson v. Ayres, 117 Ill. 558; Beach on Trusts, par. 542; Cunningham v. Pell, 5 Paige N. Y. 607; Boyd v. Gill, 19 Fed. 145; Pennsylvania Steel Co. v. Washington & B. Bridge Co., 194 Fed. 1011; Ramskill v. Edwards, L. R. (1886), 31 Ch. Div. 100, and such right of contribution made them necessary parties. (Chandler v. Ward, 188 Ill. 322; North Hudson Mut. Building & Loan Ass’n v. Childs, 82 Wis. 460.) But if the bill was dismissed for want of necessary parties, it should have been without prejudice, that an opportunity might have been given to bring them before the court. (Thomas v. Adams, 30 Ill. 37; 1 Daniel Ch. Pl. & Pr. (5th Ed.), p. 288, note 2.) It might be said that complainants had such opportunity when they elected to stand by their bill instead of again amending it, and from the fact that they voluntarily dismissed two of the directors out of the case. The record, however, does not disclose that the point of necessary parties was made in the court below, and the bill was dismissed for want of equity on its face as against each of the demurring defendants. While there may be some authority on such a state of facts for the unqualified dismissal of the bill, we are not disposed to hold that the dismissal was justified for want of parties in the absence of an affirmative showing that the point was raised in the court below. But for reasons already stated, the decree will be affirmed. Affirmed.